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Rule

Registration of Municipal Advisors

Action

Final Rule.

Summary

Section 975 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) amended Section 15B of the Securities Exchange Act of 1934 (“Exchange Act”) to require municipal advisors, as defined below, to register with the Securities and Exchange Commission (“Commission” or “SEC”), effective October 1, 2010. To enable municipal advisors to temporarily satisfy this requirement, the Commission adopted an interim final temporary rule, Exchange Act Rule 15Ba2-6T, and form, Form MA-T, effective October 1, 2010. To enable municipal advisors to continue to register under the temporary registration regime until the applicable compliance date for permanent registration, the Commission is extending Rule 15Ba2-6T, in a separate release, to December 31, 2014. The Commission is today adopting new Rules 15Ba1-1 through 15Ba1-8, new Rule 15Bc4-1, and new Forms MA, MA-I, MA-W, and MA-NR under the Exchange Act. These rules and forms are designed to give effect to provisions of Title IX of the Dodd-Frank Act that, among other things, require the Commission to establish a registration regime for municipal advisors and impose certain record-keeping requirements on such advisors.

Unified Agenda

Registration of Municipal Advisers

3 actions from January 6th, 2011 to July 2013

  • January 6th, 2011
  • February 22nd, 2011
    • NPRM Comment Period End
  • July 2013
    • Final Action
 

Table of Contents Back to Top

DATES: Back to Top

Effective Date: January 13, 2014, except that amendatory instruction 11 removing § 249.1300T is effective January 1, 2015.

Compliance Date: The applicable compliance dates are discussed in the section of the release titled “V. Implementation and Compliance Dates”.

FOR FURTHER INFORMATION CONTACT: Back to Top

Office of Municipal Securities: John Cross, Director, at (202) 551-5839; Jessica Kane, Senior Special Counsel to the Director, at (202) 551-3235; Rebecca Olsen, Attorney Fellow, at (202) 551-5540; or Mary Simpkins, Senior Special Counsel, at (202) 551-5683; at Office of Municipal Securities, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

Office of Market Supervision: Molly Kim, Senior Special Counsel, at (202) 551-5644; Ira Brandriss, Special Counsel, at (202) 551-5651; Brian Baltz, Special Counsel, at (202) 551-5762; Jennifer Dodd, Special Counsel, at (202) 551-5653; Derek James, Special Counsel, at (202) 551-5792; Yue Ding, Attorney-Adviser, at (202) 551-5842; or Eugene Hsia, Attorney-Adviser, at (202) 551-5709; at Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: Back to Top

The Commission is adopting Rules 15Ba1-1 to 15Ba1-8 (17 CFR 240.15Ba1-1 to 240.15Ba1-8) and 15Bc4-1 (17 CFR 240.15Bc4-1) under the Exchange Act; Forms MA, MA-I, MA-W, and MA-NR (17 CFR 249.1300, 1310, 1320, and 1330); and Rules 30-3a (17 CFR 200.30-3a) and 19d (17 CFR 200.19d) under the Commission's Rules of Organization and Program Management. The Commission is amending Rules 30-18 (17 CFR 200.30-18) and 19c (17 CFR 200.19c) under the Commission's Rules of Organization and Program Management.

Table of Contents Back to Top

I. Executive Summary

II. Introduction

A. Background

1. Overview of Municipal Securities Market

a. Municipal Advisors

b. Municipal Entities and Municipal Financial Products

2. Historical Regulation of Municipal Securities and Municipal Advisors

a. Municipal Securities Market

b. Municipal Advisors

B. Dodd-Frank Act and the Need for Oversight

C. Interim Final Temporary Rule 15Ba2-6T and Form MA-T

D. Proposal To Establish a Registration Regime for Municipal Advisors

III. Discussion

A. Rules for the Registration of Municipal Advisors

1. Rule 15Ba1-1: Definition of “Municipal Advisor” and Related Terms

a. Statutory Definition of “Municipal Advisor”

b. Interpretation of the Term “Municipal Advisor”; Definition of Related Terms

i. Advice Standard in General

ii. Municipal Entity

iii. Obligated Person

iv. Municipal Financial Products

v. Municipal Derivatives

vi. Guaranteed Investment Contracts

vii. Issuance of Municipal Securities

viii. Investment Strategies

ix. Pooled Investment Vehicles

x. Solicitation of a Municipal Entity or Obligated Person

c. Exclusions and Exemptions From the Definition of “Municipal Advisor”

i. Public Officials and Employees of Municipal Entities and Obligated Persons

ii. Responses to Requests for Proposals or Requests for Qualifications

iii. Municipal Entity or Obligated Person Represented by an Independent Municipal Advisor

iv. Broker, Dealer, or Municipal Securities Dealer Serving as an Underwriter

v. Registered Investment Advisers

vi. Registered Commodity Trading Advisors; Swap Dealers

vii. Accountants, Attorneys, Engineers and Other Professionals

viii. Banks

2. Rule 15Ba1-2

a. Application for Municipal Advisor Registration

b. Information Requested in Form MA

c. Information Requested in Form MA-I

3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated With Registered Municipal Advisors From Registration

4. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration; Form MA-W

a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration

b. Form MA-W

5. Rule 15Ba1-5: Amendments to Form MA and Form MA-I

6. Rule 15Ba1-6: Consent to Service of Process To Be Filed by Non-Resident Registered Municipal Advisors; Legal Opinion To Be Provided by Non-Resident Municipal Advisors; and Form MA-NR

a. Rule 15Ba1-6: Consent to Service of Process To Be Filed by Non-Resident Registered Municipal Advisors; Legal Opinion To Be Provided by Non-Resident Municipal Advisors

b. Form MA-NR

7. Rule 15Ba1-7: Registration of Successor to Municipal Advisor

8. General Instructions and Glossary

9. Rule 15Bc4-1: Persons Associated With Municipal Advisors

B. Approval or Denial of Registration

C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by Municipal Advisors

IV. Designation of FINRA To Examine FINRA Member Municipal Advisors

V. Implementation and Compliance Dates

VI. Delegation of Authority

A. Delegation to the Director of the Office of Municipal Securities

B. Delegation to the Director of the Office of Compliance Inspections and Examinations

VII. Paperwork Reduction Act

VIII. Economic Analysis

IX. Final Regulatory Flexibility Analysis

X. Statutory Basis and Text of Amendments

I. Executive Summary Back to Top

Section 975 of the Dodd-Frank Act creates a new class of regulated persons, “municipal advisors,” and requires these advisors to register with the Commission. This new registration requirement, which became effective on October 1, 2010, makes it unlawful for any municipal advisor to provide certain advice to or on behalf of, or to solicit, municipal entities or certain other persons without registering with the Commission. [1] A person is deemed under the Exchange Act to have a statutory fiduciary duty to any municipal entity for whom such person acts as a municipal advisor.

The new registration requirements and regulatory standards are intended to mitigate some of the problems observed with the conduct of some municipal advisors, including “pay to play” practices, undisclosed conflicts of interest, advice rendered by financial advisors without adequate training or qualifications, and failure to place the duty of loyalty to their clients ahead of their own interests. [2] According to a Senate Report related to the Dodd-Frank Act, “[t]he $3 trillion municipal securities market is subject to less supervision than corporate securities markets, and market participants generally have less information upon which to base investment decisions. During the [financial] crisis, a number of municipalities suffered losses from complex derivatives products that were marketed by unregulated financial intermediaries.” [3] Accordingly, in response to the financial crisis that began in 2008, the Dodd-Frank Act amended the Exchange Act to require “a range of municipal financial advisors to register with the [Commission] and comply with regulations issued by the [MSRB].” [4]

In September 2010, the Commission adopted, and subsequently extended, an interim final temporary rule establishing a temporary means for municipal advisors to satisfy the registration requirement. [5] As of March 31, 2013, there were approximately 1,130 Form MA-T registrants, including approximately 330 registrants that are also registered investment advisers and/or broker-dealers. In December 2010, the Commission proposed a permanent registration regime to govern municipal advisor registration (“Proposal”). [6] The Commission has considered comments received in connection with both the 2010 interim final temporary rules, as well as the Proposal, and is today establishing a permanent registration regime for municipal advisors and imposing certain record-keeping requirements on such advisors. Further, the Commission today, in a separate release, is extending the expiration date of the temporary registration regime to December 31, 2014. [7] This extension will enable municipal advisors that are required to register with the Commission on or after the Effective Date but before the applicable compliance date to continue to register under the temporary registration regime.

The statutory definition of a “municipal advisor” is broad and includes persons that may not have been considered to be municipal financial advisors prior to the enactment of the Dodd-Frank Act. Historically, municipal advisors have been largely unregulated. [8] The Commission believes that the information disclosed pursuant to the rules and forms established by the permanent registration regime for municipal advisors will enhance the Commission's oversight of municipal advisors and their activities in the municipal securities markets. The publicly-available online information provided pursuant to these rules and forms should also aid municipal entities and obligated persons in choosing municipal advisors and help provide greater transparency when engaging in transactions or investments with municipal advisors.

The Exchange Act defines the term “municipal advisor” to mean a person (who is not a municipal entity or an employee of a municipal entity) that: (1) Provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products 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; or (2) undertakes a solicitation of a municipal entity. [9] The definition of municipal advisor includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors that provide municipal advisory services, unless they are statutorily excluded. [10]

The statutory definition of “municipal advisor” explicitly excludes: (1) A broker, dealer, or municipal securities dealer serving as an underwriter (as defined in Section 2(a)(11) of the Securities Act of 1933); (2) any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice; (3) any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps; (4) attorneys offering legal advice or providing services of a traditional legal nature; and (5) engineers providing engineering advice. [11]

The Exchange Act defines the term “municipal financial product” to mean municipal derivatives, guaranteed investment contracts, and investment strategies. [12] “Investment strategies” is defined to include plans or programs for the investment of proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments. [13]

The Proposal reflected the Commission's preliminary interpretation of the new statutory requirements, based on its understanding at that time of Congressional objectives and intent in adopting Section 975 of the Dodd-Frank Act. The Commission requested comment generally on the Proposal and also requested comment on over 175 specific issues. The Commission received over 1,000 comment letters on the Proposal, representing a wide range of viewpoints, which are discussed throughout this release. Commenters included municipal advisors, municipal entities, broker-dealers, banks, accountants, lawyers, engineers, registered investment advisers, organizations representing industry participants, investors, the Municipal Securities Rulemaking Board, members of Congress, and others.

Commenters generally supported the goals of the Proposal, although many expressed concerns about its breadth and recommended that the Proposal be amended or clarified in certain respects. Major themes in the comments included: (1) Concerns about the proposed treatment of appointed board members and other public officials of municipal entities as advisors; (2) concerns about the proposed application to advice on investments of all municipal funds (versus investments associated with proceeds of municipal securities); and (3) potential effects on securities activities of banks for which there are no statutory exclusions from the definition of “municipal advisor.” The Commission staff discussed many issues with other U.S. financial regulators, commenters, and interested market participants in devising a final rule that requires registration of parties engaging in municipal advisory activities without unnecessarily imposing additional regulation.

One theme reflected in the statutory exclusions to the definition of a municipal advisor and in the Commission's consideration of additional regulatory exemptions involves an approach that focuses and limits the scope of these exclusions and exemptions based on identified activities (“activities-based exemptions”) rather than on the basis of the status of particular categories of market participants (“status-based exemptions”). This approach aims to ensure that exemptions apply in targeted circumstances to appropriate identified activities. By comparison, a concern with status-based exemptions is that they could provide inappropriate competitive advantages to covered categories of market participants. [14]

In consideration of the views expressed, suggestions for alternatives, and other information provided by commenters, the Commission is adopting the rules with significant modifications from the Proposal to narrow the scope of the registration requirement, including through certain activity-based exemptions from the definition of municipal advisor, and to provide additional guidance to market participants about what constitutes municipal advice and who is required to register as a municipal advisor. Some of the more significant changes made in this adopting release are summarized as follows.

Broad Exemption for Public Officials and Employees of Municipal Entities and Obligated Persons

The Exchange Act excludes municipal entities and employees of municipal entities from the definition of municipal advisor. [15] The Proposal did not extend the exclusion for “employees of a municipal entity” to include appointed officials. The Commission received approximately 670 comment letters to the effect that the proposed exclusion for employees of municipal entities was unduly narrow and that it failed to provide sufficient coverage for appointed board members and other public officials associated with municipal entities. The final rule provides a broad exemption from municipal advisor registration for all employees, governing body members, and other officials of municipal entities and obligated persons, to the extent that they act within the scope of their employment or official capacity. [16] The Commission does not expect that the ordinary performance of the duties of an appointed member of a governing body of a municipal entity—such as voting, providing a statement or discussion of views, or asking questions at a public meeting—would cause that individual to be a municipal advisor with respect to the municipal entity on whose board he or she serves.

Limitation to Investments Related to Proceeds of Municipal Securities Instead of All Public Funds

The Exchange Act provides that the term “`investment strategies'includes plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments” (emphasis added). [17] In the Proposal, the Commission proposed to interpret the “investment strategies” definition broadly to cover not only the statutorily-identified matters but also plans, programs, or pools of assets that invest any funds held by or on behalf of a municipal entity.

The Commission received approximately 60 comment letters to the effect that the Proposal interpreted the “investment strategies” definition too broadly to cover advice to municipal entities regarding plans or programs for the investment of all public funds of municipal entities (rather than investments more narrowly associated with proceeds of municipal securities and the recommendation of and brokerage of municipal escrow arrangements). The Commission has determined to adopt the statutory definition of “investment strategies,” but is also adopting an exemption for certain persons that will result in a narrower application of “investment strategies” than originally proposed, limiting such strategies to matters relating to the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments, in lieu of all public funds of municipal entities. [18] This more circumscribed approach to “investment strategies” has a narrowing effect throughout the municipal advisor registration regime (e.g., many investment advisers and a significant portion of the bank activities identified by commenters will not be subject to municipal advisor registration).

New Tailored Exemption for Banks

The Exchange Act does not exclude banks from the definition of municipal advisor. The Commission received approximately 300 comment letters to the effect that the Proposal did not provide needed exemptions for so-called “traditional banking” activities. Most of these comments regarding the impact on banks related to the proposed broad interpretation of the “investment strategies” definition. Many commercial banks and banking associations asserted that the Commission's interpretation of “investment strategies” was overly broad and would potentially cover traditional banking products and services, such as deposit accounts, cash management products, and loans to municipalities. As a result, according to commenters, banks or bank employees that provide advice regarding such products and services could be considered municipal advisors, adding “a new layer of regulation on bank products for no meaningful public purpose.” [19]

The narrowing of the application of “investment strategies” in the final rule is designed to address the main concerns raised by these commenters. [20] In addition, the final rule provides a new tailored exemption from the definition of municipal advisor for a bank providing advice with respect to the following: (1) Any investments that are held in a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank; (2) any extension of credit by a bank to a municipal entity or obligated person, including the issuance of a letter of credit, the making of a direct loan, or the purchase of a municipal security by the bank for its own account; (3) any funds held in a sweep account; or (4) any investment made by a bank acting in the capacity of an indenture trustee or similar capacity (e.g., a bond indenture trustee, paying agent, or municipal escrow agent).

The final rule preserves the municipal advisor registration requirement for banks that engage in municipal advisory activities, such as banks that act as financial advisors to municipal entities in structuring issues of municipal securities. Also, the final rule preserves the municipal advisor registration requirement for banks that provide advice with respect to municipal derivatives.

Advice Standard in General

For purposes of the municipal advisor definition, the Dodd-Frank Act did not specifically define or otherwise provide a general standard to determine what constitutes “advice” to a municipal entity or obligated person. The Commission received comments requesting clarification of “advice” and suggesting general parameters for defining advice that distinguish between providing general information to a municipal entity and recommending a specific action to a municipal entity. While the Commission believes that the determination of whether a person provides advice to or on behalf of a municipal entity or obligated person depends on all the relevant facts and circumstances, the Commission also believes that additional guidance on the advice standard for purposes of the municipal advisor definition will provide greater clarity regarding the applicability of the municipal advisor registration requirement. Accordingly, the adopted rules provide that advice excludes, among other things, the provision of general information that does not involve a recommendation regarding 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). [21]

Exemption for Certain Swap Dealers

The Exchange Act does not exclude swap dealers from the definition of municipal advisor. The Commission received comments suggesting that regulation of swap dealers under the municipal advisor registration regime should be coordinated with other regulatory programs. The Commission recognizes that swap dealers are also subject to the provisions of Title VII of the Dodd-Frank Act, [22] which provide the Commodity Futures Trading Commission (“CFTC”) with authority to register and implement business conduct standards for swap dealers with respect to their interactions with municipal entities and obligated persons that are “special entities,” as discussed further below in Section III.A.1.c.vi. The final rules exempt any registered swap dealer to the extent that such dealer recommends a municipal derivative or a trading strategy that involves a municipal derivative, so long as such dealer or associated person is not “acting as an advisor” to the municipal entity or obligated person, applying the standards applicable to the parties to such transactions under the existing regulatory regime of the CFTC. [23]

Exemption When There Is an Independent Registered Municipal Advisor

Several commenters suggested that a person providing advice with respect to municipal financial products or the issuance of municipal securities should not be regulated as a municipal advisor if the municipal entity or obligated person is otherwise represented by a municipal advisor. The Commission believes that if a municipal entity or obligated person is represented by a registered municipal advisor, parties to the municipal securities transaction and others who are not registered municipal advisors should be able to provide advice to such municipal entity or obligated person, so long as the responsibilities of each of the parties are clear.

Accordingly, the final rules exempt persons providing advice with respect to municipal financial products or the issuance of municipal securities from the definition of municipal advisor so long as: (1) An independent registered municipal advisor is providing advice with respect to the same aspects of the municipal financial product or issuance of municipal securities, is registered pursuant to Section 15B of the Exchange Act and the rules and regulations thereunder, and is not, and within at least the past two years was not, associated with the person seeking to rely on this exemption; (2) such person receives from the municipal entity or obligated person a representation in writing that it is represented by, and will rely on the advice of, an independent registered municipal advisor; and (3) such person provides written disclosure to the municipal entity or obligated person that such person is not a municipal advisor and, with respect to a municipal entity, is not subject to the statutory fiduciary duty applicable to municipal advisors under the Exchange Act, and such person provides a copy of such disclosure to the municipal entity's or the obligated person's independent registered municipal advisor. [24]

Exclusion of Individuals From Registration

In the Proposal, the Commission proposed to require registration of all individuals associated with municipal advisory firms who engage in municipal advisory activities, as contrasted with limiting registration to the municipal advisory firms themselves. For reasons further discussed in Sections III.A.2.a. and III.A.3. of this adopting release, the Commission is limiting the registration requirement to municipal advisory firms and sole proprietors.

II. Introduction Back to Top

A. Background

On July 21, 2010, President Obama signed into law the Dodd-Frank Act. [25] The Dodd-Frank Act was enacted, among other things, to promote the financial stability of the United States by improving accountability and transparency in the financial system. [26] With Section 975 of Title IX of the Dodd-Frank Act, Congress amended Section 15B of the Exchange Act [27] to, among other things, make it unlawful for municipal advisors [28] to provide certain advice to, or solicit, municipal entities [29] or certain other persons without registering with the Commission. [30]

1. Overview of Municipal Securities Market

a. Municipal Advisors

As discussed in the Proposal, [31] until the passage of the Dodd-Frank Act, the activities of municipal advisors were largely unregulated, and municipal advisors were generally not required to register with the Commission or any other federal, state, or self-regulatory entity with respect to their municipal advisory activities. As discussed below in this section and in the Proposal, [32] some entities that are now subject to registration as municipal advisors pursuant to Section 15B of the Exchange Act and rules or regulations promulgated thereunder currently are subject to regulation by various federal and state regulators in other capacities. These entities include brokers, dealers, municipal securities dealers, investment advisers, and banks. Such regulations, however, generally do not apply specifically to these entities' municipal advisory activities.

Municipal advisors, commonly referred to as “financial advisors,” [33] engage in municipal advisory activities in a variety of contexts. With respect to the issuance of municipal securities, municipal advisors (which may include entities registered as brokers, dealers, municipal securities dealers, or investment advisers acting as municipal advisors), among other things, may assist municipal entities in developing a financing plan, assist municipal entities in evaluating different financing options and structures, assist in the selection of other parties to the financing (such as bond counsel and underwriters), coordinate the rating process, ensure adequate disclosure, and/or evaluate and negotiate the financing terms. [34] According to the Municipal Securities Rulemaking Board (“MSRB”), approximately $315 billion (70%) [35] of the municipal debt issued in 2008 was issued with the participation of municipal advisors. [36] The MSRB also stated that participation by municipal advisory firms in the issuance of municipal securities is rising, noting a 63% participation rate in 2006, a 66% participation rate in 2007, and a 70% participation rate in 2008. [37] A study that looked at historical involvement by “financial advisors” identified participation rates of approximately 50% in the period from 1984 to 2002. [38]

As discussed in the Proposal, [39] municipal advisors may also engage in municipal advisory activities with respect to municipal financial products. [40] For example, as derivatives—which are municipal financial products—developed in the municipal securities market, some municipal advisory firms began marketing themselves as experts in derivatives. These municipal advisory firms are generally referred to as “swap advisors.” [41] Swap advisors may provide advice solely with respect to a municipal derivative transaction or may provide advice in other types of municipal advisory capacities.

Further, municipal advisors may provide advice to municipal entities concerning guaranteed investment contracts and investment strategies. [42] These advisory firms may assist in the investment of proceeds from bond offerings as well as manage other public monies. Such public monies include general and special funds of state and local governments, public pension plans, and other funds dedicated to public programs, such as public transportation, police and fire protection, public health, and public education. In addition, municipal advisors may help state and local governments find and evaluate other advisors that manage public funds and provide other types of services. [43]

Other persons that may be required to register as municipal advisors include those who solicit municipal entities on behalf of brokers, dealers, municipal securities dealers, municipal advisors, and investment advisers. Such solicitation activities are discussed herein. [44]

b. Municipal Entities and Municipal Financial Products

The municipal securities market consists of approximately 44,000 issuers, [45] a diverse group that includes states, their political subdivisions (such as cities, towns, counties, and school districts), and their instrumentalities, authorities, agencies, and special districts. These public bodies are governed by state and local laws, including state constitutions, statutes, city charters, and municipal codes. [46] Such constitutions, statutes, charters, and codes impose on municipal issuers requirements relating to governance, budgeting, accounting, and other financial matters. [47] The governing bodies of municipal issuers are as varied as the types of issuers, ranging from state governments, cities, towns, counties, and school districts, to authorities, agencies, and other special districts. [48]

Municipal securities are issued by government entities to pay for a variety of public projects, to obtain cash flow for other governmental needs, and to provide tax-exempt or taxable financing for non-governmental private projects by acting as a conduit on behalf of private organizations. [49] In 2011, there were over one million different municipal bonds outstanding, totaling $3.7 trillion in principal. [50] Also, there were 13,463 municipal issuances, totaling $355 billion of principal. [51] Further, in 2011, the average daily trading volume for the municipal bond market was $11.3 billion. [52]

Interests offered by college savings plans (“529 Savings Plans”) that comply with Section 529 of the Internal Revenue Code [53] are another type of municipal security. 529 Savings Plans involve offerings of interests in state tuition programs and qualified savings plans that are public instrumentalities of the particular state, and provide tax advantages designed to encourage saving for future college costs. [54] 529 Savings Plan assets have increased from approximately $9 billion in 2000 to approximately $190 billion in 2012, and the number of 529 Savings Plan accounts has increased from approximately 1.3 million in 2000 to approximately 11 million in 2012. [55]

A person that sells interests in 529 Savings Plans generally must be registered as a broker, dealer, or municipal securities dealer and comply with applicable MSRB rules. [56] 529 Savings Plans are also relevant in the context of municipal advisor regulation, because an issuance of interests in 529 Savings Plans is an issuance of municipal securities. [57] Further, 529 Savings Plans may engage in transactions involving municipal financial products and may also seek advice in connection with such products or issuances. [58] Moreover, third parties seeking to advise 529 Savings Plans may solicit such plans for that purpose. [59]

Public pension plans may also engage in transactions in municipal financial products and seek advice in connection with such transactions. Third parties may solicit these public pension plans on behalf of firms seeking to provide advice to these plans. [60] According to the 2011 Census Bureau survey, there were 3,418 state- and locally-administered pension systems in 2011. [61] As of the first quarter of 2013, public pension plans had over $3 trillion of assets and represented approximately 30 percent of all U.S. pension assets. [62]

In addition to public pension plans and 529 Savings Plans, state and local government agencies also maintain other pools of assets, including general funds and other special funds. Governmental entities generally invest such funds in a combination of individualized investments, investment agreements, and local government investment pools (“LGIPs”). [63]

Historically, the over-the-counter derivatives markets have been relatively opaque because of their privately negotiated, bilateral nature and the limited availability of transaction data such as prices and volumes. [64] Accordingly, there is currently no comprehensive data on how many municipal issuers are active in the $162 trillion interest-rate swap market, [65] although reported estimates of the size of the municipal derivatives market range from $100 billion to $300 billion annually in notional principal amount. [66] Further, estimates of the number of municipal issuers that have engaged in derivative transactions also vary. Some anecdotal evidence suggests a relatively wide use of municipal derivatives in recent years. For instance, a 2008 review of Pennsylvania Department of Community and Economic Development records indicated that 185 school districts, towns, and counties in Pennsylvania have entered into derivative transactions since 2003, when the state's law was explicitly changed to allow for such transactions. [67] Other estimates, however, have pointed to a less widespread use of derivatives among municipal issuers. For example, a 2007 study by Standard & Poor's identified 750 municipal issuers that engaged in interest rate swaps. [68] In addition, in October 2009, Moody's undertook a review of the state and local governments for which Moody's provides ratings and identified 500 entities with outstanding interest rate swaps. [69] Moody's also estimated that Pennsylvania issuers accounted for 22% of all municipal derivative transactions, suggesting that a broad participation in derivative transactions by municipal entities in Pennsylvania did not necessarily translate into a broad participation by municipal entities nationwide. [70] Since 2008, the use of derivatives by municipal entities has declined, and many municipal entities have terminated existing interest rate swaps. [71]

2. Historical Regulation of Municipal Securities and Municipal Advisors

a. Municipal Securities Market

As discussed in the Proposal, [72] the Securities Act of 1933 (“Securities Act”) [73] and the Exchange Act [74] were both enacted with exemptions for municipal securities, except for the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder. [75] In the early 1970s, the municipal securities market was still relatively small. [76] Up until that time, the standard issue was usually a general obligation bond, with fairly standard features, and the typical participants were banks, underwriters, and bond counsel. [77]

In 1975, Congress granted new authority to regulate intermediaries in the market for municipal securities. As part of the Securities Acts Amendments of 1975 (“1975 Amendments”), Congress created a limited regulatory scheme for the municipal securities market at the federal level. [78] That scheme included mandatory registration with the Commission for brokers, dealers, and municipal securities dealers involved in effecting municipal securities transactions, [79] and gave the Commission broad rulemaking and enforcement authority over such persons. [80] In addition, the 1975 Amendments authorized the creation of the MSRB and granted it authority to promulgate rules concerning transactions in municipal securities by brokers, dealers, and municipal securities dealers. The 1975 Amendments, however, did not create a regulatory scheme for, or impose any new requirements on, municipal issuers. Rather, the 1975 Amendments expressly prohibited the Commission and the MSRB from requiring municipal securities issuers, either directly or indirectly, to file any application, report, or document with the Commission or the MSRB prior to any sale by the issuer. [81]

As noted above and in the Proposal, pursuant to the 1975 Amendments, unless an exception or exemption applies, all brokers, dealers, and municipal securities dealers that underwrite or trade municipal securities are required to register with the Commission. [82] All brokers, dealers, and municipal securities dealers that engage in municipal securities transactions also must register with the MSRB and comply with its rules. [83] Furthermore, unless it is a bank, each broker, dealer, and municipal securities dealer that engages in municipal securities transactions must be a member of FINRA. [84] FINRA is required to examine brokers, dealers, and municipal securities dealers for compliance with the Exchange Act, rules and regulations thereunder, and MSRB rules. [85] Bank municipal securities dealers are examined by their appropriate regulatory agencies. [86]

Since 1975, the municipal securities market has grown and evolved significantly to encompass a wide variety of bond structures [87] and credit enhancements. The variety of financing options has led municipal entities to increasingly rely on external advisors to assist them in deciding among the structural choices for their debt and to help them negotiate with a variety of specialized intermediaries. [88] For example, municipal bond insurance was first introduced in 1971. [89] The introduction of variable rate municipal bonds in the early 1980s increased the use of letter of credit-supported municipal bonds. [90] In 1988, auction rate securities were introduced into the municipal market. [91] In addition, derivative products have been utilized by municipal securities issuers beginning generally with interest rate swap transactions in the mid-1980s. The derivatives utilized since then have become more complex. [92]

b. Municipal Advisors

As discussed above and in the Proposal, [93] many market participants advise municipal entities about the issuance of municipal securities and municipal financial products. Historically, however, these participants have been largely unregulated with respect to their municipal advisory activities. In addition, Commission staff has taken the position that financial advisors that limit their advisory activities solely to advising municipal issuers as to the structuring of their financings may not need to register as investment advisers. [94]

Approximately fifteen states, however, as well as a number of municipalities, have rules relating to the conduct of some municipal advisors (generally, financial advisors and swap advisors). For example, these governmental entities have enacted pay-to-play prohibitions that range from broad proscriptions relating to all state and local contracts to narrowly defined rules that apply only to specific situations. [95] Some state and local entities also require certain types of municipal advisors to disclose actual or apparent conflicts of interest. [96]

B. Dodd-Frank Act and the Need for Oversight

As discussed in more detail below and in the Proposal, [97] the Dodd-Frank Act amended the Exchange Act to require municipal advisors to register with the Commission. [98] In addition, the Exchange Act, as amended by the Dodd-Frank Act, grants the MSRB regulatory authority over municipal advisors [99] and imposes a fiduciary duty on municipal advisors when advising municipal entities. [100]

The Commission believes that regulation of municipal advisors is in the public interest and will improve the protection of municipal entities, including the protection of municipal entities in their capacities as investors, and those who invest in municipal securities. As noted above, [101] according to a Senate Report related to the Dodd-Frank Act, “[t]he $3 trillion municipal securities market is subject to less supervision than corporate securities markets, and market participants generally have less information upon which to base investment decisions. During the [financial] crisis, a number of municipalities suffered losses from complex derivatives products that were marketed by unregulated financial intermediaries.” [102] Accordingly, in response to the financial crisis that began in 2008, the Dodd-Frank Act amended the Exchange Act to require “a range of municipal financial advisors to register with the [Commission] and comply with regulations issued by the [MSRB].” [103]

A number of actions brought by the Commission against municipal market participants also highlight the abuses in the municipal securities market. For example, the Commission brought a number of actions alleging payments by J.P. Morgan Securities Inc. (now J.P. Morgan Securities LLC) to local firms whose principals or employees were friends of public officials of Jefferson County, Alabama in connection with a $5 billion bond underwriting and interest rate swap agreement business. [104] In addition, the Commission has settled several actions against major financial institutions for their role in a series of complex, wide-ranging bid-rigging schemes involving derivatives utilized by municipalities and underlying obligors as reinvestment products. [105] Further, in August 2011, the Commission filed a civil injunctive action against Stifel, Nicolaus & Co., Inc. and its former Senior Vice President, David Noack, for allegedly violating federal securities laws in connection with a $200 million sale of highly leveraged and unsuitably risky derivatives to five Wisconsin school districts. [106] According to the complaint, Stifel and Noack misrepresented the risks of the investments and failed to disclose material facts to the school districts.

C. Interim Final Temporary Rule 15Ba2-6T and Form MA-T

The registration requirement for municipal advisors established by the Dodd-Frank Act became effective on October 1, 2010. [107] To enable municipal advisors to temporarily satisfy the registration requirement, and to make relevant information available to the public and municipal entities, the Commission adopted interim final temporary Rule 15Ba2-6T [108] on September 1, 2010. [109] Pursuant to Rule 15Ba2-6T, a municipal advisor may temporarily satisfy the statutory registration requirement by submitting certain information electronically through the Commission's public Web site on Form MA-T. [110]

Form MA-T requires a municipal advisor to indicate the purpose for which it is submitting the form (i.e., initial application, amendment, or withdrawal), provide certain basic identifying and contact information concerning its business, indicate the nature of its activities, and supply information about its disciplinary history and the disciplinary history of its associated municipal advisor professionals. [111]

As originally adopted, the interim final temporary rule provided that, unless rescinded, a municipal advisor's temporary registration by means of Form MA-T would expire on the earlier of: (1) The date that the municipal advisor's registration is approved or disapproved by the Commission pursuant to a final rule establishing a permanent registration regime; (2) the date on which the municipal advisor's temporary registration is rescinded by the Commission; or (3) December 31, 2011. [112] The temporary registration procedure was developed as a transitional step toward the implementation of a permanent registration regime, which, as discussed below, the Commission is adopting today. On December 21, 2011, the Commission extended the expiration date of the temporary registration regime to September 30, 2012, in order to continue to provide a method for municipal advisors to temporarily satisfy the statutory registration requirement. [113] On September 21, 2012, the Commission further extended the expiration date of the temporary registration regime to September 30, 2013. [114] Today, in a separate release, the Commission is extending the expiration date of the temporary registration regime to December 31, 2014. [115] This extension will enable municipal advisors that are required to register with the Commission on or after the Effective Date but before the applicable compliance date to continue to register under the temporary registration regime.

D. Proposal To Establish a Registration Regime for Municipal Advisors

In light of the requirements of Section 975 of the Dodd-Frank Act, and in anticipation of the expiration of Rule 15Ba2-6T, on December 20, 2010, the Commission proposed Rules 15Ba1-1 to 15Ba1-7 under the Exchange Act and Forms MA, MA-I, MA-W, and MA-NR to establish a permanent registration regime for all persons meeting the definition of municipal advisor, including those persons currently registered on Form MA-T. [116] The Proposal was published for comment in the Federal Register on January 6, 2011. [117]

In response to the Proposal, the Commission received over 1,000 unique comment letters from broker-dealers, investment advisers, individuals, banks, municipal entities, attorneys, engineers, and other market participants. [118] In general, commenters supported the Proposal's overarching goal to establish a permanent registration regime for municipal advisors. As discussed further below, however, many commenters recommended that the Proposal be modified or clarified in certain respects.

The Commission has carefully considered these comments and is adopting Rules 15Ba1-1 to 15Ba1-8 and 15Bc4-1 under the Exchange Act and Forms MA, MA-I, MA-W, and MA-NR, with revisions as appropriate. In discussing these rules and forms, the Commission highlights and addresses below commenters' main issues, concerns, and suggestions.

The Commission believes that the information required to be disclosed pursuant to the new rules and forms will enhance the Commission's oversight of municipal advisors and their activities in the municipal securities market. Moreover, the Commission believes the information provided pursuant to these rules and forms will aid municipal entities and obligated persons in choosing municipal advisors and engaging in transactions or investments with municipal advisors.

III. Discussion Back to Top

Section 15B(a)(1) of the Exchange Act, as amended by the Dodd-Frank Act, makes it unlawful for a municipal advisor [119] 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, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered with the Commission. [120] Section 15B(a)(2) of the Exchange Act, as amended by the Dodd-Frank Act, provides that a municipal advisor may be registered by filing with the Commission an application for registration in such form and containing such information and documents concerning the municipal advisor and any person associated with the municipal advisor as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. [121]

Consistent with the requirements of the Dodd-Frank Act, as discussed in detail below, the Commission is adopting new rules and forms that establish a Commission registration regime for municipal advisors, which the Commission believes is necessary and appropriate in the public interest and will improve the protection of municipal entities and investors in municipal securities.

A. Rules for the Registration of Municipal Advisors

1. Rule 15Ba1-1: Definition of “Municipal Advisor” and Related Terms

a. Statutory Definition of “Municipal Advisor”

Section 15B(e)(4)(A) of the Exchange Act, [122] as amended by the Dodd-Frank Act, defines the term “municipal advisor” to mean a person (who is not a municipal entity [123] or an employee of a municipal entity [124] ) that (i) provides advice to or on behalf of a municipal entity or obligated person [125] with respect to municipal financial products [126] or the issuance of municipal securities, [127] including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or (ii) undertakes a solicitation of a municipal entity. [128] As discussed in the Proposal, [129] the statutory definition of municipal advisor is broad and includes persons that traditionally have not been considered to be municipal financial advisors. Specifically, the definition of a municipal advisor includes “financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors” [130] that engage in municipal advisory activities. [131]

The statutory definition of municipal advisor includes distinct groups of professionals that offer different services and compete in distinct markets. As noted in the Proposal, the three principal types of municipal advisors are: (1) financial advisors, including, but not limited to, brokers, dealers, and municipal securities dealers already registered with the Commission, that provide advice to municipal entities with respect to their issuance of municipal securities and their use of municipal financial products; [132] (2) investment advisers that advise municipal entities on the investment of public monies, including the proceeds of municipal securities; [133] and (3) third-party marketers and solicitors.

Relevant exclusions from the definition of a municipal advisor also limit the scope of the three types of municipal advisors. The statutory definition of municipal advisor explicitly excludes “a broker, dealer, or municipal securities dealer serving as an underwriter . . ., attorneys offering legal advice or providing services that are of a traditional legal nature, [and] engineers providing engineering advice[.]” [134] Further, the statutory definition of municipal advisor excludes “any investment adviser registered under the Investment Advisers Act of 1940 [(“Investment Advisers Act”)], or persons associated with such investment advisers who are providing investment advice” and “any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps[.]” [135] As discussed more fully below in Section III.A.1.c., the Commission also proposed Rule 15Ba1-1(d)(2), and is adopting with modifications as Rules 15Ba1-1(d)(2) and 15Ba1-1(d)(3) a definition of “municipal advisor” that interprets those exclusions and provides other activity-based (but not status-based) exemptions.

The Commission also noted in the Proposal that, in defining the term municipal advisor in Exchange Act Section 15B(e)(4), Congress did not distinguish between persons who are compensated for providing advice and those who are not. Accordingly, as explained in the Proposal, the Commission believes compensation for providing advice with respect to municipal financial products or the issuance of municipal securities should not factor into the determination of whether a person must register with the Commission as a municipal advisor. [136] However, as clarified in this release, whether or not a person would have to register as a municipal advisor in connection with solicitation of a municipal entity or obligated person would depend upon whether such person receives compensation (direct or indirect). [137]

b. Interpretation of the Term “Municipal Advisor”; Definition of Related Terms

As noted above, Exchange Act Section 15B(e)(4) defines the term “municipal advisor” to mean, in part, a person (who is not a municipal entity or an employee of a municipal entity) that (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or (ii) undertakes a solicitation of a municipal entity or obligated person. [138] The Commission discusses below the terms “municipal entity,” “obligated person,” “municipal financial products,” and “solicitation of a municipal entity or obligated person” as well as other terms relating to the definition of municipal advisor. [139] Rule 15Ba1-1(d), as proposed [140] and adopted, provides that the term “municipal advisor” has the same meaning as in Exchange Act Section 15B(e)(4), [141] and, as discussed in Section III.A.1.c., provides certain exclusions and exemptions. For the purposes of clarity, however, Rule 15Ba1-1(d) as adopted also includes several non-substantive and organizational changes. For example, it: (1) incorporates in Rule 15Ba1-1(d)(1) the language of the statutory definition, rather than cross referencing the statute; (2) sets forth in Rule 15Ba1-1(d)(2) the statutory exclusions from the definition, as interpreted by the Commission; and (3) sets forth in Rule 15Ba1-1(d)(3) certain exemptions. [142]

In certain of the rules and forms that the Commission is adopting with respect to the registration of municipal advisors, the Commission uses the term “municipal advisory activities” to refer to the activities that would generally require a person to register as a municipal advisor. In this regard, the Commission is adopting, substantially as proposed, a definition of the term “municipal advisory activities” with minor clarifying modifications. As adopted, “municipal advisory activities” means “(1) [p]roviding advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products 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; or (2) [s]olicitation of a municipal entity or obligated person.” [143] The Commission notes, for example, that advice to a municipal entity about whether to issue municipal securities would be “municipal advisor activity.”

Additionally, as discussed more fully below, in response to comments received on the Proposal and to provide additional clarity, the Commission is adopting rule text to provide guidance on the term “advice.” The Commission also notes, as mentioned above and explained in more detail below, that the definitions of “municipal advisor” and related terms that it is adopting today include several non-substantive, clarifying changes designed to reorganize and simplify the rule, including using defined terms, where possible, and providing greater clarity as to which statutory standards are being incorporated into the Commission's rules, the Commission's interpretation of such standards, and any exemptions the Commission is providing with these rules.

i. Advice Standard in General

In the Proposal and as noted above, the Commission defined the term “municipal advisory activities,” which includes certain advice to or on behalf of a municipal entity or obligated person, [144] and addressed the scope of activities that would require a person to register as a municipal advisor. The Commission discussed the scope of such activities through its proposed interpretation of the definition of “municipal advisor,” which included guidance on the particular statutory exclusions and exemptions therefrom. [145]

In the Proposal, the Commission requested comment on its interpretation of the definition of “municipal advisor” and related terms, and particularly sought comment on whether any of its interpretations should be in any way modified or clarified. [146] The Commission also requested comment on whether its interpretation of certain exclusions from the definition of “municipal advisor” should be narrowed or expanded to exclude or include various activities. [147] More specifically, the Commission requested comment on whether it should exclude the following persons from the definition of municipal advisor: (1) An entity that provides to clients investment advice, such as research information and generic trade ideas or commentary that does not purport to meet the needs or objectives of specific clients, and is provided to a municipal entity as part of its ongoing ordinary communications; and (2) a broker-dealer that provides to a municipal entity a list of securities meeting specified criteria that are readily available in the marketplace, but without making a recommendation as to the merits of any investment particularized to the municipal entity's specific circumstances or investment objectives. [148]

In response to these requests for comment, commenters recommended additional guidance on the meaning and scope of the term “advice” both in general and, as addressed in more detail in subsequent sections on particular exclusions and exemptions, in the context of specific activities. A number of commenters requested that the Commission clarify the meaning of providing “advice to a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities.” [149] One commenter noted that “the concept of `advice' is central to the application of Section 975,” [150] while another commenter stated that “[a]bsent a clear understanding of the scope of `advice,' there will be substantial uncertainty as to which communications with municipal entity clients would be deemed `advice.'” [151] The Commission also received comments suggesting general parameters for defining advice. For example, one commenter suggested that the Commission “distinguish between situations in which information is provided to a municipal entity or obligated person as opposed to a recommendation as to a specific course of action.” [152] Similarly, another commenter suggested that “advice” is generally understood to contain a recommendation component as distinguished from the mere giving of factual, objectively-determinable information. [153]

Regarding the provision of general information, commenters made general and specific suggestions regarding the types of information that should not require registration as a municipal advisor. For example, one commenter suggested that the provision of general information should not be defined, in any instance, as municipal advisory activities that would give rise to a fiduciary duty. [154] More specifically, other commenters suggested that broker-dealers be permitted to provide general market, transactional or financial information, [155] attorneys be permitted to provide general educational information to clients and non-clients, [156] and insurance companies be permitted to provide certain general information of an educational nature regarding retirement plans without being required to register as a municipal advisor. [157] With respect to municipal derivatives, one commenter asked for clarification that the following activities do not constitute advice for purposes of the municipal advisor definition: (i) The provision of research, general market information, and product information that is not specific to a particular client and is provided to the bank's customers as part of its ordinary communications with clients or the public; and (ii) the provision of information describing product alternatives that may meet the needs of a client without giving a recommendation that the client engage in any specific transaction. [158]

Additionally, several commenters recommended that advice be defined in accordance with its commonly understood meaning—a recommendation to act. [159] One of these commenters further recommended that the Commission clarify that a communication constitutes advice only when “it is provided with respect to and directly relates to an enumerated municipal financial product or the issuance of municipal securities, and it is a recommendation that is particularized to the needs and circumstances of the recipient such that, under the prevailing facts and circumstances, a municipal entity or obligated person would reasonably expect that it could rely and take action, without further input, based upon such communication.” [160] Another commenter suggested that registration be required only if a communication constitutes a recommendation that the municipal entity take an action and the recommendation is particularized to the entity's needs and is distinct from normal sales efforts. [161]

The Commission agrees with commenters that clarifying guidance on what constitutes advice solely for the purposes of the municipal advisor definition will provide greater clarity regarding the applicability of the municipal advisor registration requirement. The Commission does not however believe that the term “advice” is susceptible to a bright-line definition. Instead, the Commission believes that “advice” can be construed broadly and that, therefore, the determination of whether a person provides advice to or on behalf of a municipal entity or an obligated person regarding municipal financial products or the issuance of municipal securities depends on all the relevant facts and circumstances. [162] Accordingly, to address comments, the Commission is adopting Rule 15Ba1-1(d)(1)(ii), which provides that advice excludes, among other things, the provision of general information that does not involve a recommendation regarding 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. [163]

The Commission agrees with commenters that the provision of certain general information does not constitute advice for purposes of the municipal advisor definition. For example, the Commission believes that advice does not include provision of the following general information:

  • Information of a factual nature without subjective assumptions, opinions, or views;
  • Information that is not particularized to a specific municipal entity or type of municipal entity;
  • Information that is widely disseminated for use by the public, clients, or market participants other than municipal entities or obligated persons; or
  • General information in the nature of educational materials.

The Commission believes that educational materials constitute general information if the content is limited to instructional or explanatory information, such as materials that describe the general nature of financial products or strategies, do not include past or projected performance figures (including annualized rate of return), do not include a recommendation to purchase or sell any product or utilize any particular strategy, and to the extent additional disclosure is available about a product (such as a prospectus), the materials contain information about how to obtain such additional information. [164]

Conversely, the definition of advice under Rule 15Ba1-1(d)(1)(ii), as adopted, does not exclude information that involves a recommendation [165] regarding municipal financial products or the issuance of municipal securities. Further and more precisely, the Commission believes that, for purposes of the municipal advisor definition, 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. As discussed above and consistent with the FINRA approach to what constitutes a recommendation, for purposes of the municipal advisor definition, the Commission believes that the determination of whether a recommendation has been made is an objective rather than a subjective inquiry. [166] An important factor in this inquiry is whether, considering its content, context and manner of presentation, the information communicated to the municipal entity or obligated person reasonably would be viewed as a suggestion that the municipal entity or obligated person take action or refrain from taking action regarding municipal financial products or the issuance of municipal securities. [167]

While the determination of whether a person provides advice depends on all the relevant facts and circumstances, the more individually tailored the information to a specific municipal entity or obligated person or a targeted group of municipal entities or obligated persons that share common characteristics, such as school districts or hospitals, with respect to municipal financial products or the issuance of municipal securities, the more likely it will be a recommendation that constitutes advice under the municipal advisor definition, which would require registration as a municipal advisor, absent the application of an exemption or exclusion from registration. [168] For example, whether information describing municipal financial product alternatives constitutes advice under the municipal advisor definition generally depends on how individually tailored the information is to a particular municipal entity, obligated person, or targeted group of municipal entities or obligated persons that share common characteristics, as well as the content, context, and manner of presentation of the information communicated.

ii. Municipal Entity

Exchange Act Section 15B(e)(8) provides that the term “municipal entity” means “any State, political subdivision of a State, or municipal corporate instrumentality of a State, including—(A) any agency, authority, or instrumentality of the State, political subdivision, or municipal corporate instrumentality; (B) any plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and (C) any other issuer of municipal securities.” [169] In the Proposal, the Commission proposed to clarify that, with respect to clause (B) of the definition of “municipal entity,” the definition includes, but is not limited to, public pension funds, LGIPs, and other state and local governmental entities or funds, as well as participant-directed investment programs or plans such as 529, 403(b), and 457 plans. [170]

In the Proposal, the Commission requested comment on whether the proposed interpretation of municipal entity for purposes of the proposed definition of municipal advisor is appropriate, and whether additional clarification is necessary. [171] The Commission received approximately 20 comment letters regarding the scope of the Commission's interpretation of the term “municipal entity.” Based on consideration of the comments received, as further discussed below, the Commission is making one change to its interpretation.

Several commenters suggested that the definition of “municipal entity” should be limited to issuers of municipal securities [172] because the phrase “any other issuer of municipal securities” in Section 15B(e)(8)(C) would otherwise be unnecessary. [173] In connection with these comments, one commenter stated that the text and legislative history of the Dodd-Frank Act “are devoid of any indication that its provisions addressing municipal securities were intended to grant the [Commission] general prudential authority over State and local fiscal matters.” [174] This commenter further stated that the “Dodd-Frank Act references to municipal securities were intended to address securities (primarily municipal bonds) issued by `municipal entities' to the class of nongovernmental investors that the [Commission] is charged with protecting.” [175] Another commenter, however, suggested that the definition, as proposed, should extend to public pension funds, LGIPs, other government asset pools, and investor-directed governmental plans only to the extent that they are political subdivisions of a state, or corporate instrumentalities of a state, that issue municipal securities in the public market. [176] This commenter also stated that LGIPs, tax-sheltered annuities, and deferred compensation plans should not be deemed to be municipal entities, because they do not issue securities in the public municipal securities market. [177] Finally, another commenter suggested that the definition of municipal entity should include obligated persons, because the definition includes issuers of municipal securities, and obligated persons can be issuers of municipal securities pursuant to other provisions of the federal securities laws. [178]

One commenter stated that, although Congress specifically referred to states, counties, cities, and other political subdivisions, Congress did not refer to their pension or retirement plans when it enacted Section 975 of the Dodd-Frank Act. This commenter further argued that governmental retirement plans are separate legal entities from the municipal entities and are not ordinarily funded by, or involved in, the types of transactions contemplated by Section 975 or the proposed rules. [179] Another commenter questioned whether a public retirement system would be a municipal entity, a municipal financial product, or both. [180]

Other commenters suggested that the definition of municipal entity should exclude public pension plans or participant-directed plans. [181] One commenter stated that these plans have nothing to do with raising funds for a municipal entity or investing proceeds from an offering of municipal securities. [182] This commenter also stated that once the funds are contributed to a governmental retirement plan, they are no longer the property or held for the benefit of the municipal entity that established the plan. [183] Further, this commenter stated that the definition of municipal entity should not include individual participants in a governmental retirement plan. [184]

One commenter stated that the Commission should clarify that municipal entity only includes entities that are controlled by, or established for the benefit and enjoyment of, a state or any of its constituent political subdivisions or municipal corporations. [185] This commenter noted that some public pension plans, “sponsored or established” by states or their political subdivisions or municipal corporations, are not controlled by the sponsoring governmental unit but are instead controlled by trustees with plenary authority. [186] This commenter also suggested that private pension funds, mutual funds, and insurance companies recognized under state law as such entities as a result of a filing with a state official and issuance of a certificate of formation should not be included within clause (B) of the definition of municipal entity as a “plan, program or pool of assets sponsored or established by the State.. . .” [187]

The Commission has carefully evaluated comments received on its proposed definition of “municipal entity” and continues to believe that the definition of “municipal entity” should not be limited to issuers of municipal securities. [188] The Commission believes that the phrase “any other issuer of municipal securities” does not limit clauses (A) and (B) of the definition to entities that can issue municipal securities. Many of the plans, programs and pools of assets included in clause (B) of Section 15B(e)(8) do not issue municipal securities. Further, the definition of municipal entity does not otherwise limit itself to those entities that issue municipal securities. To limit the entities listed in clause (A) and (B) of Section 15B(e)(8) to issuers of municipal securities would also limit the definitions of “municipal financial products” (and therefore “municipal derivatives”) and “solicitation of a municipal entity” to encompass only those entities that issue municipal securities. Under such a limited definition, advice with respect to municipal derivatives, for example, would not subject advisors to registration unless the municipal entity entering into a swap [189] was also an issuer of municipal securities. This limited definition would also allow third parties to solicit various public pension funds and LGIPs on behalf of brokers, dealers, investment advisers, and municipal advisors without registering as municipal advisors. The Commission believes that such entities should have the protections provided by municipal advisor registration. [190]

The Commission believes public employee retirement systems and public employee benefit plans or public pension plans (including participant-directed plans, 403(b), and 457 plans) [191] fall within the statutory definition of municipal entity. The Commission believes that each of these plans constitutes a “plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof.” [192]

Further, the Commission believes that such plans should be afforded the protection granted to municipal entities by the statute. The Commission notes that the solicitation of public pension plans [193] in connection with investment advisory services has been subject to multiple Commission enforcement actions. For example, in 2009, the Commission charged a former New York State official and top political advisor with allegedly defrauding the New York State Common Retirement Fund by causing the fund to invest billions of dollars with private equity funds and hedge fund managers who paid millions of dollars in the form of sham “finder” or “placement agent” fees. [194]

The Commission notes, however, that individual natural person participants in a public employee benefit plan do not fall within the definition of municipal entity, because such persons would not be a state, political subdivision of a state, or municipal corporate instrumentality. Similarly, private employee benefit plans, mutual funds, and insurance companies that are not sponsored or established by a state, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof, do not fall within the statutory definition of municipal entity. [195] Such funds and entities are not “established or sponsored by” a state merely because they file with a state official or are issued a certificate of formation by a state.

As noted above, three commenters [196] stated that funds contributed to a governmental plan are no longer the property of, or held for the benefit of or controlled by, the municipal entity that established the plan, and that such plans are not ordinarily funded by or involved in the types of transactions contemplated by Congress. These commenters argued that, as a result, these plans should be excluded from the definition of municipal entity. The Commission does not agree. Such a plan is “sponsored or established” by the municipal entity and, therefore, falls within the statutory definition of municipal entity.

One commenter suggested that the phrase “any State, political subdivision of a State, or municipal corporate instrumentality of a State” in the interpretation of the definition of “municipal entity” would be clearer if it were revised to read “any State, political subdivision of a State, or municipal corporate instrumentality of a State or of a political subdivision of a State.” [197] The commenter noted, for example, that a charter school may be organized as an “instrumentality of a political subdivision of a State.”

Because states delegate powers to their political subdivisions and one of the powers that may be delegated to political subdivisions is the ability of political subdivisions to create corporate instrumentalities, [198] the Commission believes that a municipal entity organized as a municipal corporate instrumentality of a political subdivision of a state is properly considered a municipal corporate instrumentality of a state. Accordingly, the Commission is adopting Rule 15Ba1-1(g) to reflect such interpretation and define municipal entity to include municipal corporate instrumentalities of political subdivisions of states. [199]

iii. Obligated Person

Exchange Act Section 15B(e)(10) provides that the term “obligated person” means “any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.” [200] In the Proposal, in response to a commenter's request for clarification, [201] the Commission stated its belief that the definition of obligated person for purposes of the definition of municipal advisor should be consistent with the definition of obligated person for purposes of Rule 15c2-12. [202] The Commission therefore proposed to exempt from the definition of obligated person providers of municipal bond insurance, letters of credit, or other liquidity facilities. [203] In the Proposal, the Commission stated its belief that this interpretation would not conflict with the goals of the Dodd-Frank Act to provide further protections for certain entities that participate in borrowings in the municipal securities market and would help ensure uniformity among rules relating to such market, including uniformity relating to the definition of obligated persons. [204] The Commission noted that providers of municipal bond insurance, letters of credit, or other liquidity facilities are generally non-governmental providers of credit enhancements. [205] As providers of credit enhancements, these entities are not borrowing funds through a municipal entity. Therefore, the Commission stated in the Proposal its belief that they do not require the type of protection that should be provided to those who, in municipal securities transactions, borrow funds through municipal entities.

The Commission received approximately ten comment letters with regard to the definition of “obligated person” and the application of the proposed rules to such persons.

Definition of “Obligated Person”

Generally, most commenters agreed that the definition of “obligated person” should be consistent with the definition of that term in Rule 15c2-12, [206] or otherwise expressed support for the proposed definition of obligated person. [207] Consequently, the Commission is adopting the definition substantially as proposed, but with modifications for general consistency with the application of the term in Rule 15c2-12 [208] and certain clarifying modifications to address concerns raised by commenters. Specifically, Rule 15Ba1-1(k) provides that obligated person “has the same meaning as in section 15B(e)(10) of the Act (15 U.S.C. 78 o-4(e)(10)); provided, however, the term obligated person shall not include: (1) A person who provides municipal bond insurance, letters of credit, or other liquidity facilities; (2) a person whose financial information or operating data is not material to a municipal securities offering, without reference to any municipal bond insurance, letter of credit, liquidity facility, or other credit enhancement; or (3) the federal government.”

The Commission believes that there is no reason to differentiate the definition of obligated person for purposes of municipal advisor registration from the definition of obligated person for other Exchange Act purposes. As discussed in the Proposal and herein, the Commission believes that such definition will provide further protections for certain entities that participate in borrowings in, and help ensure uniformity among rules relating to, the municipal securities market. The continued use of a consistent definition will also provide clearer guidance to market participants.

Although most commenters supported the proposed definition, some commenters asked for clarification. One commenter suggested that the definition should exclude persons who might otherwise be deemed to be an obligated person solely on the basis of a commitment to support payment of the underlying assets that secure such issue, other than a borrower, lessee, or installment purchaser who is contractually responsible for payments that exceed a specified and substantial materiality standard, or a guarantor of such a payment obligation, who is not otherwise excluded from the definition of obligated person. [209] One commenter specifically stated that guaranty agencies for loans under the Federal Family Education Loan Program (“FFELP”) should not be deemed obligated persons. [210] Another commenter stated that companies registered under the Exchange Act, the federal government and its instrumentalities, foreign governments and their instrumentalities, religious organizations, and entities already subject to substantial oversight and regulation, such as banks, credit unions, regulated investment companies, and insurance companies, should be exempt from the definition of obligated person. [211]

The Commission has carefully considered these comments. The Commission continues to believe that there is no reason to differentiate the definition of obligated person for purposes of municipal advisor registration from the definition of obligated person for purposes of Rule 15c2-12. The Commission, however, is modifying the rule text of Rule 15Ba1-1(k) to clarify that the definition of obligated person excludes persons whose financial information or operating data is not material to a municipal securities offering, without reference to any municipal bond insurance, letter of credit, liquidity facility, or other credit enhancement.

The continuing disclosure requirements of Rule 15c2-12 exclude certain obligated persons whose financial information or operating data is not material to the issuance of municipal securities. [212] Therefore, consistent with Rule 15c2-12, the Commission is clarifying that an entity whose financial information or operating data is not material to an issuance of municipal securities would not be an obligated person under Rule 15Ba1-1(k). Any advisor to such entity would not be required to register as a municipal advisor, because such person would not be a municipal advisor within the meaning of Rule 15Ba1-1(d). [213] In addition to promoting consistency, the Commission believes that the materiality standard for secondary market disclosure in Rule 15c2-12 also serves as an appropriate standard to identify those obligated persons that should have the protections afforded by Section 15B of the Exchange Act. Using a similar approach ensures uniformity, provides municipal market participants with existing guidance about how the rules should be applied, and limits the application of the definition to only those persons whose financial information or operating data is material to a municipal securities offering and for whom registration provides significant benefits to the municipal marketplace.

While the definition of obligated person in the Proposal excluded only providers of municipal bond insurance, letters of credit, or other liquidity facilities, the Commission understands that credit enhancement for municipal securities is not necessarily limited to those three categories and that many municipal securities may be credit enhanced indirectly. Prior guidance from Commission staff provides that “[e]ntities that insure or guarantee performance of assets that have been pledged to secure the repayment of the municipal obligation may fall within the definition of `obligated person' . . . unless such insurance or guarantee has been obtained prior to and not in contemplation of any offering of municipal securities, the insurance or guarantee relates only to the individual pledged assets, and the insurance or guarantee exists independent of the existence of a municipal obligation.” [214] Consistent with this prior guidance from Commission staff, the Commission is adopting a definition of “obligated person” for purposes of Rule 15Ba1-1(k), which provides that the ultimate determination as to whether an insurer or guarantor is an obligated person under Rule 15c2-12 depends on the relationship to the financing itself, which is a factual analysis. [215] Similarly, a determination of whether a guarantor or insurer falls within the exclusion from the definition of obligated person for the purposes of the municipal advisor registration regime also depends on the particular facts and circumstances. [216]

In addition, the Commission notes that although the federal government and its instrumentalities, as providers of credit enhancement, could fall within the definition of obligated person under Rule 15c2-12, the federal government does not require the type of protection that should be applicable generally to those who borrow funds through municipal entities in municipal securities transactions. [217] Accordingly, for purposes of the municipal advisor registration regime, the Commission is interpreting the definition of obligated person to exclude the federal government. Therefore, advisors to the federal government and its instrumentalities providing credit enhancements in connection with issuances of municipal securities are not required to register as municipal advisors.

Another commenter stated that buyers of municipal securities rely on the letter of credit and the credit rating of the lender issuing the bonds rather than the “ultimate borrower,” and the security or collateral provided by a borrower goes to the lender or letter of credit issuer, not bondholders. [218] The commenter stated that the real borrower-lender relationship is between the borrower and the bank issuing the letter of credit. [219] This commenter noted that these and other factors distance conduit borrowers [220] from direct obligations to bondholders, but they nonetheless would be obligated persons under the Proposal.

The Commission understands this commenter to be suggesting that such conduit borrowers should not be considered obligated persons, such that their advisors would not have to register as municipal advisors. The Commission, however, has taken the position that, regardless of whether an obligated person obtains a letter of credit from a bank to guarantee the payment of municipal securities, an obligated person has an obligation to investors. [221] The Commission has long been of the view that the presence of credit enhancements generally would not be a substitute for material disclosure concerning the primary obligor on municipal bonds. [222] Thus, an advisor to an obligated person that has obtained a letter of credit from a bank to guarantee the payment of municipal securities should not be treated differently from an advisor to an obligated person that has not obtained such credit enhancements, and would therefore have to register as a municipal advisor. [223]

Application of Rules to Advisors to Obligated Persons

One commenter suggested generally that the proposed rules should be more strictly applied to advisors dealing with municipal entities than to advisors dealing with obligated persons. The commenter asserted that there is less public interest in regulating advice to private entities, and such regulation is better handled outside of municipal markets regulation. [224] As stated above, obligated persons assume the same role as municipal entities in an issuance of municipal securities, because obligated persons are committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities. Further, defaults by private entity obligated persons with respect to municipal securities can have negative consequences for municipal entities. [225] Section 15B of Exchange Act (as amended by the Dodd-Frank Act), moreover, provides for the protection of both municipal entities and obligated persons. [226] Accordingly, the Commission believes that the municipal advisor registration regime should generally apply in the same manner to advisors of obligated persons as to advisors of municipal entities. [227]

As described more fully below, however, the Commission is providing an exemption from the definition of municipal advisor for persons providing advice with respect to certain “investment strategies,” which will narrow the range of activities that would cause an advisor to an obligated person to meet the definition of municipal advisor. [228] Also as described more fully below, the Commission is limiting the scope of its definition of the term “municipal derivative” and its interpretation of the term “solicitation of a municipal entity or obligated person” as each applies to obligated persons, such that an obligated person must be acting in its capacity as such and the relevant activity is in connection with municipal securities (or, in the case of a solicitation, municipal financial products). [229]

When does a person become an obligated person?

One commenter asked when a client would become an obligated person. [230] Specifically, the commenter asked whether it would be rendering advice as a municipal advisor if it was engaged to consider a client's options regarding conventional versus conduit financing, but the client subsequently chose not to engage in conduit financing. [231] In addition, the commenter asked whether only registered municipal advisors can solicit clients that are eligible to use conduit financing. [232] Lastly, the same commenter asked whether a financial advisor would be required to register as a municipal advisor if a client is examining its debt alternatives, among which is conduit financing. [233]

Whether a financial advisor that advises clients about conduit financing or other financing options would be required to register as a municipal advisor would depend on the facts and circumstances. A person will not be a municipal advisor to an obligated person until the obligated person has begun the process of applying to, or negotiating with, a municipal entity to issue conduit bonds on behalf of the obligated person. Activity that never results in solicitation of or actual contact with a municipal entity does not have a sufficient nexus to municipal financial products or the issuance of municipal securities to require registration as municipal advisor. Merely advising a client on debt financing alternatives that include conduit financing is not a municipal advisory activity, because the client would not be sufficiently close to being an obligated person with respect to an issuance of municipal securities. [234] If a client is only considering conduit financing, the client is not an obligated person. However, if the client applies to, or negotiates with, the municipal entity to issue conduit bonds, the person advising the conduit borrower would be required to be registered as a municipal advisor, regardless of whether or not the financing successfully closes.

One commenter argued that a person that is an obligated person does not remain an obligated person indefinitely and is not an obligated person with respect to unrelated matters. [235] The Commission agrees and has limited the scope of the rules as applied to advice concerning municipal financial products used by, and third-party solicitations of, obligated persons as described herein. [236]

The same commenter also argued that a person should not be deemed an obligated person if it is not the initial obligor, but rather comes to support the payment of obligations on municipal securities after the offering, through an assumption or other arrangement, and asked the Commission to clarify that any relationship between an obligated person and its advisor will only be considered a municipal advisory relationship to the extent that it directly involves a transaction in which the person is an obligated person. [237] The Commission does not agree. It is the Commission's view that such a person would be an obligated person if the municipal securities remain outstanding after the substitution of the obligated person, and such a person is an obligated person for purposes of Rule 15c2-12. The obligated person's responsibilities and need for protection would be similar regardless of whether it was an initial obligor or a subsequent obligor. The Commission notes that, as discussed, a person is only a municipal advisor to an obligated person if it provides advice to, or on behalf of, the obligated person “with respect to municipal financial products 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” or that meets the definition for “solicitation” of such obligated person. [238] The Commission also notes that Exchange Act Section 15B(e)(10) defines obligated person to mean, among other things, “any person . . . who is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.” [239]

Charter Schools

In the Proposal, the Commission noted that a charter school would generally fall under the definition of municipal entity, but may, in certain circumstances, fall under the definition of obligated person. [240] With respect to municipal financial products or the issuance of municipal securities, the Commission asked in what circumstances should charter schools be considered municipal entities or obligated persons. [241] Further, the Commission asked how the treatment of charter schools under different state laws affects their classification as municipal entities or obligated persons. [242]

One commenter stated that charter schools that have bonds issued on their behalf by a local financing governmental entity are classic examples of obligated persons. [243] This commenter suggested that, if a charter school receives tax money from a state or school district, the school should be treated as a municipal entity. [244] Otherwise, the school should be treated as an obligated person. [245] Another commenter stated that a charter school should be considered a municipal entity if it is organized as a political subdivision of a state or an instrumentality of a political subdivision of a state. [246] This commenter stated that, in other circumstances when providing for payment of municipal securities, a charter school should be considered an obligated person. [247]

As stated in the Proposal, the Commission continues to believe that charter schools are generally municipal entities, because they are public schools and derive their charter from a political subdivision of a state. While charter schools generally receive a portion of their funds from the state, they may also raise funds through conduit borrowing, and may pledge funds other than state money for the payment on the conduit borrowing. Thus, a charter school is an obligated person under Section 15B(e)(10) and Rule 15Ba1-1(k) when it engages in conduit borrowing using and/or pledging solely monies derived from sources other than the state or political subdivision of a state. [248] A municipal entity that is an obligated person on bonds issued by another municipal entity is still a municipal entity for purposes of this rule, and advisors to such municipal entities are subject to a statutory fiduciary duty. [249]

iv. Municipal Financial Products

Exchange Act Section 15B(e)(5) defines “municipal financial product” to mean “municipal derivatives, guaranteed investment contracts, and investment strategies.” [250] The Commission proposed to incorporate into the rule the statutory definition of municipal financial product. [251] The Commission received approximately ten comment letters regarding the proposed definition. The issues raised by these commenters are discussed below in the “Municipal Derivatives,” “Guaranteed Investment Contracts,” and “Investment Strategies” sections. The Commission is adopting the definition of “municipal financial product” as proposed. [252]

v. Municipal Derivatives

As discussed in the Proposal, Exchange Act Section 15B does not define the term “municipal derivatives.” Accordingly, the Commission proposed Rule 15Ba1-1(f) to define the term to mean any swap [253] or security-based swap [254] to which a municipal entity is a counterparty or to which an obligated person, acting in its capacity as an obligated person, is a counterparty. [255] Thus, as stated in the Proposal, the Commission included in the definition of municipal derivatives the definitions of “swap” and “security-based swap,” as those terms are defined by statute (and any rules and regulations thereunder). In the Proposal, the Commission asked whether the proposed definition of municipal derivatives should be modified or clarified in any way. [256]

One commenter stated that the proposed definition of municipal derivatives is too broad, because it encompasses too many types of advisory entities and transactions and the definition goes beyond securities. [257] The commenter expressed concern that a person must register as a municipal advisor regardless of the type of swap advice contemplated or the relationship between the municipal entity and the person seeking to offer the advice. [258]

Another commenter stated that there is no statutory basis or legislative history for the proposed expansion of the industry's common usage of the term “municipal derivatives,” which is limited to derivatives of a municipal security. [259] The commenter stated that the proposed definition would mean that any public plan (if not exempted from the definition of municipal entity) using swaps in the management of its overall portfolio would be dealing in municipal financial products, merely by virtue of being a counterparty to the swap. [260]

Additionally, one commenter stated that many municipal entities enter into commodity hedging transactions in connection with their operations to avoid mid-year operating budget disruptions and rate hikes. Accordingly, this commenter asked the Commission to confirm that hedging transactions by municipal entities related to their operations (rather than municipal securities) do not constitute municipal derivatives. [261]

One commenter asked the Commission to clarify how a person engaging in a transaction or assignment with respect to a municipal derivative would determine that the person it is advising is “an obligated person, acting in its capacity as an obligated person.” [262] The commenter stated that the Commission should clarify that a person (presumably acting as a dealer or counterparty) must have actual knowledge that the counterparty is an obligated person acting as such and have actual knowledge that the municipal derivative implicates or is related to the underlying transactions or funds that make such person an obligated person. [263] Further, the commenter stated that a person should not need to affirmatively inquire as to the counterparty's or the funds' status. [264]

Another commenter suggested narrowing the definition of municipal derivatives to only include debt-related derivatives entered into (a) by a municipal entity in connection with an issue of municipal securities or (b) by an obligated person as a pledged security or a source of payment for municipal securities. [265] This commenter also stated that the phrase “in its capacity as an obligated person” is not sufficiently tailored, because it would include any derivative entered into by the obligated person to hedge a conduit borrowing, not merely those that “by contract or other arrangement . . . support the payment” of municipal securities. [266] In addition, this commenter stated that, given the use of the term “municipal financial product,” Congress did not intend to regulate transactions with non-municipal entities that do not affect municipal entities or investors, simply because they result from a municipal securities transaction. [267]

In contrast, one commenter agreed with the Commission that municipal derivatives includes both swaps and security-based swaps to which a municipal entity or obligated person is a counterparty, but stated that this definition is too narrow. [268] This commenter stated that, because the term “municipal derivatives” (rather than the term “swap”) was used in the definition of municipal financial products, Congress intended to “provide flexibility to address problems that may arise in the future in connection with the use of other existing or yet-to-be-developed forms of derivatives by municipal entities.” [269]

The Commission has carefully considered these comments and is adopting the definition of municipal derivatives substantially as proposed. The Commission, however, is clarifying herein the scope of application of the definition to obligated persons, in response to issues raised by commenters. [270] Specifically, the Commission is adopting Rule 15Ba1-1(f), which now provides that the term “municipal derivatives” means “any swap (as defined in Section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)) and section 3(a)(69) of the Act (15 U.S.C. 78c(a)(69)), including any rules and regulations thereunder) or security-based swap (as defined in section 3(a)(68) of the Act (15 U.S.C. 78c(a)(68)), including any rules and regulations thereunder) to which: (1) [a] Municipal entity is a counterparty; or (2) [a]n obligated person, acting in such capacity, is a counterparty.” [271]

As proposed and adopted, with respect to municipal entities, the Commission has determined not to qualify the definition of municipal derivatives as being limited to those entered into in connection with, or pledged as security or a source of payment for, existing or contemplated municipal securities. Municipal entities seeking advice with respect to municipal derivative transactions (including commodity hedging transactions in connection with their operations, which fall within the definition of municipal derivatives) are subject to risks, regardless of whether the municipal derivatives are entered into in connection with or pledged as security or a source of payment for existing or contemplated municipal securities, and should have the protections provided by municipal advisor registration. [272]

As proposed and adopted, with respect to obligated persons, the coverage of the registration requirement is limited to advice relating to derivatives entered into by an obligated person in its capacity as an obligated person with respect to municipal securities. Thus, with respect to obligated persons, municipal derivatives include those derivatives entered into by obligated persons in connection with, or pledged as security or a source of payment for, existing municipal securities or municipal securities to be issued in the future. [273] By contrast, advice with respect to other types of derivative transactions entered into by obligated persons outside of their capacity as obligated persons will not trigger the municipal advisor registration requirement. For example, a person advising a nonprofit hospital to hedge an interest rate swap entered into in connection with a variable rate conduit borrowing (by such hospital) would be a municipal advisor. However, a person would not be required to register as a municipal advisor if it is advising an airline company that is an obligated person with respect to airport revenue bonds about whether the airline company should hedge its exposure on aviation fuel costs with a derivatives transaction that is unrelated to any particular issuance of municipal securities and that is outside of its capacity as an obligated person. The Commission believes that this clarification with respect to obligated persons addresses the concerns of commenters regarding scope of the advisors' responsibilities to conduit borrowers and the ability to identify situations where advising obligated persons triggers a registration requirement.

The Commission notes that the Exchange Act and the Commodity Exchange Act, as amended by the Dodd-Frank Act, provide heightened protection to special entities, in connection with swaps and security-based swaps. The Commission interprets the term special entity to generally include municipal entities, because the definition of municipal entity is substantially similar to the definition of special entity in the Exchange Act and the Commodity Exchange Act. [274] The heightened protection afforded by the Acts to special entities applies to all swaps and security-based swaps, irrespective of whether the swaps and security-based swaps are entered into in connection with or pledged as security or a source of payment for existing or contemplated securities. [275] Accordingly, the Commission's determination not to qualify its interpretation of the term “municipal derivatives” with respect to municipal entities is designed to provide a level of protection to such entities with respect to swaps and security-based swaps that is consistent with the protection afforded to special entities and the Commission's interpretation of that term with respect to obligated persons is intended to reflect the scope of the role of obligated persons with respect to municipal securities.

vi. Guaranteed Investment Contracts

Section 15B(e)(2) of the Exchange Act, as amended by the Dodd-Frank Act, defines “guaranteed investment contract” to include “any investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, and also includes any agreement to supply investments on two or more future dates, such as a forward supply contract.” [276] In the Proposal, the Commission proposed to include the statutory definition of guaranteed investment contract in Rule 15Ba1-1(a). [277]

The Commission received one comment supporting the proposed definition. [278] Another commenter, however, suggested that the definition does not include all guaranteed investment contracts entered into by municipal entities. [279] Instead, this commenter stated that the statutory definition of guaranteed investment contracts refers only to those contracts related to issues of bonds and similar municipal securities. [280] Another commenter stated that it is “cognizant of special issues arising in the investment of bond proceeds in guaranteed investment contracts, particularly in the tax area, but [is] unclear how the situation is improved . . . . by additional regulation of [guaranteed investment contract] providers by the SEC.” [281]

The Commission has carefully considered these comments and is adopting a definition of guaranteed investment contract substantially as proposed but with changes designed to respond to commenters. [282] Specifically, the Commission is interpreting the statutory definition of guaranteed investment contract so that it “has the same meaning as in section 15B(e)(2) of the Act (15 U.S.C. 78 o-4(e)(2)); provided, however, that the contract relates to investments of proceeds of municipal securities or municipal escrow investments.” [283]

For the same reasons that the Commission is narrowing the application of the term investment strategies as discussed further herein, [284] the Commission is persuaded by commenters that, at this time, it is appropriate to apply the definition of guaranteed investment contract more narrowly. Guaranteed investment contracts are investment products, [285] and this more limited interpretation is consistent with the approach the Commission is adopting with respect to the application of “investment strategies,” which will be limited to plans or programs for the investment of proceeds of municipal securities and the recommendation of and brokerage of municipal escrow investments. [286] A municipal entity could invest any funds held by or on behalf of such municipal entity, as opposed to just proceeds of municipal securities, in a guaranteed investment contract. Under the rule as adopted, a provider of a guaranteed investment contract is generally not a municipal advisor as long as such provider does not engage in municipal advisory activities, such as providing advice to the municipal entity or obligated person about the purchase of a guaranteed investment contract that relates to investments of proceeds of municipal securities or municipal escrow investments. [287] The Commission, therefore, believes it is in the public interest and consistent with the purposes of Section 15B to interpret the definition of guaranteed investment contract as described herein.

vii. Issuance of Municipal Securities

Section 15B(e)(4)(A) of the Exchange Act provides in relevant part that a municipal advisor includes a person that provides advice to or on behalf of a municipal entity or obligated person with respect to the “issuance of municipal securities,” including advice with respect to “the structure, timing, terms, and other similar matters” concerning such issues. Section 3(a)(29) of the Exchange Act defines the term “municipal securities.” [288] The broad statutory language in Section 15B(e)(4)(A) of the Exchange Act regarding advice on “the structure, timing, terms and other similar matters” concerning such issues suggests that advice on a broad range of activities potentially may be included within advice with respect to the issuance of municipal securities.

The scope of the concept of an “issuance of municipal securities” is particularly relevant to the “advice” aspect of the municipal advisor definition, as discussed previously herein, [289] because a person's provision of advice to a municipal entity or obligated person only results in municipal advisor status if the subject of that advice involves either the “issuance of municipal securities” or “municipal financial products.” [290] Several commenters recommended that the Commission provide guidance on the extent to which activities would be considered “advice with respect to the issuance of municipal securities. [291] One commenter suggested that the municipal advisor registration provision in Section 975 of the Dodd-Frank Act is intended to cover advice on certain listed activities within broad categories, including certain “strategic services,” “transaction-related services, and “post-issuance related services.” [292] One commenter recommended that such advice should be construed broadly, from a timing perspective, to include “any advice provided in connection with a municipal securities issue . . . at any point during the pre-issuance planning process as well as throughout the life of the issuance through final payment of principal and interest on the securities (by reason of maturity, earlier redemption, or otherwise, or for such longer period due to delayed payment such as the case of a payment default). . . .” [293] Another commenter recommended that such advice should not extend to advice after the closing of a specific bond issue. [294]

The Commission generally agrees that activities covered by the subject of the “issuance of municipal securities” should be construed broadly as a matter of statutory construction and policy to ensure appropriate protection of municipal entities with respect to advice received relating in some way to the issuance of municipal securities and to limit the potential for circumvention of the municipal advisor registration provision. As discussed previously herein, however, the determination of whether any particular activity constitutes “advice” in the first instance for purposes of the municipal advisor definition depends on all the facts and circumstances. [295] The Commission also agrees that “advice with respect to the issuance of municipal securities” should be construed broadly from a timing perspective to include advice throughout the life of an issuance of municipal securities, from the pre-issuance planning stage for a debt transaction involving the issuance of municipal securities to the repayment stage for those municipal securities. This interpretation would afford municipal entities and investors with the protections of the municipal advisor registration provision during a time frame that may involve advice on significant matters affecting issues of municipal securities. In this regard, municipal issuers may make significant decisions affecting the structure, timing, terms, or other similar matters concerning an issue of municipal securities early in the planning stages of a transaction and may make significant decisions affecting ongoing compliance, repayment, or refinancing throughout the term of an outstanding bond issue.

In addition, the scope of the concept of the issuance of municipal securities also is particularly relevant to the statutory exclusion to the municipal advisor definition for broker-dealers serving as underwriters, because the underwriting function involves certain activities that relate to the issuance of municipal securities. The exclusion for underwriters from the definition of municipal advisor is limited to activities that are within the scope of an underwriting of a particular issuance of municipal securities. For purposes of the underwriting exclusion to the municipal advisor definition, the function of serving as underwriter on a particular issuance of municipal securities is more circumscribed and encompasses services on a particular transaction during a narrower time frame than the overall focus of the municipal advisor definition with respect to advice on the issuance of municipal securities (which involves a broader focus and longer time frame), as discussed further herein. [296]

viii. Investment Strategies

Exchange Act Section 15B(e)(3) provides that the term “investment strategies” “includes” plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments. [297] The Commission proposed to interpret the term to mean that it includes, without limitation, the investment of the proceeds of municipal securities and plans, programs, or pools of assets that invest any other funds held by, or on behalf of, a municipal entity. [298] As such, under the proposed interpretation of the statutory definition, any person that provides advice with respect to such funds would have to register as a municipal advisor unless the person was covered by an exclusion or exemption. [299]

Plans or Programs for the Investment of the Proceeds of Municipal Securities

In the Proposal, the Commission asked whether its interpretation of the term “investment strategies” should be modified or clarified in any way. [300] Specifically, the Commission asked whether it should exclude plans, programs, or pools of assets that invest funds that are not proceeds of the issuance of municipal securities. [301] The Commission also asked how it would determine when funds should no longer be considered “proceeds of municipal securities” if it were to limit investment strategies to “plans or programs for the investment of the proceeds of municipal securities (other than municipal derivatives and guaranteed investment contracts) or the recommendation of or brokerage of municipal escrow investments.” [302]

Commenters generally opposed the proposed interpretation of investment strategies. Many commenters stated that the proposed interpretation was too broad, because it covers any fund held by a municipal entity, regardless of its source. [303] Some commenters asserted that the proposed interpretation is contrary to the language and intent of the Dodd-Frank Act [304] and suggested that the definition be restricted so that it applies only to the statutorily-identified categories of investments of proceeds of municipal securities and recommendation of and brokerage of municipal escrow investments. [305] One commenter stated that the “expanded definition” of investment strategies is not required or even implied by the Dodd-Frank Act and would subject a “vast swath of activity—which was not intended to be, and need not be, further regulated—to additional regulation.” [306]

On the other hand, one commenter agreed with the Commission that the use of the word “includes” in the statutory definition of investment strategies suggests that the term is not limited to plans or programs for the investment of the proceeds of municipal securities. [307] This commenter stated its belief, however, that Congress intended the definition to be limited to investment activities that relate to the securities and securities-like vehicles of a municipal entity, rather than all investment activities of municipal entities. [308]

In a similar vein, commenters suggested that the definition should encompass only plans or programs for investments in financial instruments, as opposed to investments in, for example, infrastructure, real estate, social welfare, and other non-financial investments. [309] Another commenter stated that, with respect to the funds held by or on behalf of a municipal entity, whether a person is providing advice regarding the “investment of” those funds, not other expenditure or use of the funds for non-investment purposes, is the determining factor for deciding that a person is a municipal advisor. [310]

One commenter stated that a “plan or program,” as used in the statutory definition of investment strategies, is a series of investment related actions that would be generally akin to a financial plan, not merely advice incidental to a particular trade or investment. [311] Another commenter urged the Commission to limit investment strategies to advice articulated as a part of the investment plan for the proceeds of a municipal securities offering at or before the time the proceeds are received. [312]

Some commenters asserted that public pension plans, participant directed investment programs or plans such as 529 Savings Plans and 403(b) and 457 plans were not intended to be regulated under the Exchange Act or the Dodd-Frank Act and should not be covered under the definition of investment strategies. [313] According to these commenters, the Dodd-Frank Act was intended to regulate those who provide advice regarding the issuance of municipal bonds and the investment of offering proceeds. [314] Therefore, these commenters argue, all governmental retirement plans should be excluded from the definition of investment strategies. Alternatively, one commenter suggested that, at the very least, governmental retirement and savings plans that are funded exclusively through the contribution of the employees as participants should be excluded. [315] Another commenter stated that the phrase “plans or programs for the investment of proceeds of municipal securities” implies that the purpose of the plan or program is to invest proceeds of municipal securities, whereas the purpose of public pension plans is to provide retirement benefits. [316] Another commenter suggested that municipal securities regulation was originally intended to regulate the issuance of investment instruments by a municipal entity under which the municipal entity is required to pay the investor in accordance with the terms of the investment. [317] The commenter stated that state employee pension plans, 529 Savings Plans, and assets invested by the state are not investment instruments issued by the state to investors. [318] As such, the commenter stated that they were never intended to be, nor should they now be, regulated under the Exchange Act or the Dodd-Frank Act. [319]

On the other hand, one commenter stated that the term “investment strategies” should include any type of investment strategy or advice relating to the investment of funds of investors or other vested persons held in any plan, program, or pool of assets sponsored or established by a state, political subdivision, or municipal corporate instrumentality, or any agency, authority, or instrumentality thereof, such as those created in connection with municipal fund securities, including but not limited to 529 Savings Plans and state and local government investment pools. [320] This commenter further stated that public defined contribution pension plans should also fall within the definition, because these plans share many of the same potential impacts on third-party beneficiaries and are generally exempt from the protections afforded by ERISA to private pension funds. [321]

The same commenter stated that funds should cease to be subject to the definition of investment strategies once their investment is no longer governed by legal documents or covenants governing the use of such funds. [322] Similarly, another commenter stated that proceeds should mean proceeds raised in securities offerings, until they are used for the purposes described in the use of proceeds section in the offering document, or otherwise commingled with the general funds of the municipal entity. [323] Additionally, one commenter suggested that “proceeds” should not extend to “replacement proceeds” such as pledge funds. [324]

The Commission has carefully considered the issues raised by commenters on the Proposal. As noted above, Exchange Act Section 15B(e)(3) defines investment strategies to include plans or programs for the investment of the proceeds of municipal securities that are not municipal derivatives, guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments. [325] In response to comments on the proposed definition of “investment strategies,” the Commission is adopting Rule 15Ba1-1(b), which defines “investment strategies” as having “the same meaning as in section 15B(e)(3) of the Act (15 U.S.C. 78 o-4(e)(3)), and includes plans or programs for the investment of proceeds of municipal securities that are not municipal derivatives or guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments.” [326]

While the Commission continues to believe that the term “includes” is not limiting, [327] the Commission is adopting a definition of “investment strategies” that, as compared to the definition in the Proposal, focuses more narrowly on the statutorily-identified categories of “proceeds of municipal securities” and “municipal escrow investments.” In this regard, the Commission is adopting Rule 15Ba1-1(d)(3)(vii), which will effectively narrow the focus of the term “investment strategies” to investments of proceeds of municipal securities and the recommendation of and brokerage of municipal escrow investments. Specifically, Rule 15Ba1-1(d)(3)(vii), as adopted, exempts from the definition of municipal advisor any person that provides advice to a municipal entity or obligated person with respect to municipal financial products to the extent that such person provides advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments.

Pursuant to Section 15B(a)(4) of the Exchange Act, the Commission may exempt any class of municipal advisors from any provision of Section 15B or the rules and regulations thereunder, if it finds that such an exemption is consistent with the public interest, the protection of investors, and the purposes of Section 15B. [328] The Commission believes that providing the exemption described above is consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act. The exemption tailors protection of municipal entities to those activities related to the investment of the proceeds of municipal securities and related municipal escrow investments, which are the specific categories of activities that Congress identified in the statutory definition of the term “investment strategies” and that the Commission believes have the most direct nexus to municipal securities and the protection of investors and municipal issuers in furtherance of the purposes of Section 15B.

In the Proposal, the Commission asked how it should determine when funds should no longer be considered proceeds of municipal securities, if it were to limit investment strategies to proceeds of municipal securities or the recommendation of or brokerage of municipal escrow investments. [329] While the Exchange Act does not define the term “proceeds of municipal securities,” the Federal tax laws provide a longstanding, known definition of “proceeds” of tax-exempt bonds issued by State and local governments, including related definitions of various types of proceeds (including “gross proceeds,” “sale proceeds,” “investment proceeds,” and “transferred proceeds”) under Section 148 of the Internal Revenue Code of 1986, as amended, [330] and Section 1.148-1 through 1.148-11 of the Regulations [331] for the purpose of the arbitrage [332] investment restrictions applicable to investments of proceeds of tax-exempt municipal securities. The arbitrage rules apply as long as the tax-exempt municipal securities are outstanding, and non-compliance with the arbitrage rules can result in the loss of the tax-exempt status of the interest on the municipal securities retroactively to the date of issuance. The Commission believes that the well-developed concept of proceeds of tax-exempt municipal securities under the arbitrage rules is well-known to issuers and to the professional participants in the municipal marketplace.

Some commenters that discussed “proceeds of municipal securities” did so by reference to Federal tax regulations and terms defined therein. [333] Because the arbitrage rules governing the investment of bond proceeds are central to an issue of tax-exempt municipal securities and well-known in the municipal market, the Commission has determined to define proceeds of municipal securities in a similar manner and to apply the term to tax-exempt municipal securities and also to taxable [334] municipal securities. Therefore, for purposes of the application of the definition of investment strategies and in response to comments raised on this issue, [335] the Commission is adopting Rule 15Ba1-1(m)(1), which defines “proceeds of municipal securities” as (i) monies derived by a municipal entity from the sale of municipal securities, (ii) investment income derived from the investment or reinvestment of such monies, (iii) any monies of a municipal entity or obligated person held in funds under legal documents for the municipal securities that are reasonably expected to be used as security or a source of payment for the payment of the debt service on the municipal securities, including reserves, sinking funds, and pledged funds created for such purpose, [336] and (iv) the investment income derived from the investment or reinvestment of monies in such funds. [337] Further, consistent with the general definition of proceeds under the arbitrage rules, Rule 15Ba1-1(m)(1) also provides that when such monies are spent to carry out the authorized purposes of municipal securities, they cease to be proceeds of municipal securities.

Rule 15Ba1-1(m), however, establishes an exception from the definition of proceeds of municipal securities. The exception provides that, solely for purposes of Rule 15Ba1-1(m), monies derived from a municipal security issued by an education trust established by a State under Section 529(b) of the Internal Revenue Code are not proceeds of municipal securities. [338] Although interests in 529 Savings Plans may be municipal fund securities, and therefore municipal securities, monies derived from a municipal security issued by an education trust established under Section 529(b) come from individuals making investments for the purpose of prepaying or accumulating savings for higher education costs, and do not come from municipal entities. Because these monies are derived from individuals primarily for the benefit of these individuals and not municipal entities, the Commission does not believe persons engaged in activities with respect to these monies are appropriately governed by this registration regime. [339]

Rule 15Ba1-1(m) also states that in determining whether or not funds to be invested constitute proceeds of municipal securities for purposes of Rule 15Ba1-1(m), a person may rely on representations in writing made by a knowledgeable official of the municipal entity or obligated person whose funds are to be invested regarding the nature of such funds, provided that the person has a reasonable basis for such reliance. [340] This exemption is discussed in more detail below.

The Commission notes that the exemption from the definition of “municipal advisor” in Rule 15Ba1-1(d)(3)(vii) does not permit a person to avoid registering as a municipal advisor by stating that its advice is isolated or incidental and thus not within the meaning of “plan or program” in the definition of investment strategies. The Commission is not persuaded by commenters who have stated that “plan or program” means a series of investment decisions [341] and does not agree that this would be an appropriate interpretation of the statute. Any advice or recommendation with respect to the investment of proceeds not otherwise subject to an exclusion or exemption [342] would be a municipal advisory activity, even if such advice or recommendation is not part of a series of investment-related actions or articulated as part of the investment plan for the proceeds at or before the time the proceeds are received. [343] For example, advice or a recommendation with respect to a single trade or investment not otherwise subject to an exemption would be a municipal advisory activity, and the person providing such advice would not be exempt from the definition of municipal advisor pursuant to Rule 15Ba1-1(d)(3)(vii).

Commingling of Proceeds of Municipal Securities With Other Funds and Proceeds Determinations Generally

In the Proposal, the Commission provided that commingled proceeds, regardless of when they lose their character as proceeds, would still constitute “funds held by or on behalf of a municipal entity,” but asked whether that interpretation was too broad. [344] Additionally, the Commission asked what obligations parties other than a municipal entity should have in determining whether funds held by or on behalf of the municipal entity are proceeds of municipal securities. [345]

The Commission received a number of comments in response to these questions. One commenter stated “[t]he Commission's proposed definition effectively reads out the statutory requirement to trace assets to the proceeds of municipal securities[,]” and “[t]hus, an adviser providing advice to a municipal entity with respect to any plan, program or pool of assets—even if the plan, program or pool of assets did not consist of the proceeds of municipal securities (such as, for example, 529 Savings Plans and public pension plans)—would be required to register with the Commission if no exclusion is available.” [346] Some commenters stated that once the proceeds of a municipal offering are commingled with other funds, they lose their character as proceeds. [347] Commenters also stated that subsequent investments of proceeds are not proceeds of municipal securities, unless the subsequent investment is part of the plan or program that was developed at the time of, and in connection with, the initial investment. [348]

One commenter stated that a person should not be considered to be providing advice with respect to an investment strategy if he reasonably believes that the relevant funds are not from an account specifically for the proceeds of municipal securities issuances, unless the municipal entity or obligated person communicated otherwise. [349] This commenter also stated that, depending on the Commission's interpretation of investment strategies, the adviser should only be considered a municipal advisor if the funds invested are proceeds of municipal securities, the adviser is aware of this fact, and there is no evidence of a sham. [350] Another commenter further suggested that a municipal entity should have the responsibility for tracking and characterizing municipal proceeds. [351] This commenter suggested that advisors should be entitled to reasonably rely on the municipal entity's representation since it is already required to track proceeds under certain state and Federal tax laws. [352]

One commenter stated that, in the context of obligated persons, only the investment of the proceeds of municipal securities, and not all monies of the obligated person, could be considered proceeds of municipal securities, even if the proceeds may be commingled with other monies for investment purposes. [353] Further, another commenter urged the Commission to exclude investments of bond proceeds for the accounts of obligated persons when the investment is not pledged as security for a municipal securities issue. [354] On the other hand, a different commenter stated that in no event should the definition of investment strategies apply to engagements with obligated persons, because obligated persons' funds are not held in plans, programs, or pools of assets that invest funds held by or on behalf of a municipal entity. [355]

As discussed above, in response to comments, the Commission is adopting a definition of “proceeds of municipal securities” for purposes of the term “investment strategies,” which is consistent with Federal tax laws and regulations related to the definition of proceeds. This definition provides that when monies are spent to carry out the authorized purposes of the municipal securities, they cease to be proceeds of municipal securities. [356] Under this definition and except as otherwise noted below, the mere fact that proceeds are commingled with other funds generally does not cause such monies to lose their character as proceeds. However, once the proceeds are spent to carry out an authorized purpose of the issuance of municipal securities, and the applicable legal documents or any other agreement pertaining to the investment of proceeds of municipal securities are no longer in effect, such funds will no longer constitute proceeds of municipal securities.

The Commission does not agree with those commenters who argued that once the proceeds of a municipal offering are commingled with other funds, they lose their character as proceeds. [357] The adopted definition of “proceeds of municipal securities” and the treatment of commingled proceeds are familiar concepts to market participants because they are consistent with Federal tax laws and regulations related to the definition of proceeds. The Commission believes this treatment of commingled proceeds will help to ensure that municipal advisors are registered and regulated as such until commingled proceeds are spent to carry out the authorized purposes of the municipal securities. Further, as discussed above, to assist a person in determining whether or not funds to be invested constitute proceeds of municipal securities, such person may rely on representations in writing made by a knowledgeable official of the municipal entity or obligated person whose funds are to be invested regarding the nature of such funds, provided that the person seeking to rely on such representations has a reasonable basis for such reliance. [358] As noted below, municipal entities and obligated persons generally already track investments and ultimate expenditures of proceeds of tax-exempt municipal securities for authorized purposes in order to comply with certain state and tax Federal laws and governing legal documents pertaining to the investment of proceeds of municipal securities. [359]

With respect to the tracing of proceeds after commingling, Federal tax arbitrage rules provide that if amounts of proceeds constituting investment earnings (excluding those of municipal escrow investments) on certain tax-exempt municipal securities (particularly governmental bonds and certain governmentally-owned private activity bonds) are deposited in a commingled fund with substantial tax or other revenues from governmental operations of the municipal issuer and the amounts are reasonably expected to be spent for governmental purposes within six months from the date of the commingling, those proceeds are treated as spent at the time of commingling. [360] This Federal tax arbitrage rule mainly benefits general purpose municipal entities (e.g., States, cities, and counties) with respect to very short-term investment practices involving their general fund accounts. The Commission likewise considers proceeds as spent at the time of such commingling in the context of municipal advisors because, as noted above, arbitrage rules governing the investment of bond proceeds are central to an issue of tax exempt municipal securities and are well-known in the municipal market. Because the approach the Commission is taking today is consistent with Federal tax arbitrage rules, it should be consistent with the current practice of municipal entities and obligated persons related to tracing proceeds of municipal securities. Further, because such proceeds are reasonably expected to be spent for governmental purposes within six months from the date of commingling, the Commission believes these proceeds involve shorter term investments and therefore are subject to lower risk. As a result, they raise less concern.

The Commission believes that any person that does not satisfy the conditions for an exclusion or exemption from the definition of municipal advisor should know whether the person it is advising is a municipal entity or obligated person and whether the relevant funds constitute proceeds of municipal securities. As commenters stated, municipal entities and obligated persons generally already track investments and ultimate expenditures of proceeds of tax-exempt municipal securities for authorized purposes in order to comply with certain state and Federal tax laws and governing legal documents pertaining to the investment of proceeds of municipal securities. [361] Thus, with respect to the tracing of proceeds of municipal securities to investments and expenditures for authorized purposes, the Commission does not believe that the municipal advisor registration regime will impose any significant additional burden on municipal entities, obligated persons, or municipal advisors. [362]

Reasonable Reliance on Representations for Proceeds Determinations

As set forth in Rule 15Ba1-1(m)(3), in determining whether or not relevant funds constitute proceeds of municipal securities for purposes of Rule 15Ba1-1(m), a person may rely on representations in writing made by a knowledgeable official of the municipal entity or obligated person whose funds are to be invested regarding the nature of such funds, provided the person has a reasonable basis for such reliance. [363] Under Rule 15Ba1-1(m)(3), a person need not obtain a separate written representation each time an investment is made, and can instead rely on a prior written representation if the person has a reasonable basis for reliance. The Commission believes that a determination of whether or not a person has a reasonable basis to rely on a written representation requires reasonable diligence, based on all the facts and circumstances, including review of the written representation and other relevant information reasonably available to the person. For example, a person should not ignore information [364] in the person's possession as a result of which such person would know that the representation is inaccurate. In such a circumstance, the person seeking to rely on the representation should make further inquiry to verify the accuracy of the representation in order to show a reasonable basis for the reliance. However, a person relying on a written representation generally need not independently verify all the information underlying the representation. Depending on the particular facts and circumstances, however, a person seeking to rely on such representations should take into account other information, including, but not limited to, information that is reasonably available to such person either as a result of the person's relationship with the municipal entity or obligated person or that is provided by other parties to the relevant transaction. [365]

Municipal Escrow Investments

Section 15B(e)(3) of the Exchange Act provides that the term investment strategies includes, in part, “the recommendation of and brokerage of municipal escrow investments.” [366] However, Section 15B(e) of the Exchange Act does not define the term “municipal escrow investments.”

Several commenters discussed the term “municipal escrow investments” as used in the context of investment strategies and some asked for further Commission guidance on the meaning of this term. [367] For example, one commenter stated that Congress intended the term to be limited to accounts holding the proceeds of municipal securities pending deployment. [368] Another commenter stated that municipal escrow investments means investments deposited in an escrow account to “defease” [369] municipal securities. [370] Another commenter stated that municipal escrow investments are investments of funds in a segregated escrow account established by the municipal entity or obligated person to hold funds that have been allocated for satisfying a specific and identified obligation of the municipal entity or obligated person and maintained by an escrow agent for the municipal entity or obligated person. [371] One commenter stated that the Commission should recognize that the term “municipal escrow investments” has a different and narrower meaning than “proceeds of municipal securities” and is limited to investments held in an escrow account. [372] This commenter also suggested that the Commission should clarify that merely providing brokerage of municipal escrow investments does not make a person a municipal advisor. [373]

The Commission has carefully considered the issues raised by commenters on the Proposal and has determined to provide a definition for “municipal escrow investments.” [374] For purposes of the definition of investment strategies, the Commission is defining “municipal escrow investments” as proceeds of municipal securities and any other funds of a municipal entity that are deposited in an escrow account to pay the principal of, premium, if any, and interest on one or more issues of municipal securities. [375] Because it is a separate component of the statutory definition of investment strategies, the Commission agrees with the comments that “municipal escrow investments” does not necessarily have the same meaning as “proceeds.” [376] At the same time, however, municipal escrow investments generally are funded with proceeds raised from the issuance of municipal securities in refunding or refinancing transactions to be used to provide for repayment of prior outstanding issues of municipal securities and these escrows also may include certain other funds, such as an issuer's cash contribution derived from revenues. [377] In addition, municipal escrow investments may be funded in part from equity-type funds which may be viewed as equity or as a broad category of proceeds as a result of their escrow pledge to secure the outstanding municipal securities to be refinanced and their attendant close nexus to those municipal securities. [378] The definition of municipal escrow investments provided herein, consistent with Rule 15Ba1-1(d)(3)(vii), protects funds that are used for payment of the municipal securities issue, whether or not they are derived from the sale of municipal securities.

The Commission believes that this definition of municipal escrow investments is appropriate in order to protect both investors in municipal securities and municipal entities for reasons discussed further below. These municipal escrow investments typically involve investments of significant amounts of proceeds of municipal securities for long periods of time linked to call restrictions or maturities of refunded debt. These features make municipal escrow investments particularly vulnerable to abuse, and in fact significant investment pricing abuses have occurred in the area of municipal escrow investments in the past and the potential for future pricing abuses continues to exist in this area. [379] In one particularly notable historic example, pricing abuses involving municipal escrow investments were the subject of a major joint enforcement initiative involving the Commission, the Internal Revenue Service, and the U.S. Attorney for the Southern District of New York that affected a large number of major broker-dealers with respect to artificially high prices on U.S. Treasury securities charged by such dealers in sales of such securities to municipal entities to fund municipal escrow investments. [380]

The Commission notes that a person merely providing brokerage of municipal escrow investments would not be a municipal advisor if such person does not provide advice with respect to such investments. [381] The purchase and sale of escrow investments upon the direction of an obligated person or its financial advisor without rendering advice is merely a provision of brokerage services and does not render such person a municipal advisor. It is the provision of advice to or on behalf of a municipal entity or obligated person with respect to municipal escrow investments that renders a person a municipal advisor. [382]

Also, consistent with the definition of proceeds of municipal securities that the Commission is adopting, the Commission is including a written representation component in the definition of municipal escrow investments. Accordingly, Rule 15Ba1-1(h)(2) states that, in determining whether or not funds to be invested or reinvested constitute municipal escrow investments for purposes of Rule 15Ba1-1(h), a person may rely on representations in writing made by a knowledgeable official of the municipal entity or obligated person whose funds are to be invested or reinvested regarding the nature of such investments, provided that the person seeking to rely on such representations has a reasonable basis for such reliance. [383] As with the written representation component under the definition of proceeds of municipal securities, under Rule 15Ba1-1(h), a person need not obtain a separate written representation each time an investment is made, and can instead rely on a prior written representation if the person has a reasonable basis for reliance. For this purpose, the same standard and principles apply in determining whether a person has a reasonable basis for such reliance as discussed previously with respect to reliance on representations regarding proceeds determinations. [384]

Other Comments on the Scope of the Proposed Interpretation of “Investment Strategies”

In addition to responses to specific requests for comment, the Commission received a number of other comments regarding its proposed interpretation of the statutory definition of investment strategies. For example, one commenter requested that the Commission clarify that the term “investment strategies” does not include separate accounts supporting insurance contracts or their underlying investment vehicles. [385] The commenter reasoned that the funds invested in such insurance contracts are not proceeds of municipal securities, but are employer and employee contributions. [386] Another commenter argued that the term “municipal financial product” should not include “an insurance product tailored to a municipal entity,” because “such products . . . are already quite well regulated.” [387]

The Commission agrees that employee contributions are not proceeds of municipal securities because these funds are derived from salary deduction arrangements with individual employees and not from the issuance of a municipal security. Therefore, a person providing advice with respect to such contributions would be exempt from the definition of municipal advisor to the extent their municipal advisory activities are limited to such advice. Whether a person providing advice with respect to employer contributions will be exempt, however, will depend upon whether such funds are proceeds of municipal securities. In general, public pension plans do not include proceeds of municipal securities because proceeds of tax-exempt municipal securities generally cannot be spent to fund investments for pension liabilities. [388] Further, the Commission agrees that a person providing advice with respect to other insurance products tailored to a municipal entity would not be engaged in municipal advisory activities if the insurance products do not involve the investment of proceeds of municipal securities because the final rules narrow the focus of the term “investment strategies” to those involving investments of proceeds of municipal securities and municipal escrow investments with a new exemption in Rule 15Ba1-1(d)(3)(vii).

ix. Pooled Investment Vehicles

As discussed above, the Commission proposed to interpret the statutory definition of the term “investment strategies” to include “pools of assets that invest funds held by or on behalf of a municipal entity.” [389] Further, as part of the discussion of the term “investment strategies,” the Commission noted in the Proposal that, to the extent a person is providing advice to certain pooled investment vehicles in which a municipal entity has invested funds along with other investors, such pooled investment vehicles would not be considered funds “held by or on behalf of a municipal entity.” [390] Consequently, a person providing advice to such vehicle would not have to register as a municipal advisor. However, the Commission noted that, to the extent that the pooled investment vehicle is a LGIP, the pooled investment vehicle would be considered to be funds “held by or on behalf of” a municipal entity and a person providing advice with respect to a LGIP would have to register as a municipal advisor, absent eligibility for some other exclusion or exemption. [391]

The Commission requested comment on whether it should modify or clarify its proposed interpretation of the circumstances under which a pooled investment vehicle would be considered to involve funds “held by or on behalf of a municipal entity,” including whether the proposed interpretation should no longer apply if municipal entities are not considered to be the “primary investors” in the pooled investment vehicle or if funds of municipal entities exceed a certain threshold in the pooled investment vehicle. [392] The Commission received several comment letters addressing the interpretation.

One commenter supported the Commission's proposed interpretation, without further request for modification. [393] Two commenters opposed any approach to determine municipal advisory status based on whether municipal entities were the “primary investors” in the pooled vehicle, citing the difficulty of making such a determination on an ongoing basis. [394] Another commenter urged the Commission to reiterate that an adviser to a pooled investment vehicle in which a municipal entity or obligated person invests is not a municipal advisor by virtue of providing advice to such a vehicle, and that purchasing an interest in a vehicle does not create an advisory engagement between the investor and the vehicle's adviser. [395] This commenter suggested that, “so long as there is at least one bona fide investor that is not a municipal entity or obligated person, the adviser to the vehicle should not be a municipal advisor.” [396] The commenter also stated that not exempting advisors to pooled vehicles would particularly limit investment choices for public pension funds. [397]

The Commission has carefully considered these comments and is not adopting its proposed interpretation of when a pooled investment vehicle will be considered to be funds held by or on behalf of a municipal entity. It is also not adopting an interpretation that would tie the determination of whether a person providing advice to a pooled investment vehicle is a municipal advisor, to whether municipal entities are the primary investors in the pooled investment vehicle. Instead, consistent with the narrowed approach that the Commission is adopting for “investment strategies,” the Commission is interpreting a pooled investment vehicle to be an investment strategy, and an advisor to such a pool to be a municipal advisor, when the pooled investment vehicle contains proceeds of an issuance of municipal securities, regardless of whether all funds invested in the vehicle are funds of municipal entities. [398] In such a case, an advisor to such a pooled investment vehicle will be required to register as a municipal advisor, unless an exclusion or exemption applies.

The Commission recognizes commenters' concerns that requiring advisors to pooled investment vehicles that include funds of municipal entities to register as municipal advisors could have the effect of limiting investment choices for municipal entities, including investment choices for public pension funds. As noted above, however, the Commission is exempting from the definition of municipal advisor persons that provide advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments. [399] Contrary to the construction under the proposed definition of “investment strategies,” [400] under the definition of “investment strategies” as adopted and the exemption in Rule 15Ba1-1(d)(3)(vii), whether or not the funds invested in a pooled investment vehicle are considered to be “funds held by or on behalf of a municipal entity” does not determine whether a person providing advice to such a vehicle is required to register as a municipal advisor. Rather, under the rule as adopted, the determination of whether a person providing advice to a pooled investment vehicle is required to register as a municipal advisor depends upon the narrower inquiry of whether the funds in the pooled investment vehicle constitute “proceeds of municipal securities that are not municipal derivatives or guaranteed investment contracts, and the recommendation of and brokerage of municipal escrow investments.” [401] Also, the Commission notes that many advisors to pooled investment vehicles will be registered investment advisers or employees of municipal entities. Therefore, many advisors would or could be either exempted or excluded from registration as municipal advisors. [402] Moreover, the Commission believes that this approach to pooled investment vehicles appropriately focuses protection on those activities related to investment of the proceeds of municipal securities and related escrow investments, with respect to which there has been significant enforcement activity. [403]

One commenter expressed concern that pooled investment vehicles whose investors are limited to one or more municipal entities (e.g., a government retirement pension plan) would be considered investment strategies under the Proposal. [404] This commenter suggested that the term “investment strategies” should not include insurance company's separate accounts supporting variable annuity contracts (and their underlying investment vehicles) offered to or held by municipal entities, even if the assets of the separate account are limited only to contributions from municipal entities. [405]

To the extent that an insurance company's separate accounts supporting variable annuity contracts offered to or held by municipal entities do not include “proceeds of municipal securities,” persons providing advice with respect to such accounts would not be required to register as municipal advisors because they would be exempt with respect to such municipal advisory activity. [406] Specifically, the Commission notes that, as a result of the exemption in Rule 15Ba1-1(d)(3)(vii) adopted today, a person providing advice with respect to investment strategies that are not “plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments” will be exempt from the definition of municipal advisor with respect to such activities. Further, the definition of “proceeds of municipal securities” is limited to the monies derived by a municipal entity from the sale of municipal securities, investment income derived from such monies, and other monies of a municipal entity (or obligated person) held in funds under legal documents for the municipal securities that are reasonably expected to be used as security or a source of payment for the debt service on the municipal securities, and investment income from the investment or reinvestment of such funds. [407] If, however, such separate accounts supporting variable annuity contracts offered to or held by municipal entities do include “proceeds of municipal securities,” advice with respect to such accounts would not be eligible for the exemption in Rule 15Ba1-1(d)(3)(vii) and such activity could be municipal advisory activity triggering the registration requirement.

x. Solicitation of a Municipal Entity or Obligated Person

The definition of municipal advisor in Exchange Act Section 15B(e)(4) includes a person that undertakes a solicitation of a municipal entity or obligated person on behalf of specified persons. [408] Exchange Act Section 15B(e)(9) provides that the term “solicitation of a municipal entity or obligated person” means “a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser (as defined in section 202 of the Investment Advisers Act of 1940 [15 U.S.C. 80b-2]) that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity.” [409]

In connection with the statutory definition, the Commission discussed in the Proposal its interpretation of “solicitation of a municipal entity or obligated person” and stated in the Proposal that, unless an exclusion applies, any third-party solicitor that seeks business on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser from a municipal entity must register as a municipal advisor. [410] The Commission noted that the determination of whether a solicitation of a municipal entity requires registration is not based on the number, or size, of investments that are solicited. [411] The Commission also specifically stated that the exclusion from the definition of municipal advisor for a broker-dealer serving as an underwriter would not apply to a broker-dealer acting as a placement agent for a private equity fund that solicits a municipal entity or obligated person to invest in the fund. [412]

The Commission received approximately 14 comment letters regarding the definition of “solicitation of a municipal entity or obligated person.” As discussed in more detail below, a number of commenters requested further clarification regarding the statutory definition of, and the Commission's proposed interpretations of, that term. The Commission has carefully considered issues raised by commenters on its proposed interpretation and is adopting a rule [413] to define “solicitation of a municipal entity or obligated person.” The Commission's interpretation of “solicitation of a municipal entity or obligated person” in Rule 15Ba1-1(n) is substantially the same as its proposed interpretation, and includes certain clarifications discussed below designed to address commenters' concerns. [414] In addition, the Commission notes that, both in its proposed interpretation and adopted rule, a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser, soliciting on its own behalf, as explained below [415] —or an affiliate of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser soliciting on behalf of such entity—would not fall within the definition of “solicitation of a municipal entity or obligated person.” Accordingly, such person would not need to register as a municipal advisor.

Mailings, Advertisements, and Other General Information

Commenters stated that the Commission should explicitly exclude certain activities from the definition of solicitation of a municipal entity or obligated person. For example, one commenter recommended that “generic `mass mailing' solicitations, or institutional advertising” should not be considered solicitation under the proposed rules, especially if such mass mailings are not targeted to a small group of particular municipal entities or obligated persons. [416] This commenter noted that the same argument would apply with respect to newspaper or periodical ads, brochures, TV, radio, or Internet ads. [417]

The Commission agrees with commenters that advertisements [418] or solicitations do not trigger an obligation for a third-party to register as a municipal advisor, provided such activity is undertaken by a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser on behalf of itself as opposed to on behalf of a third party. Accordingly, the Commission is adopting Rule 15Ba1-1(n) with a clarification to address advertising and the scope of the rule with respect to solicitation of obligated persons. [419] Specifically, Rule 15Ba1-1(n), as adopted, clarifies that “solicitation of a municipal entity or obligated person” does not include “advertising by a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser.” [420]

Assistance With Requests for Proposals

It is a relatively common industry practice for municipal entities to request that a financial advisor, bond counsel, or other market professional assist in the review of requests for proposals (“RFP”) for underwriter, financial advisory, or investment advisory services. [421] A person assisting a municipal entity or obligated person in selecting a broker-dealer, investment adviser, or financial advisor as part of an RFP process established by the municipal entity or obligated person would not be considered to be undertaking a solicitation for purposes of the definition of municipal advisor in Rule 15Ba1-1(d)(1), because such person would not be soliciting “on behalf of” such broker-dealer, investment adviser, or financial advisor. [422] Such person could, however, be engaging in other municipal advisory activities with respect to assistance in the selection process. [423]

Endorsement of Financial Products and Services by Associations

The Commission received approximately nine comment letters from various associations that endorse third parties offering products and services to the associations' members (“endorsement arrangements”). [424] According to commenters, in these endorsement arrangements, the third parties, which typically include investment advisers, broker-dealers, and mutual fund companies, compensate the associations or their for-profit subsidiaries through a royalty arrangement or through a marketing or sponsorship fee, depending on the association's level of involvement in providing information to its members. [425] The commenters expressed concern that the associations' compensated endorsement of investment advisory, municipal advisory, or broker-dealer businesses to their members, some of whom are municipal entities, could potentially be interpreted as solicitation of a municipal entity or obligated person. [426] Many of these commenters believed that the Proposal did not provide sufficient guidance about the statutory definition of “solicitation.” The statutory definition of solicitation includes “direct or indirect communication with a municipal entity or obligated person,” thus creating uncertainty regarding the possible inclusion of such endorsements. [427] One commenter noted that investment advisory, municipal advisory, or broker-dealer businesses that are endorsed by associations are not directed specifically at municipal entities, but rather are prepared and circulated without regard to whether the audience may include municipal entities. [428]

Two commenters recommended that the definition of solicitation exempt “advertisement, endorsement, sponsorship, and similar services offered by persons who are not municipal advisors, brokers, dealers, municipal securities dealers, or similar persons engaged in the financial advisory service industry.” [429] One stated that compliance with the registration rules would create a significant administrative burden and would not create any material public benefits. [430] The other commenter requested that the Commission clarify the meaning of “indirect communication” within the definition of solicitation. [431] Similarly, other commenters stated that the Commission should exempt national and state associations representing state and local governments from municipal advisor registration. [432] These commenters argued that their staffs do not directly contact public employees or offer advice to public agencies or public employees. [433]

At this time, the Commission is not providing a general exemption for national and state associations that engage in endorsement arrangements. An organization that receives compensation for endorsing a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser is soliciting a municipal entity or obligated person within the meaning of the statute. However, the Commission notes that its interpretation in Rule 15Ba1-1(n) with respect to excluding advertising from “solicitation of a municipal entity or obligated person” may apply to some of these associations. For example, if an association's “endorsement” qualifies as “advertising” by a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser, pursuant to Rule 15Ba1-1(n), it would not be required to register as a municipal advisor. Such a determination, however, would be based on the particular facts and circumstances.

The Commission does not believe at this time that it is appropriate to provide a blanket exemption to associations that are not able to take advantage of Rule 15Ba1-1(n), because these associations are being directly or indirectly compensated for recommending a broker, dealer, municipal advisor, or investment adviser to municipal entities or obligated persons. In addition, these associations may, in certain cases, be compensated in direct relation to the number of municipal entities that engage the endorsed product or service provider.

Uncompensated Recommendations

Some commenters stated that the Exchange Act and the Proposal are unclear about when uncompensated recommendations might be deemed to be solicitations for purposes of the rule. [434] Several commenters stated that uncompensated recommendations should not be considered to be solicitations because the statutory text only refers to “direct or indirect compensation.” [435] One commenter stated further that, if uncompensated recommendations are interpreted to be solicitations, it “will chill significantly the provision of information to municipal entities. . . .” [436] Other commenters suggested that the solicitation prong should not apply if the municipal entity or obligated person requests an introduction. [437]

The Commission notes that an introduction is not necessarily a solicitation. Moreover, whether an introduction is a solicitation does not depend on whether a municipal entity or obligated person requests an introduction or the introduction is provided without request. Rather, for purposes of Rule 15Ba1-1(n), the solicitation determination is based on whether the person providing the introduction receives direct or indirect compensation for providing the introduction. [438] For example, a person could respond to a request from a municipal entity with a particular recommendation and then subsequently receive payment from the recommended entity. In this example, the solicitation would trigger the registration requirement.

The statutory definition of “solicitation of a municipal entity or obligated person” provides that the solicitation must be performed for “direct or indirect compensation.” [439] Thus, persons that are not compensated for soliciting a municipal entity or obligated person would not be required to register as municipal advisors. The Commission notes, however, that Commission staff has broadly construed the term “direct or indirect compensation” in other contexts. [440] In addition, as noted in the Proposal, other regulatory agencies have interpreted indirect compensation to include non-monetary compensation. [441]

Solicitation of Obligated Persons

Exchange Act Section 15B(e)(9) provides, in part, that the term “solicitation of a municipal entity or obligated person” is “for the purpose of obtaining or retaining an engagement . . . of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products . . . .” [442] One commenter asked the Commission to clarify that the meaning of “municipal financial products” with respect to the “solicitation of an obligated person” includes municipal derivatives, guaranteed investment contracts, and investment strategies of the municipal entity only, and not of the obligated person. [443] The commenter stated that obligated persons may include large entities with numerous and varied funds and investments, many of which may have nothing to do with the transactions pursuant to which they have become obligated persons. [444] In addition, the commenter stated that if the municipal advisor definition includes persons who advise obligated persons or solicit obligated persons with respect to the funds, securities, or investment strategies of the obligated person, “the reach of the registration requirement would expand in potentially unpredictable ways.” [445]

The Commission agrees with the comment that solicitation with respect to an obligated person applies only when an obligated person is acting in its capacity as an obligated person. [446] The Commission is, therefore, adopting Rule 15Ba1-1(n), which clarifies that, in the case of solicitation of an obligated person, the definition of “solicitation of a municipal entity or obligated person” does not include solicitation of an obligated person “if such obligated person is not acting in the capacity of an obligated person or the solicitation of the obligated person is not in connection with the issuance of municipal securities or with respect to municipal financial products.” [447]

As discussed above, with respect to the definition of obligated person, the Commission believes that the municipal advisor registration regime should apply in the same manner to advisors of obligated persons as to advisors of municipal entities. [448] The Commission further notes that, because they are committed by contract or other arrangement to support the payment of all or part of the obligations on municipal securities, obligated persons serve the same role as municipal entities with regard to municipal securities. [449] Therefore, pursuant to the Commission's clarification in Rule 15Ba1-1(n), a person soliciting an obligated person with respect to the issuance of municipal securities or municipal financial products will not meet the definition of municipal advisor as a result of such activity unless the obligated person is acting in its capacity as such. [450]

One commenter asked when a person should know whether he or she is soliciting an obligated person. Specifically, with respect to the application of the proposed rules to persons who undertake a solicitation of an obligated person, the commenter stated that a person should be considered to have engaged in such activities only when it has actual knowledge that it is (a) soliciting an obligated person, acting in its capacity as an obligated person, and (b) engaging in solicitation with respect to the issuance of municipal securities or proceeds of municipal securities. [451] Further, this commenter stated that a person must be rendering services with respect to the types of activities or instruments that make a person a municipal advisor. [452] Lastly, the commenter suggested that a person need not affirmatively inquire as to the potential obligated person's status or the funds' status. [453]

The Commission believes that the commenter's suggestion, if adopted, would allow the municipal advisor registration regime to be too easily circumvented. An advisor could always argue that it did not have “actual knowledge” that it was soliciting an obligated person and therefore is not subject to regulation. The Commission instead believes that a person that is soliciting an obligated person should make a reasonable inquiry to a person in a position to know as to whether it is soliciting for services related to the issuance of municipal securities or municipal financial products, and whether the person being solicited is an obligated person. For example, a person may rely on the written representation of the obligated person, unless such person has information that would cause a reasonable person to question the accuracy of the representation. [454] In such a case, a person could not ignore the information and would need to make further reasonable inquiry to verify the accuracy of the representation. [455]

Other Exclusions and Exemptions From the Definition of “Solicitation of a Municipal Entity or Obligated Person”

Some commenters stated that the Commission should explicitly exclude certain entities from the solicitation definition altogether. For example, several commenters stated that placement agents for pooled investment vehicles should not be considered solicitors. [456] Another commenter recommended that an investment adviser's employees who solicit municipal entities as part of their regular responsibilities should not be considered solicitors. [457] The Commission has carefully considered issues raised by commenters and has determined not to provide specific exemptions from the definition of “solicitation of a municipal entity or obligated person.” [458]

Section 15B(e)(4)(A) of the Exchange Act states that the definition of municipal advisor includes a person that undertakes a solicitation of a municipal entity. [459] Section 15B(e)(4)(B) of the Exchange Act states that the definition of municipal advisor includes a number of listed types of market participants (specifically financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors) if such persons otherwise meet the definition of a municipal advisor under Exchange Act Section 15B(e)(4)(A). In relevant part, Exchange Act Section 15B(e)(4)(A)(ii) provides that a municipal advisor includes a person that, on behalf of certain types of third-parties, undertakes a solicitation of a municipal entity to engage such parties to perform certain specified activities. [460] In the case of placement agents, the Commission agrees with commenters that a placement agent for a pooled investment vehicle that is not a municipal entity (e.g., a hedge fund or mutual fund) and that “solicits” a municipal entity to invest in the fund does not, with respect to such activity, meet the statutory definition of the term “solicitation of a municipal entity or obligated person” in Exchange Act Section 15B(e)(9). Such a placement agent does not meet the statutory definition of the term because it is not soliciting on behalf of a third-party broker, dealer, municipal securities dealer, municipal advisor, or investment adviser to obtain or retain an engagement by a municipal entity or obligated person of such third-party broker, dealer, municipal securities dealer, municipal advisor, or investment adviser. Whether the placement agent otherwise meets the definition of “municipal advisor” with respect to any activity related to or in connection with its “solicitation” activity (that does not, as discussed above, meet the statutory definition of solicitation in Exchange Act Section 15B(e)(9)) would depend on the facts and circumstances. [461] By contrast, a placement agent that undertakes a solicitation of a municipal entity for the purpose of obtaining an engagement by the municipal entity of an unaffiliated investment adviser to provide investment advisory services to the municipal entity is a municipal advisor because it is soliciting on behalf of an unaffiliated adviser to provide investment advisory services. [462] The Commission also agrees with commenters that employees of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser that solicit municipal entities as part of their regular duties on behalf of their employer or an affiliate of such employer are not municipal advisors, if they are acting within the scope of their employment. Specifically, as provided in Exchange Act Section 15B(e)(9), the term “solicitation of a municipal entity or obligated person” means, in part, “a direct or indirect communication with a municipal entity or obligated person made by a person . . . on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser . . . that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation . . . .” [463] As such, the term applies only to third-party solicitors, and not to an entity acting on its own behalf or on behalf of its affiliate. Employees acting in their capacity as such on behalf of their employer are acting as the agent of their employer and, consequently, are not third-party solicitors that fall within the definition of municipal advisor as a result of their solicitation activity.

Pursuant to Rule 15Ba1-1(d)(3)(viii) and consistent with the exemption from the definition of municipal advisor under Rule 15Ba1-1(d)(3)(vii) for a person that provides advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments, [464] the Commission is exempting from the definition of municipal advisor under Rule 15Ba1-1(d)(1) any person that undertakes a “solicitation of a municipal entity or obligated person” (as defined in Rule 15Ba1-1(n) (17 CFR 240.15Ba1-1(n)) for the purpose of obtaining or retaining an engagement by a municipal entity or by an obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products that are investment strategies, to the extent that such investment strategies are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments. [465] As with respect to the exemption in Rule 15Ba1-1(d)(3)(vii), the Commission believes that the exemption in Rule 15Ba1-1(d)(3)(viii) is consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, because the exemption tailors protection of municipal entities to those activities related to the investment of the proceeds of municipal securities and related escrow investments. [466]

Marketing of Insurance Contracts

One commenter stated that solicitation should not include the marketing of insurance contracts by broker-dealers to retirement plans established by municipal entities. [467] The Commission agrees that the marketing of insurance contracts by broker-dealers is not solicitation for purposes of the municipal advisor definition if it is not performed on behalf of a third-party broker, dealer, investment adviser, municipal securities dealer, or municipal advisor. As described above, the definition of “solicitation of a municipal entity or obligated person” only applies to third-party solicitations on behalf of these specific kinds of entities. [468]

c. Exclusions and Exemptions From the Definition of “Municipal Advisor”

In addition to the exemption described above for persons providing advice or soliciting engagements with respect to certain financial products, the Commission discusses below its interpretations of certain statutory exclusions, as well as specific activities-based exemptions it is granting from the definition of “municipal advisor.” [469] Also, the Commission discusses below exemptions of general applicability to the extent a person is responding to an RFP or a request for qualifications (“RFQ”) or to the extent a municipal entity or obligated person is otherwise represented by a registered municipal advisor, subject to certain conditions.

i. Public Officials and Employees of Municipal Entities and Obligated Persons

Exchange Act Section 15B(e)(4)(A) provides that the term “municipal advisor” excludes employees of a municipal entity. [470] As noted in the Proposal, one commenter suggested that the Commission clarify that this exclusion would include any person serving as an appointed or elected member of the governing body of a municipal entity, such as a board member, county commissioner or city councilman. [471] This commenter stated that, because these persons are not technically “employees” of the municipal entity (but rather “unpaid volunteers”), they would not fall within the exclusion from the definition of municipal advisor for “employees of a municipal entity.” [472]

The Commission stated in the Proposal that the exclusion from the definition of municipal advisor for “employees of a municipal entity” should include any person serving as an elected member of the municipal entity's governing body to the extent that the person is acting within the scope of his or her role as an elected member. The Commission also stated that “employees of a municipal entity” should include a governing body's appointed members to the extent such appointed members are ex officio members by virtue of holding an elective office. [473] The Commission stated its concern that appointed members are not directly accountable for their performance to the citizens of the municipal entity. [474]

In the Proposal, the Commission requested comment on: (1) Whether there are any persons who engage in uncompensated municipal advisory activities, or municipal advisory activities for indirect compensation, that the Commission should exclude from the definition of municipal advisor; (2) whether “employees of a municipal entity” should include elected members of a governing body of a municipal entity, and appointed members of a municipal entity's governing body to the extent such appointed members are ex officio members of the governing body by virtue of holding an elective office, is appropriate; and (3) whether there are other persons associated with a municipal entity who might not be “employees” of a municipal entity but that the Commission should exclude from the definition of municipal advisor. [475]

The Commission received over 600 comment letters on its interpretation of “employee of a municipal entity.” Commenters represented a wide array of individuals and entities, including representatives of: city and state governments; [476] city and state retirement systems; [477] state university systems; [478] state housing, development, and port authorities; [479] city transit authorities; [480] special districts (such as healthcare, water, sanitation, and other districts); [481] public utility boards and associations; [482] airports, and airport authorities and commissions; [483] and individual volunteer or appointed board members. [484]

The comments dealt predominantly with the Commission's proposed view that “employees of a municipal entity” should include elected members of a municipal entity's governing body, and appointed members, to the extent such appointed members are ex officio members of the governing body by virtue of holding an elective office. Many commenters asserted that the Commission's proposed interpretation of municipal advisor is overly broad or overreaching and should exclude all members of a municipal entity's governing board.

The majority of commenters stated, in particular, that appointed board members should not be treated differently from elected board members or officials and disagreed with the Commission's statement that appointed board members are not directly accountable. Many of the commenters asserted that state and local laws applicable to officials of a municipal entity do not distinguish between appointed or elected members and that all members are subject to the same legal obligations, including fiduciary duties, codes of conduct, open meeting laws, and conflicts of interest and ethics laws. [485] For example, commenters asserted that appointed officials of municipal non-profit corporations, trusts, and pension funds have a duty to act in the interests of the corporation, trust, or the fund. [486] Many commenters also asserted that appointed board members are accountable to the elected officials that appointed them or for whom they work. [487] Many also noted that appointed board members may be removed for cause [488] and are subject to civil suit. [489] Others observed that appointed board members are more accountable than elected officials. [490]

Additionally, many commenters asserted that board members are the decision and policy makers who receive advice from third parties who are paid for providing services and that board members themselves are not “advisors.” [491] Many commenters asserted that members of governing boards are the intended beneficiaries of the proposed regulation. [492] Further, some commenters asserted that the Proposal would usurp state laws governing duties and responsibilities of appointed board members of municipal entities. [493] Many commenters also stated that, in its current form, the Proposal would deter much needed citizen volunteers from serving on governing boards of municipal entities or would chill the deliberative process of such boards. These commenters reasoned that volunteers would fear that their participation in votes on, or discussions of, financial matters will be deemed “advice” that would subject them to registration. [494]

Commenters also stated that the Proposal is unclear with respect to whether: (1) Appointed, rather than elected, officials (such as city controllers, managers, and commissioners) would be “employees;” [495] (2) the employee of one municipal entity (such as an employee of a municipal entity that is the sponsor of a pension plan) would be covered by the exclusion when serving as an appointed member of the board of another municipal entity (such as on the board of the sponsored pension plan) or otherwise performing services for other related municipal entities; [496] and (3) board members that were “elected,” but were not elected by the citizens of the municipal entity, would be considered “employees of a municipal entity.” [497] Some commenters stated that designees of board members should also be covered by the exclusion. [498] One commenter suggested that “employees and board members of a municipal entity should be excluded [from the definition of municipal advisor] to the extent they provide advice to an obligated person (and acting in the purview of their duties).” [499]

Many commenters also stated that boards of municipal entities are legally inseparable from the municipal entity. [500] One commenter stated that if the governing body of a municipal entity, as a whole, is not a part of the “municipal entity,” then any third party soliciting or providing advice to the governing body with respect to municipal financial products or the issuance of municipal securities would not be subject to the registration requirements. [501]

Additionally, some commenters asserted that the Proposal would restrict municipal entities from soliciting advice from citizens, and would subject to the registration requirements members of the general public submitting written comments or giving oral statements to the board of a municipal entity. [502] Another commenter stated that the Proposal would require registration of a former board member, if the Chairman of the current board contacts that former board member with questions about a prior issuance. [503]

After considering the comments, the Commission has determined to exempt from the definition of municipal advisor, pursuant to its authority under Section 15B(a)(4), all members of a municipal entity's governing body, its advisory boards and its committees, as well as persons serving in a similar official capacity with respect to the municipal entity, to the extent they are acting within the scope of their official capacity, regardless of whether such members or officials are employees of the municipal entity. Specifically, Rule 15Ba1-1(d)(3)(ii) exempts from the definition of municipal advisor “[a]ny person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, a municipal entity or obligated person [504] to the extent that such person is acting within the scope of such person's official capacity” [505] and “any employee of a municipal entity or obligated person to the extent that such person is acting within the scope of such person's employment.” [506]

The Commission agrees with commenters that like employees, a municipal entity's officials, as well as members of a municipal entity's governing body and other officials serving in a similar capacity (including members of advisory boards and committees), whether or not employed by a municipal entity, typically act on behalf of the municipal entity. The Commission also believes that if a local government official or appointed board member of a municipal entity, in the scope of his or her duties to that municipal entity, provides advice to another municipal entity, such advice would not require the person to register as a municipal advisor because such person would be acting within the scope of his or her duties to the municipal entity. Rule 15Ba1-1(d)(3)(ii) also clarifies the Commission's interpretation of the statutory exclusion from the definition of “municipal advisor” for employees of municipal entities by providing that such employees are exempt “to the extent that such person is acting within the scope of such person's employment.” [507] Consequently, as described above with respect to governing board members and officials, an employee of one municipal entity that provides advice, within the scope of his or her employment as such, to another municipal entity or obligated person would be exempt from the definition of “municipal advisor.”

The exemption in Rule 15Ba1-1(d)(3)(ii) would extend to all designees of public officials or members of a municipal entity's governing body, to the extent such designation is made pursuant to existing rules of the municipal entity for designating or delegating authority. The Commission believes that under such scenario, the designee would be serving “in a similar official capacity” [508] as the person for whom they are acting. Further, the Commission notes that the exemption from registration includes members of advisory boards [509] and committees, [510] acting within the scope of their capacity as such [511] because, as with respect to members of the governing body or other government officials, when acting within the scope of their official capacity such persons are acting on behalf of the municipal entity.

The Commission does not intend to impede the deliberative process that municipal entities engage in with their citizens. Accordingly, the registration requirement for municipal advisors does not apply to persons who comment on municipal financial products or the issuance of municipal securities by making use of public comment forums provided by municipal entities or other public forums. Additionally, responding to factual questions about a past issuance by a former board member would not constitute municipal advisory activities, because providing such information in response to questions under such circumstances is factual and therefore does not constitute advice with respect to such issuance. [512]

The Commission agrees with commenters that individuals who engage in deliberative and decision-making functions with respect to municipal financial products or the issuance of municipal securities as part of their duties as members of a governing body should not have to register as municipal advisors. Such individuals represent the municipal entity that is the intended recipient of the protections of the municipal advisor registration regime, and the Commission does not consider such deliberative and decision-making functions to be advice. Additionally, board members and other officials (appointed and elected alike, as well as their duly appointed designees) may be subject to state and local law, including fiduciary duties and ethics laws, and the statutory qualifications for such members' board positions may be significant to the mission of the municipal entity. Accordingly, the Commission does not believe that imposing an additional layer of regulation, including the fiduciary duty imposed upon municipal advisors, [513] would provide a significant additional benefit. The Commission agrees with commenters that whether a public official or other member of a governing body of a municipal entity is appointed or elected is not the sole factor in determining whether such individual is accountable to the municipal entity he or she serves. Board members, officials, and employees would be required to register, however, if they are engaged by other municipal entities or obligated persons to provide services as compensated advisors in addition to their normal duties as an employee, official, or board member of the municipal entity. [514]

For the reasons described above, the Commission finds it consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, to use its authority pursuant to Exchange Act Section 15B(a)(4) to exempt any person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, a municipal entity to the extent that such person is acting within the scope of such person's official capacity. [515] Accordingly, such persons are not required to register as municipal advisors.

Employees and Officials of Obligated Persons

Section 15B(e)(4) of the Exchange Act excludes from the definition of municipal advisor persons who are employees of a municipal entity, but does not extend such exclusion to employees of obligated persons. In the Proposal, the Commission asked whether employees of obligated persons should be excluded, to the extent they are providing advice to the obligated person, acting in its capacity as an obligated person, in connection with municipal financial products or the issuance of municipal securities. [516] In addition, the Commission asked whether there are types of persons, other than employees of obligated persons, who should be excluded from the definition of municipal advisor. [517] In response, the Commission received several comments.

Some commenters stated that employees, officers, and directors of obligated persons should be excluded from the definition of municipal advisor when they provide advice to the obligated person with respect to municipal financial products or the issuance of municipal securities. [518] More specifically, some commenters stated that board members of obligated persons acting within the scope of their duties do not give “advice” and that it is the obligation of board members to communicate with fellow board members and staff. [519] For example, one commenter stated that municipal advisors typically have multiple clients, hold themselves out as advisors, and generally do not exercise decision making authority for the municipal entity or obligated person. [520] On the other hand, according to this commenter, directors and employees of obligated persons act on behalf of and in the interest of entities with which they are affiliated and do not hold themselves out as advisors. [521] They act for obligated persons in connection with municipal offerings only as part of their responsibilities to the obligated person. [522] Other commenters stated that members of governing boards of obligated persons are already subject to state and federal laws, such as laws governing non-profit entities, conflict of interest laws, ethics laws, and open meeting laws. [523] Commenters also made similar statements with respect to employees of obligated persons. [524] Further, some commenters stated that officers, directors, and employees of obligated persons are no different from those of municipal entities, [525] and an obligated person can only act through its board and employees. [526] One commenter suggested, however, that individual board members and employees should not be exempt from registration if they are engaged to provide services for a nonprofit organization as compensated advisors. [527]

Several commenters stated that the MSRB Study, [528] the legislative history of the Dodd-Frank Act, and the Proposal indicate that the term “municipal advisor” is meant to capture professionals that offer advisory services in a financial marketplace. [529] One commenter stated that for decades, in regulating the market for financial advice, Congress and the Commission have expressly declined to regulate internal advice provided by employee to employer. [530] The commenter stated that a departure from this established practice should not be inferred, absent a clear indication from Congress, and nothing in the language or history of the Dodd-Frank Act signals that Congress intended to affect a fundamental shift in policy. [531]

Some commenters stated that the proposed rules would make it difficult for obligated persons to recruit and retain board members and employees, [532] discourage officers and board members from engaging in matters that are traditionally within their purview, [533] and disrupt the process of borrowing and operations of borrowers and issuers. [534] Other commenters stated that the proposed rules could substantially increase the cost of financing [535] and could cause a potential borrower to forego projects using the economic development options offered by states and avoid the issuance of municipal bonds. [536]

As discussed above, one commenter suggested that “employees and board members of a municipal entity should be excluded from regulation to the extent they provide advice to an obligated person (and acting in the purview of their duties).” [537] Likewise, employees and board members of an obligated person should be excluded from regulation to the extent they provide advice to a municipal entity. [538] On the other hand, another commenter stated that employees, officers, and directors of an obligated person should be exempt to the extent they provide advice solely to the obligated person and not to a municipal entity. [539] One other commenter stated that when an obligated person solicits conduit issuers to issue bonds on behalf of the obligated person, such solicitation should not require the obligated person or its board members or employees to register as municipal advisors. [540]

After considering the comments, the Commission agrees with commenters that board members, officers, and employees of obligated persons should be treated in the same manner as board members, officers, and employees of municipal entities and is using its statutory authority to provide an exemption for such persons that is parallel to the exemption with respect to municipal entities described above. [541] The Commission believes that this exemption is appropriate, because such individuals, when acting in the scope of their duty to the obligated person, are accountable to the obligated person. Further, board members, officers, and employees of obligated persons serve similar functions as board members, officers, and employees of municipal entities. Consequently, the Commission is exempting from the definition of municipal advisor any employee of an obligated person acting within the scope of such person's employment, as well as any person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, an obligated person to the extent they are acting within the scope of their duties. [542] The Commission believes that, like municipal entities, obligated persons and persons who perform decision-making functions for, or otherwise act on behalf of, obligated persons, when fulfilling their duty to the obligated person, are also the intended beneficiaries of the protections afforded by the municipal advisor registration requirement. As with respect to municipal entities, board members, officials, and employees of obligated persons would be required to register, however, if they are engaged by other municipal entities or obligated persons to provide services as compensated advisors in addition to their normal duties as an employee, official, or board member of the obligated person. [543]

For the reasons described above, the Commission finds it consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, to use its authority pursuant to Exchange Act Section 15B(a)(4) to exempt any: (1) Person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, an obligated person to the extent that such person is acting within the scope of such person's official capacity; and (2) employee of an obligated person to the extent that such person is acting within the scope of such person's employment. [544] Accordingly, such persons are not required to register as municipal advisors.

With regard to the application of the rules to employees or governing body members of an obligated person who solicit conduit issuers to issue bonds on behalf of the obligated person, the Commission notes that these persons are not acting as advisors. [545] Instead, they act as principals seeking an issuance of municipal securities by a municipal entity on behalf of the obligated person pursuant to an arm's-length loan (or similar) agreement under which the obligated person will be required to pay debt service and other costs upon bond issuance. The Commission notes that these individuals would not be required to register as municipal advisors, because they are not advising a municipal entity with respect to the issuance of municipal securities or soliciting a municipal entity on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement for such person. However, an employee, governing board member or other official of an obligated person could still be deemed to be engaged in municipal advisory activities (which include solicitation activities) if his or her recommendations cannot be properly characterized as negotiations of the terms by which the obligated person is agreeing to engage in the borrowing through the municipal entity. [546]

Regardless of an individual's title as a member of a governing body, an employee, or other official (appointed or elected) of a municipal entity or obligated person, the Commission notes that the exemptions described above do not apply to the extent such individual acts outside of the scope of authority of his or her position. [547]

ii. Responses to Requests for Proposals or Requests for Qualifications

In the Proposal, the Commission requested comment about banks that respond to municipal entities' RFPs regarding investment products offered, such as money market mutual funds or other exempt securities. [548] The Commission received a number of comments regarding responses to RFPs or RFQs by banks and other entities. [549]

Several commenters stated that responses to RFPs and RFQs should not require a person to register as a municipal advisor. For example, one commenter suggested that, with respect to municipal derivatives, responding to RFPs or RFQs from a municipal entity or obligated person does not constitute “advice.” [550] Similarly, another commenter stated generally that certain activities should be expressly excluded from the definition of “advice,” including responding to RFPs or RFQs and providing terms on which a financial institution would be prepared to enter into a transaction or purchase securities issued by a municipal entity. [551] This commenter also stated that bid documents submitted in response to a municipal entity's request for private financing proposals should not constitute advice. [552] Another commenter concurred that responses to RFPs should not be treated as advice. [553]

The Commission has carefully considered the issues raised by commenters on the Proposal and agrees that responses to RFPs or RFQs alone do not constitute municipal advisory activities. [554] Therefore, the Commission is adopting Rule 15Ba1-1(d)(3)(iv), which exempts from the definition of municipal advisor “[a]ny person providing a response in writing or orally to a request for proposals or qualifications from a municipal entity or obligated person for services in connection with a municipal financial product or the issuance of municipal securities; provided however, that such person does not receive separate direct or indirect compensation for advice provided as part of such response.” [555]

Responses to RFPs or RFQs are provided at the request of, and established by, a municipal entity or obligated person as part of a competitive process. Therefore, it is reasonable to believe that the municipal entity or obligated person would understand that service providers respond to RFPs and RFQs in order to obtain business and would not rely on such responses as it would on advice from its advisor. Further, persons who respond to RFPs or RFQs are likely to be already regulated entities, such as registered municipal advisors, brokers, dealers, or investment advisers. Accordingly, their responses may be subject to fair dealing, suitability, or other standards. Moreover, if a person is selected by a municipal entity or obligated person as a result of an RFP or RFQ, such person could be required to register as a municipal advisor for its subsequent activities.

For the same reasons discussed above for other RFPs, the exemption pursuant to Rule 15Ba1-1(d)(3)(iv) also includes responses to so-called “mini-RFPs” that might only be distributed to service providers that have been pre-screened or pre-qualified by the municipal entity or obligated person. For the exemption to apply, a person providing advice in response to an RFP or RFQ may not be separately compensated for advice given as part of the RFP or RFQ process. Further, the compensation such person receives, if hired as a result of the RFP or RFQ, is not direct or indirect compensation for the advice provided as part of the RFP or RFQ. However, assisting with the preparation of an RFP or RFQ on behalf of a municipal entity or obligated person, or assisting in the selection of a broker-dealer, investment adviser, or financial advisor as part of an RFP process, could constitute municipal advisory activity. Specifically, in assisting in the preparation of an RFP or RFQ, a person could provide advice with respect to the parameters of such RFP or RFQ, such as the potential use of municipal financial products or the issuance of municipal securities. Further, in assisting in the selection of a broker-dealer, investment adviser, or municipal advisor as part of an RFP process, a person could provide advice with respect to the responses to the RFP, including responses related to the use of municipal financial products or the issuance of municipal securities. [556]

For the foregoing reasons, the Commission finds it consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, to use its authority pursuant to Exchange Act Section 15B(a)(4) [557] to exempt persons responding to RFPs and RFQs from the definition of municipal advisor, subject to the limitations described above.

iii. Municipal Entity or Obligated Person Represented by an Independent Municipal Advisor

In the Proposal, the Commission sought comment on whether it should provide other exclusions from the definition of municipal advisor. [558] Several commenters suggested that a person providing advice with respect to municipal financial products or the issuance of municipal securities should not be regulated as a municipal advisor if the municipal entity or obligated person is otherwise represented by a municipal advisor with respect to the transaction. [559] One commenter argued that the Commission should provide that a person will not be regulated as a municipal advisor to a municipal entity or obligated person if such municipal entity or obligated person is or will be represented by an “independent advisor” that is a registered municipal advisor (or that is eligible for an exception) and any relevant documentation states that: (1) The person is not acting as an “advisor;” and (2) the municipal entity or obligated person is not relying on any advisory communications from such person. [560] According to another commenter, “when a municipality has engaged an independent financial advisor in connection with a proposed transaction, unaffiliated counterparties or potential counterparties to the transaction should not be deemed to be providing advice to the municipality as it has already elected an entity to fulfill that role.” [561] Another commenter stated that, in most cases where a bank is “providing a municipal derivative or other bank products and services to a municipal entity or obligated person, a third party advisor is providing advice on the transaction to the municipal entity or obligated person.” [562] This commenter suggested that the existence of such a third party relationship should be viewed as evidence that the municipal entity or obligated person is not relying on the bank for advice. [563]

The Commission has carefully considered these comments and is adopting Rule 15Ba1-1(d)(3)(vi), which exempts from the municipal advisor definition any person engaging in municipal advisory activities in a circumstance in which a municipal entity or obligated person is otherwise represented by an independent registered municipal advisor with respect to the same aspects of a municipal financial product or an issuance of municipal securities, provided that the following requirements are met. [564] First, an independent registered municipal advisor must be providing advice with respect to the same aspects of the municipal financial product or issuance of municipal securities as the person seeking to rely on Rule 15Ba1-1(d)(3)(vi). [565] For purposes of Rule 15Ba1-1(d)(3)(vi), the term “independent registered municipal advisor” means a municipal advisor registered pursuant to Section 15B of the Exchange Act and the rules and regulations thereunder and that is not, and within at least the past two years was not, associated [566] with the person seeking to rely on Rule 15Ba1-1(d)(3)(vi). The Commission believes that a two year cooling-off period represents an appropriate period of time to help remove any actual or perceived influence over a municipal advisor's ability to exercise independent judgment when engaging in municipal advisory activities. [567] Second, a person seeking to rely on this exemption must receive from the municipal entity or obligated person a representation in writing that it is represented by, and will rely on the advice of, an independent registered municipal advisor, and such person has a reasonable basis for relying on the representation. [568] Third, such person must provide the required disclosures to the municipal entity or obligated person, and provide a copy of such disclosures to the municipal entity's or obligated person's independent registered municipal advisor. With respect to a municipal entity, such person must disclose in writing to the municipal entity that, by obtaining such representation from the municipal entity, such person is not a municipal advisor and is not subject to the fiduciary duty established in Section 15B(c)(1) of the Exchange Act with respect to the municipal financial product or issuance of municipal securities. [569] With respect to an obligated person, such person must disclose in writing to the obligated person that, by obtaining such representation from the obligated person, such person is not a municipal advisor with respect to the municipal financial product or issuance of municipal securities. [570] The rule also requires that each such disclosure must be made at a time and in a manner reasonably designed to allow the municipal entity or obligated person to assess the material incentives and conflicts of interest that such person may have in connection with the municipal advisory activities. [571] The level and timing of disclosure required may vary according to the issuer's knowledge or experience. [572]

The requirement that a copy of the disclosure be provided to the independent registered municipal advisor is not intended to alter the nature of the duty owed by the municipal advisor to its municipal entity or obligated person client or the nature of such municipal advisor's engagement.

The Commission believes that exempting persons advising a municipal entity or obligated person from the definition of municipal advisor when the municipal entity or obligated person is represented by an independent registered municipal advisor is consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act. The Commission believes that Rule 15Ba1-1(d)(3)(vi) will allow parties to a municipal securities transaction and others who are not registered municipal advisors to share advice with municipal entities and obligated persons so long as the municipal entity or obligated person is represented by an independent registered municipal advisor. A municipal entity represented by an independent registered municipal advisor will have the benefits associated with the regulation of municipal advisors. Such benefits include, but are not limited to, standards of conduct, training, and testing for municipal advisors that may be required by the Commission or the MSRB, other requirements unique to municipal advisors that may be imposed by the MSRB, [573] and fiduciary duty. While independent registered municipal advisors do not owe a fiduciary duty to obligated persons, the Commission notes that they have a duty to deal fairly with obligated persons under MSRB Rule G-17. [574] Also, as noted by commenters, the engagement by a municipal entity or obligated person of an independent registered municipal advisor indicates that the municipal entity or obligated person intends to rely on the advice of that advisor. Rule 15Ba1-1(d)(3)(vi) requires that this intention be further evidenced by a written representation that the municipal entity or obligated person will rely on the advice of an independent registered municipal advisor. Further, Rule 15Ba1-1(d)(3)(vi) requires the person receiving such representation to have a reasonable basis for relying on the representation.

So long as a municipal entity or obligated person is represented by and relies on an independent registered municipal advisor, the Commission believes it is appropriate to allow municipal entities and obligated persons to receive as much advice and information as possible from a variety of sources, even if the providers of such advice are not subject to a fiduciary duty. The Commission does not seek to curtail the receipt of important advice and information so long as the municipal entities and obligated persons are represented by and rely on independent registered municipal advisors who are subject to a fiduciary or other duties and who can help the municipal entities and obligated persons evaluate the advice and identify potential conflicts of interest. Further, the requirement that a person seeking to rely on this rule provide a copy of the disclosures under Rule 15Ba1-1(d)(3)(vi)(C) to the independent registered municipal advisor will help timely inform the independent registered municipal advisor that the municipal entity or obligated person is receiving advice from a person seeking to rely on Rule 15Ba1-1(d)(3)(vi).

In addition, certain persons that may engage in municipal advisory activities could also be counterparties to a municipal entity or obligated person, such as swap dealers and security-based swap dealers. The requirement for such persons to register as municipal advisors could be inconsistent with their roles as counterparties to the municipal entity or obligated person. While the Commission is separately providing certain exemptions for counterparties of municipal entities and obligated persons, [575] such persons may also consider whether they can rely on this exemption.

iv. Broker, Dealer, or Municipal Securities Dealer Serving as an Underwriter

Exchange Act Section 15B(e)(4)(C) provides that the term “municipal advisor” does not include a broker, dealer, or municipal securities dealer serving as an underwriter (as defined in Section 2(a)(11) of the Securities Act) (the “underwriter exclusion”). [576] In the Proposal, the Commission proposed to interpret this statutory underwriter exclusion to apply solely to a broker, dealer, or municipal securities dealer serving as an underwriter in connection with the issuance of municipal securities. [577] Further, the Commission proposed that this exclusion would not apply when such persons are acting in a capacity other than as an underwriter, and that, for example, this exclusion would not apply to advice with respect to the investment of bond proceeds or municipal derivatives. [578]

In the Proposal, the Commission requested comment on whether its interpretation of the statutory exclusion from the definition of municipal advisor for a broker, dealer, or municipal securities dealer serving as an underwriter was appropriate. [579] The Commission received approximately 20 comment letters addressing the scope of this underwriter exclusion. Most commenters suggested that this exclusion should cover broker-dealer activities already subject to regulation, [580] and some commenters suggested that it should cover broker-dealer activities that are solely incidental to underwriting an issuance of municipal securities. [581] By contrast, other commenters supported a more limited scope for the underwriter exclusion, stating, for example, that “[u]nless the Commission recognizes and implements in an appropriate manner the narrow character of the underwriter definition referenced in the Dodd-Frank Act, the Commission will be diminishing otherwise important protections for municipal entities and obligated persons provided in that Act.” [582] Another commenter suggested that the Commission clarify that an underwriter is not permitted to provide “advice” with respect to the structure, timing, or terms of the bond issue it seeks to purchase and distribute. [583]

The Commission has carefully considered comments submitted about the underwriter exclusion in the Proposal, as discussed further below, and is adopting its proposed interpretation of the statutory underwriter exclusion, with modifications and clarifications designed to address commenters' concerns. Specifically, Rule 15Ba1-1(d)(2)(i) provides that the term “municipal advisor” shall not include a “broker, dealer, or municipal securities dealer serving as an underwriter of a particular issuance of municipal securities to the extent that the broker, dealer, or municipal securities dealer engages in activities that are within the scope of an underwriting of such issuance of municipal securities.”

Under the Commission's modified interpretation of the underwriter exclusion, if a broker, dealer, or municipal securities dealer is serving as an underwriter of a particular issuance of municipal securities, the underwriter exclusion would include advice provided by that underwriter within the scope of underwriting and would generally include advice with respect to the structure, timing, terms, and other similar matters concerning that issuance of municipal securities.

It is important to note that the following advice would be outside the scope of an underwriting for purposes of this exclusion: (1) Advice on investment strategies; (2) advice on municipal derivatives; and (3) advice otherwise identified by the Commission to be outside the scope of an underwriting. [584] Such advice generally is not within the scope of serving as an underwriter on an issuance of municipal securities and can raise issues that implicate the policy objectives of municipal advisor registration. For example, municipal entities suffered significant losses in the financial crisis related to advice on complex municipal derivatives, [585] and advice on investments, [586] such as refunding escrow investments provided by underwriters [587] and investments involving fraud in investment bidding procedures, [588] has been the subject of significant enforcement activity. In other circumstances, such advice may create conflicts of interest for an underwriter, such as when the advice addresses whether to issue debt or whether to conduct a competitive sale instead of a negotiated underwriting. In addition, as discussed further below, the underwriter exclusion does not include all activities that may be solely incidental to an underwriting, such as advice on investment strategies or advice on municipal derivatives, because these activities are not within the scope of an underwriting and are activities for which municipal entities and obligated persons require the protections afforded by municipal advisors.

Although, as noted above, “issuance of municipal securities” should be construed broadly, [589] the Commission believes that, in order for a person to be “serving as an underwriter” [590] with respect to an issuance of municipal securities, there must be a relationship to a particular transaction. [591] For example, a contractual engagement by a municipal entity of a broker-dealer to serve as underwriter on a specific planned transaction for the issuance of municipal securities would constitute the requisite engagement on a particular issuance of municipal securities. By contrast, an engagement by a municipal entity of a broker-dealer to serve as underwriter for some period of time or to serve as a member of an underwriting “pool” without specifying the broker-dealer's assignment expressly to serve as underwriter on one or more particular planned transactions would not constitute serving as an underwriter on a particular issuance of municipal securities. Further, an underwriter providing advice with respect to related transactions or tranches on which it is not engaged would be acting within the scope of the underwriter exclusion only if such advice is also related to the tranche or transaction on which the underwriter is engaged. For example, an underwriter may give advice about the timing of a sale of a related transaction on which it is not engaged by noting that shifting the timing of such sale will have a positive impact on market demand for the transaction on which it is engaged. Such advice would fall within the underwriter exclusion because such advice concerns the timing of the particular issuance of municipal securities for which it is acting as underwriter and is not regarded by the Commission as being outside the scope of an underwriting.

The Commission recognizes, however, that a municipal entity issuer may wish to request advice on an issuance of municipal securities from a broker-dealer serving as a member of its underwriting “pool” that does not yet have a specific assignment or from a broker-dealer engaged on related transactions or tranches. In such circumstances, the broker-dealer could respond within the requirements of one of the other exemptions of general applicability discussed above. For example, if the municipal entity issuer was seeking the advice in response to a “mini-RFP” sent to members of the underwriting pool, the broker-dealer could respond and provide advice within the limitations of the exemption for responses to RFPs and RFQs. [592] In addition, if the municipal entity is represented by an independent registered municipal advisor with respect to such issuance of municipal securities, the broker-dealer could respond and provide advice if the requirements of the exemption available when a municipal entity is otherwise represented by an independent registered municipal advisor with respect to the same aspects of the issuance of municipal securities were satisfied. [593] Finally, depending on the nature of the requested information and the response, it might be considered a communication or effort to win business that is not municipal advisory activity. [594]

In response to commenters that suggested that underwriters should not be permitted to provide “advice” with respect to the structure, timing and terms of the bond issue it seeks to purchase and distribute, [595] the Commission points out that, subsequent to the Proposal, the MSRB provided additional interpretive guidance under MSRB Rule G-17, which requires that brokers, dealers, and municipal securities dealers acting as underwriters make certain disclosures to municipal issuers about the roles of underwriters in negotiated sales of municipal securities, including disclosures about their duty of fair dealing with a municipal issuer (but not a fiduciary duty to a municipal issuer) and their actual or potential, material conflicts of interest. The Commission continues to believe that allowing underwriters to give advice within the scope of an underwriting with respect to the structure, timing, terms, and other similar matters concerning an issuance is consistent with the aim of improving the quality of advice that municipal entities and obligated persons receive, because these Rule G-17 disclosure requirements should assist them in clarifying the duties of underwriters to municipal issuers, identifying conflicts of interest, and appropriately evaluating the advice they receive from underwriters with that informed perspective. [596]

The Commission continues to believe that a broker, dealer, or municipal securities dealer engaging in municipal advisory activities outside the scope of underwriting a particular issuance of municipal securities should be subject to municipal advisor registration, absent the availability of another exemption or exclusion. With respect to the treatment of advice on municipal derivatives as outside the underwriter exclusion, the Commission notes that one purpose of the municipal advisor provision in the Dodd-Frank Act was to address concerns about advice to municipalities on complex municipal derivatives in which municipalities suffered significant losses in the financial crisis. [597]

Several commenters requested additional guidance from the Commission regarding the types of activities that would fall within the Commission's interpretation of the statutory underwriter exclusion for activity within the scope of an underwriting of an issuance of municipal securities. For example, one commenter stated that the exclusion should clearly extend to a full range of activities “closely related” to the underwriting. [598] Another commenter asserted that certain municipal advisory activities and, in particular, certain “transaction-related services” provided by underwriters are integral to fulfilling the function of an underwriter in a professional manner but did not specify which activities were integral. [599] A few commenters stated that the Proposal did not provide sufficient guidance regarding the scope of the underwriter exclusion and requested further clarification. [600]

Set forth below are non-exclusive examples of activities that the Commission considers to be within or outside the scope of the underwriter exclusion to the municipal advisor definition, respectively.

Examples of Activities Within the Scope of Serving as an Underwriter of a Particular Issuance Municipal Securities for Purposes of the Underwriter Exclusion

The Commission agrees with those commenters [601] that stated that it is not possible to provide an exhaustive list of all activities that would be considered to be within the scope of an underwriting. As a general matter, the Commission considers activities that are integral to the purchase and distribution of a particular issuance of municipal securities on which a broker, dealer, or municipal securities dealer is engaged to serve in the capacity as underwriter to be within the scope of the underwriter exclusion. The Commission also considers activities that are integral to fulfilling the role of an underwriter, such as the obligations of underwriters under the antifraud provisions of the federal securities laws and obligations of underwriters under MSRB rules, to be within the scope of an underwriting. [602]

The Commission considers the following activities, identified by commenters, [603] to be within the scope of the underwriting exclusion: [604] (1) advice regarding the structure, timing, terms, and other similar matters concerning a particular issuance of municipal securities (except as otherwise provided herein with respect to advice on investment strategies, municipal derivatives, or other activities identified by the Commission as outside the scope of an underwriting); (2) preparation of rating strategies and presentations related to the issuance being underwritten; (3) preparations for and assistance with investor “road shows” and investor discussions related to the issuance being underwritten; (4) advice regarding retail order periods and institutional marketing if the municipal entity has determined to engage in a negotiated sale; (5) assistance in the preparation of the preliminary and final official statements for the municipal securities; (6) assistance with the closing of the issuance of municipal securities, including negotiation and discussion with respect to all documents, certificates, and opinions needed for such closing; (7) coordination with respect to obtaining CUSIP numbers and the registration of the issue of municipal securities with the book-entry only system of the Depository Trust Company; (8) preparation of post-sale reports for such municipal securities; and (9) structuring of refunding escrow cash flow requirements necessary to provide for the refunding and defeasance of an issue of municipal securities (provided, however, that the recommendation of and brokerage of particular municipal escrow investments is outside the scope of the underwriting exclusion).

Examples of Activities Outside the Scope of Serving as an Underwriter of a Particular Issuance of Municipal Securities for Purposes of the Underwriter Exclusion

Several commenters [605] also requested clarification as to whether certain strategic, transaction-related, and post-issuance activities would be considered acting within the scope of the underwriter exclusion. The Commission notes that an underwriter providing certain advice outside the scope of the underwriter exclusion would not be required to be registered as a municipal advisor in order to provide that advice if: (a) the advice does not relate to a municipal financial product [606] or the issuance of municipal securities, [607] (b) the advice is given in response to a request for proposal [608] or is otherwise permitted when seeking to obtain business, [609] or (c) the advice is given when the municipal entity has engaged an independent registered municipal advisor. [610]

The Commission considers the following activities, identified by commenters, [611] to be outside the scope of the underwriter exclusion: [612] (1) advice on investment strategies; (2) advice on municipal derivatives (including derivative valuation services); (3) advice on what method of sale (competitive sale [613] or negotiated sale [614] ) a municipal entity should use for an issuance of municipal securities; (4) advice on whether a governing body of a municipal entity or obligated person should approve or authorize an issuance of municipal securities; (5) advice on a bond election campaign; (6) advice that is not specific to a particular issuance of municipal securities on which a person is serving as underwriter and that involves analysis or strategic services with respect to overall financing options, debt capacity constraints, debt portfolio impacts, analysis of effects of debt or expenditures under various economic assumptions, or other impacts of funding or financing capital projects or working capital; (7) assisting issuers with competitive sales, including bid verification, true interest cost (TIC) calculations and reconciliations, verifications of bidding platform calculations, and preparation of notices of sale; (8) preparation of financial feasibility analyses with respect to new projects; (9) budget planning and analyses and budget implementation issues with respect to debt issuance and collateral budgetary impacts; (10) advice on an overall rating strategy that is not related to a particular issuance of municipal securities on which a person is serving as an underwriter, including advice and actions taken on behalf of a municipal entity or obligated person between financing transactions; (11) advice on overall financial controls that are not related to a particular issuance of municipal securities on which a person is serving as an underwriter; or (12) advice regarding the terms of requests for proposals or requests for qualification for the selection of underwriters or other professionals for a project financing and advice regarding review of responses to such requests, including matters regarding compensation of such underwriters or other professionals.

The Commission believes the above-listed activities are not within the scope of the underwriter exclusion because the activities are either not specific to a particular issuance of municipal securities for which a broker, dealer or municipal securities dealer could be serving as an underwriter or the activities are not integral to fulfilling the role of an underwriter.

Communications or Efforts to Win Business

A few commenters asked whether communications and analyses that are part of an effort to win business would be considered municipal advisory activity. [615] The Commission notes that not all communications with a municipal entity or obligated person constitute municipal advisory activities. If the person has identified himself or herself as seeking to obtain business, such as serving as an underwriter on future transactions, whether such communications and analyses constitute municipal advisory activities or the provision of general information (as discussed further above [616] ) will depend on the specific facts and circumstances. For example, pursuant to the Commission's interpretation of the treatment of the provision of general information, the Commission believes that a broker-dealer who provides information to a municipal entity regarding its underwriting capabilities and experience or general market or financial information that might indicate favorable conditions to issue or refinance debt likely would not be treated as engaging in municipal advisory activity.

On the other hand, for purposes of this rule and in response to comments, [617] the Commission does not consider advice rendered by a broker-dealer in its capacity as a member of an “underwriting pool” for a municipal entity or obligated person (and in the absence of a designation of that broker-dealer to serve as underwriter on the particular issuance of municipal securities on which the advice is given) to be advice within the scope of the underwriting exclusion. An underwriting pool generally includes a group of underwriters selected by a municipal entity pursuant to an RFP or other process [618] from which the municipal entity may select one or more firms to underwrite a specific transaction. As noted above, a broker-dealer that is merely a part of an underwriting pool is not engaged to underwrite any particular issuance, and therefore, is not acting as an underwriter. As described above, however, depending on the particular facts and circumstances, the broker-dealer's activities as part of an underwriting pool may be within the requirements of one of the exemptions of general applicability, [619] may be considered to be an effort to obtain underwriting business on its own behalf, or may be otherwise exempt, which would not require municipal advisor registration.

Post-Offering Services

Commenters asked whether post-offering work performed by an underwriter would qualify for the underwriter exclusion or whether it would constitute municipal advisory activity requiring registration. [620] For purposes of this rule, the Commission considers post-offering work performed by an underwriter to be municipal advisory activity unless it is a request for information or services that would have been provided as part of the underwriting (such as resending cash flow and other similar information related to the offering) or is required for an underwriter to fulfill its regulatory obligations as underwriter. [621] If an issuance has closed and the underwriting period [622] has terminated, the broker-dealer cannot be considered to be acting as an underwriter with respect to the issuance of municipal securities. Therefore, any advice or recommendation with respect to the issuance of municipal securities or a municipal financial product given after the termination of the underwriting period generally would be municipal advisory activities. Accordingly, broker-dealers should consider whether particular post-offering work they provide would constitute advice with respect to the issuance of municipal securities or a municipal financial product.

The Commission notes that assisting a municipal entity or obligated person with filing annual financial information, audited financial statements, or material event notices, as required by Rule 15c2-12, [623] after an issuance has closed and after the underwriting period has terminated, would generally be outside the scope of the underwriting exclusion. A determination as to whether or not these activities would constitute advice would be based on all the facts and circumstances. [624]

Broker-Dealers Acting as Placement Agents, Dealer-Managers, and Remarketing Agents

A few commenters emphasized the similarity between private placement agents and underwriters, and suggested that private placement agents should be included in the underwriter exclusion. [625] One commenter stated that a private placement agent offering securities of a municipal entity or obligated person in a private placement under the Securities Act, even if the agent is not serving as an underwriter within the strict meaning of Section 2(a)(11) of the Securities Act, serves almost exactly the same role underwriters play in assisting issuers. [626] This commenter also noted that “[a]ny uncertainty with respect to a private placement agent's role can be adequately clarified to municipal issuers or obligors through mandatory disclosures.” [627]

The Commission believes that any registered broker-dealer who participates in a particular issuance of municipal securities, whether the broker-dealer is acting as agent (such as in a best-efforts offering) or is acting as principal (such as in a firm commitment offering) would not have to register as a municipal advisor if facts and circumstances indicate that the registered broker-dealer is performing municipal advisory activities that otherwise would be considered within the scope of the underwriting of a particular issuance of municipal securities as discussed above. [628] Registered broker-dealers are subject to regulation under the Exchange Act, regardless of whether they act as principal or agent in a municipal securities offering. The Commission does not believe that the underwriter exclusion should be limited to a particular type of underwriting or particular type of offering. [629] Therefore, if a registered broker-dealer, acting as a placement agent, performs municipal advisory activities that otherwise would be considered within the scope of the underwriting of a particular issuance of municipal securities as discussed above, the broker-dealer would not have to register as a municipal advisor.

In addition, the Commission has determined that a broker-dealer acting as a dealer-manager for a tender offer, without more, [630] would not be municipal advisory activity because tender offers typically involve only the purchase of municipal securities and the purchase is not itself an advisory activity. Similarly, a broker-dealer acting as a dealer-manager for an exchange offer would generally involve only two transactions—the purchase of one security in the tender offer and the underwriting of a particular issuance of municipal securities in exchange for such tendered securities. Since the purchase itself is not advisory activity and the underwriting of the new issue of municipal securities would be excluded under the underwriter exclusion, neither component of the exchange offer would be considered municipal advisory activity. [631]

A few commenters also suggested that remarketing agents should be included in the underwriter exclusion. [632] Generally, the Commission also would not consider a remarketing agent [633] acting only in its capacity as a remarketing agent to be a municipal advisor because the mere remarketing of bonds likely would not constitute an issuance of municipal securities. If, however, the remarketing constitutes a primary offering, [634] then the remarketing agent would need to evaluate its activities to determine if an exemption or exclusion from registration (such as the underwriter exclusion) applies. A primary offering is an issuance of municipal securities for purposes of the municipal advisor registration regime. [635] Similarly, if the activities of a remarketing agent include providing advice (such as advice with respect to the investment of proceeds) beyond merely determining a remarketing price for bonds that have already been issued and that are not being reoffered, the remarketing agent would need to evaluate its activities to determine if an exception to registration (such as the investment adviser exclusion) applies.

Solely Incidental Services

Many commenters recommended that the municipal advisor registration rules include an exclusion for broker-dealers that is similar in scope to the broker-dealer exclusion under Section 202(a)(11)(C) of the Investment Advisers Act. [636] Specifically, these commenters stated that the Commission should exclude from registration broker-dealers that provide advice that is solely incidental to a transaction. [637] These commenters generally noted that broker-dealers are already regulated by the Commission and should not be subject to additional or duplicative regulation. [638]

The Commission is not adopting an exemption from the definition of municipal advisor for a broker-dealer that engages in municipal advisory activities that are solely incidental to the conduct of its business as a broker-dealer because the Commission believes that it has otherwise addressed commenters' concerns regarding duplicative regulation. As discussed above, the Commission is exempting from the definition of municipal advisor persons that provide advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities and the recommendation of and brokerage of municipal escrow investments. [639] As discussed below, based on the application of the adopted rules, broker-dealers that sell securities to municipal entities and obligated persons would generally not be engaging in municipal advisory activity. [640] The application of the adopted rules limits the range of municipal financial products to which duplicative regulation could apply. As noted above, the Commission believes that registered broker-dealers that engage in municipal advisory activities by advising on the investment of proceeds of municipal securities or municipal escrow investments should not be exempt from municipal advisor registration. [641]

Broker-Dealers Selling Securities to Municipal Entities and Obligated Persons

Several commenters suggested that, based on the Proposal, the Commission appears to conclude that “a broker-dealer that sells a security to a municipal entity where it is not serving as an underwriter” is engaged in municipal advisory activity, because advice is integral to the sale of securities. [642] That is not the conclusion of the Commission. The municipal advisor registration requirement does not apply in the absence of advice (or solicitation). As noted above, for purposes of the municipal advisor definition, “advice” includes, without limitation, a recommendation that is particularized to the needs and circumstances of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, based on all the facts and circumstances. [643] Thus, a broker-dealer that effects a transaction that it has not recommended will not be a “municipal advisor” with respect to such activity. [644] However, the sale of a security to a municipal entity or obligated person constitutes a municipal advisory activity if: (1) the monies used to purchase such security are proceeds of municipal securities; [645] and (2) in executing such transaction, the broker-dealer also recommends the investment or otherwise offers advice to the municipal entity or obligated person about which securities to purchase or sell.

Another commenter urged the Commission to exclude broker-dealers affiliated with life insurance companies from municipal advisor registration, because such “limited service” broker-dealers are substantively different from “full service” broker-dealers. [646] The Commission notes that broker-dealers affiliated with insurance companies are only required to register as municipal advisors to the extent their activities constitute advice to (or solicitation of) a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities. The mere fact that a broker-dealer is affiliated with a life insurance company and may not sell as wide a range of securities as other broker-dealers is not determinative as to whether such broker-dealer must register as a municipal advisor. As noted in the paragraph above, such broker-dealers may sell securities to a municipal entity without triggering municipal advisor registration.

Broker-Dealers Providing Advice to Individual Plan Participants in a Public Employee Benefit Plan

One commenter expressed concern that broker-dealers that provide investment advice (such as asset allocation) to individual plan participants in the context of a 403(b) retirement plan or a similar defined contribution plan might trigger municipal advisor registration. This commenter recommended that such broker-dealers be specifically excluded from registration. [647]

The definition of municipal advisor states that a municipal advisor is a person that provides advice “to or on behalf of a municipal entity or obligated person.” As described above, advice related to investment strategies that would require registration is limited to advice with respect to “the investment of proceeds of municipal securities . . . and the recommendation of and brokerage of municipal escrow investments.” [648] Thus, the provision of investment advice to individual plan participants in a public employee benefit plan is not a municipal advisory activity, as long as the individual plan participant is not a municipal entity. [649]

v. Registered Investment Advisers

Exchange Act Section 15B(e)(4)(C) excludes from the definition of municipal advisor “any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice.” [650] The Commission proposed in Rule 15Ba1-1(d)(2)(ii) to interpret the statutory exclusion for registered investment advisers from the definition of municipal advisor. [651] Specifically, the Commission proposed that the term “municipal advisor” shall not include “[a]n investment adviser registered under the Investment Advisers Act of 1940 . . . or a person associated with such registered investment adviser, unless the registered investment adviser or person associated with the investment adviser engages in municipal advisory activities other than providing investment advice that would subject such adviser or person associated with such adviser to the Investment Advisers Act of 1940.” [652]

In the Proposal, the Commission stated that a registered investment adviser or an associated person of a registered investment adviser would fall within the definition of municipal advisor and be required to register with the Commission as a municipal advisor if the adviser or associated person engages in any municipal advisory activities (including solicitation) that would not be investment advice subject to the Investment Advisers Act. [653] In the Proposal, the Commission stated its belief that this interpretation is in furtherance of the goals of the Dodd-Frank Act to regulate persons that engage in municipal advisory activities. [654]

As discussed further below, the Commission received several comments in response to its proposed interpretation of the statutory exclusion relating to investment advisers. After careful consideration, to address commenters' concerns, the Commission is modifying proposed Rule 15Ba1-1(d)(2)(ii) to provide certain clarifications. Specifically, Rule 15Ba1-1(d)(2)(ii), as adopted, provides that the definition of municipal advisor excludes “[a]ny investment adviser registered under the Investment Advisers Act of 1940 . . . or any person associated with such registered investment adviser to the extent that such registered investment adviser or such person is providing investment advice in such capacity.” Moreover, the Commission clarifies in Rule 15Ba1-1(d)(2)(ii) that “investment advice,” solely for purposes of this rule, “does not include advice concerning whether and how to issue municipal securities, advice concerning the structure, timing, and terms of an issuance of municipal securities and other similar matters, advice concerning municipal derivatives, or a solicitation of a municipal entity or obligated person.” [655]

Interpretation of the Statutory Language

Several commenters stated that the Commission's proposed interpretation is contrary to the plain meaning of the statute and exceeds its intended scope. [656] One commenter stated that the statute excludes “any” registered investment adviser—without limitation. [657] Similarly, another commenter stated that the phrase “who are providing investment advice” refers only to the immediately previous phrase, “persons associated with such investment advisers”—not to “such registered advisers” themselves. [658] As such, this commenter also encouraged the Commission to interpret the exclusion for investment advisers to apply to all registered investment advisers, not just those who are providing investment advice. [659] Yet another commenter stated that the statute's exclusion of investment advisers “who are providing investment advice” cannot be interpreted to only exclude advisers providing “investment advice” subject to the Investment Advisers Act, because not all “investment advice” requires registration under the Investment Advisers Act (e.g., advice with respect to instruments that are not securities). [660] This commenter stated that the Commission's interpretation would mean that “[a Commission]-registered investment adviser would be excepted from municipal advisor registration for only some, but not all, of its investment activities.” [661] The commenter described the Commission's interpretation as “without an apparent reason or policy justification.” [662]

In commenting that registered investment advisers should be excluded broadly from municipal advisor registration, one commenter stated that the municipal advisor registration requirement established by the Dodd-Frank Act was “primarily aimed at registering unregulated persons.” [663] Registered investment advisers, in the view of some commenters, are “already subject to the fiduciary duties and comprehensive registration and disclosure requirements mandated by the Investment Advisers Act.” [664] The proposal would therefore subject them to “duplicative and overlapping regulation.” [665]

Some commenters stated that the Commission's proposed interpretation of the exclusion “interjects ambiguity” on how to determine whether registered investment advisers must also register as municipal advisors. [666] These commenters stated that the Commission's interpretation would create “widespread uncertainty” [667] among investment advisers regarding whether certain of their activities are subject to regulation as municipal advisory activities. One commenter stated that the uncertainty would be compounded by the lack of a definition concerning the kind of investment advice that would exempt a registered investment adviser from the municipal advisor registration requirement. [668]

One commenter requested that the Commission include a non-exclusive interpretation that “any advice provided by a registered investment adviser pursuant to a written agreement with a municipal entity to whom the adviser owes a fiduciary duty as an investment adviser constitutes the rendering of investment advice.” [669] The requested interpretation would thereby exempt the investment adviser from registration as a municipal advisor. [670]

As stated above, the Commission is adopting a revised Rule 15Ba1-1(d)(2)(ii). Under the rule the Commission is adopting today, a registered investment adviser could provide advice concerning the investment of proceeds in securities without registering as a municipal advisor because it would be “providing investment advice” in its capacity as a registered investment adviser. Further, if the advice is provided pursuant to an advisory agreement that extends to investments in both securities and non-security financial instruments, such advice would still be excluded, because investment advice provided pursuant to the advisory agreement would be investment advice for purposes of Rule 15Ba1-1(d)(2)(ii). [671]

However, the Commission notes that, solely for purposes of the municipal advisor registration rules, pursuant to Rule 15Ba1-1(d)(2)(ii), “investment advice” does not include advice concerning whether and how to issue municipal securities, advice concerning the structure, timing, and terms of an issuance of municipal securities and other similar matters, advice concerning municipal derivatives, or a solicitation of a municipal entity or obligated person. Notwithstanding that these activities may constitute advice under the Investment Advisers Act, the Commission believes that this approach is appropriate given that Section 15B(e) of the Exchange Act expressly designates these activities as requiring municipal advisor registration. [672] Accordingly, a registered investment adviser that provides these types of advice to municipal entities or obligated persons would need to register as a municipal advisor.

The Commission interprets the statutory language, which provides an exclusion for registered investment advisers and associated persons “who are providing investment advice,” as evidence that Congress did not intend to grant a blanket exemption from municipal advisor registration for all registered investment advisers and their associated persons regardless of the activities in which they are engaged. The Commission believes the phrase “who are providing investment advice” limits the exclusion. Under this interpretation, if an associated person or a registered investment adviser engages in municipal advisory activities that do not constitute “investment advice” for purposes of Rule 15Ba1-1(d)(2)(ii), both the registered investment adviser and the associated person of such adviser engaging in the municipal advisory activities would be “municipal advisors” unless eligible for another exclusion or exemption. [673]

The Commission further notes that the municipal advisor registration and regulatory regime relates to issues that are unique to municipal advisory activities—particularly the advice concerning utilization of municipal derivatives, whether and how to issue municipal securities, and the structure, timing, and terms of issuances of municipal securities and other similar matters. The registration of registered investment advisers as municipal advisors, to the extent they engage in these activities, whether or not already subject to the Investment Advisers Act, is necessary to provide the benefits associated with the regulation of persons who engage in municipal advisory activities. Such benefits include, but are not limited to, standards of conduct, training, and testing for municipal advisors that may be required by the Commission or the MSRB, and other requirements unique to municipal advisors that may be imposed by the MSRB. [674]

The Commission believes that the clarifications described above address the comments that the Commission's interpretation introduces “ambiguity” and will lead to “widespread uncertainty” among registered investment advisers. In particular, permitting a Commission-registered investment adviser to rely on the exclusion when providing any advice under an investment advisory agreement that is subject to the Investment Advisers Act, as long as such advice is not specifically excluded from the definition of “investment advice” under Rule 15Ba1-1(d)(2)(ii), will allow registered investment advisers to achieve greater certainty about the scope of the exclusion at the time they enter into an advisory agreement. [675] If an investment adviser firm engages in a municipal advisory activity that is not within the registered investment adviser exclusion, such as advice concerning the issuance of municipal securities or the utilization of swaps by municipalities, the mere fact that the firm is registered under the Investment Advisers Act would not exempt that firm from registration as a municipal advisor. [676]

As discussed above in Section III.A.1.b.viii., the Commission is narrowing the application of the term “investment strategies” from all plans, programs, or pools of assets that invest funds held by or on behalf of a municipal entity to plans or programs for the investment of the proceeds of municipal securities and the recommendation of and brokerage of municipal escrow investments. Accordingly, the municipal advisor registration regime, as adopted, will provide appropriate protection for advice with respect to proceeds of municipal securities while mitigating many of the commenters' concerns with respect to funds of municipal entities other than proceeds of municipal securities. Moreover, because advice provided to fewer types of plans, programs, or pools of assets would require municipal advisor registration, the Commission's exemption for persons providing advice with respect to certain investment strategies will result in fewer registered investment advisers having to register as municipal advisors compared to Rule 15Ba1-1(b) as originally proposed. [677] For example, under the narrow scope of investment strategies, investment advisers who provide advice to public employee benefit plans, participant-directed investment plans such as 529, 403(b) or 457 plans that do not include proceeds of municipal securities would not be required to register as municipal advisors.

As noted above, one commenter suggested that any advice pursuant to a written agreement between an investment adviser and a municipal entity to whom the adviser owes a fiduciary duty should be considered investment advice and thus exclude the adviser from registration as a municipal advisor. [678] In the Commission's view, this approach fails to recognize that the regulatory regime for municipal advisors set forth in the Dodd-Frank Act includes more than a fiduciary duty. [679] Accordingly, unless an exclusion or exemption applies, a municipal advisor must register with the Commission and comply with the applicable MSRB rules. [680]

Ancillary or Additional Advisory Services Provided by Investment Advisers

Several commenters urged the Commission to carve out from the definition of municipal advisor certain investment advisers that provide various specific kinds of advice to municipal entities. For example, some commenters noted that a registered investment adviser may provide clients with services ancillary to its investment advice in “the normal course of its advisory services.” [681] Such ancillary service includes advice regarding investments other than securities (e.g., bank deposits, currencies, real estate, futures, and forward contracts), [682] research, and reports. [683] One commenter stated that such services may not subject the adviser providing such services to the Investment Advisers Act but would require the provider to register as a municipal advisor. According to the commenter, an adviser would have to “segregate its activities into those that are exempt and those which require registration as a municipal advisor and follow potentially conflicting rules.” [684]

Another commenter stated that managers at investment adviser firms “would need to regularly monitor each service they provide to municipal entities,” which would be “burdensome for a private fund manager or other investment manager” and “would divert resources from the performance of [their] core advisory services.” [685] The commenter stated that the proposed rules could also cause some managers to “choose to reduce the types of services they provide,” which could “harm fund managers and their municipal entity clients.” [686]

Another commenter suggested an exemption for a “particularized recommendation regarding the structuring or issuance of municipal securities” when such advice is provided in the context of the investment adviser providing investment advisory services. [687] For example, according to this commenter, an investment adviser would be exempt if it recommends changes to the terms of a municipal entity's proposed bond offering so that the municipal entity can pay a lower interest rate on the securities and invest the proceeds in less risky investment vehicles. [688]

The Commission carefully considered the comments received, including comments regarding the burden for firm managers to monitor each service provided by the firm to determine whether it would require municipal advisor registration. The Commission, however, is not exempting from the definition of municipal advisor a registered investment adviser that engages in municipal advisory activities that are “in the ordinary course of” investment advice or “ancillary” to such investment advice. The determination of whether a particular activity is “in the ordinary course of” or “ancillary” is very much based on facts and circumstances. Thus, the Commission is concerned that such a standard could be easily circumvented and could create a pretext for abuse. [689]

The Commission interprets the registered investment adviser exclusion to include any advice provided pursuant to an advisory agreement. However, Rule 15Ba1-1(d)(2)(ii) excludes from “investment advice” advice concerning: (1) Whether and how to issue municipal securities; (2) the structure, timing, and terms of issuances of municipal securities and other similar matters; and (3) municipal derivatives. Additionally, the registered investment adviser exclusion does not cover solicitation of a municipal entity or obligated person, as defined in Rule 15Ba1-1(n). The Commission does not believe that it is necessary to adopt most of the interpretations or carve-outs from the municipal advisor definition that commenters suggested because it anticipates that most of these additional services would be covered by advisory agreements. For example, as discussed above, a registered investment adviser that advises a municipal entity to invest the proceeds of an issuance of municipal securities in an asset class other than securities will not be required to register as a municipal advisor, if that advice is provided pursuant to an advisory agreement between the registered investment adviser and the municipal entity. Similarly, if ancillary services are provided pursuant to an advisory agreement and these services are not of the type specifically excluded from “investment advice” under Rule 15Ba1-1(d)(2)(ii), the investment adviser exclusion would apply. The Commission believes that its interpretation of the investment adviser exclusion should mitigate commenters' concerns regarding segregating activities into those that are exempt and those that are not and following potentially conflicting rules. [690] The Commission also believes that its interpretation should mitigate commenters' concerns regarding the burden for a firm to monitor its activities [691] because a firm would only need to monitor for the specific types of activities that are excluded from “investment advice” under Rule 15Ba1-1(d)(2)(ii) and the activities that are not covered by advisory agreements.

The Commission is also not adopting a commenter's suggestion to create a specific exemption for “a particularized recommendation regarding the structuring or issuance of municipal securities.” [692] The Commission believes that an adviser offering advice regarding the issuance of municipal securities, including advice with respect to the structuring, timing, terms, and other similar matters, clearly is a municipal advisor because the statutory definition of municipal advisor expressly includes such activities.

Affiliates of Investment Advisers Providing Municipal Advisory Services

As discussed above, Exchange Act Section 15B(e)(4)(A)(ii) includes in the definition of municipal advisor a person that “undertakes a solicitation of a municipal entity.” [693] Section 15B(e)(9), however, excludes a person that controls, is controlled by, or is under common control with a registered investment adviser [694] from the requirement to register as a municipal advisor when it solicits municipal entities or obligated persons on behalf of the affiliated investment adviser. [695] Thus, an affiliate of a registered investment adviser may engage in such solicitation without registering as a municipal advisor. Neither the statute nor the rules, as proposed, otherwise exclude an affiliate of a registered investment adviser from the definition of municipal advisor.

One commenter stated that registered investment advisers “often assign or delegate management of a portion of their client's assets to an affiliated entity . . . when they seek specialized expertise for particular regions, strategies, or products.” [696] The commenter stated that such affiliated entities “are typically part of the same organization as the registered adviser and are subject to the same or similar compliance and management structures.” [697] Further, they are usually “organized as separate legal entities rather than branch offices” for “tax or other purposes.” [698] The commenter stated that, because the registered investment advisers themselves are exempt from registration as municipal advisors when they provide investment advice, it would be incongruous to require their affiliates to register as municipal advisors. [699] The commenter further stated that registration would “simply add costs to the industry and regulators without additional public policy benefits.” [700]

The Commission disagrees that there should be a general exemption for affiliates of registered investment advisers that engage in municipal advisory activities. The Commission notes that Congress explicitly exempted affiliates from the solicitation prong of the municipal advisor definition, but not from the prong relating to advisory and other activities. Accordingly, the Commission believes that the statute does not contemplate exempting affiliates from municipal advisor registration, except when an affiliate specifically solicits business for its affiliated entity.

Further, as discussed below, the Commission does not believe that any additional exemption is necessary or appropriate. In the case of solicitations, the Commission notes that, although the statute excludes solicitation by an affiliate from the definition of municipal advisor, [701] the Commission would still have regulatory authority over the entity on whose behalf the affiliate is soliciting, as a municipal advisor, if it engages in municipal advisory activities. If the entity is also a registered investment adviser and falls under the investment adviser exclusion in Rule 15Ba1-1(d)(2)(ii), the Commission would continue to have regulatory authority over that entity as a registered investment adviser. In a case where an affiliate of a registered investment adviser is engaged in municipal advisory activities as a municipal advisor, however, the Commission would not necessarily have regulatory authority outside of the municipal advisor registration regime. Also, as discussed more fully above, the Commission's exemption for persons that provide advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of escrow investments [702] should reduce the likelihood that specialized expertise from affiliates, such as foreign affiliates, will require registration.

Investment Adviser Solicitations and Referrals

Some commenters requested clarification on the exclusion for investment advisers from the solicitation prong of the municipal advisor definition. One commenter requested that the Commission confirm that the exclusion for investment advisers applies to the investment adviser and its employees “who may solicit municipal entities as part of their regular responsibilities to market the adviser's investment advisory services or who may incidentally discuss the adviser's advisory services with municipal entities.” [703]

The Commission agrees with this comment and notes that a registered investment adviser that solicits on its own behalf does not fall within the “solicitation” prong of the municipal advisor definition. Exchange Act Section 15B(e)(9) provides that the term “solicitation of a municipal entity or obligated person” means a communication “on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser . . . that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation.” [704] Thus, Section 15B(e)(9) permits a registered investment adviser and its employees, who market the adviser's investment advisory services, to solicit municipal entities or obligated persons, including discussing the adviser's advisory services, without triggering regulatory obligations, to the extent such solicitation is on behalf of the registered investment adviser. As discussed above, the same is true for affiliates of registered investment advisers.

One commenter expressed concern that an investment adviser providing advice to a client regarding the selection or retention of another investment manager could constitute a solicitation of a municipal entity or obligated person under Section 15B(e)(9) of the Exchange Act. [705] The Commission confirms that a registered investment adviser will not be required to register as a municipal advisor in this scenario, unless it receives direct or indirect compensation and acts on behalf of the recommended investment adviser. Absent such facts, the registered investment adviser is not soliciting on behalf of another broker, dealer, municipal securities dealer, municipal advisor, or investment adviser, and thus would not be engaging in solicitation requiring municipal advisor registration. [706]

State-Registered Investment Advisers

As a result of changes in the threshold for registration as an investment adviser with the Commission, [707] certain entities are not required to register as investment advisers under the Investment Advisers Act and instead are subject to state registration requirements. [708] In the Proposal, the Commission sought comment on whether state-registered investment advisers should be exempt from the municipal advisor definition to the extent they are providing advice that otherwise would be subject to the Investment Advisers Act, but for the operation of a prohibition on, or exemption from, Commission registration. [709]

Several commenters supported an exemption for state-registered investment advisers. [710] One commenter, for example, stated that “Congress has recognized the efficacy of state regulation of investment advisers.” [711] Therefore, “the Commission should similarly recognize the efficacy of state regulation of investment advisers, particularly since the provision of advice to municipal entities is a matter of special interest to state authorities.” [712] Another commenter stated that state-registered investment advisers are already subject to significant regulation by state regulators, including fiduciary obligations with respect to investment management activities. Consequently, the commenter stated that “imposing an additional layer of regulation on these persons would not provide an appreciable regulatory benefit or increase the protection of municipal entities or obligated persons.” [713]

After considering the commenters' views, the Commission is not adopting an exemption for state-registered investment advisers at this time. The Commission notes that the statutory definition of municipal advisor excludes only federally-registered investment advisers. The Commission also notes that state regulation of investment advisers is not always similar to regulation under the Investment Advisers Act. For example, state-registered investment advisers are not subject to the Commission's pay-to-play rule. [714] Furthermore, because the Commission is limiting the kinds of advice with respect to “investment strategies” that would require a person to register as a municipal advisor, [715] the Commission believes that fewer state-registered investment advisers will be required to register as municipal advisors than as originally proposed. [716]

Exempt Reporting Advisers

Finally, the Commission is not adopting the suggestion of one commenter to exempt the category of “Exempt Reporting Advisers” from registration as municipal advisors. [717] The commenter stated that the Exempt Reporting Advisers exemption from registration under the Investment Advisers Act indicates that policy makers have determined that “such investment advisers are not of the type that must register with the [Commission] and be subject to Commission oversight as a registered investment adviser.” [718] The commenter stated that it would be “consistent with these policy determinations to similarly exempt these advisers from the definition of municipal advisor in connection with providing investment advice to a municipal entity.” [719]

The Commission does not agree. The Commission believes that, if Exempt Reporting Advisers engage in municipal advisory activities, consistent with the protection of municipal entities and obligated persons, and consistent with the policy objectives of Congress and this rulemaking, they should not be exempt from the municipal advisor registration requirement based on status. Specifically, while Congress determined that Exempt Reporting Advisers do not need to be registered in connection with their investment advisory activities, that does not suggest that Exempt Reporting Advisers should similarly be exempt from regulation as municipal advisors. Therefore, Exempt Reporting Advisers who are exempt from registration as investment advisers must register as municipal advisors if they engage in municipal advisory activities, unless they qualify for an exclusion or exemption. However, as discussed above, the Commission is exempting from the definition of municipal advisor persons that provide advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments. [720] Accordingly, the Commission believes that fewer Exempt Reporting Advisers will be required to register as municipal advisors than as originally proposed. For example, under the narrow scope of investment strategies, Exempt Reporting Advisers who provide advice to private funds that do not include proceeds of municipal securities would not be required to register as municipal advisors.

vi. Registered Commodity Trading Advisors; Swap Dealers

Exchange Act Section 15B(e)(4)(C) excludes from the definition of municipal advisor any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps. In the Proposal, the Commission interpreted the statutory exclusion for registered commodity trading advisors and their associated persons to apply only to such persons when they are providing advice related to swaps, as that term is defined in Section 1a(47) of the Commodity Exchange Act and Section 3(a)(69) of the Exchange Act, [721] and any rules and regulations promulgated thereunder. [722] As proposed in Rule 15Ba1-1(d)(2)(iii), a commodity trading advisor, or an associated person of a commodity trading advisor, would be required to register with the Commission as a municipal advisor if the commodity trading advisor, or an associated person of the commodity trading advisor, engages in any municipal advisory activities that are not advice related to swaps. [723] Further, a commodity trading advisor would be required to register with the Commission if the advisor provides advice with respect to swaps on behalf of a municipal entity or obligated person, but is not registered as a commodity trading advisor under the Commodity Exchange Act or is not a person associated with a registered commodity trading advisor providing advice related to swaps. [724]

The Commission requested comment on, and received several comments regarding, its interpretation of the exclusion for commodity trading advisors. [725] One commenter agreed that the exclusion should only be available when the registered commodity trading advisor is providing advice related to swaps. [726] This commenter believed that Congress intended a single comprehensive municipal advisor regulatory structure to govern advice to municipal entities, particularly in, but not necessarily limited to, the context of a municipal securities offering. [727]

Another commenter expressed concern that the Commission's proposed interpretation of the exclusion could have the unintended consequence of requiring commodity trading advisors to register as municipal advisors if, “in connection with providing advice about swaps, [a commodity trading advisor] provide[s] clients or prospective clients with research or advice about instruments other than swaps.” [728] The commenter expressed concern that a registered commodity trading advisor would need to register as a municipal advisor if these ancillary services fall within the scope of municipal advisory activities and are not deemed to be the type of advice described in the exclusion. According to the commenter, the types of ancillary services that a commodity trading advisor may provide to a municipal entity would be subject to “regular oversight by the [Commission] and CFTC.” [729] In addition, the commenter stated that the rules would create widespread uncertainty among registered commodity trading advisors regarding whether the services they perform would require registration as municipal advisors. [730] According to the commenter, in order to comply with the proposed rules, managers would need to regularly monitor each service they provide to municipal entities, determine which of the services are municipal advisory activities, and further determine which of the services, if any, may not be deemed to be advice related to swaps. [731]

Another commenter urged the Commission to “honor a waiver, no-action letters or other remedy from the CFTC regarding the requirement to register as a commodity trading advisor.” [732] The same commenter stated that “the CFTC has established a `private advisor' limited exemption from commodity trading advisor registration.” [733] Under this exemption, a person does not have to register as a commodity trading advisor if it has not provided commodity trading advice to more than fifteen persons during the preceding twelve months and does not hold itself out to the public as a commodity trading advisor. [734] The commenter suggested that the Commission should implement a similar exemption for purposes of determining when a person must register as a municipal advisor. [735] In addition, the commenter stated that creating an exemption for providing advice to a de minimis number of entities would help distinguish between entities whose principal business is to be a municipal advisor and others. [736]

This commenter also expressed concern that a person must register, regardless of the type of swap advice that may be contemplated and irrespective of the relationship between the municipal entity and the person seeking to offer advice. [737] The commenter urged the Commission to consider exclusions based on both: (1) The types of swaps (specifically, limiting municipal derivatives to securities-based swaps); and (2) the types of relationships between the municipal entity and the person who is providing the advice (specifically, providing an exclusion where the advisor acts as an agent and fiduciary of the municipal entity).

Exclusion for Commodity Trading Advisors

The Commission is adopting the interpretation of the statutory exclusion for commodity trading advisors substantially as proposed, with some modifications to provide additional clarity on the scope of advice that would be excluded, in response to commenters' concerns. As adopted, Rule 15Ba1-1(d)(2)(iii) provides that the term “municipal advisor” shall not include any commodity trading advisor registered under the Commodity Exchange Act or person associated with a registered commodity trading advisor, [738] to the extent that such registered commodity trading advisor or such person is providing advice that is related to swaps (as defined in Section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)) and Section 3(a)(69) of the Exchange Act (15 U.S.C. 78c(a)(69)), and any rules and regulations thereunder). [739] The final rule reflects minor, non-substantive modifications to provide greater clarity and consistency with other organizational changes the Commission is making to the exclusions and exemptions. Accordingly, the exclusion from the municipal advisor definition will not be available to a registered commodity trading advisor, or an associated person of a registered commodity trading advisor, to the extent it engages in municipal advisory activities that are not providing advice related to swaps. [740] As noted in the Proposal, while a registered commodity trading advisor generally could provide advice related to swaps without registering as a municipal advisor, a commodity trading advisor that is not a registered commodity trading advisor would be required to register as a municipal advisor if it provides advice related to swaps to a municipal entity. [741] Similarly, as noted in the Proposal, if a registered commodity trading advisor provides advice with respect to an issuance of municipal securities or any municipal financial product other than the swap, the advisor must register as a municipal advisor. [742]

The Commission is not exempting from municipal advisor registration persons that have received no-action letters from the CFTC or are otherwise exempt from registration as commodity trading advisors. [743] For example, a person may be exempted from registration as a commodity trading advisor precisely because it engages in the types of activities that are more akin to activities in which municipal advisors engage. Thus, the Commission does not believe that a blanket exemption is appropriate at this time. The Commission notes, however, that such entities could apply for no-action or exemptive relief. [744]

The Commission is also not adopting an exemption for services provided by a commodity trading advisor that are solely incidental or ancillary to the commodity trading advisor's advice related to swaps. [745] To the extent the commodity trading advisor is providing general information, however, such activities would not be municipal advisory activities that would subject the advisor to registration as a municipal advisor. [746]

Swap Dealers

Section 15B(e)(4)(C) of the Exchange Act does not include an exclusion from the definition of municipal advisor for swap dealers or security-based swap dealers. In its Proposal, the Commission requested comment generally as to whether there are exclusions from the definition of “municipal advisor,” other than those proposed, that the Commission should consider. [747]

Some commenters suggested that the exclusion should be extended to swap dealers and security-based swap dealers because, otherwise, registration as a municipal advisor would be duplicative. [748] One such commenter noted that Sections 731 and 764 of the Dodd-Frank Act have provisions requiring registration by swap dealers and security-based swap dealers with the CFTC and the Commission, respectively, and provisions specifically covering such dealers' activities when acting as advisors to “special entities,” which include state and local governments. [749] Another commenter stated that persons that will be considered municipal advisors will often be engaged in business activities other than providing advice to or on behalf of a municipal entity or obligated person. [750] The commenter expressed concern that regulated persons, such as swap dealers, that may also provide advice to a municipal entity or obligated person in connection with their business as swap dealers, may be required to register as municipal advisors. [751] The commenter stated that it would be best to avoid dual or multiple regulations by exempting any advice that is related to, or given in connection with, another regulated activity. The commenter also provided that, in the alternative, the Commission should coordinate the definition of “advice” with that of other regulatory regimes. [752]

In its Business Conduct Standards for Swaps, the CFTC adopted certain standards for swap dealers in their dealings with counterparties to swap transactions, as well as for any swap dealer that acts an advisor to a special entity. [753] The CFTC's adopted standards also include a safe harbor from the heightened protections that would otherwise apply when a swap dealer acts as an advisor to a special entity, if: such swap dealer does not express an opinion as to whether the special entity should enter into a recommended swap or trading strategy involving a swap that is tailored to the particular needs or characteristics of the special entity; the special entity represents in writing that it will not rely on recommendations provided by the swap dealer, and will rely on advice from an independent representative; and the swap dealer discloses to the special entity that it is not undertaking to act in the best interests of the special entity as otherwise required under the CFTC's standards. [754] Consistent with this approach and for the reasons described below, the Commission believes that it is appropriate to provide an exemption for certain swap dealers.

Specifically, to address commenters' concerns, the Commission is exempting any swap dealer registered under the Commodity Exchange Act or associated person of the swap dealer recommending a municipal derivative or a trading strategy that involves a municipal derivative, so long as the registered swap dealer or associated person is not “acting as an advisor” to the municipal entity or obligated person with respect to the municipal derivative or trading strategy pursuant to Section 4s(h)(4) of the Commodity Exchange Act and the rules and regulations thereunder. [755] For purposes of determining whether a swap dealer is “acting as an advisor” under Rule 15Ba1-1(d)(3)(v), the municipal entity or obligated person involved in the transaction will be treated as a “special entity” [756] under Section 4s(h)(2) of the Commodity Exchange Act and the rules and regulations thereunder (regardless of whether such municipal entity or obligated person is otherwise a “special entity”). [757]

The Commission believes an exemption for swap dealers is appropriate because, as discussed below, the exemption will apply the standards that are applicable under the CFTC's existing regulatory regime. As under such regime, the exemption will also preserve consistent and comparable protections for municipal entities and obligated persons. For example, for the exemption for registered swap dealers to apply, a municipal entity or obligated person must have an independent representative who is subject to a duty to act in the best interests of its client. [758] The Commission notes that independent representatives would likely be commodity trading advisors, municipal advisors, investment advisers, or ERISA fiduciaries [759] that are also subject to, or may become subject to, [760] a fiduciary duty to their clients. [761] Moreover, regardless of whether a municipal entity or obligated person is a special entity, the swap dealer will need to comply with any applicable suitability standards and disclosure requirements, which should offer another measure of protection for municipal entities and obligated persons in addition to those noted above. Further, in the context of interactions between swap dealers and municipal entities and obligated persons, the exemptions will incorporate the standards provided by the CFTC's Business Conduct Standards for Swaps, which include a requirement that the swap dealer disclose that it is not undertaking to act in the best interest of the special entity. [762] Therefore, municipal entities and certain obligated persons may already be familiar with the notion that exempt swap dealers are not undertaking to act in their best interest when recommending a swap or a trading strategy involving a swap and could more appropriately evaluate such recommendation. In addition, the Commission believes the standards provided by the CFTC's Business Conduct Standards for Swaps are appropriate for the swap dealer exemption from the definition of municipal advisor, because they will help provide clarity about: (1) when a swap dealer must register as a municipal advisor; and (2) its relationship with municipal entities and obligated persons.

For these reasons, the Commission finds it consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, to use its authority pursuant to Exchange Act Section 15B(a)(4) to exempt swap dealers from the definition of municipal advisor, subject to the limitations described above, and therefore not require such dealers to register as municipal advisors.

The Commission is not adopting, at this time, an exemption for security-based swap dealers. As a general matter, the Commission understands that municipal entities currently do not typically enter into security-based swap transactions. [763] The Commission also notes security-based swap dealers may, to the extent they would otherwise meet the definition of “municipal advisor,” qualify for a different exemption, such as the exemption in Rule 15Ba1-1(d)(3)(vi) when the municipal entity or obligated person is otherwise represented by an independent registered municipal advisor. Further, the Commission notes that such entities could apply for no-action or exemptive relief. [764] When the Commission considers adopting external business conduct rules for security-based swap dealers, the Commission may also consider amending the municipal advisor definition to include an exemption for security-based swap dealers that is similar to the exemption for swap dealers. [765]

vii. Accountants, Attorneys, Engineers and Other Professionals

The definition of municipal advisor in Exchange Act Section 15B(e)(4) excludes attorneys offering legal advice or providing services of a traditional legal nature and engineers providing engineering advice. [766] As discussed more fully below, the Commission proposed interpretations of the attorney and engineer exclusions and also proposed a limited exemption for accountants. [767]

Accountants Providing Attest Services

Exchange Act Section 15B(e)(4) does not explicitly exclude accountants from the definition of municipal advisor. In the Proposal, however, the Commission proposed to interpret the statutory definition of municipal advisor to exempt any accountant, unless the accountant engages in municipal advisory activities other than preparing or auditing financial statements or issuing letters for underwriters. In other words, the Commission proposed to exempt from the municipal advisor definition accountants preparing financial statements, auditing financial statements, or issuing letters for underwriters for, or on behalf of, a municipal entity or obligated person. [768] In the Proposal, the Commission noted that it was not appropriate to exempt accountants entirely, because accountants may provide advice to municipal entities that includes advice about the structure, timing, terms, and other similar matters concerning the issuance of municipal securities. [769]

The Commission requested comment on its proposed exemption for accountants. In particular, the Commission requested comment on whether the Commission should provide this exemption and whether there are additional types of accounting services that should fall under the exemption. [770]

The Commission received approximately 11 comment letters that addressed the proposed accountant exemption. Two commenters expressed support for the accountant exemption as proposed and did not suggest any changes. [771] Several commenters, however, believed that the proposed accountant exemption was too narrow and recommended including additional services under the exemption. [772]

Several commenters recommended that attest, not just audit, services should be part of the accountant exemption. [773] The performance of attest services is generally limited to certified public accountants by state regulation and professional standards. [774] One commenter noted that audit services are a subset of the broader category of attest services and both are subject to similar professional standards, including an “independence” requirement. [775] Another commenter also provided examples of services in this broader category of attest services, all of which it believed would be subject to professional standards: (1) Examinations, compilations, or agreed-upon procedures engagements on projections or forecasts using AICPA Statements on Standards for Attestation Engagements (“SSAEs”); (2) performance of other types of agreed-upon procedures engagements; (3) compliance audits (e.g., opinions on compliance with federal, state, or local compliance requirements); and (4) review of debt coverage requirements on outstanding bonds and verification of calculations of escrow account requirements for advance refunding of bonds. [776]

Further, one commenter asked if the following services would be included or excluded from the accountant exemption: (1) The preparation of unaudited annual financial statements; (2) the provision of annual independent audits of a municipal entity; (3) the review and preparation of pro forma maturity schedules of principal and interest on proposed bond issues; (4) the provision of budget, audit, and other information to credit rating agencies; and (5) the preparation of the “front end” of offering statements and financial and demographic information. [777]

Several commenters also recommended extending the exemption to services that non-certified public accountants can provide but are subject to regulation and professional standards. For example, two commenters stated that advice related to Generally Accepted Accounting Principles (“GAAP”) and tax advice related to municipal securities and derivatives should also fall under the accountant exemption. [778]

In addition to these services, another commenter recommended, more generally, that the Commission extend the accountant exemption to the provision of non-attest services, such as certain tax and actuarial services. [779] Two other commenters stated that accountants and other consultants who provide feasibility studies should not be considered municipal advisors. [780]

One commenter suggested that accountants of conduit borrowers should be exempt as municipal advisors. [781]

The Commission has carefully considered issues raised by commenters on the Proposal and is expanding the accountant exemption to include accountants providing audit or other attest services. Specifically, Rule 15Ba1-1(d)(3)(i), as adopted, provides that the term “municipal advisor” shall not include any accountant to the extent that the accountant is providing audit or other attest services, preparing financial statements, or issuing letters for underwriters for, or on behalf of, a municipal entity or obligated person. [782] To the extent commenters requested clarification regarding whether specific activities would be exempted, such activities would be exempted if they constitute audit or other attest services, [783] the preparation of financial statements, or the issuance of letters for underwriters for, or on behalf of, a municipal entity or obligated person.

The Commission believes that it is appropriate to include attest services in general, and not just audit services in particular, among the services that fall under the exemption. Both audit and other attest services are generally subject to regulation and professional standards, [784] including independence requirements. Such independence requirements could potentially conflict with municipal advisors' fiduciary duty to the municipal entities they advise. [785] Accountants providing attest services are also required to meet general standards related to adequate technical training and proficiency, adequate knowledge of subject matter, suitability and availability of criteria, and the exercise of due professional care. [786] Accordingly, the Commission believes that attest services, and not just audit services, exemplify the types of services typically performed by accountants that should not constitute the provision of advice within the meaning of Exchange Act Section 15B(e)(4)(A)(i). [787]

The Commission has considered whether various non-attest services should also be included in the accountant exemption, such as tax services (including arbitrage rebate services [788] ) and advice relating to GAAP. While the Commission acknowledges that such non-attest services may represent activities provided by accountants, such services are neither necessarily provided by certified public accountants, nor necessarily subject to similar regulation and professional standards as attest services. The Commission does not believe it is appropriate to expand the exemption to cover activities or services that non-accountants could perform. Accordingly, the Commission is not including non-attest services in the accountant exemption. Nevertheless, a person providing non-attest services would only be required to register as a municipal advisor if such services are within the scope of the municipal advisory activities definition.

Several commenters noted that non-attest services should be included because accountants are already subject to other regulatory regimes, including those of state boards of accountancy, the Commission, and the Public Company Accounting Oversight Board. [789] The Commission does not believe those regimes, which are principally focused on the certified public accountant's provision of attest services, [790] are sufficient to warrant further expansion of the accountant exemption.

As stated above and in the Proposal, accountants may provide advice to municipal entities, including advice about the structure, timing, terms, and other similar matters, and such advice may be the basis for an issuance of municipal securities. Therefore, the Commission does not believe that it is appropriate to exempt accountants from the definition of municipal advisor entirely. In addition, although attest services are often included as part of larger engagements, such as the examination of prospective financial information that is included as part of a feasibility study or acquisition study, [791] the accountant exemption includes only the attest portion of these engagements and does not cover all services that comprise such engagements. [792]

The Commission also notes that, according to the exemption provided by Rule 15Ba1-1(d)(3)(i), feasibility studies concerning the issuance of municipal securities or municipal financial products for which an accountant provides only audit or attest services would not require the accountant to register as a municipal advisor. [793]

Lastly, with respect to accountants of obligated persons, the Commission notes that such accountants will be treated consistently with accountants of municipal entities. [794]

For these reasons, the Commission finds it consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, to use its authority pursuant to Exchange Act Section 15B(a)(4) to exempt accountants from the definition of municipal advisor, subject to the limitations described above.

Attorneys Offering Legal Advice or Providing Services of a Traditional Legal Nature

Section 15B(e)(4)(C) of the Exchange Act excludes from the municipal advisor definition attorneys offering legal advice or providing services that are of a traditional legal nature. In the Proposal, the Commission proposed to interpret the exclusion to mean that the term “municipal advisor” shall not include any attorney, unless the attorney engages in municipal advisory activities other than offering legal advice or providing services that are of a traditional legal nature to a client of the attorney that is a municipal entity or obligated person. [795] In addition, the Commission proposed to interpret advice from an attorney to his or her client with respect to the structure, timing, terms, and other similar matters concerning the issuance of municipal securities or municipal financial products to be services of a traditional legal nature, if such advice is provided within an attorney-client relationship specifically related to the issuance of municipal securities or such municipal financial products in conjunction with related legal advice. [796] Further, in the Proposal, the Commission indicated that, for example, the following advice would be considered to be services of a traditional legal nature: (1) Advice comparing the structures, terms, or associated costs of issuance of different types of securities or financial instruments (such as fixed rate bonds or variable rate demand obligations) given by an attorney hired to advise a municipal entity client embarking on a bond offering; (2) advice concerning the tax consequences of alternative financing structures; or (3) advice recommending a particular financing structure due to legal considerations, such as the limitations included in existing contracts and indentures to which the issuer is a party. [797] The Commission, however, also stated in the Proposal that the following advice would not be services of a traditional legal nature: (1) advice concerning the financial feasibility of a project or a financing; (2) advice estimating or comparing the relative cost to maturity of an issuance, depending on various interest rate assumptions, or (3) advice recommending a particular structure as being financially advantageous under prevailing market conditions. [798]

The Commission requested comment on numerous aspects of the attorney exclusion, including whether the exclusion should only apply to legal services to an attorney's municipal or obligated person client; whether the Commission should provide an exclusion for all an attorney's activities as long as that attorney has an attorney-client relationship with the municipal entity or obligated person; and whether the meaning of the term “services of a traditional legal nature” is sufficiently clear. [799]

The Commission received approximately 20 comment letters regarding the attorney exclusion. Two commenters generally supported the proposed interpretation of the exclusion, [800] although one of these commenters recommended that the Commission continue to refine the attorney exemption. The commenter suggested that exempted activity “consists of advice on legal matters such as the legal ramifications of such structure, timing, terms and other matters, the appropriate documentation thereof, and matters of a similar legal nature.” [801] Meanwhile, two other commenters stated that they did not support the exclusion because advice provided by attorneys to financing teams is generally financial in nature and represents municipal advisory activity. [802]

The majority of commenters did not support the proposed interpretation of the statutory exclusion, stating that the interpretation is too limited in scope. [803] One commenter sought clarification that the statutory exclusion for attorneys covers all “legal advice” and that the “traditional legal nature” limitation applies only to “services” provided by attorneys. [804] Some commenters noted the difficulty of separating “services of a traditional legal nature” from advice that could be considered “financial” in nature. [805] These commenters also noted that roles of outside counsel are not neatly compartmentalized, and that municipal clients benefit from attorneys' “financial” advice. [806] Other commenters indicated that attorneys should feel free to provide advice to municipal entities and obligated persons without fear of falling subject to municipal advisor registration. [807] Some commenters questioned whether registration of attorneys was necessary, even if they provided financial advice. These commenters reasoned that attorneys already have a fiduciary duty to their clients, in addition to state ethics laws and well-established disciplinary processes for those who breach their fiduciary duties. [808]

Several commenters stated that the attorney exclusion should not depend on a pre-existing attorney-client relationship. [809] Some commenters generally noted that attorneys are often expected to provide counsel to all financing team members, and not only to the attorney's clients that are municipal entities and obligated persons. [810] One commenter stated that “others in the bond issue clearly rely upon the legal advice of bond counsel, including the . . . obligated person in a conduit financing. The very role of bond counsel is to provide advice to the entire group relative to the state law authority for the issuance of the bonds (the approving legal opinion) and the federal and state tax status of the interest on the bonds.” [811] Similarly, another commenter noted that bond counsel has at times been described as representing “the transaction” rather than any particular party to an offering. [812] Accordingly, the commenter asked the Commission to clarify if in such instance the bond counsel would be viewed as having a municipal entity or obligated person as a client. Finally, commenters also stated that attorneys representing parties other than municipal entities and obligated persons, such as underwriter's counsel, are called upon to provide their views or advice to the entire team, yet the attorney exclusion, as proposed, would not pertain to these attorneys. [813]

Some commenters noted that, if an attorney is required to register as a municipal advisor in order to provide advice to non-clients on the financing team, the resulting municipal advisory relationship would create a fiduciary duty for the attorney to the non-client. According to these commenters, such a fiduciary duty would directly conflict with the attorney's pre-existing fiduciary duties to its clients, and thus potentially infringe upon state rules of professional responsibility. [814]

Other commenters indicated that many law firms provide to both clients and non-clients educational material about municipal bond financings through newsletters and emails and expressed concern that such activity would not be covered under the proposed interpretation of the attorney exclusion. [815] Moreover, some commenters indicated that attorneys typically provide legal advice to a client, both before a formal attorney-client relationship is formed and after the attorney-client relationship has ended (e.g., upon the closing of a bond transaction). [816] One commenter noted that it is often asked to provide its view or advice on matters relating to prior transactions for which it served as bond counsel or in another legal capacity. [817]

The Commission has carefully considered issues raised by commenters on the Proposal and is modifying its interpretation of the statutory attorney exclusion to provide that attorneys are excluded from the definition of municipal advisor to the extent that the attorney is offering legal advice or providing services that are of a traditional legal nature with respect to the issuance of municipal securities or municipal financial products to a client of such attorney that is a municipal entity, obligated person, or other participant in the transaction. The Commission recognizes that legal advice and services of a traditional legal nature in the area of municipal finance inherently involves a financial advice component. By contrast, to the extent an attorney represents himself or herself as a financial advisor or financial expert regarding the issuance of municipal securities or municipal financial products, the attorney is not excluded with respect to such financial activities under Rule 15Ba1-1(d)(2)(iv) as this type of advice and services would be outside the statutory exclusion. [818]

By revising its interpretation of the exclusion in this way and providing guidance, the Commission intends to clarify that all legal advice or services of a traditional legal nature involving the issuance of municipal securities or a municipal financial product are covered under the attorney exclusion. This approach addresses many comments received by the Commission noting the negative impacts of requiring attorneys in municipal finance transactions to limit their advice and services to those related strictly to legal issues and describing the difficulty involved in complying with such limitations given the nature of the legal advice and services attorneys traditionally have provided, and are expected to provide, in municipal finance transactions. [819] In addition, if another participant in the issuance or transaction, who is not a client of the attorney, receives and acts upon the legal advice the attorney provides to its client, the attorney will not have to register as a municipal advisor. In this situation, the attorney is still only advising its client, even if the advice affects the actions of other participants in the transaction. This approach addresses commenters' concerns that bond counsel and other attorneys routinely share their views with non-client parties in a municipal finance transaction in the context of working group discussions. [820] Because such attorney would not be required to register as a municipal advisor, he or she would not be subject to an additional fiduciary duty that could potentially conflict with the attorney's existing fiduciary duty to his or her client. [821] By revising its interpretation of the exclusion to include a client of such attorney that is a municipal entity, obligated person, or other participant in the transaction, the Commission intends to be responsive to the comments received that attorneys representing participants other than a municipal entity or obligated person should be included in the exemption. [822]

If, however, in connection with the issuance of municipal securities or municipal financial products, an attorney represents himself or herself as a “financial advisor” or “financial expert,” the attorney will be required to register as a municipal advisor if the attorney engages in municipal advisory activities. As provided in the Proposal, the Commission would consider an attorney to be representing himself or herself as a “financial advisor” or “financial expert” if the attorney provides advice that is primarily financial in nature, such as: (1) The financial feasibility of a project or financing; (2) advice estimating or comparing the relative cost to maturity of an issuance of municipal securities depending on various interest rate assumptions; (3) advice recommending a particular structure as being financially advantageous under prevailing market conditions; (4) advice regarding the financial aspects of pursuing a competitive sale versus a negotiated sale; and (5) other types of financial advice that are not related to the attorney's provision of legal advice and services of a traditional legal nature. [823] In these examples, attorneys would be providing services that are primarily financial in nature and that are beyond their traditional legal roles and outside of the statutory exclusion. The Commission believes that if an attorney represents himself or herself as a financial advisor or expert and engages in municipal advisory activities, the attorney is acting outside the scope of the statutory exclusion (i.e., the attorney is not offering legal advice or providing services that are of a traditional legal nature). [824]

The Commission recognizes that analysis, discussion, negotiation, and advice regarding the legal ramifications of the structure, timing, terms, and other provisions of a financial transaction by an attorney to a client are essential to the development of a plan of finance. In turn, these services become, among other things, the basis for a transaction's basic legal documents, the preparation and delivery of the official statement or other disclosure document that describes the material terms and provisions of the transaction, the preparation of the various closing certificates that embody the terms and provisions of the transaction, the preparation and delivery of the attorney's legal opinion with respect to the transaction that is relied upon by the client and investors in the municipal securities marketplace, and advice and documentation with respect to post-closing policies and procedures that are necessary for compliance with federal and state law during the term of the municipal securities or municipal financial product. Similarly, attorneys often provide legal advice and related legal services regarding Federal tax requirements for issues of municipal securities, such as, for example, legal advice and services in determining ongoing compliance of an issue of municipal securities with the Federal tax law requirement to “rebate” excess arbitrage earnings on investments of tax-exempt bond proceeds to the Federal Government at periodic intervals during the term of the bond issue. The legal advice and legal services described in this paragraph would be within the attorney exclusion to the municipal advisor definition. Thus, attorneys providing this advice or these services would not be required to register as municipal advisors.

In addition, the Commission recognizes that attorneys seeking to represent municipal entities and obligated persons are often required to respond to RFPs and RFQs, and to participate in interviews during which they are requested to, and do, offer advice regarding the structure, timing, terms, and other provisions of a proposed offering of municipal securities or municipal financial products before being retained as counsel and that these requests may not be limited to legal questions. As discussed above in Section III.A.1.c.ii, the Commission does not believe that a response to an RFP or RFQ is advice with respect to the issuance of municipal securities or municipal financial products, and the Commission is adopting an exemption from the definition of municipal advisor for any person providing a response to an RFP or RFQ, provided such person does not receive separate direct or indirect compensation for advice provided as part of such RFP or RFQ. The Commission notes that responses to RFPs and RFQs are provided at the request of the municipal entity or obligated person. Thus, anyone responding to an RFP or RFQ in accordance with the exemption, including an attorney, will not have to register as a municipal advisor.

The Commission also recognizes that attorneys who represent municipal entities or obligated persons with respect to the issuance of municipal securities or municipal financial products are often asked to provide interpretation of the provisions of the legal documents throughout the term of the municipal securities or municipal financial products, including before and after the formal attorney-client relationship with respect to the issuance or municipal financial product exists. [825] Although the attorney-client relationship may not be in existence, if the advice is with respect to an issuance or transaction in connection with which the municipal entity was or will be a client of the attorney, the Commission considers such advice to be “to a client.” Accordingly, such advice will not require the attorney to register as a municipal advisor.

Finally, as discussed above, the Commission is clarifying that provision of general information, including the provision of educational materials to an attorney's clients and non-clients does not constitute advice, and therefore, will not require the attorney to register as a municipal advisor. [826]

Engineers Providing Engineering Advice

Section 15B(e)(4)(C) of the Exchange Act excludes engineers providing engineering advice from the municipal advisor definition. In the Proposal, the Commission proposed to interpret this exclusion to mean that the term “municipal advisor” shall not include “[a]ny engineer, unless the engineer engages in municipal advisory activities other than providing engineering advice.” [827] In the Proposal, the Commission stated that costing out engineering alternatives would not subject an engineer to registration because such activity would be considered “engineering advice.” [828] The Commission, however, further proposed that this exclusion would not include circumstances in which the engineer is engaging in municipal advisory activities, including cash flow modeling or the provision of information and educational materials relating to municipal financial products or the issuance of municipal securities, even if those activities are incidental to the provision of engineering advice. [829] The Commission also proposed that the exclusion would not include preparing feasibility studies concerning municipal financial products or the issuance of municipal securities that provide analysis beyond the engineering aspects of the project. Therefore, under the Proposal, engineers engaging in the types of activities described above would have been required to register as a municipal advisor. [830]

The Commission requested comment on whether it should expand its proposed interpretation of the statutory exclusion beyond engineers providing engineering advice. [831] The Commission also asked how the term “engineering advice” should be interpreted and whether the engineering exclusion should include circumstances in which the engineer is preparing feasibility studies concerning municipal financial products or the issuance of municipal securities that include analysis beyond the engineering aspects of the project. [832]

The Commission received approximately 32 comment letters regarding the proposed interpretation of the statutory engineering exclusion. Some commenters supported the proposed interpretation of the exclusion. [833] One commenter stated that the Commission ignored the statutory exclusion altogether. [834] Most commenters, however, suggested that the Commission's proposed interpretation of the engineering exclusion was too narrow and that activities such as cash flow analyses and feasibility studies represent an integral part of an engineer's services. [835] Some commenters suggested that the terms “cash flow analysis” and “feasibility studies” have very specific meanings within the engineering industry. [836] One commenter specifically recommended that engineering firms reporting on the condition of water and sewer systems should be excluded from the definition of municipal advisor. [837] Another commenter noted that the Brooks Act, [838] which was enacted in 1972, delineates what constitutes “engineering services.” [839]

A number of commenters highlighted energy services and solar energy companies, in particular, as a sector of the engineering industry that would be especially affected by the Commission's proposed interpretation. [840] Three commenters suggested that energy service companies should be able to provide disclosure statements to municipalities without being considered municipal advisors, [841] and one commenter suggested that solar energy companies acting in an engineering role and providing just information and education related to cost savings integral to solar engineering should be included in the exemption. [842]

The Commission has carefully considered the issues raised by commenters on the Proposal and is adopting its interpretation of the statutory engineering exclusion, substantially as proposed, to provide that engineers are excluded from the definition of municipal advisor “to the extent that the engineer is providing engineering advice,” [843] with modifications and clarifications regarding the scope of its interpretation of the statutory exclusion in response to public comment. [844] In general, the Commission believes activities within the scope of the engineering exclusion may include feasibility studies, cash flow analyses, and similar activities; provided, however, that the engineering exclusion does not cover activities in which an engineer provides advice to a municipal entity or obligated person regarding municipal financial products or the issuance of municipal securities, as discussed further herein.

Activities within the scope of the engineering exclusion include, among other things, certain activities discussed below. The Commission believes that this exclusion covers an engineer's provision of certain information to its client regarding a project schedule and anticipated funding requirements of the project. The Commission further believes that the provision of engineering feasibility studies that include certain types of projections, such as projections of output capacity, utility project rates, project market demand, or project revenues that are based on considerations involving engineering aspects of a project are within the scope of the engineering exception.

For example, [845] an engineer who provides funding schedules and cash flow models that anticipate the need for funding at certain junctures in a project or engineering feasibility studies based on analysis of engineering aspects of the project will fall within the Commission's interpretation of the statutory engineering exclusion from the municipal advisor definition. An engineering feasibility study, for example, might include a discussion of how much power might be generated by the installation of solar panels, and such a discussion would not constitute a municipal advisory activity. Similarly, recommendations about how to increase power output based on factors such as the placement of the panels or the number of panels would also not constitute a municipal advisory activity. Moreover, an engineer might provide estimates of water delivery capacity or a road's traffic capacity without engaging in municipal advisory activity. Engineers who report on the physical condition of infrastructure, such as roads, bridges or water and sewer systems, would also not be engaged in municipal advisor activity. [846] Absent other facts and circumstances which indicate that an engineer is providing advice to a municipal entity or obligated person regarding the issuance of municipal securities, an engineer's use of assumptions provided by a municipal entity or obligated person regarding interest rates or debt levels in preparing an engineering feasibility study or cash flow analysis alone will not result in municipal advisory activity.

With respect to services related to cash flow analysis, a municipal entity might seek input from an engineering company about whether a project could be accomplished with estimated available funding, including the timing of such funding. As noted above, engineers that provide input about the anticipated funding requirements of a project would not be engaging in a municipal advisory activity. [847] Thus, an engineer could advise a municipal entity about whether a project could be safely or reliably completed with the available funds and provide engineering advice about other alternative projects, cost estimates, or funding schedules without engaging in municipal advisory activity. Further, the Commission would consider an engineering company that informs a municipal entity or obligated person of potential tax savings, discounts, or rebates on supplies to be acting within the scope of the engineering exclusion.

By contrast, however, activities of engineers are outside the scope of the engineering exclusion if they include advice to a municipal entity or obligated person regarding municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, or other similar matters concerning such products or issuances. For example, an engineer that is engaged by a municipal entity or obligated person to prepare revenue projections to support the structure of an issuance of municipal securities would be providing advice outside the scope of the engineering exclusion and would be engaging in municipal advisory activity. Further, while the inclusion of an engineering feasibility study in an official statement or other offering document for an issuance of municipal securities alone does not cause an engineer's activities with respect to the feasibility study to be treated as municipal advisory activity, other facts and circumstances, such as the inclusion of revenue projections and debt service coverage calculations in the feasibility study, may suggest municipal advisory activity.

Engineering companies may also provide advice to their clients regarding financing of products and services delivered to such clients. As noted previously, the Commission is clarifying that provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities (including general information with respect to financing options) would not be municipal advisory activity. [848] Depending on all the facts and circumstances, however, the provision of information describing financing alternatives that may meet the needs of a municipal entity or obligated person may be considered a recommendation with respect to municipal financial products or the issuance of municipal securities that would be municipal advisory activity. [849]

One commenter stated that another standard service offered by engineers involves the provision of introductions of municipal entities to brokers, dealers, municipal advisors, and municipal securities dealers and that such introductions should be within the engineering exclusion. [850] One commenter recommended that the Commission “refine its approach” to register only those solicitors that receive compensation for introductions to funding sources. [851]

The Commission does not believe it is necessary or appropriate to provide a separate exemption for engineers engaging in introductions. The Commission notes that introductions provided by engineers would be subject to the same analysis as any other “solicitation of a municipal entity or obligated person.” [852] Thus, if an introduction does not result in direct or indirect compensation to the engineer, the introduction will not constitute such a solicitation and the engineer will not be required to register as a municipal advisor.

Finally, as discussed previously, the Commission is providing an exemption for advice given to municipal entities and obligated persons in circumstances in which the municipal entity or obligated person separately is represented by an independent registered municipaladvisor. [853] Engineers may provide advice beyond engineering advice when such an independent registered municipal advisor is present without triggering the requirement to register as a municipal advisor.

Vendors Generally

Some commenters who commented on other aspects of the Proposal also provided information with respect to purchases from vendors made by municipal entities that could potentially involve the issuance of municipal securities. One commenter stated that most municipalities, for example, do not purchase a solar installation upfront, but rather enter into a purchase or lease agreement with the solar company. [854] Another commenter referenced lease-leaseback arrangements and preferred provider or performance contract arrangements. [855]

The Commission notes that municipal entities and obligated persons purchase a wide range of products from vendors, including, for example, computers, office furnishings and supplies, car, truck and school bus fleets, telephone systems, and a multitude of other products. The Commission believes that the activities of vendors in advertising, promoting, and selling their products to municipal entities are generally outside the scope of municipal advisory activities because these activities generally do not involve advice with respect to the issuance of municipal securities or municipal financial products. [856]

The Commission understands, however, that sometimes municipal entities and obligated persons may finance the purchase of products from vendors through the use of instruments such as installment purchase contracts, installment sale contracts, lease-purchase agreements, or loans. The Commission notes that the provision of advice and recommendations by vendors (or any other person including, for example, lease financing companies affiliated with vendors) to municipal entity or obligated person clients regarding specific financing options for the purchase of products could, depending on the facts and circumstances, be a municipal advisory activity. For example, certain financings, depending on how they are structured, could constitute the issuance of a security [857] by a municipal entity and, therefore, could constitute the issuance of a municipal security. [858] The provision of advice and recommendations regarding such an issuance would constitute municipal advisory activity unless an exclusion or exemption applies.

Actuaries

Section 15B(e)(4)(C) of the Exchange Act does not include an exclusion for actuaries from the municipal advisor definition. The Commission received approximately five comment letters concerning a possible exemption for actuaries. [859]

One commenter stated that if the term “investment strategies” extends beyond proceeds of municipal securities to include funds held in pension plans, actuarial services for pension plans would potentially require municipal advisor registration. [860] The same commenter recommended that the Commission exempt from the municipal advisor definition enrolled actuaries and members of the five U.S.-based actuarial organizations that have adopted the actuarial Code of Professional Conduct (including the American Academy of Actuaries, the American Society of Pension Professionals and Actuaries, the Casualty Actuarial Society, the Conference of Consulting Actuaries, and the Society of Actuaries). [861] This commenter suggested that such exemption should apply to actuaries providing actuarial services that are governed by the Actuarial Standards of Practice and the Code of Professional Conduct. [862] Further, another commenter recommended that actuaries providing actuarial services to public pension plans, 403(b) plans, and 457(b) plans generally should also be exempt. [863] Additionally, one commenter recommended that the Commission clarify whether actuaries who perform actuarial and/or consulting services for certain other governmental benefit plans and trusts, such as retiree medical plans, voluntary employee benefit associations and related trusts (“VEBAs”), and other post-employment benefits (“OPEB”) plans and trusts would be municipal advisors. [864] Finally, another commenter stated that actuarial studies should not be considered to be “municipal advisory activities.” [865]

For the reasons discussed below, the Commission does not believe that it is necessary or appropriate to exempt actuaries from the municipal advisor registration regime as suggested by commenters. However, as discussed in other sections of the release, the Commission is making several changes to the final rule text and its interpretations that would also address some of the concerns raised by commenters. As discussed above in Section III.A.1.b.viii, the Commission is exempting from the definition of municipal advisor persons that provide advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments. Thus, persons who provide advice with respect to a plan, such as a public employee benefit plan (including 403(b) plans and 457(b) plans, to the extent the plans do not contain proceeds of municipal securities) will not be required to register as municipal advisors. To the extent that a plan contains proceeds of municipal securities, the Commission understands that an actuary's service does not generally involve advice with respect to the investment of such proceeds. As such, an actuary's services with respect to such plan generally would not constitute municipal advisory activities and would not require the actuary to register as a municipal advisor.

In addition, the provision of actuarial studies that are used as the basis for a municipal entity to engage in a financing will not be considered a municipal advisory activity if the actuarial study only uses client-provided investment return assumptions and does not make any recommendations about how such municipal entity might address an unfunded liability, including a discussion of the advisability of an issuance of municipal securities or a municipal financial product. Further, in order for the provision of actuarial studies that form the basis for disclosure with respect to an issuance of municipal securities to not constitute a municipal advisory activity, it must not include a discussion of the advisability of an issuance of municipal securities or a municipal financial product. Such actuarial studies only provide calculations using data from the client and do not involve the provision of any advice. An actuary may be deemed to be engaged in a municipal advisory activity if the facts and circumstances indicate that the actuary tailored its actuarial study to support an issuance of municipal securities or to support entering into a municipal financial product.

viii. Banks

In the Proposal, the Commission discussed a commenter's suggestion that the Commission exempt from the definition of “municipal advisor” banks providing “traditional banking services” and banks and trust companies that provide “investment advisory services.” [866] The Commission noted that Congress included in the statutory definition of municipal advisor a limited number of exclusions, and such exclusions did not include banks in any capacity. [867] In addition, as discussed more fully above, [868] the Commission proposed to interpret the term “investment strategies” to include “plans, programs, or pools of assets that invest in funds held by or on behalf of a municipal entity.” [869] In connection with its proposed interpretation of “investment strategies,” the Commission stated that, because every bank account of a municipal entity is comprised of funds “held by or on behalf of a municipal entity,” money managers that provide advice to municipal entities regarding their bank accounts could be municipal advisors. [870]

The Commission requested comment on whether it should exempt banks providing advice to a municipal entity or obligated person concerning transactions that involve a “deposit” (as defined in Section 3(l) of the Federal Deposit Insurance Act [871] ) at an “insured depository institution” (as defined in Section 3(c)(2) of the Federal Deposit Insurance Act [872] ). The Commission stated that, if adopted, banks would be exempted from the definition of municipal advisor to the extent they provide advice to a municipal entity or obligated person with respect to such banking products as insured checking and savings accounts and certificates of deposit. However, banks would not be exempted if they engage in other municipal advisory activities. [873]

In response to request for comment, the Commission received over 300 letters from commenters, many of them commercial banks and banking associations. The commenters stated that, because the Commission was proposing to interpret the term “investment strategies” to encompass any funds “held” by a municipal entity, regardless of whether such funds are related to the issuance of municipal securities or investment of bond proceeds, the definition would potentially cover what commenters termed “traditional banking products and services.” [874] According to the commenters, such services include deposit accounts, cash management products, and loans to municipalities, all of which are already subject to supervision by federal bank regulators. [875] As a result, these commenters stated that banks providing such products and services would have to register as municipal advisors, adding “a new layer of regulation on bank products for no meaningful public purpose.” [876] One commenter noted that “the OCC and the other federal banking agencies have an existing regulatory framework and oversight over traditional banking products and services, which include bank deposit transactions * * * The OCC also already evaluates the ability of bank management to monitor and control traditional banking products and services, including the administration of deposit accounts, through regular and extensive on-site examinations.” [877] Other commenters recommended that municipal advisor registration should instead only apply to currently unregulated entities. [878]

Many commenters focused, in particular, on the potential effects of the proposed rules on “community banks.” [879] Many other commenters claimed that the additional regulatory burden of registering as a municipal advisor would raise costs, which would either discourage community banks from offering their full array of products and services to municipalities [880] or lead community banks to pass on added costs and expenses to their municipal entity customers. [881]

Commenters stated that “traditional banking products and services” are not the intended focus of the municipal advisor registration provision of the Dodd-Frank Act and that banks that provide these services should not be subject to this provision. [882] For example, one commenter noted that products such as deposit accounts and cash management products do not warrant municipal advisor registration, because “[t]hese types of products merely are extension [sic] of more traditional deposit products, such as savings accounts, checking accounts and CDs, and do not constitute `advice' under any reasonably accepted definition of the term.” [883]

Other commenters listed specific banking products and services that, in their view, should not be encompassed within municipal advisor registration. For example, one commenter stated that, “[a]t a minimum, the Commission should clarify that banks providing municipal entity customers advice regarding traditional banking products including deposit accounts, savings accounts, certificates of deposit, bankers acceptances, bank loans and letters of credit, and certain loan participations do not need to register as municipal advisors.” [884] This commenter also stated that the Commission should clarify that “banks providing the terms for the purchase of municipal securities for the bank's own account shall be excluded from registration as `municipal advisors'” and explained that “banks are authorized to purchase municipal securities for their own account subject to extensive regulation and oversight.” [885] Another commenter also argued that banks extending credit, “whether through loans, letters of credit or otherwise,” should be excluded from the definition of municipal advisor. [886]

Meanwhile, another commenter recommended that the Commission adopt an exclusion for providing advice concerning (or soliciting) transactions that involve a “deposit” at an “insured depository institution,” as defined in Section 3(c)(2) of the Federal Deposit Insurance Act, including advice with respect to: (1) Insured checking and savings accounts and certificates of deposit; (2) directing or executing purchases and sales of securities or other instruments in a trust, fiduciary, or investment management account in accordance with predetermined investment criteria or guidelines, including on a discretionary basis; (3) providing other services to municipal entities, such as acting as trustees with respect to governmental pension plans and other similar capacities; (4) providing advice concerning (or soliciting) transactions that are subject to an exemption under Regulation R under the Exchange Act, or transactions otherwise excluded from the definition of broker-dealer activities under the Exchange Act, including bank broker-dealer exceptions relating to third-party networking arrangements, trust and fiduciary activities, deposit “sweep” activities, custody and safekeeping activities and certain securities lending transactions; (5) and serving as trustee to a pooled investment vehicle. [887] Another commenter recommended that the municipal advisor definition only cover the services of advisors with respect to the investment of proceeds of municipal securities and exclude the deposit and cash management services traditionally provided by “community banks.” [888] Another commenter suggested that “investment strategies” not include products and services in the categories of deposit accounts insured by the FDIC (up to $250,000) or bank activities that the Commission has exempted from the definitions of “broker” under Section 3(a)(4)(B) of the Exchange Act. [889]

The Commission is exempting from the definition of municipal advisor persons that provide advice with respect to “investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments.” [890] Accordingly, the performance of many of the bank activities and services about which commenters were concerned would not require banks to register as municipal advisors. In addition, as discussed further below, the Commission is exempting from registration banks that perform certain activities.

Specifically, the Commission is exempting from the definition of municipal advisor “[a]ny bank, as defined in section 3(a)(6) of the Act (15 U.S.C. 78c(a)(6)), to the extent the bank provides advice with respect to the following: (A) [a]ny investments that are held in a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank; (B) [a]ny extension of credit by a bank to a municipal entity or obligated person, including the issuance of a letter of credit, the making of a direct loan, or the purchase of a municipal security by the bank for its own account; (C) [a]ny funds held in a sweep account that meets the requirements of Section 3(a)(4)(B)(v) of the Act (15 U.S.C. 78c(a)(4)(B)(v)); or (D) [a]ny investment made by a bank acting in the capacity of an indenture trustee [891] or similar capacity.” [892] The Commission believes that advice by banks to municipal entities and obligated persons with respect to these products and services would not subject municipal entities and obligated persons to the kinds of risks that the municipal advisor registration regime is intended to mitigate.

The Commission notes that the products and services included in the exemption, such as deposit accounts and certain other short-term cash investments like sweep accounts, and extensions of credit by a bank (whether by direct loan or otherwise), [893] are transactions in which there should be no confusion as to the role of the bank or its employees. Similarly, the Commission notes that banks that purchase securities from municipal entities or obligated persons for their own account (without providing advice to the municipal entities or obligated persons with respect to other issues or municipal products) are not engaging in municipal advisory activities. Instead, they are acting as principals in purchase transactions. [894] In the case of investments made by an indenture trustee, the bank acts at the direction of the municipal entity or obligated person.

Accordingly, Rule 15Ba1-1(d)(3)(iii) provides an exemption from the definition of municipal advisor for banks that provide advice with respect to certain enumerated products and services that the Commission believes do not pose the types of risks that the Dodd-Frank Act was designed to address. Moreover, the Commission notes that the narrower focus of the “investment strategies” definition on investments of proceeds of municipal securities and municipal escrow investments discussed above is intended to be responsive to comments about the impact of the municipal advisor registration requirement on the provision of products and services offered by banks. The Commission believes that, together, these exemptions to the definition of “municipal advisor” generally will cover banks with respect to advice that they provide regarding the types of products and services that commenters referred to as “traditional banking products and services.” [895] For example, commenters identified deposit accounts, which municipal entities typically use for short-term investments of revenues, as one type of traditional banking product. Under the final rules, banks that provide advice regarding deposit accounts generally will be explicitly exempt from the definition of municipal advisor for this type of account. Similarly, banks will be explicitly exempt with respect to other identified products and services such as letters of credit and sweep accounts. Additionally, although the final rules would not explicitly exempt certain products and services such as custody accounts and trust services (unless the bank is serving in the capacity of an indenture trustee or a similar capacity), a bank providing advice with respect to such products or services would not be required to register as a municipal advisor, as a result of the narrower approach with respect to investment strategies, unless such accounts contain proceeds of municipal securities or municipal escrow investments.

By contrast, however, the Commission is not exempting from registration banks that engage in municipal advisory activities, including without limitation banks that provide advice to municipal entities or obligated persons with respect to the issuance of municipal securities, or banks that provide advice with respect to municipal derivatives, unless the bank qualifies for another exclusion or exemption, such as under the limited circumstances described above with respect to the exemption for certain swap dealers. [896] As discussed above in the context of the definition of municipal derivatives and the exemption for certain swap dealers, with the Dodd-Frank Act, Congress established heightened protection with respect to swaps and security-based swaps, [897] and the Commission therefore does not believe that a blanket exemption for banks with respect to such activities would be appropriate. The Commission believes it is important to emphasize that the bank exemption does not apply to advice on municipal derivatives, which is a significant problem area identified in the financial crisis in which municipal entities suffered significant losses, [898] and further, the bank exemption does not apply to advice on the issuance of municipal securities, which is a core focus of the protections to municipal entities in the municipal advisor registration provision and is an area in which a blanket exemption to banks would result in a potential inappropriate competitive advantage to banks over other financial advisors. [899]

The Commission believes that the exemption it is providing for banks will help ensure that parties engaging in key municipal advisory activities are registered, while permitting banks to continue to provide products and services to municipal entities and obligated persons that do not pose the types of risks that the Dodd-Frank Act was designed to address. Therefore, for these reasons and the reasons described above, the Commission finds that it is consistent with the public interest, the protection of investors, and the purposes of Section 15B of the Exchange Act, to use its authority pursuant to Exchange Act Section 15B(a)(4) to exempt banks engaging in certain municipal advisory activities from the definition of municipal advisor pursuant to the limitations described above. Accordingly, such banks are not required to register as municipal advisors.

Separately Identifiable Departments or Divisions

Sections 3(a)(30) and 15B(b)(2)(H) of the Exchange Act provide for the MSRB to define a separately identifiable department or division of a bank (“SID”) for purposes of whether a bank is a municipal securities dealer and must register as such. [900] In the Proposal, the Commission specifically requested comment on whether the Commission should permit SIDs (providing a bank's municipal advisory activities) to register as a municipal advisor, rather than the bank itself. [901] The Commission requested comment on suggested rule text relating to SIDs, based on MSRB Rule G-1 relating to SIDs engaged in municipal securities dealer activities, [902] and asked: whether such a rule would provide appropriate conditions for determining whether and when a SID engaged in municipal advisory activities may register as a municipal advisor; whether there were reasons the language based on MSRB Rule G-1 should not be used for SIDs engaging in municipal advisory activities; and whether the language should be modified or clarified in any way, or if there was alternative language the Commission should consider. [903] The Commission notes that the concept of separate treatment for SIDs exists in the current regulatory regimes for both municipal securities dealers and investment advisers, which both permit the SID to be the regulated entity. [904]

Although as discussed above many commenters recommended that the Commission create a blanket exemption for banks, [905] some commenters specifically recommended that, to the extent a bank provides products or services that would not be excluded, the Commission should allow a bank to register a SID if its municipal advisory services or actions are performed through such a SID. [906] A few commenters [907] additionally stated that permitting registration of SIDs would be consistent with the registration scheme for municipal securities dealers [908] and investment advisers. [909]

The Commission has carefully considered issues raised by commenters on its proposal and is adopting Rule 15Ba1-1(d)(4) to permit a SID that meets the requirements of the rule to register as a municipal advisor instead of the bank. The Commission agrees with commenters that it is appropriate to treat banks performing municipal advisory activities through a SID in a manner consistent with their treatment under the investment adviser and municipal securities dealer registration regimes. [910] Thus, to the extent a bank provides advice with respect to a municipal derivative or engages in any other non-exempted municipal advisory activity, if such advice is provided through a SID that meets the requirements of Rule 15Ba1-1(d)(4), the SID, rather than the bank itself, shall be deemed to be the municipal advisor. [911] The Commission believes that permitting SIDs to register is in the public interest, because it will ensure that municipal entities and obligated persons receive the regulatory protection intended by the statute, while addressing commenters' general concerns about duplicative regulation for banks and the impact of imposing the municipal advisor registration regime on banks in general. [912]

Specifically, as adopted, Rule 15Ba1-1(d)(4) provides that “[i]f a bank engages in municipal advisory activities through a separately identifiable department or division that meets the requirements of [Rule 15Ba1-1(d)(4)], the determination of whether those municipal advisory activities cause any person to be a municipal advisor may be made separately for such department or division. In such event, that department or division, rather than the bank itself, shall be deemed to be the municipal advisor.” For purposes of Rule 15Ba1-1(d)(4), a SID of a bank is defined as “that unit of the bank which conducts all of the municipal advisory activities of the bank” provided that certain specific requirements are met. In the Proposal, the Commission suggested defining SID as such term is defined in Section 3(a)(30) of the Exchange Act. To provide additional clarity, however, the Commission is eliminating the specific reference to Section 3(a)(30) of the Exchange Act in the definition of SID that it is adopting because, while based on that definition, Section 3(a)(30) relates specifically to activities of municipal securities dealers, as opposed to municipal advisory activities. The Commission is also clarifying, consistent with the definition for SIDs suggested in the Proposal, that the fact that directors and senior officers of the bank may from time to time set broad policy guidelines affecting the bank as a whole and which are not directly related to the day-to-day conduct of the bank's municipal advisory activities, shall not disqualify such unit or require that such directors or officers be considered as part of such unit. Further, the fact that the bank's municipal advisory activities are conducted in more than one geographic organizational or operational unit of the bank shall not preclude a finding that the bank has a separately identifiable department or division for purposes of Rule 15Ba1-1(d)(4), provided, however, that all such units are identifiable and that the requirements of Rule 15Ba1-1(d)(4) are met with respect to each such unit. All such geographic, organizational or operational units of the bank shall be considered in the aggregate as the separately identifiable department or division of the bank for purposes of this paragraph Rule 15Ba1-1(d)(4). [913] With the exception of the reference to Section 3(a)(30) and the removal from the rule text of the Commission's guidance with respect to the activities of directors and senior officers and multiple geographic locations, the other applicable requirements are substantively identical to those suggested in the proposal and based on the rules applicable to municipal securities dealer SIDs. [914]

2. Rule 15Ba1-2

a. Application for Municipal Advisor Registration

Section 15B(a)(1)(B) of the Exchange Act provides that it shall be 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, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered in accordance with the relevant provisions of the statute. A “municipal advisor” is defined in Section 15B(e)(4) of the Exchange Act to mean, with certain exceptions, “a person” that “provides advice to or on behalf of a municipal entity or obligated person . . . . or undertakes a solicitation of a municipal entity.” [915] In the Proposal, the Commission indicated that the type of information it should gather from firms versus individuals for registration purposes may be different. [916] As such, the Commission proposed two different registration forms: Form MA for “municipal advisory firms” and Form MA-I for “natural person municipal advisors.” [917]

In connection with these forms, the Commission also proposed Rule 15Ba1-2(a) and 15Ba1-2(b) for the registration of municipal advisory firms and natural person municipal advisors, respectively. Rule 15Ba1-2(a), as proposed, required a “person, other than a natural person, including a sole proprietor” [918] applying for registration with the Commission as a municipal advisor to complete Form MA in accordance with the instructions to the form and to file the form electronically with the Commission. Rule 15Ba1-2(b), as proposed, required a “natural person (including a sole proprietor)” [919] applying for registration with the Commission as a municipal advisor to complete Form MA-I in accordance with the instructions to the form and to file the form electronically with the Commission. This proposed requirement applied to, among others, each individual employee of a firm who meets the definition of municipal advisor. The two proposed provisions read together required a sole proprietor to complete both Form MA and Form MA-I.

The Commission requested comments on proposed Rule 15Ba1-2(a) and Form MA. The Commission received no comments directly on proposed Rule 15Ba1-2(a) and is adopting this provision substantively [920] as proposed. [921]

The Commission also requested comments on proposed Rule 15Ba1-2(b) and Form MA-I. Specifically, the Commission solicited comments on the effects of a separate registration requirement for natural persons and firms and the relative advantages and disadvantages for firms, municipal advisor employees, municipal entities, obligated persons, investors, and regulators, of requiring separate registration for natural person municipal advisors. [922] The Commission also asked, if the Commission were to only require registration of municipal advisory firms, would inclusion of information regarding the firm's employees on the firm's Form MA cause confusion for municipal entities, obligated persons, and investors. [923] Finally, the Commission also asked what, if any, legal ramifications may result for firms, and/or for natural persons, based on a registration regime that allows natural person municipal advisors that are employees of a municipal advisory firm to be registered by their firms as opposed to separate registration. [924]

The Commission received several comment letters regarding the proposed requirement for individual registration of natural person municipal advisors on Form MA-I. [925] One commenter asserted that the Commission should not require individuals to register separately on Form MA-I. [926] This commenter stated such requirement would not only impose significant burden and costs on municipal advisory firms and their individual associated persons but also would “force the SEC to devote substantial resources to processing many individual applications for registration” in addition to processing municipal advisory firms' registrations on Form MA. [927] This commenter noted that the Commission expected approximately 21,800—if not more—individuals to register as municipal advisors on Form MA-I [928] and that “[t]he sheer number of registrations would place significant strain on the SEC's budget and personnel, especially if it plans to review all applications for municipal advisors that are filed under the permanent registration program.” [929] The commenter questioned “whether the incremental regulatory benefit (which [the commenter] does not believe would be significant) stemming from the public availability of the information that would be produced by a system of individual registration would justify this massive resource commitment by both applicants and the SEC.” [930] Another commenter also suggested that the Commission eliminate individual registration of registrants' employees. [931]

Two commenters argued that the statute does not require individual registration of natural person municipal advisors. [932] One of these commenters asserted that the statute appears to intend that registration of municipal advisors be limited to entities (including partnerships, unincorporated organizations, and sole proprietors). [933] This commenter also stated that such entities would provide the critical information about individuals (including associated persons of the municipal advisor entity) during the registration process. [934]

Another commenter believed that “dual reporting” on Forms MA and MA-I “could lead to confusion” and that “there could be inadvertent inconsistencies in the information.” [935] In particular, the commenter noted that, under the Proposal, natural persons would be required to maintain and comply with recordkeeping and inspection requirements, which, in the commenter's view, would be “a significant burden” without “any meaningful benefit.” The commenter suggested that the Commission eliminate registration for natural persons altogether, or at least require natural persons to register as “registered representatives,” without recordkeeping and inspection requirements. [936] Similarly, another commenter believed that, rather than introducing a new Form MA-I to provide for registration of natural persons, FINRA's Form U4 should be adapted to allow for registration of individuals. [937]

The Commission has carefully considered the issues raised by commenters on the Proposal. In response to these comments, the Commission is modifying its approach in the final rules and is not adopting Rule 15Ba1-2(b) and Form MA-I as proposed. Specifically, the Commission is exempting certain natural persons from the requirement to register as municipal advisors [938] and is modifying Rule 15Ba1-2(b) and Form MA-I accordingly. Rule 15Ba1-3, as adopted, exempts from municipal advisor registration natural persons who are associated persons of a registered municipal advisor and who engage in municipal advisory activities solely on behalf of a registered municipal advisor. [939] In practical terms, this exemption means that employees of municipal advisory firms who do not engage in municipal advisory activities independently of their firms (e.g., by engaging in municipal advisory activities on the side as a sole proprietor) will not be required to register as municipal advisors.

While the Commission is not requiring municipal advisor registration for these natural persons, the Commission is requiring municipal advisory firms to provide the Commission with information relating to these exempted natural persons. In this regard, Rule 15Ba1-2(b), as adopted, requires the municipal advisor to complete and file with the Commission Form MA-I for each of its natural persons who are associated with the municipal advisor and engaged in municipal advisory activities on its behalf. [940] While Form MA-I, as adopted, is not a form for individual registration of natural persons, adopted Form MA-I requires municipal advisory firms to provide similar information regarding its associated natural persons as proposed Form MA-I required (with some modifications, as discussed below).

The Commission believes that the information obtained from Form MA-I is necessary and appropriate to assist the Commission in assuring compliance with Section 15B of the Exchange Act and the rules thereunder. The Commission believes that exempting certain natural persons from registration and requiring municipal advisors to complete and file a Form MA-I for certain exempted natural persons retains the benefits of individual registration discussed in the Proposal while also addressing the concerns raised by commenters. Specifically, the final rules and forms mitigate commenters' concerns about imposing registration obligations upon the large number of individuals without negating the important disclosures and other benefits that the Commission believes would be obtained through Form MA-I. [941] For example, as discussed in the Proposal, the information provided by Form MA-I would help the Commission (i) manage its regulatory and examination programs by assisting the Commission in identifying municipal advisors and understanding their business structures; (ii) prepare for its inspection and examination of municipal advisors; and (iii) oversee the municipal securities market and investigate possible wrongdoing. [942] This approach would also provide municipal entities, obligated persons, investors, and other regulators with information that would inform them as to the relevant municipal advisory experience and history of each natural person for whom the municipal advisor completed and filed a Form MA-I. [943]

This approach also would help to streamline the manner of gathering pertinent information, reduce confusion in the disclosure process, and reduce inconsistencies in the information reported because the municipal advisory firm will be required to complete and file Form MA and Form MA-I for each of the associated natural persons engaged in municipal advisory activities on its behalf. [944] Indeed, commenters observed that a registered municipal advisory firm should provide critical information about its employees who engage in municipal advisory activities, rather than require the individual's separate registration. [945] Accordingly, as adopted, Rule 15Ba1-2(b), Rule 15Ba1-3, and Form MA-I will serve this purpose. Finally, the Commission also believes that eliminating the requirement for individual municipal advisors to separately register addresses commenters' concerns regarding regulatory efficiency, as it will allow the Commission to direct resources that would have otherwise been required to review many thousands of these individuals' applications to other regulatory matters.

As stated above, one commenter argued against individual registration, claiming that, under the Proposal, natural persons would be required to maintain and comply with recordkeeping and inspection requirements, which, in the commenter's view, would be “a significant burden” without “any meaningful benefit.” [946] The Commission notes, however, that the recordkeeping obligations imposed by the Proposal always applied only to municipal advisory firms. [947]

The Commission recognizes that the rule, as adopted, places on municipal advisory firms an obligation to file a Form MA-I for each individual employee that acts as a municipal advisor on its behalf. The Commission notes that, in the context of broker-dealer regulation, Form U4, which is required of individual employees and asks for much the same information as Form MA-I, is generally filed by the employees' firms. [948] Indeed, commenters appeared to favor a regime in which firms submit information regarding their employees rather than one in which each employee submits information separately. [949]

The Commission notes further that, as described below, [950] the information that firms will need to obtain to complete Form MA-I is primarily the individual's full legal and other names, social security number, and employment and residential history, other business activities in which the employee is engaged, and his or her disciplinary history. The Commission notes that, in any case, a firm generally must obtain information regarding any relevant criminal, regulatory, or civil judicial history concerning any of its associated persons [951] in order to accurately complete Form MA for purposes of its own registration. [952] In addition, to help ensure adequate regulatory oversight, aid the prosecution of wrongdoing, and benefit municipal entities and investors, the final Form MA-I collects substantially the same information as required under the proposed form. [953] Moreover, although under the adopted rules employees of municipal advisory firms are not required to register independently, they are otherwise not exempt from any other provision relating to municipal advisors.

The Commission received no comments on the requirement, under the Proposal, for a sole proprietor to file both Form MA and Form MA-I. Accordingly, the Commission is retaining this requirement in the rules, although, in view of the other changes described above, a provision has been added to set forth explicitly that a natural person applying for registration must file Form MA-I in addition to Form MA. [954]

The Commission stated in the Proposal that it was considering whether Form MA and Form MA-I should be submitted through the Commission's Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) or otherwise. [955] The Commission requested comment on whether the electronic registration system to be established should have the ability to cross-check other electronic systems, such as IARD and CRD, and whether requiring the filing of forms on EDGAR would be an appropriate means to make the requested information available. [956]

Two commenters favored the use of FINRA's electronic registration system for CRD and IARD or some similar system for the registration of municipal advisors. [957] One commenter stated that this system would “allow regulators to easily find filings for firms and individuals, as well as cross reference between the CRD and IARD systems.” [958] The commenters believed that use of FINRA's system would allay concerns that EDGAR would subject registration information to “unnecessary public scrutiny” [959] and “compromise the confidentiality of operating performance data for privately held Municipal Advisors.” [960]

After carefully considering the comments, the Commission has determined to require the forms to be submitted through EDGAR. [961] Although EDGAR is known primarily as the vehicle through which public companies file their annual and quarterly reports and other disclosures, the Commission has adapted EDGAR for other information gathering purposes. [962] Further, collecting information regarding municipal advisors through EDGAR should enable the Commission to efficiently retrieve and analyze data in a cost-effective manner to carry out its oversight of municipal advisors and their municipal advisory activities. The Commission notes that, while IARD, which is an electronic filing system that facilitates investment adviser registration, is funded through user fees, [963] there is no comparable provision in Section 975 of the Dodd-Frank Act authorizing the Commission to charge municipal advisors (or to authorize another entity to collect) registration fees. Accordingly, the Commission has determined to leverage its existing technology to serve as a mechanism by which municipal advisors can register with the Commission. The Commission further notes that EDGAR is a widely utilized resource that is already familiar to investors and other interested parties seeking information about public companies, and believes that municipal entities, investors, other regulators, and members of the public seeking information about municipal advisors should not have difficulty learning how to use the system.

Regarding the comment that the use of FINRA's CRD and IARD systems would be preferable because it would allow regulators to cross reference the information in Forms MA and MA-I with information in those other systems, the Commission notes that, as discussed further below, Form MA requires a municipal advisor that has been assigned a number either under the CRD system or the IARD system (a “CRD Number”) to provide that number in completing the form. [964] In addition, Form MA asks an applicant specifically whether it is registered with the Commission in various other capacities (e.g., municipal securities dealer, government securities broker-dealer, or other category that the applicant must specify) and, if so, to provide the relevant file numbers. [965] In a similar fashion, an applicant is required to supply file numbers for any registrations it has with another federal agency or state or other U.S. jurisdiction. [966] Form MA-I requires the municipal advisory firm filing the form to provide the relevant individual's CRD Number, if registered on the CRD or IARD system; list any other names by which the individual is known or has been known; and provide the name, registration number, and the firm's EDGAR CIK (Central Index Key) number. [967] These identifying numbers should assist municipal entities, regulators, and the public to access any other publicly available information about the municipal advisor. Although EDGAR will not automatically provide an electronic link to the information on the CRD and IARD systems, these systems are nevertheless readily accessible to regulators, municipal entities, and to the public.

With respect to commenters' concerns regarding privacy, the Commission notes that, while information required in Form MA and Form MA-I generally will not be confidential, some information, such as social security numbers, will be kept confidential (subject to the provisions of applicable law). [968] The EDGAR system will block the relevant information in these forms in the versions that will be made public.

One commenter argued that information relating to operating performance of privately held municipal advisors should be kept confidential. [969] The commenter did not specify which particular questions in the forms it considered problematic. The Commission believes, however, that the public interest in making the information available—to allow municipal entities to better evaluate candidates for service in municipal advisory roles and to provide investors in municipal securities with clearer knowledge of who may be influencing the use and outcome of their investments—outweighs this type of confidentiality concern. [970]

The Commission received no comments on the requirement in proposed Rules 15Ba1-2(a) and (b) that Forms MA and MA-I, respectively, must be filed electronically, and is adopting this requirement as proposed. The Commission also received no comments on paragraph (c) of proposed Rule 15Ba1-2, which provided that the forms would be considered filed with the Commission “upon acceptance by the [applicable electronic system].” However, the Commission is adopting the rule with modifications.

As proposed, Rule 15Ba1-2 provides that Forms MA and MA-I “shall be considered filed with the Commission upon acceptance by the [applicable electronic system].” As adopted, the rule instead provides that the forms are considered filed upon “submission of a completed Form MA, together with all additional required documents, including all required filings of Form MA-I (17 CFR 249.1310) . . .” The Commission is modifying the rule to state that the form is considered filed upon “submission” to EDGAR rather than upon “acceptance” to align the rule with the terminology used by the EDGAR system. Further, the Commission is modifying the rule to provide that Form MA will be considered filed upon submission of a “completed Form MA, together with all additional required documents,” to clarify that, if a Form MA is not considered complete, the Commission's statutory forty-five day review period will not commence. [971] Moreover, because a municipal advisor applying for registration under the final rules is responsible for submitting Form MA-I for each associated person engaging in municipal advisory activities on its behalf, the Commission believes it appropriate to stipulate that the firm's application for registration will be considered filed only if the firm has submitted all requisite Form MA-Is.

When an applicant attempts to transmit its Form MA electronically, EDGAR performs the initial automated checks to determine whether questions that require responses have been answered and to detect, in certain instances, defective responses. For example, if an applicant indicates that it has three Web sites but provides, contrary to instructions, only two corresponding Web site addresses, EDGAR will detect the deficiency. [972] In such instance, EDGAR will not permit the applicant's submission. However, if a form passes EDGAR's automated checks, EDGAR will display a message indicating that the submission was successfully transmitted and will provide an “accession number,” which permits the applicant to enter the system to check the status of its application. At this point, the applicant is also advised that its application is not “accepted,” which is an EDGAR term for not “approved,” and EDGAR will display the status of the application as “In Progress.”

Once an application passes EDGAR's initial automated check and is successfully transmitted, the Commission staff will check the application for the types of deficiencies that may not be detected through automation, and if the Form MA is considered incomplete, the applicant will receive by email an EDGAR-generated notice of suspension. The notice will inform the applicant that the transmission has been suspended and the reason for the suspension. The notice will also instruct the applicant to make corrections and re-transmit the application to the Commission in its entirety.

The Commission notes that, within forty-five days of the date a complete Form MA is considered filed, the Commission shall by order grant registration or institute proceedings to determine whether registration should be denied. The Commission also notes that the statutory review period for a filed Form MA may be longer if the applicant consents to a longer time period. If the Commission determines to grant registration, an EDGAR-generated email will be sent to inform the applicant that the filing has been “accepted” and the Commission will issue a formal order of approval separately.

The Proposed paragraph (d) of Rule 15Ba1-2 provided that Forms MA and MA-I constitute “reports” within the meaning of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78 o-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable provisions of the Exchange Act. [973] The Commission received no comments on paragraph (d) and is adopting this provision as proposed. As a consequence, it is unlawful for a municipal advisor to willfully make or cause to be made, a false or misleading statement of a material fact or omit to state a material fact in Form MA or Form MA-I.

b. Information Requested in Form MA

Municipal advisors that are municipal advisory firms (including sole proprietors) must submit Form MA to register with the Commission. The Commission received several comments, as discussed further below, on the information it proposed to require from applicants in completing Form MA. [974] After carefully considering the comments, the Commission is adopting Form MA substantially as proposed, with some modifications, as discussed below.

Form MA is modeled primarily on Form ADV (Part 1), [975] which is used for the registration of investment advisers with the Commission, with appropriate changes made to reflect the differences in the activities of municipal advisors and the markets that they serve. The information that applicants are required to provide on the form is described in detail below. As discussed in the Proposal, the items in Form MA were drafted broadly to apply to the different types of municipal advisors that may register with the Commission. [976]

Form MA asks for information about the municipal advisor and persons associated with the advisor. The Commission believes it necessary to obtain the requested information to manage the Commission's regulatory and examination programs and to make such information available to the MSRB to better inform its regulation of municipal advisors. The information will assist the Commission in identifying municipal advisors, their owners, and their business models, and in determining whether a municipal advisor might present sufficient concerns as to warrant the Commission's further attention in order to protect the municipal advisor's clients. In addition, the information will assist the Commission in understanding the kinds of activities in which the applicant participates. The information will also be useful to the Commission in tailoring any requests for additional information that the Commission may send to a municipal advisor. Furthermore, the required information will assist the Commission in the preparation of the Commission's inspection and examination of municipal advisors and the MSRB in determining what regulations for municipal advisors may be necessary or appropriate and how such regulations might be best implemented. [977]

Moreover, the Commission believes that the information sought will enable municipal entities and potential obligated persons to better assess the experience and background of municipal advisors in deciding whether to engage the services of, or do business with, any particular municipal advisor. Similarly, information about the persons serving as municipal advisors can be important to investors in deciding whether to purchase specific municipal securities. In determining what information should be disclosed, the Commission also considered the broader public interest in the availability of information about municipal advisors to the public. [978]

The Commission received several comments regarding the extent and kind of information sought on Form MA, as a general matter, and the impact that the requirement to provide this information will have on municipal advisors. [979] While one commenter generally approved of the content of the questions, most of the commenters on this subject believed that the scope of information sought was too broad, that the form should ask different questions for different kinds of municipal advisors, or that providing the answers would be too burdensome.

Specifically, one commenter stated its belief that the information requested was “generally appropriate” and that it would assist the Commission in its examination and enforcement activities as well as assist its rulemaking activities. [980] Another commenter stated that it does not object in principle to requiring municipal advisors to make disclosures similar to the disclosures required of registered investment advisers, but urged that the Commission “tailor carefully” any disclosure document to “ensure that the information to be disclosed relates only to the municipal advisor activities of the provider, rather than broadly requiring companies to disclose information unrelated to municipal advisory activities.” [981] Another commenter suggested that the forms be tailored for various categories of advisors, instead of a “one-size-fits-all” approach. [982] According to another commenter, “the disclosures required for investment advisers on Form ADV, on which proposed Form MA is based, are, in many cases, not relevant to municipal advisors.” [983] The commenter maintained that many of the other questions drawn from Form ADV are “not likely to obtain useful responses from municipal advisors” and that the Commission “has not articulated a convincing purpose for much of the information.” [984]

Some commenters additionally believed that supplying the information requested on the proposed forms would be too burdensome on certain firms and individuals, but varied on the specifics. [985] On the one hand, some commenters believed, as one commenter expressed, that “the scope of the proposed information to be collected” in Form MA “is exhaustive and could place a burden on small municipal advisors.” [986] On the other hand, one commenter believed that large organizations would incur “significant time, burden, and expense in identifying personnel involved in activities that would subject them to registration.” [987]

In considering these comments, the Commission carefully analyzed each aspect of Form MA as set forth in the Proposal, consulting with and drawing on the experience and expertise of Commission's enforcement and examination staffs. As already stated, the Commission had paid conscious and due attention in developing Form MA to the differences between the activities of investment advisers and those of municipal advisors. The Commission has analyzed proposed Form MA in the light of the comments received, specifically with an eye to making any possible further adjustments to reflect the field of municipal advisory activities and to remove any proposed elements of Form MA that are not appropriate to the regulation of municipal advisors or valuable for such regulation in consideration of the burdens of completing the form.

The Commission continues to believe that the information requested will be valuable in establishing and maintaining effective oversight of municipal advisors. The various purposes to which the Commission intends to put the information to use, as well as its value for municipal entities and investors, have been broadly described above. The decision to model Form MA on Form ADV was based, in part, on the Commission's belief that the level of information sought in Form ADV is important, appropriate, and not unduly burdensome for participants engaged in providing investment advice, bearing in mind the goal of protection of investors and the public interest. The Commission believes that the regulation of municipal advisors warrants obtaining a similar level of information as pertinent to municipal advisors. [988] The Commission notes that the MSRB, the statutorily mandated rulemaking body for the municipal securities market, believes that the information obtained generally will contribute to the Commission's and its own regulatory activities. [989]

Some commenters believed that the information sought by Form MA with respect to many municipal advisors is information already available to the Commission through other registrations and that the proposed disclosures would therefore be redundant. [990] One commenter argued that “adding new layers of regulation in this area will not serve to enhance the protection of municipal entities or investors.” [991] Another commenter contended that it would be “more efficient for the SEC to leverage existing registration forms, which have years of interpretive guidance behind them, than to create a new form seeking much of the same information as required by Forms BD and U4.” [992] To address this issue, some suggested that the Commission allow persons that are already registered with the Commission—such as broker-dealers, investment advisers, and municipal securities dealers—to check an additional box on their primary registration forms already filed with the Commission or to provide them with a short-form registration process. [993] Short of this, commenters urged that, if such persons must complete Form MA, they should be allowed to incorporate by reference on Form MA any information that is included on another registration form and be required to provide on Form MA only such additional information as deemed essential regarding municipal advisory activities. [994]

The Commission notes that Form MA, both as proposed and adopted, allow for incorporation by reference of certain information that already has been submitted on certain other forms by the applicant, any of its associated persons, or another entity pursuant to the requirements of other regulatory regimes. Specifically, each of the Disclosure Reporting Pages (“DRPs”) of Form MA permits incorporation by reference to DRPs that are already on file with regulators. [995] The DRPs are generally where the most significant amount of information is requested on Form MA and on which applicants will likely need to expend the most time and effort.

Form MA, as adopted, more prominently highlights the option to incorporate information by reference. Part A of each DRP asks for basic information regarding the person(s) or entity(ies) concerning whom the DRP must be filed. Immediately thereafter, in Part B, the form asks if there is another DRP or other disclosure already on file in the IARD, CRD, or EDGAR system containing the information required by the DRP. If the answer is “Yes,” the form asks the applicant to identify where the disclosures may be found. In addition, for the benefit of regulators, municipal entities, and other interested parties, the DRPs ask for information that will enable such parties to locate the referenced document easily, by requiring the applicant to provide the name of the registrant on the referenced document, the relevant registration number, and other identifying information. Thus, for all persons for whom disclosures of criminal, regulatory, and civil judicial actions must be made, Form MA already allows for incorporation by reference. The Commission believes that the accommodation of incorporation by reference for these disclosures will eliminate a significant amount of redundancy to which the commenters refer.

The Commission believes that commenters' suggestion to allow applicants already registered with the Commission under other regulatory regimes to check an additional box on their primary registration forms [996] would not achieve the aim of the municipal advisor registration regime. Specifically, the Commission believes that persons seeking to compile, compare, and analyze data pertaining to registered municipal advisors, as well as regulators overseeing compliance with rules and regulations applicable to registered municipal advisors, should generally be able to easily access within one system relevant information about municipal advisors.

The Commission notes that the vast majority of applicants registering under the permanent registration regime would be new Commission registrants. [997] As such, the majority of all information pertaining to municipal advisors will be centralized in EDGAR. On the other hand, the Commission acknowledges that, because disclosures required by Form MA DRPs and Form MA-I DRPs may be incorporated by reference from other forms, some information will reside outside EDGAR. However, the Commission notes that, under the temporary registration regime, only about 15% of applicants on Form MA-T indicated a history of criminal, regulatory, or civil judicial action that would require the submission of DRPs under the permanent registration regime. Moreover, not all 15% of municipal advisors indicating such a history would have DRPs on file elsewhere, as many may not be broker-dealers or investment advisers and thus would not be required to file Form BD or Form ADV. Accordingly, the Commission believes that fewer than 15% of municipal advisors should have DRP information stored outside EDGAR, with the majority of information collected under the permanent municipal advisor regime centralized in EDGAR. The Commission also notes that, if applicants that are already registered with the Commission under other regulatory regimes can register as municipal advisors by only checking an additional box on their primary registration form, a municipal entity or investor seeking information about a municipal advisor may not realize that the information they seek is available on a Form BD or ADV, rather than a Form MA or MA-I.

Description of the Form: Introduction

As previously noted, in addition to considering the comments, the Commission analyzed the entire proposed Form MA and its appended schedules and disclosure pages to make any necessary adjustments. The discussion below describes Form MA, as adopted, and notes the substantive changes to the proposed form. At the outset, the Commission notes that it is making some revisions to clarify questions asked in Form MA. Other revisions are intended to elicit additional information. The Commission believes that the additional required data should make the information provided by registrants more useful to examiners, investigators, and other regulatory authorities and/or to municipal entities and investors. [998]

As noted below, the Commission made some revisions to the form to eliminate unnecessary disclosure requirements. Other changes involve a reorganization of the requested information. In general, the Commission intends to improve the picture that municipal entities, investors, and regulators will be able to obtain from Form MAs, whether regarding municipal advisors, in particular, or regarding municipal advisory activities, as a whole. For example, while the proposed DRPs required information generally regarding the disposition of criminal charges or resolution of regulatory or civil proceedings, in the DRPs, as adopted, the questions are more specific and require certain additional details. [999]

Format of Form MA

Form MA, as proposed, required the applicant to provide information describing itself and its business through a series of fill-in-the-blank, multiple choice, and the check-the-box questions. [1000] In the form, as adopted, these questions have been adapted to an electronic, web-based format, [1001] with minor revisions to the text as necessary or appropriate for online completion. [1002] As stated above, EDGAR is designed to detect certain failures to respond to mandatory questions and, to detect, in certain instances, defective responses. [1003]

Form MA also contains several supplemental schedules that must be completed, where applicable, each of which is discussed further below: Schedule A asks for information about the municipal advisor's direct owners and executive officers; Schedule B asks for information about the municipal advisor's indirect owners; Schedule C is used to amend information on either Schedule A or Schedule B; and Schedule D asks for additional information when an applicant answers in the affirmative regarding certain questions in the form and also provides space for any explanations that a filer may wish to add to its application. Form MA also contains DRPs, which require further details about events and proceedings involving the municipal advisor and/or the municipal advisor's associated persons that the applicant was required to report in Item 9 of the main body of the form, and are discussed in the context of Item 9 below.

Form MA, as proposed, first required a municipal advisor to indicate whether it is submitting the form for initial registration as a municipal advisor or submitting an annual update or an amendment (other than an annual update) to a registration as a municipal advisor. [1004] In the electronic form, as adopted, Form MA asks the applicant to indicate, upon entry, whether it is filing an initial form, an annual update, or amendment. Once an initial form is submitted, when a filer subsequently enters the system and selects the choice of annual update or amendment, the most recently submitted version of the form will appear, pre-populated with the responses as completed at that time. Thus, the filer will need only to amend the outdated information.

Item 1: Identifying Information

The Commission proposed Item 1 of Form MA to require essential identifying information regarding the applicant. For the reasons discussed below and in the Proposal, [1005] the Commission is adopting Item 1 substantially as proposed but with the minor modifications discussed below.

As proposed and adopted, Items 1-A and B of Form MA require a municipal advisor to indicate the full legal name of the municipal advisor and, if different, the name under which it primarily conducts its municipal advisor-related business. [1006] As adopted, Item 1-A also asks for the municipal advisor's CRD Number, if it has one. [1007] Item 1-C of Form MA as proposed and adopted requires a municipal advisor also to provide its Employer Identification Number (or “EIN,” a number used with respect to Internal Revenue Service matters) or, if the applicant (such as a sole proprietor) does not have an EIN, a social security number. [1008]

In Item 1-D, as proposed and adopted, if the municipal advisor is also registered with the Commission as an investment adviser, broker, dealer, or municipal securities dealer, or if it has previously registered with the Commission as a municipal advisor on Form MA-T, such municipal advisor is required to provide its related SEC file number or numbers. Further, if the municipal advisor is a broker-dealer or an investment adviser and has a CRD Number assigned to it either under the CRD system or the IARD system, it is required to provide its CRD Number.

As proposed and adopted, Item 1-D also requires an applicant to indicate whether it is a state-registered investment adviser. In such case, as adopted, Item 1-D additionally requires the applicant to identify the state (or states) with which it is registered, [1009] and adds to this category other U.S. jurisdictions where the applicant is registered. [1010]

Item 1-D, as adopted, additionally requires a municipal advisor to indicate if it is an “exempt reporting adviser” with respect to investment adviser registration and, if so, to provide the SEC file number and CRD Number. The category of exempt reporting advisers, discussed in Section III.A.1.c.v. herein, was created by Commission rule after Form MA was proposed. Because exempt reporting advisers are not exempt from municipal advisor registration, if applicable, the Commission believes that the information that such advisers must report to the Commission, and the identifying numbers necessary to ease access to such information, is no less important to regulators of the municipal market, municipal entities, and investors than the equivalent information available regarding municipal advisors who are registered investment advisers. [1011]

The information provided in response to Item 1-D will allow the Commission to more effectively cross-reference those entities applying for registration as municipal advisors to those who are registered as brokers, dealers, municipal securities dealers, investment advisers, or otherwise registered [1012] with the Commission. As discussed in the Proposal, the ability to cross-reference will allow the Commission to assemble more complete information concerning a municipal advisor to inform the Commission's decision to approve or institute proceedings to deny an application for registration as a municipal advisor. The ability to cross-reference will also permit the Commission or any designee [1013] to plan for, and carry out, efficient and effective examinations of registered municipal advisors. By obtaining all of an applicant's regulatory file numbers, the Commission will be able to cross-reference disciplinary information in the CRD or IARD systems with the information on Form MA. This ability would provide the Commission with a more complete understanding of a municipal advisor's structure and business.

Item 1-E asks for the address of applicant's principal office and place of business [1014] and the telephone and fax numbers at that location. As proposed, Item 1-E of Form MA required an applicant to list on Schedule D any additional names under which it conducts municipal advisor-related business and the offices at which such business is conducted. In consideration of comments, generally, that the form is too burdensome, [1015] in Item 1-E, as adopted, the Commission has determined to require information pertaining only to the five largest offices.

Item 1-F of Form MA, as proposed, asked whether the applicant has one or more Web sites, and, if so, to list them in Schedule D of the form. As adopted, Item-F continues to require an applicant to list all its Web sites, but also requires the address of its principal Web site on the main part of the form and any additional Web site addresses on Schedule D. [1016]

Item 1-G of Form MA, as proposed, required applicants to supply the name, address, email address, and telephone and fax numbers of its Chief Compliance Officer, if it has such an officer, and to list any other title(s) the officer holds. Item 1-H, as proposed, asked for the title of, and similar contact information for, any other person whom the municipal advisor has authorized to receive information and respond to questions about the registration (the “contact person”). Items 1-G and 1-H are being adopted, as proposed, with a clarification to advise applicants that they must provide the name and contact information for only one person (i.e., either a Chief Compliance Officer or another contact person). The intent of the Proposal was for the applicant to provide one or the other, and the form, as adopted, makes this clearer. The added note also advises, however, that information for both may be provided if the applicant so chooses. As discussed in the Proposal, the Commission is requesting the identifying and contact information in Item 1-G and/or 1-H to assist the Commission and the staff in evaluating applications for registration and overseeing registered municipal advisors. [1017]

As proposed and adopted, Item 1-I of Form MA requires the applicant further to state whether it maintains, or intends to maintain, some or all of its books and records required to be kept under MSRB or Commission rules somewhere other than at its principal office and place of business and, if so, to provide (on Schedule D) information about the other location(s).

Item 1-J of Form MA, as proposed and adopted, requires an applicant to answer whether it is registered with any foreign financial regulatory authority, [1018] and, if so, to provide the name (on Schedule D) of each such authority and the country. Item 1-J is being adopted as proposed, with the additional requirement to provide the applicant's registration number under the foreign authority. [1019]

Item 1-K, as proposed and adopted, requires an applicant to disclose whether it is affiliated with any other business entity, and, if so, to disclose on Schedule D the name and registration number of each such affiliate. [1020] As discussed in the Proposal, this information will help inform the Commission as to the structure of the municipal advisor's business, which will help staff prepare for examinations of the municipal advisor. [1021]

Item 2: Form of Organization

The Commission proposed Item 2 of Form MA to require information about a municipal advisor's form of organization. The Commission received no comments regarding Item 2 and is adopting this item substantially as proposed. Item 2 requires a municipal advisor to specify whether it is organized as a corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, limited partnership, or other form of organization that the municipal advisor must specify; the month of its annual fiscal year end; the date on which it was organized; and the state or other U.S. jurisdiction [1022] or foreign jurisdiction where it was organized. As discussed in the Proposal, this information will assist the Commission in evaluating the applications for registration and overseeing registered municipal advisors. [1023]

Item 2 also requires an applicant to specify whether it is a public reporting company under Section 12 or 15(d) of the Exchange Act and, if so, to provide its Commission-assigned EDGAR CIK number. As discussed in the Proposal, the information that an applicant is a public reporting company will provide a signal that additional public information is available about the municipal advisor and/or its control persons. [1024]

Item 3: Successions

The Commission proposed Item 3 of Form MA to require applicants to disclose whether they are succeeding to the business of a registered municipal advisor and, if so, the date of succession. Further, Item 3 requires, on Schedule D, the name of, and registration information for, the firm the applicants are succeeding. [1025] The Commission received no comments regarding Item 3 and is adopting this item as proposed. As discussed in the Proposal, this information will assist the Commission, among other things, in overseeing registered municipal advisors and in determining whether there has been a change in control of a municipal advisor. [1026]

Item 4: Information About Applicant's Business

The Commission proposed Item 4 to require certain information about the applicant's business. The Commission received several comments relating to Item 4, which are discussed below. [1027] The Commission is adopting Item 4 substantially as proposed, with certain modifications as discussed in the description of the item below.

As proposed and adopted, subparts A to C of Item 4 require an applicant to provide information regarding the approximate number of employees it has, approximately how many of those employees engage in municipal advisory activities, and approximately how many are registered representatives of a broker-dealer or investment adviser representatives.

Item 4-D, as proposed and adopted, requires an applicant to state approximately how many firms, or other persons (that are not employees or otherwise associated persons of the applicant) solicit municipal advisory clients on the applicant's behalf. As proposed, an applicant is required to disclose on Schedule D the names, addresses, and phone numbers of firms that solicit on its behalf. As adopted, Item 4-D additionally requires the applicant to disclose on Schedule D the same information for other persons who are not employed by, or otherwise associated persons of, the applicant but who solicit on its behalf. [1028] In addition, to make the information more useful, the Commission has determined to require an applicant also to provide the EDGAR CIK and/or individual CRD Number, if any, of the soliciting firm or other person.

Further, Item 4-E, as proposed, required an applicant to state whether it has any employees that also do business independently on the applicant's behalf as affiliates of the applicant and, if so, to disclose in related Section 4-E of Schedule D the names of such employees. [1029] In the form, as adopted, Section 4-E of Schedule D requires the applicant, in addition, to provide the address, telephone and fax number, EDGAR CIK (if any) and individual CRD Number (if any) of each such employee. [1030]

Item 4-F, as proposed and adopted, requires the applicant also to approximate the number of clients it served in the context of its municipal advisory activities in the past fiscal year and to specify by checking the appropriate box(es) whether its clients include: municipal entities, non-profit organizations (e.g., 501(c)(3) organizations) who are obligated persons, corporations or other businesses not listed previously who are obligated persons, or other types of entities (and specify which other types of entities); or whether the applicant engages only in solicitation and does not serve clients in the context of its municipal advisory activities.

As proposed and adopted, applicants also are required, in Item 4-G, [1031] to specify approximately the number of municipal entities or obligated persons that were solicited by the applicant on behalf of a third-party during its most recently completed fiscal year, including any clients that it solicits in addition to serving them in the context of its municipal advisory activities. However, Item 4-G, as adopted, requires the applicant to provide the numbers separately for municipal entities and obligated persons. [1032]

Further, as proposed and adopted, applicants must indicate, in Item 4-H, [1033] whether they solicit public pension funds, 529 Savings Plans, local or state government investment pools, hospitals, colleges, or other types of municipal entities or obligated persons (and to specify which other types). Alternatively, an applicant is able to indicate that the question is inapplicable, because it serves only clients and does not engage in solicitation in the context of its municipal advisory activities.

As proposed and adopted, applicants are also required to disclose, in Item 4-I, [1034] whether they are compensated for their advice to or on behalf of municipal entities or obligated persons by hourly charges, fixed fees (not contingent on the success of solicitations), contingent fees, subscription fees (for a newsletter or other publications), or otherwise. [1035] If the applicant checks “other,” the other kind of arrangement must be described. Item 4-J, [1036] as proposed and adopted, asks for similar information about compensation for solicitation activities. Item 4-K, [1037] as proposed and adopted, asks whether the applicant receives compensation, in the context of its municipal advisory activities, from anyone other than clients, and, if so, to provide an explanation.

As discussed in the Proposal, disclosure of information relating to the number of a municipal advisor's employees and compensation arrangements will provide the Commission with a clearer understanding of the business structure of registered municipal advisors, including the size of each advisor, the number of its employees that engage in municipal advisory activities, and in what capacity these employees engage in such activities. Information about compensation arrangements also will identify possible conflicts of interest that the municipal advisor may have with its clients. [1038]

The Commission received several comments regarding the five categories of compensation arrangements. [1039] One commenter believed that the Commission should “refrain from utilizing this limited information in making a determination as to the existence of conflicts of interest with respect to compensation” and that “a more comprehensive analysis of compensation arrangements and the rationale for such fees should be considered prior to making any determination as to the appropriateness of a particular fee arrangement.” [1040] Another commenter believed that, because investment advisers generally have “a completely different business model, approach to business and compensation model,” as well as “scale of business,” than municipal advisors, Form ADV is “not a good model in this element of registration.” [1041]

The five choices from among which applicants are asked to select are not intended to give an exhaustive picture of a municipal advisor's business model, but the Commission does believe that receiving responses regarding compensation, at least on the level of specificity requested in this item, will enable Commission staff to ask more targeted questions on routine examinations and may highlight relationships that should be more closely examined. Furthermore, the Commission notes that in addition to the five choices, an applicant may also check “Other” to describe its compensation arrangements. If selected, the applicant is required to specify the nature of such arrangements.

Item 4-L, [1042] as proposed and adopted, also requires the municipal advisor to indicate the general types of municipal advisory activities in which it engages. [1043] The Commission understands that the listed activities are those in which the municipal advisors engage and are derived from the definition of municipal advisor in Exchange Act Section 15B(e)(4) [1044] or closely related to the activities included within that definition. As discussed in the Proposal, this information will help the Commission understand the scope of activities in which a municipal advisor engages and identify possible conflicts of interest and in preparing for examinations, and will also provide the Commission with data useful to making regulatory policy. [1045]

One commenter believed that, due to competitive concerns, a municipal advisor should not be required to disclose the names and contact information of persons that solicit municipal clients on its behalf. [1046] The Commission notes that the definition of municipal advisor under the Exchange Act includes, specifically, persons who undertake solicitation of municipal entities and obligated persons. The Commission thus believes that requiring an applicant to provide information about persons who solicit clients on its behalf will help it carry out its oversight responsibilities with respect to the full range of persons who are municipal advisors. For example, as already stated, [1047] such information may yield the names of persons who are engaged in such activities without themselves registering. Moreover, as stated in the Proposal, the Commission believes that information requested in Item 4-L is important for discerning possible conflicts of interest. [1048] The Commission further notes that the requirement that a municipal advisor disclose all persons who solicit clients on its behalf applies equally to all applicants for registration. The Commission believes that such universal disclosure serves to mitigate the competitive concerns raised by the commenter.

Item 5: Other Business Activities

The Commission proposed Item 5 to require information about the applicant's other business activities. The Commission received no comments regarding Item 5 and is adopting Item 5 substantially as proposed, with minor modifications as discussed below.

As proposed and adopted, Item 5 requires applicants to indicate whether they are actively engaged any one of an enumerated list of businesses. [1049] In Item 5, as adopted, the applicant is required additionally to indicate, for each other business in which it is engaged, whether this is its primary business. [1050] As proposed and adopted, Item 5 requires an applicant also to state whether it is actively engaged in any other business that is not one of those enumerated above and whether that other business is its primary business. It also is required to describe the other business on Schedule D to Form MA. As discussed in the Proposal, this information will assist the Commission, among other things, in identifying conflicts of interest for municipal advisors and preparing for inspections and examinations of municipal advisors. The information also will assist the Commission and the MSRB in understanding municipal advisors in the context of their activities for regulatory purposes. [1051]

Item 6: Financial Industry and Other Activities of Associated Persons [1052]

The Commission proposed Item 6 to require an applicant to disclose financial industry affiliations of its associated persons. The Commission received several comments on Item 6, as discussed below. [1053] The Commission has carefully considered these comments and is adopting Item 6 and the related information it requires on Schedule D of Form MA largely as proposed. Some modifications have been made, however, and these are discussed below.

Item 6, as proposed and adopted, requires an applicant to provide information about its associated persons [1054] that are engaged in activities other than those that relate to their association with the applicant. As discussed in the Proposal, Item 6 lists twenty activities that an associated person may engage in, some of which are not listed in Item 5 as other activities in which the applicant itself may be engaged. [1055] The collection of this information is designed to gather more complete information about the associated persons of a municipal advisor who are actually providing advice or are controlling the firm and help better inform the Commission's regulatory and examination programs. [1056]

As proposed, Item 6 of Form MA required an applicant to list, on related Section 6 of Schedule D of the form, all associated persons, including foreign affiliates, that are broker-dealers, municipal securities dealers, or government securities brokers or dealers, or investment advisers, municipal advisors, registered swap dealers, banking or thrift institutions, or trust companies. As adopted, the form requires the applicant also to list in Section 6 of Schedule D all associated persons that are investment companies (including mutual funds), major swap participants and major security-based swap participants, commodity pool operators, commodity trading advisors, futures commission merchants, accountants or accounting firms, attorneys or law firms, insurance companies or agencies, pension consultants, real estate brokers or dealers, sponsors or syndicators of limited partnerships, or engineers or engineering firms. [1057]

Section 6 of Schedule D, as proposed and adopted, also requires the applicant to provide the legal and primary business names of each associated person listed, as well as to indicate the category or categories listed in Item 6 of the main form of which the associated person is a member. Finally, Section 6 of Schedule D, as proposed and adopted, requires the applicant to indicate whether it controls, or is controlled by, the associated person; whether the two are under common control; [1058] and/or whether the associated person is registered with a foreign financial regulatory authority and, if so, the country and name in English of that authority. [1059]

As discussed above, the purpose of Item 6 is to elicit more complete information about who is providing advice or controlling the applicant. Moreover, as new Rule 15Bc4-1 underscores, all associated persons of municipal advisors are subject to censure. [1060] Thus, after further consideration, the Commission believes that requiring the applicant municipal advisory firm to identify associated persons that are involved in any of the above categories—each of which involves activities that can impact or be impacted by the advice the firm provides—will better assist the Commission in gaining an understanding of possible conflicts of interest or wrongful influence in the municipal advisor's activities. The Commission notes that Form MA elsewhere already reflects a concern that involvement in a wider range of areas can lead to conflict of interest, as Item 5 of the form requires disclosure of whether the applicant firm itself is involved in any of 17 enumerated categories of that Item and must further indicate whether it acts as any other type of financial product advisor and specify the type. [1061]

As already noted, [1062] in conformance with the additions to the categories of associated persons that must be identified in Item 6, Section 6 of Schedule D, as adopted, will require disclosure of foreign registration information with respect to associated persons in twenty categories. As discussed above, the Commission believes that an associated person's involvement in any of these categories can impact or be impacted by the advice the firm provides, and foreign financial regulatory authorities can be of significant help in tracking such activity and uncovering possible wrongdoing. An additional change in Section 6 of Schedule D, as adopted, requires the applicant to provide, in the case of an associated person registered with a foreign financial regulatory authority, the relevant registration number. The Commission believes that, for associated persons that are active in foreign countries, having the registration number, if any, under foreign financial regulatory authorities can be particularly helpful in obtaining information for regulatory and investigative purposes.

The Commission received several comment letters opposing the extent of the disclosures required by Item 6 and, on a more general level, all the disclosures that Form MA requires regarding an applicant's associated persons. [1063] One commenter believed that the form requires “overly extensive disclosure” regarding affiliates of a municipal advisor, particularly for a municipal advisor that is a member of a large affiliated group of institutions. [1064] These requirements, the commenter said, would impose “a vast information-gathering burden on applicants.” [1065] The commenter raised specifically the case of affiliates that are under common control with a municipal advisor (“sister affiliates”), whose activities “may have no connection to municipal advisory activities, let alone, in the case of financial institutions with global operations, a nexus or connection to any activities in the United States.” [1066] The commenter suggested that disclosures regarding affiliates be limited to affiliates that control or are controlled by the municipal advisor or “at a minimum” to sister affiliates providing municipal advisory services in the U.S. [1067] This commenter also believed that a municipal advisory firm should not be required to provide information regarding its individual associated persons (citing the example of employees) on Form MA unless those persons “devote a significant amount of time or resources” to, or are “primarily engaged” in, municipal advisory activities, particularly if those persons are already registered with a broker-dealer, investment adviser, municipal securities dealer, commodity trading advisor or swap dealer. [1068]

Another commenter believed that requiring disclosures regarding associated persons performing “any activities” relating to advice could “impose significant costs” and “create a significant burden.” [1069] This commenter stated that the Commission should “establish a threshold for reporting and updating associated person information in Form MA”—a certain minimum of hours spent on municipal advisory activities over a specified time period. The commenter also suggested that, when personnel from an entity are subcontracted, the entity itself should not be required to register. [1070]

The Commission notes that, for certain information pertaining to affiliates, it has determined to limit the required disclosures in Form MA to information regarding persons that control, or are controlled by, the municipal advisor (and not persons under common control). [1071] However, with respect to financial industry and other activities represented on the list in Item 6, the Commission believes it is appropriate to extend its information base regarding such activities to all of a municipal advisor's associated persons (which, by definition, includes persons under common control with the municipal advisor). [1072] For example, the Commission believes that ascertaining such information may assist the Commission in identifying potential conflicts of interest.

The ability to discern connections within a large network of affiliations and other associations that otherwise would not be evident is particularly important to the Commission for purposes of enforcement, to enable regulators to detect possible trails of influence and to widen their potential sources of factual information relevant to investigations of wrongdoing. The Commission believes that establishing such an information base is consistent with the Dodd-Frank Act's amendments to Section 15B of the Act, which explicitly extend the Commission's regulatory authority (directly and through its oversight of the MSRB) to associated persons of municipal advisors. [1073]

The Commission notes that Item 6 and Section 6 of Schedule D ask for little more than the names (legal and business) of any associated persons of the municipal advisor that do business in the specified fields and, if the associated person is registered with a foreign financial regulatory authority, the registration number. Otherwise, Section 6 asks only whether the municipal advisor controls or is controlled by the associated person or whether the two are under common control. Such control relationships are directly relevant to investigations of the municipal advisor.

The Commission believes that, in today's world of organizational and managerial sophistication and advanced information technology, including as is pertinent to cross-border affiliations, it should not be unreasonably difficult for a municipal advisor that finds itself within a larger family of affiliates, particularly of the size discussed by commenters, to obtain knowledge of its own place and the place of others within that family. Given the potential relevance and importance of such information, as discussed above, to assuring lawfulness and fairness in the field of municipal advisory services, as well as in maintaining confidence in the municipal securities markets, the Commission believes it is appropriate to require municipal advisors to obtain and provide such information.

With respect to the suggestions that a municipal advisory firm should not be required to provide information regarding its individual associated persons unless those persons devote a certain threshold of time or resources to municipal advisory activities, the Commission disagrees. In particular, the kind of activity that disclosure relating to associated persons is intended to bring to light may involve the kind of significant influence that often is wielded in very short timeframes of activity, e.g., a short phone call from a partner in the firm to a key person in a municipal entity “urging” the issuance of a particular offering, or soliciting the municipal entity's investment.

Item 7: Participation or Interest in Municipal Advisory Client or Solicitee Transactions [1074]

The Commission proposed Item 7 to require information about an applicant's participation and interest in the transactions of its municipal advisory clients. The Commission received no comments referencing Item 7 that are not discussed elsewhere [1075] and is adopting Item 7 as proposed. [1076]

As discussed in the Proposal, the purpose of Item 7 is to identify possible conflicts of interest that the municipal advisor and its associated persons may have with the municipal advisor's clients and/or the persons the municipal advisor solicits. [1077] For example, a municipal advisor that receives commissions or other payments for sales of securities to clients may have a conflict of interest with its clients. This type of practice gives the municipal advisor and its personnel an incentive to base investment recommendations on the amount of compensation they will receive rather than on the client's best interests.

Specifically, Item 7 requires an applicant to disclose whether it, or any of its associated persons, has a proprietary interest in the securities or other investment or derivative product transactions of its clients or of persons whom it solicited or intends to solicit (“solicitees”). These disclosures include whether the applicant buys securities or other investment or derivative products from, or sells them to, its clients or solicitees; whether it buys or sells for itself securities (other than shares of mutual funds) or other investment or derivative products that it also recommends to such clients or solicitees; whether it enters into derivative contracts with such clients or solicitees; or whether it recommends to its clients or solicitees securities or other investment or derivative products in which it or any associated person has any proprietary interest (other than as already disclosed in response to the previous questions).

An applicant is also asked to disclose whether it or its associated persons recommend purchases of securities or derivative products to clients or solicitees for which the municipal advisor or its associated persons serve as underwriter, general or managing partner, or purchaser representative; recommend purchases or sales of securities or derivatives to clients or solicitees in which applicant or its associated person has any other sales interest (other than the receipt of sales commissions as a broker or registered representative of a broker-dealer); have certain discretionary authority over transactions in securities or other investment or derivative products for its clients or solicitees; and recommend brokers, dealers, or investment advisers to its clients or solicitees, and, if so, whether those brokers, dealers, or investment advisers are associated persons of the municipal advisor. Item 7 also requires the municipal advisor to disclose whether it or its associated persons give or receive compensation for municipal advisory client referrals. [1078]

Item 8: Owners, Officers, and Other Control Persons [1079]

The Commission proposed Item 8 of Form MA to require information about an applicant's control persons. As discussed below, the Commission received one comment specifically relating to Item 8. The Commission carefully considered issues raised by the commenter and is adopting Item 8 substantially as proposed, with minor modifications discussed below.

Item 8, as proposed and adopted, asks applicants to identify on Schedules A and B every person that owns a certain percentage of the applicant, that directly or indirectly controls the applicant, or that the applicant directly or indirectly controls. [1080] An initial applicant is required to complete Schedules A and B. Schedule C is used to amend information previously reported on Schedules A and B.

Schedule A requires information about the applicant's executive officers and, for firms, persons that directly own 5% or more of the applicant. [1081] Schedule B requests information about persons that indirectly own 25% or more of the applicant. A clarifying instruction has been added to Schedule B, as adopted, explaining that, for these purposes, an “indirect owner” includes any owner of 25% or more of any direct owner listed in Schedule A and any owner of 25% or more of each such indirect owner going up the chain of ownership. Applicants are also asked to identify, on Schedule D, any person that controls the applicant's management or policies if not otherwise identified as an owner or officer in Schedule A or B. Further information is requested with respect to control persons that are public reporting companies under Sections 12 or 15(d) of the Exchange Act. [1082]

For ease of use and clarity, Form MA, as adopted, asks for information separately on Schedules A-1 and B-1 for owners and control persons that are business entities and on Schedules A-2 and B-2 for owners and control persons who are natural persons, as well as (in Schedule A-2) for executive officers. [1083] The information sought in these schedules, however, is the same as in the Proposal, with minor modifications. [1084]

For each business entity listed, the applicant is required to provide its organization CRD Number, if it has one, or its IRS tax number, EIN, or, if not a domestic entity, any foreign business number. For each natural person listed, the applicant is required to provide the person's individual CRD Number, if any, or the person's social security number or foreign identity number, as well as date of birth. [1085]

As discussed in the Proposal, the information requested and the definition of control are consistent with that requested and used by the Commission in other contexts. [1086] This information will help to inform the Commission's understanding of the ownership structure of the municipal advisor and who ultimately controls the municipal advisor. Such information in turn will provide useful information in preparing for examinations and also in identifying potential conflicts of interest. The information requested also will inform the Commission about changes in control of the municipal advisor.

One commenter, as discussed above with respect to Item 6, [1087] cited Item 8 and Schedules A, B, C and D as another illustration of the burden imposed by the reach of Form MA's questions to information about affiliates. Although Item 8 refers to “control persons,” [1088] the Commission notes that the disclosure requirements in Item 8 apply only to “every person that, directly or indirectly, controls the applicant, or that the applicant directly or indirectly controls” and does not include sister affiliates (although a control relationship in other contexts is sometimes understood to include two persons under common control). The very point of registration is that, to be permitted to register as a municipal advisor, a firm must provide certain basic information that will enable the Commission to oversee the activities of, and exercise jurisdictional authority over, those who register. The Commission notes that Forms BD and ADV require filers to provide substantially similar information.

Item 9: Disclosure Information and Related DRPs

As discussed in the Proposal, Item 9 requires an applicant to provide certain information concerning any criminal, regulatory, and civil judicial actions relating to the applicant or any of its associated persons [1089] (collectively referred to hereinafter as “disciplinary history”). [1090] If an applicant indicates in Item 9 that there has been a history of such actions involving itself or any of its associated persons, the applicant must report further information in the DRPs that comprise Part II of Form MA, which are described below. [1091] The Commission received several comments regarding the disclosures required by Item 9 and its related DRPs, which are discussed below. [1092] The Commission is adopting Item 9 with certain changes. Although, as adopted, Item 9 generally seeks the same information as in the Proposal, some questions have been more narrowly tailored and broken down into subparts. These changes and the reasons for them are detailed below.

As discussed in the Proposal, [1093] Section 975(c)(3) of the Dodd-Frank Act amended Section 15B of the Exchange Act to direct the Commission, by order, to censure, place limitations on the activities, functions, or operations of, or suspend for a period not exceeding twelve months, or revoke the registration of any municipal advisor, if it finds [1094] that such municipal advisor has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), (E), (G) or (H) [1095] of paragraph (4) of Section 15(b) of the Exchange Act; has been convicted of any offense specified in Section 15(b)(4)(B) [1096] of the Exchange Act within ten years of the commencement of the proceedings under Section 15B(c); or is enjoined from any action, conduct, or practice specified in Section 15(b)(4)(C) [1097] of the Exchange Act. [1098]

Generally, Item 9 was designed to elicit information from a municipal advisor concerning certain of its activities or the activities of its associated persons that could subject the municipal advisor to disciplinary action by the Commission under these statutory provisions. The Commission intends to use this information to determine whether to approve an application for registration, to decide whether to institute proceedings to revoke registration, or to place limitations on an applicant's activities as a municipal advisor. In addition, the information will also identify potential problem areas on which to focus examinations. [1099]

In addition to its value for the Commission's oversight of municipal advisors, generally, as well as to inform MSRB rulemaking, the Commission seeks this information because it may indicate that a municipal advisor is statutorily disqualified from acting as a municipal advisor. [1100] Further, this information may be valuable to municipal entities and obligated persons who engage municipal advisors and to investors who may purchase securities from offerings in which municipal advisors have participated, as well as to other regulators.

The information to be disclosed is substantially similar to the information required to be disclosed in Form BD [1101] for broker-dealers and in Form ADV [1102] for investment advisers. [1103] In addition to information sought on Forms BD and ADV with respect to investment-related activities Form MA also requests parallel information with respect to municipal advisory activities.

The requested information is also generally consistent with the disclosure requirements of the temporary registration form, Form MA-T. [1104] However, as discussed in the Proposal, in Form MA-T, the Commission limited the disciplinary history disclosure requirements to “associated municipal advisor professionals.” [1105] As explained in the Proposal, due to the short timeframe between the passage of the Dodd-Frank Act and the deadline for registration of municipal advisors on October 1, 2010, the Commission believed it was appropriate to limit the disclosure requirement to this subgroup of associated persons, which is limited to persons who are closely associated with an advisor's municipal advisory activities. [1106]

In connection with the permanent registration regime, however, the Commission believes it is appropriate to require in Item 9 that a municipal advisor disclose the disciplinary history, as applicable, of all its associated persons, as that term is defined in Exchange Act Section 15B(e)(7), with the exclusion of employees who perform solely clerical, administrative, support, or other similar functions. [1107] The Commission believes that, for purposes of the permanent registration regime, it is important to collect information about disciplinary matters for all such associated persons, because, under the Exchange Act, such matters may form the basis for an action to suspend or revoke a municipal advisor's registration. [1108]

Specifically, Item 9 as proposed and adopted requires disclosure of disciplinary history with respect to any partner, officer, director or branch manager of a municipal advisor, and any other employee who is engaged in the management, direction, supervision, or performance of any municipal advisory activities relating to the provision of advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities; and any person that directly or indirectly controls, is controlled by, or under common control with the municipal advisor. As a result, Form MA will capture information with respect to employees that engage in municipal advisory activities, even if that is not their primary activity. Form MA, in contrast to temporary Form MA-T, also requires disclosure with respect to controlling persons and other affiliates of the municipal advisor.

As proposed and adopted, Item 9 asks whether the applicant or any associated person has, in the last ten years, been convicted of any felony, or pled guilty or nolo contendere to any charge of a felony in a domestic, foreign, or military court, or charged with any felony. Item 9 further asks whether the applicant or any associated person has been convicted of any misdemeanor or pled guilty or nolo contendere in a domestic, foreign, or military court to any charge of a misdemeanor in a case involving municipal advisor-related business, [1109] investments or an investment-related business, or any fraud, false statements, or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion or a conspiracy to commit any of these offenses, or charged with any misdemeanor of the type described above. [1110] With respect to charges alone, an applicant must respond only with respect to charges that are currently pending.

A clarification has been added in Item 9, as adopted, regarding the provision that disclosure of an event in the Criminal Action Disclosure section is not required if the date of the event was more than ten years ago. The applicant is instructed that, for purposes of calculating the ten-year period, the date of an event is the date that the final order, judgment, or decree was entered, or the date that any rights of appeal from preliminary orders, judgments, or decrees lapsed. This instruction provides a clear-cut guideline by requiring any past cases to be resolved with finality before the ten-year period of no criminal history can begin. The Commission notes that this defining line has been set forth explicitly in other contexts. [1111]

In the Regulatory Action disclosure section of Item 9, Form MA as proposed and adopted asks for information regarding whether the SEC or the CFTC has ever: found the municipal advisor or any associated person to have made a false statement or omission; found the municipal advisor or any associated person to have been involved in a violation of its regulations or statutes; found the municipal advisor or any associated person to have been a cause of a municipal advisor- or investment-related business having its authorization to do business denied, suspended, revoked, or restricted; entered an order against the municipal advisor or any associated person in connection with municipal advisor- or investment-related activity; or imposed a civil money penalty on the municipal advisor or any associated person, or ordered the municipal advisor or any associated person to cease and desist from any activity. Item 9 of the form also asks for similar information with respect to other federal regulatory agencies, any state regulatory agency, or any foreign financial regulatory authority.

Item 9 further asks for information regarding whether any SRO or commodity exchange ever found the municipal advisor or any associated person to have made a false statement or omission; found the municipal advisor or any associated person to have been involved in a violation of its rules (other than a violation designated as a “minor rule violation” under a plan approved by the SEC); found the municipal advisor or any associated person to have been the cause of a municipal advisor- or investment-related business having its authorization to do business denied, suspended, revoked, or restricted; or disciplined the municipal advisor or any associated person by expelling or suspending it from membership, barring or suspending its association with other members, or otherwise restricting its activities. It also asks whether the municipal advisor or its associated persons have had authorization to do business or to act as an attorney, accountant or federal contractor revoked or suspended.

The Civil Judicial Disclosure section of Item 9, as proposed, asks whether any domestic or foreign court has ever (a) enjoined the applicant or any associated person in connection with any municipal advisor-related or investment-related activity; (b) found that the applicant or any associated person was involved in a violation of any municipal advisor- or investment-related activity; or (c) dismissed a municipal advisor- or investment-related civil action brought against the applicant or an associated person by a state or foreign financial regulatory authority. Form MA, as adopted, retains the same questions, although the latter question has been revised to explicitly include actions brought by U.S. jurisdictions other than states. [1112]

As already indicated, the Criminal Action Disclosure section of Form MA as proposed and adopted requires disclosure of events that occurred within the last ten years. [1113] With respect to Regulatory and Civil Judicial Actions, the form as proposed and adopted places no time limit on how far back in time events must be disclosed. The applicability of these disclosure requirements to any event in the past is consistent with the disclosure reporting requirements on Form BD, adopted pursuant to Section 15(b)(1) of the Exchange Act, [1114] with one exception. In Form BD, the requirement to disclose any civil judicial injunctions is limited to the past ten years. In contrast, the Commission proposed its corresponding question in Form MA regarding past civil injunctions without limiting the disclosure requirement to the past ten years. The Commission received no comment on this disclosure requirement and is adopting it as proposed.

As mentioned above, Form MA includes three separate kinds of DRPs to report information, as relevant, relating to criminal, regulatory, and civil actions involving the municipal advisor or its associated persons reported in Item 9. [1115] The Commission is adopting each of these DRPs as proposed. Some modifications have been made, however, and these are discussed below.

Generally, each DRP requires detailed information about the reported action, such as the court where the charges were filed and when, a description of the charge and the circumstances relating to it (in the case of criminal actions); the authority that initiated the action and a description of the allegations and the product-type (in the case of regulatory actions); or the initiator of the court action, the relief sought, and the product type (in the case of civil judicial actions). Applicants are also required to indicate the status of the charge or action, including resolution details as appropriate. As discussed in the Proposal and consistent with the limitations set forth in Section 15(b)(4)(B) [1116] of the Exchange Act, [1117] however, information on the Criminal Action DRP is limited to matters within the last ten years.

The Commission believes that it is important to collect the information required by the DRPs in addition to the basic disclosures in Item 9 to further the aims described above regarding the information required in Item 9: to assist it in deciding whether to grant or institute proceedings to deny an application for registration or to revoke a registration; to manage the Commission's regulatory and examination programs; to make such information available to the MSRB; and to obtain information that can be of value to municipal entities engaging the services of municipal advisors and to investors who may purchase securities from offerings in which municipal advisors have participated, as well as to other regulators. [1118]

One commenter expressed concerns about the “vast information-gathering burden on applicants” imposed by Item 9. [1119] The commenter indicated that its concerns, which focused on the requirement to collect information regarding sister affiliates of a municipal advisor, applied “particularly in the light of the required disciplinary history disclosures.” [1120] This commenter observed that Form ADV, upon which Form MA is based, does not require disclosure of a sister affiliate's disciplinary history. Another commenter stated that “[s]ome entities, such as banks, broker-dealers and investment advisers, may have many branches, and branch managers, that have nothing to do with the entity's municipal advisory business” and urged that Form MA be amended to require disciplinary history “only with respect to branch managers of branches where a municipal advisory business is conducted.” [1121]

In considering these comments, the Commission notes that Section 15B of the Exchange Act assigns the Commission oversight and disciplinary responsibilities with respect to all associated persons of a municipal advisor, a category that includes sister affiliates and branches. Moreover, as discussed elsewhere in this release, [1122] the Commission is clarifying with new Rule 15Bc4-1 that associated persons of municipal advisors are subject to censure, limitations on their activities, suspension, or being barred from being associated. As explained above, with regard to the value of obtaining information regarding financial industry and related activities of associated persons, the Commission believes that the ability to discern connections within a large network of affiliations and other associations is important for investigations of wrongdoing. The ability to gain, through disclosure requirements, a base of knowledge that includes actions of past wrongdoing is all the more important for these purposes.

Regarding the comment concerning the burden of obtaining information about sister affiliates, the Commission notes that Form ADV, too, requests certain information regarding an investment adviser's sister affiliates—specifically, business information—as the commenter acknowledged. Moreover, as the commenter also acknowledged, Form ADV requests the disciplinary history of the investment adviser and all of its “advisory affiliates” (emphasis added)—i.e., all current employees, all officers, partners or directors, and all persons directly or indirectly controlling or controlled by the investment adviser. Given that a municipal advisor is in any case required to gather certain facts about its sister affiliates' business activities, the Commission believes that it is appropriate to request the added information about any disciplinary history of these affiliates, particularly in view of its potential value to regulators for purposes of investigation and enforcement discussed above.

The DRPs associated with the disclosures in Item 9 are being adopted substantially as proposed. However, as discussed below, some additional disclosure requirements and other revisions have been included in the DRPs, as adopted. [1123]

Generally in all the DRPs, as proposed, when an amendment was filed seeking to remove a previously-filed DRP, the applicant was asked for the reason. Some, but not all of the DRPs, gave the option of checking a box indicating that the DRP was filed in error. Some, but not all of the DRPs, additionally asked for an explanation of the circumstances that gave rise to the error. For the sake of consistency and to provide regulators, municipal entities, and others with important detail, all the DRPs, as adopted, have been revised to include these elements. Also, in the Criminal Action DRP, an additional option is given to indicate why the DRP was filed an error. The new option is that the event or proceeding occurred more than ten years ago. [1124]

As proposed, if a DRP pertains to an associated person of the municipal advisor, the DRP asks whether that person is registered with the Commission. In the DRPs, as adopted, if the associated person is registered, the registration number must be provided. [1125] The Commission believes that, if an applicant for registration with the Commission has an associated person that is otherwise registered with the Commission, such information is valuable for cross-referencing and enforcement and other regulatory purposes and providing it should not constitute an undue burden. [1126]

Each DRP, as proposed, asked if the municipal advisor or associated person whom the DRP concerned was registered through the IARD or CRD system or the municipal advisor was previously registered on Form MA-T, whether the advisor or associated person previously filed a DRP (with Form ADV, BD, or U4) or the advisor filed disclosure on Form MA-T regarding the same event. The adopted version of each DRP now asks whether an accurate and up-to-date DRP containing the information regarding the applicant or associated person required by the DRP is already on file in the IARD or CRD system (with a Form ADV, BD, or U4) or in the SEC's EDGAR system (with a Form MA or Form MA-I), and, if so, to specify the type of filing and provide specific information regarding the name of the filer, the CRD Number (where relevant), the date, and disclosure or accession number of the relevant other form. [1127] As discussed above, [1128] the ability to incorporate by reference any required information about the disciplinary history of an applicant or associated person from a DRP that already has been filed relieves the regulatory burden on applicants who can do so. At the same time, however, sufficient information about where the information is filed is necessary for regulators, municipal entities, and investors to be able to access it with reasonable ease.

As proposed, some of the DRPs, where relevant, asked for the name of the federal, military, state or foreign court where a case was formally brought or appealed. In the DRPs, as adopted, an applicant is presented with a list of types of courts from which to choose and must specifically check the type of court in which the case was brought. [1129] In addition, “international court” and “other” have been added to the choices (and, if the latter is checked, the applicant must specify the type) and the street address and postal code of the court will now need to be provided in addition to the city or county and state or country. Requests for information in all the DRPs regarding courts and other panels have been made consistent to require the name of the case (in addition to the docket number, as proposed). The Commission believes that these additions will enable regulators, municipal entities, and investors to more easily locate information that may be relevant to them and, if need be, address further inquiries. The Commission further believes that complete responses to the questions in the DRPs, as proposed, would have supplied most of this same information. [1130]

For the same reason, similar changes have been introduced into the DRPs regarding regulatory adjudications and civil judicial actions. Where the proposed Regulatory Action DRP asked the filer to indicate whether a regulatory proceeding was initiated by the SEC, another federal authority, state, SRO, or foreign authority, the forms as adopted add, as choices, the CFTC, a federal banking agency, the National Credit Union Administration, or other regulator or authority that the applicant must specify. In addition, the applicant must now indicate, as applicable, the name of the administrative proceeding, commission or agency hearing, or other regulatory proceeding or forum in which the action was brought and the street address and postal code of the location where the case was heard. Specific choices added with respect to who initiated a Civil Judicial Action include the CFTC, another federal authority (which the applicant must specify), and a municipal advisory firm.

As proposed, not all the DRPs contained instructions to the applicant regarding the language to be used in naming or describing the charges brought in a foreign jurisdiction. As adopted, the forms consistently require the applicant to provide all the information requested in English. The Commission believes that this requirement is appropriate in an application for U.S. registration designed to obtain information on behalf of U.S. regulators, municipal entities, and investors.

As proposed, in the Criminal Action DRP, in a case where criminal charges were brought against a firm or organization over which the applicant or associated person had control, the applicant was required to indicate whether the firm or organization was engaged in a municipal advisor-related business. In the DRP, as adopted, the question has been revised to ask, in addition, whether the firm or organization was engaged in an investment-related business. [1131] Because of the close relationship between investment-related business and municipal advisory activities, the Commission believes that it is important for regulators, municipal entities, and investors in municipal securities to have this information.

The instructions in the Criminal Action DRP on how to report an event or proceeding have been revised in the form as adopted. [1132] No substantive changes have been introduced in the reporting requirements. The revisions have been made solely for purposes of clarity. The adopted version of the instructions states: “Use this DRP to report all charges, including multiple counts of the same charge, arising out of the same event and filed in one criminal action. The same DRP may be used for more than one person with respect to the same event or proceeding. Separate criminal actions arising out of the same event, and unrelated criminal actions, must be reported on separate DRPs.” The Commission believes that the revised instructions, which are similar to instructions that appear in the DRPs for Forms BD and ADV, will help assure that the disciplinary information provided in response can be easily understood.

An instruction has been added to the Criminal Action DRP advising applicants that applicable court documents must be attached to, and filed with, the DRP if not previously submitted. [1133]

In the Criminal Action DRP, as proposed, an applicant was not required specifically to indicate whether the original criminal charge was amended or reduced. As adopted, the DRP asks for this information and for the relevant date. The Commission believes that the clearer picture of the disciplinary history that will emerge when this information is supplied should assist regulators, municipal entities, and investors in assessing the credentials and background of the municipal advisor and its associated persons.

In the Criminal Action DRP, as proposed, an applicant was not required to state, if the case was on appeal, to whom it was appealed and the date of the appeal. As adopted, the DRP now requires these disclosures. [1134]

The Criminal Action DRP, as proposed, asked for information generally about the disposition of the relevant action, in narrative form, and to include details concerning any sentence or penalty imposed, its start date, and its duration, and the amount and date of payment. [1135] As adopted, the form requires the applicant to choose from among 16 types of disposition of a case (or to check “other,” and specify the other), and to further identify any other type of disposition. Choices are also provided to describe specifically the disposition of any appeal. [1136] The DRP, as adopted, further asks specifically whether any incarceration was imposed in connection with the action, and, if so, the duration, the start and end dates, and any concurrent sentences. [1137] It also asks, in question-by-question format, whether any portion of a monetary penalty was reduced or suspended, whether it has been paid in full, and, if not, how much remains unpaid. The Commission believes that these revisions will help ensure that the description of the disposition is complete.

As proposed, the Regulatory Action DRP required the applicant to check off any of 14 types of “principal sanctions” [1138] in the case (or to check “other,” and specify the other type), and to further identify any other sanctions. As adopted, the DRP does not differentiate between principal sanctions and any other kind of sanction, but adds more types to the list in addition to requiring the applicant to identify any others. This, too, will help ensure that the filer provides appropriate detail, thereby enabling interested parties to better assess the credentials and background of the applicant and its associated persons.

Similarly—and for the same reason—the Civil Judicial Action DRP no longer differentiates between “principal relief” sought and other relief, and provides a longer list of possible sanctions or relief sought from among which the applicant must select in addition to identifying any other sanctions or relief sought.

The questions in the Regulatory and Civil Judicial Action DRPs regarding how a case was resolved, like the questions in the Criminal Action DRP regarding disposition, have been revised in the DRPs, as adopted, to be more specific and to offer more choices from among which an applicant must select, for the same reason as in the Criminal Action DRP. The Commission believes that these revisions will help ensure that the description of the disposition is complete. More possible answers are provided from among which the applicant must choose to describe specifically the type of resolution that resulted (acceptance, waiver, and consent, settlement, dismissal, judgment rendered, etc.) and choices are now given regarding how any appeal was resolved.

Similarly, more choices are presented to describe any sanctions that were ordered in the relevant Regulatory or Civil Judicial Action. [1139] In addition, questions are broken out into separate sections regarding the details of three specific types of sanctions and/or conditions of sanctions: (a) Bars, injunctions, and suspensions; (b) requalifications (by examination, retraining, or other process); and (c) monetary sanctions. [1140]

As proposed, the Regulatory and Civil Judicial Action DRPs asked the applicant to provide a brief summary of details relating to the action's status with relevant terms, conditions, and dates. As adopted, the DRPs specifically ask whether any limitations or restrictions are in effect while the case is pending or on appeal, as applicable. For pending cases, the DRPs also ask for the date that notice or other process was served. [1141] Here, too, the Commission believes that specifying these details as required elements will serve to ensure that the applicant's description is complete.

The Civil Judicial Action DRP, as proposed, did not ask for the full name of the defendant or ask whether the applicant is a named defendant. As adopted, the DRP requires this information, and, if the applicant is not a named defendant, further requires a description of how the action involves the defendant. This information should help interested parties more easily determine the role of the applicant or associated person in the civil judicial action as part of their assessment of the applicant.

The DRPs, as adopted, now ask for various minor additional disclosures reflecting a level of detail generally similar to the disclosures discussed above, which the Commission believes should serve to enhance the usefulness of the information to regulators and the benefit it will have for municipal entities and the investing public without unreasonably burdening applicants for registration. [1142]

Item 10: Small Businesses

As described further in Section IX below, the Commission is required by the Regulatory Flexibility Act (“RFA”) [1143] to consider the effect of its regulations on small entities. The Commission's rules do not define “small business” or “small organization” for purposes of municipal advisors. As discussed in the Proposal, the Small Business Administration (“SBA”) defines small business for purposes of entities that provide financial investment and related activities as a business that had annual receipts of less than $7 million during the preceding fiscal year and is not affiliated with any person that is not a small business or small organization. [1144] The Commission proposed to use the SBA's definition of small business to define municipal advisors that are small entities for purposes of the RFA. [1145] This definition will remain unchanged in the rules as adopted.

The Commission proposed Item 10 of Form MA to enable it to determine how many applicants meet the SBA's definition of “small business” or “small organization” as applied to municipal advisors. Thus, Item 10 requires each applicant to disclose whether it had annual receipts of less than $7 million during its most recent fiscal year (or during the time it has been in business, if it has not completed its first fiscal year in business). Item 10 also requires each applicant to disclose whether any business or organization with which it is affiliated had annual receipts of more than $7 million in its most recent fiscal year (or during the time it has been in business, if it has not completed its first fiscal year in business).

The Commission received no comments on the information requested by Item 10 and is adopting this item as proposed. [1146]

Technical and Other Changes

In addition to the modifications discussed above, a number of non-substantive, technical and clarifying changes have been made to Form MA, its schedules and the DRPs as adopted. [1147] Further, some of the multi-pronged questions have been broken down into separate parts to make the form clearer and more user-friendly. [1148] The Commission has also made certain additional changes to correct inadvertent omissions in the form, as proposed. [1149]

Execution Page

Form MA includes an Execution Page that an authorized person of the municipal advisor filing the form is required to sign electronically before the form can be submitted. [1150] The Commission received no comments regarding the Execution Page, other than on the self-certification contained therein. For reasons discussed below, the Commission is removing the self-certification section of the Execution Page in Form MA but otherwise is adopting the Execution Page substantially as proposed. [1151]

An authorized person signs the form by typing his or her name and submitting the form on behalf of the municipal advisor. The authorized person is required to sign one of two different Execution Pages, depending on whether the municipal advisor is resident in the United States or a “non-resident” municipal advisor. In either case, by signing the Execution Page, the authorized person states that he or she is signing Form MA on behalf, and with the authority, of the municipal advisor and affirms that the information in Form MA is true and correct.

The Execution Page for both resident and non-resident municipal advisors requires the signatory to certify that the books and records of the municipal advisor will be preserved and available for inspection and to authorize any person with custody of the books and records to make them available to federal representatives. On the Execution Page for non-resident municipal advisors, the signatory, in signing the form, also states that the municipal advisor agrees that it will provide to the Commission, at its own expense, copies of all books and records that the municipal advisor is required to maintain by law. As discussed in the Proposal, the Commission believes that, before granting registration to a domestic or non-resident municipal advisor, it is appropriate to obtain assurance that such person has taken the necessary steps to be in the position to provide the Commission with prompt access to its books and records and to be subject to inspection and examination by the Commission. [1152]

On the Execution Page for domestic municipal advisors, the signatory also states that it appoints certain officials as agents for service of process in the state where the advisor maintains its principal office or place of business. Specifically, a domestic municipal advisor appoints the Secretary of State or other legally designated officer in the state where it maintains its principal office and place of business. As discussed in the Proposal, this appointment allows private parties and the Commission to bring actions against the municipal advisor by delivering necessary papers to the appointed agent. [1153] The agent is able to receive any process, pleadings, or other papers in any action that arises out of or relates to or concerns municipal advisory activities of the municipal advisor. The agent also is able to receive service for investigation and administrative proceedings.

On the Execution Page for non-resident municipal advisors, the signatory on behalf of the registrant also states that an opinion of counsel is attached as an exhibit to Form MA and that the municipal advisor can, as a matter of law, provide the Commission with access to the books and records of the municipal advisor, as required by law, and that the municipal advisor can, as a matter of law, submit to inspection and examination by the Commission. [1154] As discussed in the Proposal, each jurisdiction may have a different legal framework with respect to its laws (e.g., privacy laws) that may limit or restrict the Commission's ability to receive information from a municipal advisor. [1155] Providing an opinion of counsel that a municipal advisor can provide access to its books and records and can be subject to inspection and examination allows the Commission to better evaluate a municipal advisor's ability to meet the requirements of registration and ongoing supervision. [1156] Failure to provide an opinion of counsel may be a basis for the Commission to deny an application for registration. [1157]

As proposed, Form MA required the authorized person of a municipal advisor completing the Execution Page to certify separately on behalf of the municipal advisor that it and every natural person associated with it had met, or within any applicable required timeframes would meet, such standards of training, experience, and competence, and such other qualifications, including testing, for a municipal advisor and natural persons associated with it, required by the Commission, the MSRB, or any other relevant SRO. Under the Proposal, the authorized person, on behalf of the municipal advisor also would have been required to certify that the municipal advisor had conducted an initial or annual review, as applicable, of the municipal advisor's business, and had reasonably determined that the municipal advisor: (a) could carry out the activities described in the items that are checked in Item 4-K (Applicant's Business Relating to Municipal Securities) of Form MA; [1158] (b) could comply with all applicable regulatory obligations; and (c) had met such regulatory obligations during the last year (or during such shorter period if the application was an initial application for registration). For these purposes, such applicable regulatory obligations were to include obligations under the federal securities laws and rules promulgated thereunder and applicable rules promulgated by the MSRB, or any other relevant SRO.

Under the Proposal, the authorized person also would have been required to certify that the municipal advisor had documented this review process and would maintain all documents relating to the review in accordance with Rule 15Ba1-7 under the Exchange Act. [1159] Such certification would have been required in conjunction with the filing of an initial application for registration as a municipal advisor and annually thereafter. [1160]

The Commission received one comment letter opposing the proposed self-certification requirement. [1161] The commenter provided that self-certification should not be required and noted that similar certifications are not required with Form BD and Form ADV. [1162] The commenter also asserted that requiring a municipal advisory firm to conduct an annual review of its business and determine that it can carry out its municipal advisory activities, including requiring the applicant to document the review process, would be costly, burdensome, and confusing. Further, the commenter noted that the Commission and the MSRB have yet to propose standards that are the subject of the certification. Accordingly, the commenter believed that, without such standards or related guidance, it is premature for prospective advisors to even comment. The commenter added that a municipal advisor would be unsure as to how to conduct the review, which may lead to unnecessary expense and exposure to liability (since the certification would be “reports” and therefore subject the municipal advisor to criminal liability). The commenter suggested that, if the Commission's interest is in ensuring competence of a municipal advisor, a better approach would be to create an MSRB examination process with qualifications clearly defined by the MSRB.

After careful consideration of the comment received, the Commission is not requiring self-certification in Form MA, as adopted. As the commenter notes, Forms BD and ADV, on which Form MA is based, do not require self-certification. Further, as pointed out by the commenter, the MSRB has yet to propose standards that are the subject of the certification. Accordingly, at this time, the Commission does not believe that self-certification should be required of municipal advisors.

In response to the Commission's request for comment regarding an independent third party review and whether the Commission should mandate a minimum level of review as an alternative to the self-certification requirements, [1163] the Commission received two letters. The two commenters did not object to the self-certification requirement but did oppose any third-party review or audit. [1164] Both commenters assert that such a review would impose unnecessary costs, and that Commission review would be sufficient. One of these commenters also opposed any minimum review standards. [1165] In concurrence with these commenters, the Commission has determined at this time not to establish a minimal level of review or require review by an independent third-party.

c. Information Requested in Form MA-I

As discussed above, although Form MA-I was proposed as a registration form for all natural person municipal advisors, Rule15Ba1-3, as adopted, exempts a natural person municipal advisor from the requirement to register, if such person is associated with a registered municipal advisory firm and engages in municipal advisory activities solely on behalf of a registered firm. [1166] Rule 15Ba1-2(b)(1), as adopted, requires a municipal advisory firm, on behalf of which an associated natural person engages in municipal advisory activities, to file Form MA-I with the Commission with respect to each such individual. Pursuant to Rule 15Ba1-2(b)(2), as adopted, a natural person who is a sole proprietor must file Form MA-I in addition to filing an application to register as a municipal advisor on Form MA.

The Commission received more than 30 comment letters relating to proposed Form MA-I. About 25 of these letters concerned the impact that the registration requirement for natural person municipal advisors would have if applied to volunteer members of public boards, in view of the fact that registration would require completing a Form MA-I. Because, under the rules as adopted, volunteer public board members would generally not be required to register, the Commission believes the concerns of these commenters have been otherwise addressed. [1167]

The remaining comment letters concerned the nature and scope of the information requested by Form MA-I and are discussed below. [1168] After considering the comments, the Commission is adopting Form MA-I substantially as proposed. However, the Commission is modifying Form MA-I to require a few additional points of information and is also eliminating some data requests. In addition, some of the language in Form MA-I has been modified to reflect the fact that, under the rules, as adopted, the form is no longer an application for registration and, except in the case of sole proprietors, will be completed by a firm, rather than by the individual with respect to whom the form is being filed. [1169]

As a general matter, the information requested on Form MA-I, as proposed and adopted, is similar to information requested on FINRA's Form U4. [1170] Some questions on Form U4 have been adapted for purposes of Form MA-I to relate specifically to municipal advisors. Other questions have been omitted as not necessary or appropriate in the municipal advisor context.

One commenter argued that information sought by Form MA-I largely duplicates information relating to associated persons sought by Form MA. [1171] The Commission acknowledges that a municipal advisory firm that registers by filing Form MA must already provide information on that form concerning the disciplinary history of each of its associated persons, including employees providing advice on behalf of the firm. However, there is very little overlap between the information required by Form MA and that required by Form MA-I that cannot be incorporated by reference. [1172] Moreover, Form MA-I elicits additional information that would not be provided by the firm as part of its Form MA. For example, Form MA-I requires the following information about each relevant natural person that would not be found on his or her firm's Form MA if engaged in municipal advisory activities on behalf of a firm or on his or her own Form MA if acting as a sole proprietor: social security number of the individual; other names of the individual; his or her residential and employment history; the offices of the firm where the individual is located and from which he or she is supervised; the names of any other municipal advisory firms that employ the individual; and any other businesses in which the individual is engaged. [1173]

Therefore, in completing a Form MA-I for each employee, the Commission believes that a firm will be supplementing, rather than duplicating, the information provided on Form MA. For this reason, as proposed and adopted, the rules require a sole proprietor to complete and file both forms.

Among the comments received by the Commission, specifically with regard to Form MA-I, as has already been discussed, several commenters questioned the need for separate registration forms for firms and their individual employees. [1174] One commenter believed that separate registration of individuals on Form MA-I could “lead to confusion” and “inadvertent inconsistencies in the information.” [1175] Another commenter believed that processing the estimated 21,800 forms expected to be filed would put “significant strain” on the Commission. [1176] In addition to these comments, one commenter suggested that, in lieu of requiring individuals to register separately with the Commission on Form MA-I, the Commission could “work with the MSRB to establish, through the MSRB, a licensing and registration mechanism for individuals who are municipal advisors, which would be similar to the program used to register a broker-dealer's licensed associated persons with FINRA.” [1177] Further, the commenter stated that, if the Commission believes it is necessary to formally register individuals (in addition to licensing them), the MSRB could adopt Form U4 and require it to be filed in connection with granting a license to individuals who engage in municipal advisory activities on behalf of a Commission- and MSRB-registered municipal advisory firm. [1178] The Commission believes that these comments have been addressed by the exemption created in the rules, as adopted, for natural persons who engage in municipal advisory activities solely on behalf of a registered municipal advisor. [1179]

Commenters also expressed concerns regarding the disclosures required by Form MA-I and the plan to make them publicly available. [1180] For example, one commenter believed that some of the information required in Form MA-I “could not be disclosed by a law enforcement agency, such as the individual's detailed criminal history—which includes arrests that do not result in prosecution or conviction.” [1181] The commenter further believed that “[g]overnment disclosure of a compiled criminal history is a criminal offense.” [1182]

The Commission believes that it is consistent with the Exchange Act to require disclosure of such information in order to permit persons whom Form MA-I concerns to lawfully engage in municipal advisory activities. [1183] Regarding a commenter's concern about government disclosure of compiled criminal history, the Commission notes that engaging in municipal advisory activities is voluntary. Persons engaging in municipal advisory activities are on notice that the information supplied to the Commission on Form MA and MA-I will not be kept confidential (except where indicated otherwise). Therefore, if a person does not wish to disclose his or her criminal history, such person may choose to not engage in municipal advisory activities. In addition, the Commission notes that the information requested on Form MA-I is consistent with comparable provisions in Forms BD and ADV, as well as Form U4. [1184]

One commenter focused on the impact that Form MA-I could have on bank employees, believing that it would require such information as the addresses of all offices at which the employee will be physically located or supervised and noting that it was not uncommon for bank branch employees such as tellers to work at multiple branch locations in a geographic region. [1185] As discussed above, the Commission is limiting the application of the term investment strategies, providing a limited exemption for banks, and permitting the registration of SIDs. [1186] Due to these changes, few, if any, bank employees of the type described by the commenter will be engaging in municipal advisory activities that would require filing of a Form MA-I. For those who are, the Commission believes that it is as important to obtain this information as it is with respect to any other natural person who is engaged in municipal advisory activities.

The Commission also received comment letters on Form MA-I from many municipal entities and agencies concerned about the impact of requiring appointed members of public boards to make the disclosures required by the form. [1187] As discussed in Section III.A.1.c.i., the Commission is exempting all members of the governing body of a municipal entity (acting in their capacity as such), including appointed members, from the requirement to register as municipal advisors. Thus, the concerns of these commenters should be alleviated.

Items 1 and 2: Identifying Information and Other Names

Item 1 of Form MA-I is being adopted substantially as proposed, with minor modifications as discussed below. [1188] Item 1 requires certain basic identifying information to be disclosed about any natural person engaged in municipal advisory activities. [1189] Although, as discussed above, certain information about an employee of a firm would already be available through the firm's Form MA, the individual's Form MA-I requires more information, including:

  • the individual's CRD Number, if he or she has one;
  • the individual's social security number; [1190]
  • the date of the individual's employment or contract with the firm;
  • whether the individual has an independent contractor relationship with the firm;
  • the firm's registration status;
  • all the offices of the firm where the individual may be physically located and all the offices from which the individual is or will be supervised; and
  • whether any of these offices are located in a private residence.

These elements of Item 1 are being adopted as proposed. With respect to information about the employee's firm, Item 1, as proposed, would have required the filer to provide any SEC file and registration numbers assigned to the firm in any registered capacity and also the firm's CRD Numbers, if any. To ease the completion of the form, Item 1, as adopted, requires a filer only to indicate whether the firm is currently registered as a municipal advisor on a Form MA and, if not, whether it has filed an application for registration on Form MA. If the latter, the filing date and the firm's EDGAR CIK number must be provided.

Item 1, as adopted, additionally requires a filer to provide the name under which the firm primarily conducts its municipal advisor-related business, if different from its legal name. It further also takes into account that an individual may be employed at more than one municipal advisory firm and requires entry of the relevant information for each such firm. [1191] The Commission believes that this additional information would be useful to the Commission's oversight of the municipal advisory market, without unreasonably increasing the burdens upon registrants in completing the form.

As proposed, Item 2 requires a filer to disclose all other names that the natural person engaged in municipal advisory activities is using or has been known by since the age of 18, such as nicknames, aliases, and names before and after marriage. No comments were received concerning Item 2, and it is being adopted substantially as proposed.

As stated in the Proposal, the Commission believed that the information sought by Items 1 and 2 would be useful to municipal entities and obligated persons in exploring the background, credentials, reliability, and trustworthiness of an individual in the course of making a decision whether to engage that natural person or his or her firm as a municipal advisor. [1192] The same information will be valuable to regulators in overseeing municipal advisors and investigating possible instances of wrongdoing.

Item 3: Residential History

In Item 3, which is being adopted substantially as proposed, [1193] Form MA-I requires disclosure of each location where the natural person engaged in municipal advisory activities has resided for the past five years, including the time period at each residence. [1194] Changes in residence must be reported (via an amendment) as they occur. In addition, no gaps greater than three months between addresses are permitted.

As stated in the Proposal, the Commission believes that the residential history of a natural person engaged in municipal advisory activities, like the additional identifying information Form MA-I seeks, will be useful for municipal entities and other interested parties in exploring the background, credentials, reliability, and trustworthiness of the individual and be valuable to regulators in overseeing municipal advisors and investigating possible instances of wrongdoing. The information that is required regarding residential history is similar to the information requested on Form U4. [1195]

Item 4: Employment History

In Item 4, which is being adopted substantially as proposed, [1196] Form MA-I requires a listing of the complete employment history of the natural person engaged in municipal advisory activities for the past ten years, including full and part-time employment, self-employment, military service, and homemaking. All statuses during the ten-year period, such as unemployed, full-time education, extended travel, and other similar circumstances must be included. In addition, the filer may not leave a gap longer than three months between entries. As discussed in the Proposal, the information required is similar to the information requested on Form U4. [1197] Such information will help inform an understanding of an employee's business experience and provide useful information in preparing for regulatory examinations. [1198]

Item 5: Other Business

Item 5 of Form MA-I is being adopted substantially as proposed. [1199] Item 5 requires information about the individual's other business activities, if any, in which he or she is currently engaged, as a proprietor, partner, officer, director, employee, trustee, agent or otherwise. The form asks for the name of the other business, its address, whether it is municipal advisor-related and, if not, the nature of the business in which it is engaged.

The filer is required to provide the individual's position, title, or relationship with the other business, the start date of the relationship, the approximate number of hours per month the individual devotes to the other business, and a brief description of his or her duties relating to the other business. As discussed in the Proposal, the information sought in this section is similar to the information sought by the equivalent section in Form U4. Such information will help the Commission understand the other business activities of a natural person engaged in municipal advisory activities and will help staff prepare for examinations. [1200]

Item 6: Disclosures Relating to Any Criminal Action, Regulatory Action, Investigation, Civil Judicial Action, Customer Complaint/Arbitration/Civil Litigation, Termination, Certain Financial Matters, and Judgments and Liens

Item 6 of Form MA-I, regarding the disciplinary history of the individual, is being adopted substantially as proposed. [1201] However, the Commission has made some modifications to the information sought in the DRPs, which are discussed below.

Item 6 of Form MA-I includes three sections that require the same general types of information regarding an individual's criminal, regulatory, and civil judicial history, if any, as required regarding municipal advisory firms in corresponding sections in Form MA, [1202] although the questions in these sections of Form MA-I differ somewhat from those in the corresponding sections of Form MA, as will be discussed below. As in Form MA, certain responses in the criminal, regulatory, and civil judicial action sections of Form MA-I require disclosure of complete details of all events or proceedings in DRPs pertaining to these areas.

Item 6 of Form MA-I also has five additional disclosure sections [1203] relating to an individual, which are also discussed below. Four of these ask about any investigations, terminations, customer complaints/arbitration/civil litigation, or judgments/liens relating to the individual. Each of these four sections has an associated DRP requiring further detail where applicable. The fifth additional section, which has no associated DRP, asks for certain financial disclosures. As discussed in the Proposal, the Commission believes that additional disclosures in these five areas, which are also required of individuals associated with broker-dealers and investment advisers on Form U4, are appropriate to aid municipal entities, obligated persons, and other members of the public in researching the background of municipal advisors and to aid regulators in enhancing their oversight of municipal advisors. [1204]

As discussed in the Proposal, the Commission believes that the additional disclosure items in the DRPs will be helpful to municipal entities and obligated persons as clients or prospective clients of municipal advisors. [1205] The information may also serve as the basis for granting or instituting proceedings to deny a registration or for revoking a registration or imposing other sanctions by the Commission with respect to an individual. [1206]

As a general matter, as was the case with the proposed DRPs of Form MA, many of the questions in the proposed DRPs of Form MA-I did not ask for specifics. The Commission believes that, with regard to certain questions, additional details of the kind requested in the adopted versions of Form MA's DRPs will help regulators, municipal entities, and other interested parties more easily research and better assess the background of the individual that is the subject of the DRP of Form MA-I. [1207] Thus, many of the revisions made to the DRPs of Form MA have also been made to the DRPs of Form MA-I.

Among these are changes in questions relating to: removing a DRP filed in error; [1208] incorporation by reference of disclosures already filed elsewhere; [1209] names and types of courts, regulatory authorities and forums and their locations, and parties who initiated the relevant action; [1210] how to report an event; [1211] appeals; [1212] disposition of a case and sanctions imposed in criminal cases; [1213] sanctions and/or relief sought, type of resolution, and sanctions ordered in regulatory and civil judicial actions; [1214] and other matters. [1215]

The following discussion summarizes Item 6 and its related DRPs as well as additional revisions made in their adopted versions:

Criminal Action Disclosures

With respect to felonies, Item 6 of Form MA-I—in contrast to the disclosures required by Item 9-A of Form MA—requires disclosure of:

  • any past conviction of, or plea of guilty or nolo contendere to, a felony by the individual, rather than limiting the disclosure to the past ten years, as in a firm's or solo practitioner's Form MA;
  • any charges of felony against the individual in the past, rather than limiting disclosure to currently pending charges, as in a firm's or sole proprietor's Form MA; and
  • any convictions of, or plea of guilty or nolo contendere to, a felony by an organization based on activities that occurred when the individual exercised control over the organization—a disclosure not required in Form MA.

With respect to misdemeanors, while Form MA requires only disclosures of convictions and pleas concerning an individual looking back ten years, and requires only disclosures of charges that are currently pending, Form MA-I requires disclosure of such convictions, pleas, and charges that occurred at any time in the individual's past. Misdemeanors, and convictions, pleas, and charges of misdemeanor against an organization while the individual exercised control over the organization are also required to be disclosed.

These criminal action disclosure requirements regarding individuals beyond the information required in Form MA, are consistent with the disclosure requirements on Form U4. In addition, as discussed in the Proposal, these disclosures provide additional information with respect to natural persons engaged in municipal advisory activities that will be useful to the Commission's regulatory and examination programs, and may be useful to municipal entities and obligated persons who are clients or prospective clients of the individual or his or her firm. [1216]

As proposed and adopted, the Criminal Action DRP of Form MA-I asks for additional details regarding, among other things: the charges, number of counts, and the court in which they were brought; status of the action; details of its disposition and sanctions ordered; and the date of amended charges, if any. It also provides an option and space for comment consisting of a brief summary of the circumstances leading to the charge(s) as well as their current or final disposition.

Certain revisions have been made in the adopted version of the DRP. For example, in its disclosure requirements concerning the charges, the DRP, as adopted, asks specifically whether the charge is (a) municipal advisor-related or (b) investment-related; and, if so, in each case, (c) what product type it involved. [1217]

Moreover, as proposed, the DRP required a description, in narrative form, of details concerning any sentence or penalty imposed, its start date, and its duration, and the amount and date of payment. [1218] As adopted, the DRP asks specifically whether any sentence or any other penalty is ordered, and requires, if so, a description of whether it involved prison, jail, probation, community service, counseling, education, or other. It further asks, in question-by-question format, for the duration in days, months, and/or years of any incarceration, the start and end dates, whether any concurrent sentence is to be served, and, if so, the end date. It also asks, in question-by-question format, whether any portion of a monetary penalty was reduced or suspended, whether it has been paid in full, and, if not, how much remains unpaid. These details should contribute to the clarity of the picture received by regulators, municipal entities, and investors of the individual's disciplinary background.

Finally, the proposed Criminal Action DRP of Form MA-I did not ask specifically about appeals. In its adopted version, the DRP asks whether the criminal action was appealed, and, if so, the name and location of the appeals court, and other details. Choices are also provided to describe specifically the disposition of any appeal. [1219] The Commission believes that obtaining this information will better enable regulators, municipal entities, and other interested parties to research the complete criminal history of the individual. [1220]

Regulatory Action Disclosures

As proposed and adopted, the questions in Item 6 of Form MA-I relating to regulatory actions by the Commission or the CFTC, similar to those in Form U4, require the same disclosures as in proposed Item 9 of Form MA and additional disclosures, including whether the Commission or the CFTC has ever found the individual to have:

  • willfully violated, or been unable to comply with, any provision of the federal securities laws, the Commodity Exchange Act, and the rules thereunder, and any rule of the MSRB;
  • willfully aided, abetted, commanded, induced, or procured the violation by any other person of these laws and rules; and
  • failed reasonably to supervise another person subject to his or her supervision with a view to preventing violation of these laws and rules.

As proposed and adopted, Form MA-I requires the same disclosures as proposed Form MA with respect to findings and actions relating to the individual by other federal regulatory agencies, state regulatory agencies, and foreign financial regulatory authorities. It also requires additional disclosures, including whether the individual has ever been subject to a final order of a state securities commission or similar agency or office; state authority that supervises or examines banks, savings associations, or credit unions; state insurance commission; an appropriate federal banking agency; or the National Credit Union Administration that:

  • bars the individual from association with an entity regulated by such commission, agency, authority or office, or from engaging in the business of securities, insurance, banking, savings association activities, or credit union activities; or
  • constitutes a final order based on violations of laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.

In addition to the disclosures required of a municipal advisory firm regarding its individual associated persons on proposed Form MA, Form MA-I as proposed and adopted requires disclosure of any finding by an SRO that the individual:

  • willfully violated, or is unable to comply with, any provision of the federal securities laws, the Commodity Exchange Act and the rules thereunder, or the rules of the MSRB;
  • willfully aided, abetted, counseled, commanded, induced, or procured the violation of any of these laws or rules; or
  • failed reasonably to supervise another person subject to his or her supervision, with a view to preventing such violations.

Like Form MA, Form MA-I as proposed and adopted also requires disclosure of whether the individual had an authorization to act as an attorney, accountant or federal contractor revoked or suspended.

Item 6 of Form MA-I as proposed and adopted also requires disclosure of whether the individual has been notified in writing that he or she is currently the subject of a regulatory complaint or proceeding that could result in any occurrence of the kind that would trigger any of the disclosure requirements described above relating to regulatory actions, except the latter occurrence pertaining to attorneys, accountants, and federal contractors. The form advises that if the answer is affirmative, the filer must complete a Regulatory Action DRP. [1221]

The DRP for regulatory action disclosure in Form MA-I, as proposed and adopted, requires the filer to provide further details, including: the allegations, which regulatory authority initiated the action, the kind of product involved, and the sanctions sought; the status of the action; the disposition or resolution of the action, the sanctions ordered, and their duration; the registration capacities of the individual that were affected; whether requalification was a condition of any sanction reported, and whether it was by exam, retraining, or other process; the length of time given to requalify; and whether the requalification condition was satisfied. Disclosures required in the Regulatory Action DRP, as proposed, also include details of any monetary sanction imposed, including amount; portion levied against the individual; any amount waived; payment plan; whether such plan was current; date paid; and whether the sanction was a civil or administrative penalty or fine, a monetary penalty other than a fine, disgorgement, or restitution. Revisions made in the Regulatory Action DRP, as adopted, include the following:

  • In the DRP, as proposed, a filer was asked to identify every type of product involved in the action. As adopted, the DRP requires the filer to distinguish between principal product types and other products.
  • As proposed, the DRP asked about any bars and suspensions of the individual from his or her registration capacities. As adopted, the DRP also requires information specific to any injunction that was imposed as a regulatory sanction.
  • In addition to the questions about requalification and exams, as described above, the DRP as adopted asks for a description in narrative form of any examination, re-training, or other process that was required as a condition for the person to re-qualify.

The Commission believes that these additional details will provide regulators, municipal entities, and investors with a more accurate picture of disciplinary history of the individual. [1222]

Disclosure of Investigations [1223]

Item 6 of Form MA-I, as proposed and adopted, asks whether the individual has been notified in writing that he or she is currently the subject of any investigation that could result in a positive answer to any of the questions in either the criminal and regulatory sections of Item 6 described, except the question pertaining to attorneys, accountants, and federal contractors. If the answer is positive, an Investigation DRP must be filed.

The Investigation DRP requires details of any such investigation, including the date the investigation was initiated and whether it was initiated by an SRO, a foreign financial regulatory authority (giving the specific jurisdiction), the Commission, other federal agency, or “other.” The Investigation DRP requires that the full name of the authority that initiated the investigation be specified. Space is provided for the filer to briefly describe the nature of the investigation, if known; whether it was pending or resolved; and details of any resolution. Space for optional comment is also provided to present a brief summary of the circumstances leading to the investigation and its current status or final disposition and/or findings.

The Investigation DRP also asks for similar details regarding a criminal investigation by a federal, military, state, foreign or international authority or court. Although Item 6 requires a DRP for criminal investigations, the DRP, as proposed, did not specifically reference criminal investigations or authorities.

Civil Judicial Action Disclosure

The disclosures required by Form MA-I with respect to certain matters relating to an individual's civil judicial history are the same as disclosures required on Form MA. Thus, a filer is required to disclose on Form MA-I whether the individual:

  • was ever enjoined by a domestic or foreign court in connection with any investment-related or municipal advisor-related activity;
  • was ever found by a domestic or foreign court to be involved in a violation of any investment-related or municipal advisor-related statute or regulation; or
  • ever had an investment-related or municipal advisor-related civil action brought against him or her dismissed, pursuant to a settlement agreement, by a domestic jurisdiction [1224] or foreign financial regulatory authority; or
  • was ever named in any such pending action that could result in a positive answer to the three previous questions.

As discussed in the Proposal, the Commission believes that it is appropriate to seek information regarding investment-related activities as well as municipal advisor-related activities due to the significant similarities that exist between the two advisory functions. Moreover, such information could serve as a basis to institute proceedings to deny registration of a municipal advisor or to impose other sanctions on the municipal advisor's activities. [1225]

A DRP is required for affirmative responses to questions under this item. Specifically, the DRP requires, among other things, information regarding: by whom the court action was initiated; the name of the party initiating the proceeding; information about the relief sought; the date on which the action was filed and notice or process was served; the types of financial products involved; a description of the allegations relating to the civil action; the current status, including whether the action is on appeal and details relating to any such appeal; sanction details; and if the disposition resulted in a fine, disgorgement, restitution or monetary compensation, information relating thereto. The DRP also provides the opportunity for a filer to provide additional comment, including a summary of the circumstances leading to the action and current status.

The Civil Judicial Action DRP, as adopted, has been modified to ask whether the individual is a named defendant in the action for which the DRP is being completed; [1226] indicate, if an order was issued, whether the order is a final order based on violations of any laws or regulations that prohibit fraudulent or deceptive conduct; and indicate whether a condition of any sanction was requalification by examination, retraining, or other process. The Commission believes that these changes generally will add clarity for filers in determining the type of information that must be provided. [1227]

Customer Complaints/Arbitration/Civil Litigation

Form MA does not require a municipal advisory firm to disclose any customer complaints, arbitration matters, and civil litigation concerning natural person municipal advisors. Form MA-I, however, requires disclosure of whether an individual engaged in municipal advisory activities has ever been:

  • the subject of a complaint initiated by a customer, whether written or oral, regarding investment-related or municipal advisor-related matters, which alleged that he or she was involved in fraud, false statements, omissions, theft, embezzlement, wrongful taking of property, bribery, forgery, counterfeiting, extortion, and dishonest, unfair or unethical practices; or
  • the subject of an arbitration or civil litigation initiated by a customer regarding investment-related or municipal advisor-related matters, which alleged that he or she was involved in fraud, false statements, omissions, theft, embezzlement, wrongful taking of property, bribery, forgery, counterfeiting, extortion, and dishonest, unfair or unethical practices.

In the case of a complaint, the filer must indicate whether the complaint is still pending or was settled. In the case of arbitration or civil litigation, the filer must indicate whether the arbitration or litigation is still pending; resulted in an arbitration award or civil judgment against the individual in any amount; or was settled.

A DRP is required for affirmative responses to questions under this item. Specifically, the relevant DRP requires the filer to disclose the customer's name; the customer's state of residence and other states of residence; the employing firm of the individual when the activities occurred that led to the complaint, arbitration, CFTC reparation or civil litigation; and the allegations and a brief summary of events related to the allegations, including the dates when they occurred; the product type; and the alleged compensatory damage amount.

For customer complaints, arbitration, CFTC reparation, or civil litigation in which the individual is not a named party, the DRP requires disclosure of whether the complaint is oral or written, or whether it is an arbitration, CFTC reparation or civil litigation (and the arbitration or reparation forum, docket or case number, and the filing date); whether the complaint, arbitration, CFTC reparation or civil litigation is pending, and if not, the status. The DRP requires disclosure of the status date and the settlement award amount, including the individual's contribution amount.

If the matter involves an arbitration or CFTC reparation and the individual is a named respondent, the DRP requires disclosure of the entity with which the claim was filed; the docket or case number; the date process was served; whether the arbitration of CFTC reparation is pending, and if not pending the form of disposition; the disposition date; and the amount of the monetary award, settlement or reparation (including the individual's contribution).

If the matter involves a civil litigation in which the individual is a defendant, the DRP requires disclosure of the court in which the case was filed; the location of the court; the docket or case number; the date the complaint was served on or received by the individual; whether the litigation is still pending; if not still pending the form of its disposition; the disposition date; the judgment, restitution or settlement amount, including the individual's contribution amount; whether the action is currently on appeal, and if so, the date the appeal was filed, the court in which the appeal was filed, the location of the court, and the docket or case number for the appeal. The DRP also provides for optional additional comment, such as a summary of the circumstances leading to the complaint.

As discussed in the Proposal, these disclosures, too, mirror similar disclosures in Form U4, provide additional information about natural persons engaged in municipal advisory activities that may be useful to municipal entities or obligated persons as clients or prospective clients, and help the Commission prepare for and plan examinations. [1228]

Several revisions have been made to this DRP, as adopted. In the questions relating to settlements, awards, and monetary judgments, the DRP now additionally asks whether any portion of the individual's settlement, award, or monetary judgment amount was waived, and, if so, how much; and whether the final amount was paid in full, and, if so, the date. In the section relating to civil litigation, the DRP now additionally asks whether the individual appealed, and, if so, to which court, its location, and other details. [1229]

Termination Disclosure

Unlike Form MA, Form MA-I requires disclosure regarding the termination of a natural person's employment. Specifically, consistent with Form U4, Form MA-I asks whether the individual ever voluntarily resigned or was discharged or permitted to resign after allegations were made that accused him or her of:

  • violating investment-related or municipal advisor-related statutes, regulations, rules, or industry standards of conduct;
  • fraud or the wrongful taking of property; or
  • failure to supervise in connection with investment-related or municipal advisor-related statutes, regulations, rules or industry standards of conduct.

An affirmative response to the questions described above requires additional information on a related DRP. Specifically, the DRP requires disclosure of the name of the firm, the type of termination (whether discharged, permitted to resign, or voluntary resignation), the termination date, the allegations, and the product types. The DRP also provides for optional additional comment, such as a summary of the circumstances leading to the termination.

As discussed in the Proposal, this disclosure will provide information that will be useful to the Commission in planning and preparing for inspections and examinations. The disclosure also will be useful to the public generally (including municipal entities and obligated persons, as clients or prospective clients). [1230]

Financial Disclosures

Item 6 of Form MA-I, as proposed and as adopted, also requires financial disclosures regarding individuals that are not required to be made on Form MA by municipal advisory firms, generally, regarding their associated persons or by sole proprietors regarding themselves. Specifically, the form asks the filer whether, within the past ten years:

  • the individual has made a compromise with creditors, filed a bankruptcy petition, or been the subject of an involuntary bankruptcy petition;
  • an organization controlled by the individual has made a compromise with creditors, filed a bankruptcy petition, or been the subject of an involuntary bankruptcy petition based upon events that occurred while he or she exercised control over it; or
  • a broker or dealer controlled by the individual has been the subject of an involuntary bankruptcy petition, had a trustee appointed, or had a direct payment procedure initiated under the Securities Investor Protection Act based upon events that occurred while he or she exercised control over it.

In addition, a filer must disclose whether a bonding company ever denied, paid out on, or revoked a bond for the individual. There is no DRP associated with these financial disclosures.

Judgment/Lien Disclosure

Item 6 of Form MA-I also asks whether the individual has any unsatisfied judgments or liens against him or her. An affirmative response requires additional disclosure on a DRP. Specifically, the filer must disclose the amount, holder, and type of the judgment or lien. The form also requires information about the date the judgment or lien was filed, the court in which the action was brought, the name and location of the court, the docket or case number, [1231] whether the judgment or lien is outstanding, and if the judgment or lien is not outstanding, the status date and how the matter was resolved. The DRP also provides for optional comment, such as a brief summary of the circumstances leading to the action. [1232]

As discussed in the Proposal, the Commission believes that the information that is required, which is consistent with that required by Form U4, will be useful for its regulatory purposes, including planning and preparing for inspections and examinations. The Commission also believes that the information will be useful to the public generally (including municipal entities and obligated persons, as clients or prospective clients). [1233]

Other Changes in Form MA-I, as Adopted

Additional Modifications to the DRPs

The Commission has made the following modifications to the DRPs in addition to those discussed above. An instruction has been added at the beginning of all the DRPs, regarding incorporation by reference, to clarify that the filer of Form MA-I may incorporate information either from a DRP that was filed by the firm, or from a DRP filed by another Commission registrant about the individual. This should help filers avoid the inconvenience and burden of completing the additional information.

When a DRP is being filed to remove a previously filed DRP, the filer in each case is asked whether the reason is because the matter was resolved in the individual's favor, or because the DRP was filed in error. [1234] Moreover, as proposed, several of the DRPs asked for the name of the employing firm of the individual when the relevant event occurred only if the firm was a municipal advisory firm. [1235] The Commission has concluded, however, that the name of the individual's employer when the activity occurred can be useful to regulators, municipal entities, and investors regardless of whether the individual was employed specifically by a municipal advisory firm, and is not limiting the requested information to such firms. In the case of a municipal advisory firm employer, however, the DRPs as adopted ask for the municipal advisor registration number of the firm. [1236]

As proposed, the Regulatory and Civil Action DRPs asked the filer to identify the principal product types that were the subject of the activity regarding which the formal action involving the individual was taken. As adopted, they also ask for any other product types. Finally, the adopted versions of the Regulatory and Civil Action DRPs ask for the date on which notice or other process was served if the action being reported on the DRP is still pending.

An Associated Person Who Ceases To Be Engaged in Municipal Advisory Activities

Because Form MA-I, as adopted, is not a registration form, when a natural person associated with a registered municipal advisor ceases to engage in municipal advisory activities on its behalf, Form MA-W—which is a form designed for withdrawal of registration—will not be required. Instead, the change must be reported by the registered municipal advisor that filed the Form MA-I relating to that person. This is accomplished by filing an amendment to the Form MA-I, which must be submitted promptly, like any other amendment.

For this purpose, a filer submitting an amendment to Form MA-I can indicate that the purpose of the amendment is to report that the individual to whom the form relates is no longer an associated person of the municipal advisory firm or no longer engages in municipal advisory activities on its behalf. When submitting an amendment of this kind, the filer must complete only the portion of the form asking for the name of the individual, his or her social security number, and CRD Number if any (Item 1-A) and the Execution Page of the form (Item 7).

Non-Substantive, Technical, and Clarifying Changes

In addition, a number of non-substantive, technical and clarifying changes have been made to Form MA-I, as adopted, to make the form clearer and more user-friendly. These include, where applicable, the same kinds of changes made to Form MA. [1237]

Item 7: Execution of the Form

If Form MA-I is being filed by a municipal advisory firm with respect to a natural person engaged in municipal advisory activities on its behalf, the authorized representative of the firm who signs the Execution Page of Form MA-I must attest to the truth and correctness of the information provided in the form. He or she must also attest that the firm has obtained and retained written consent from the individual that service of any civil action brought by, or notice of any proceeding before, the SEC or any self-regulatory organization in connection with the individual's municipal advisory activities may be given by registered or certified mail to the individual's address given in Item 1 of the firm.

If Form MA-I is being filed by a natural person municipal advisor who is a sole proprietor, by signing the Execution Page of Form MA-I, the filer must represent that the information and statements made in the form are true and correct. He or she must also consent that service of process of any civil action or notice of any proceeding before the Commission or an SRO regarding its municipal advisory activities may be given by registered or certified mail to the address he or she has supplied in Item 1 of the form.

As proposed, Form MA-I also required its signatory to certify that he or she has: (a) Sufficient qualifications, training, experience, and competence to effectively carry out his or her designated functions; (b) met, or within any applicable required timeframes will meet, such standards of training, experience, and competence, and such other qualifications, including testing, for a municipal advisor, required by the Commission, the MSRB or any other relevant SRO; and (c) the necessary understanding of, and ability to comply with, all applicable regulatory obligations.

The Commission received comment letters on the self-certification requirement in Form MA-I from many municipal entities and agencies concerned about the impact of requiring appointed members of public boards to make such certifications. As discussed in Section III.A.1.c.i., the Commission is exempting all members of the governing body of a municipal entity (acting in their capacity as such), including appointed members, from the requirement to register as municipal advisors. Thus, the Commission believes that the concerns of these commenters have been addressed. However, one comment received by the Commission regarding the self-certification requirement in Form MA-I, as proposed, called the requirement “problematic.” [1238]

In view of the change in the nature of Form MA-I, as adopted, including who is required to sign the form, the Commission has decided to eliminate the self-certification requirement in Item 7. Because, under the rules, as adopted, individuals who engage in municipal advisory activities on behalf of a registered firm are exempt from registration, and, with respect to these individuals, the function of Form MA-I is only to provide information, the self-certification requirement is no longer a propos. Moreover, as discussed above, the Commission has determined to remove the self-certification requirement with respect to firms in Form MA. Thus, Form MA-I, as adopted, will no longer require self-certification.

3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated With Registered Municipal Advisors From Registration [1239]

Rule 15Ba1-3, as adopted, exempts certain natural persons from registration with the Commission as a municipal advisor if the natural person is associated with a registered municipal advisor and engages in municipal advisory activities solely on behalf of a registered municipal advisor. This exemption is discussed above in Section III.A.2.a. [1240]

4. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration; Form MA-W

a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration

Proposed Rule 15Ba1-3 provided that notice of withdrawal from registration as a municipal advisor must be filed on Form MA-W, in accordance with the instructions to the form, and set forth other requirements regarding withdrawal of a municipal advisor from registration. The Commission received one comment letter regarding this proposed rule which supported the proposed rule. [1241] The Commission is adopting Rule 15Ba1-4 as it was set forth in proposed Rule 15Ba1-3, with certain minor, technical modifications. [1242] The rule as adopted, however, only applies to municipal advisors registered on Form MA, because the Commission is exempting from registration certain natural persons who are associated persons of a registered municipal advisor and who engage in municipal advisory activities solely on behalf of a registered municipal advisor. [1243]

As with Forms MA and MA-I, Form MA-W must be filed electronically with the Commission. [1244] Form MA-W also constitutes a “report” for purposes of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78 o-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable provisions of the Exchange Act. [1245]

Rule 15Ba1-4 also provides that a notice of withdrawal from registration becomes effective for all matters on the 60thday after the filing of the Form MA-W. It may also become effective within a longer time period to which the municipal advisor consents or which the Commission by order determines as necessary or appropriate in the public interest or for the protection of investors, or within a shorter time if the Commission so determines. [1246]

The rule further provides that if a municipal advisor filed a notice of withdrawal from registration with the Commission at any time subsequent to the date of issuance of a Commission order instituting proceedings pursuant to Section 15B(c) of the Exchange Act [1247] to censure, place limitations on the activities, functions or operations of, or suspend or revoke the registration of the municipal advisor or if, prior to the effective date of the notice of withdrawal, the Commission institutes such a proceeding or a proceeding to impose terms and conditions upon the withdrawal, the notice of withdrawal will not become effective except at the time and upon the terms and conditions as deemed by the Commission as necessary or appropriate in the public interest or for the protection of investors. [1248]

b. Form MA-W

The Commission received one comment letter regarding Form MA-W, which was generally supportive of the form. [1249] As discussed in more detail above, [1250] the Commission is exempting certain natural persons from municipal advisor registration. Accordingly, the Commission is adopting Form MA-W substantially as proposed, but is modifying it solely to remove all references to individual registration of natural persons associated with a municipal advisor and engaged in municipal advisory activities on its behalf and to Form MA-I as an application for registration [1251] and to add an introductory direction to refer to the General Instructions for the forms in the MA series before completing Form MA-W. Form MA-W for municipal advisors is designed to be generally consistent with the requirements of Form ADV-W for investment advisers withdrawing from registration. First, Form MA-W requires a municipal advisor to provide identifying information keyed to the identifying information on, and the SEC file number of, the municipal advisor's Form MA. A municipal advisor is required to provide on Form MA-W the name of a principal or employee of the municipal advisor who is authorized to receive information and respond to questions about the Form MA-W. Contact information for a municipal advisor's outside counsel is insufficient.

A municipal advisor filing to withdraw its registration is required to indicate on Form MA-W whether it has received any pre-paid fees for municipal advisory activities that have not been delivered, including subscription fees for publications, and, if so, to specify the amount. In addition, the withdrawing municipal advisor is required to indicate how much money, if any, it has borrowed from clients and has not repaid. If the municipal advisor responds affirmatively to either question, it is required to disclose on Schedule W2 to Form MA-W the nature and amount of its assets and liabilities and its net worth as of the last day of the month prior to the filing of the Form MA-W.

A municipal advisor that is filing to withdraw its registration is required to indicate on Form MA-W whether it has assigned any municipal advisory contracts to another person that engages in municipal advisory activities, and if so, the municipal advisor is required to list in Section 4 of Schedule W1 to Form MA-W each person to whom it has assigned any such municipal advisory contracts and provide the requested information.

A municipal advisor filing to withdraw its registration also is required to indicate whether there are any unsatisfied judgments or liens against it. If the municipal advisor responds affirmatively that it owes money or has any judgments or liens against it, it is required to disclose on Schedule W2 to Form MA-W the nature and amount of its assets and liabilities and its net worth as of the last day of the month prior to the filing of the Form MA-W.

As discussed in the Proposal, the Commission believes that requiring such information from a withdrawing municipal advisor is appropriate for the protection of investors and those persons who do business with municipal advisors. [1252] The filing of Form MA-W and the information contained in the form will provide notice that the municipal advisor is no longer registered and, therefore, is not able to engage in municipal advisory activities without violating federal securities laws. [1253] Additionally, the information provided will alert clients and prospective clients to a municipal advisor's financial stability if the municipal advisor received fees from clients for services not yet delivered, borrowed any money from clients that has not been repaid, or has any unsatisfied judgments or liens at the time of withdrawal because the municipal advisor would be required to disclose the nature and amount of its assets and liabilities and net worth on Schedule W2. This information also will help regulators' investigative and enforcement efforts. Additionally, as noted in the Proposal, an investment adviser that withdraws from registration must supply similar information on its Form ADV-W. [1254]

As discussed below, Rule 15Ba1-8(c), as adopted, requires a municipal advisor withdrawing from registration to preserve its books and records. [1255] Therefore, a municipal advisor filing a Form MA-W is required to list the name and address of each person who has or will have custody or possession of the municipal advisor's books and records and the location at which such books and records are or will be kept. In addition, as discussed above, a withdrawing municipal advisor also is required to identify on Schedule W1 each person to whom it has assigned any of its contracts. As discussed in the Proposal, the Commission believes that such a requirement—which also exists for investment advisers—is important for the protection of participants in the municipal securities markets. [1256]

The signatory to the Form MA-W is required to certify, under penalty of perjury, that the information and statements made in the Form MA-W, including any exhibits or other information submitted, are true. If the form is being filed on behalf of a municipal advisor that is not a sole proprietor, [1257] the signature constitutes such certification by both the municipal advisor and the signatory. Similarly, the signatory is required to certify that the municipal advisor's books and records will be preserved and available for inspection as required by law. The signatory is also required to authorize any person having custody or possession of these books and records to make them available to authorized regulatory representatives.

The certification includes a statement that all information previously submitted on the municipal advisor's most recent Form MA (and Form MA-I for sole proprietors) is accurate and complete as of the date the Form MA-W was signed. It also includes an understanding by the signatory that if any information contained in items on the Form MA-W is different from the information contained on the most recent Form MA (and MA-I for sole proprietors), the information on the Form MA-W will replace the corresponding entry on the municipal advisor's Form MA (and/or MA-I for sole proprietors). As discussed in the Proposal, the Commission believes that the certification requirement should serve as an effective means to assure that the information supplied in Form MA-W is correct. [1258]

5. Rule 15Ba1-5: Amendments to Form MA and Form MA-I

Proposed Rule 15Ba1-4 set forth requirements regarding when amendments to Form MA and Form MA-I are required and how such amendments must be filed. The Commission received one comment letter regarding this proposed rule which supported the proposed rule. [1259] The Commission is adopting Rule 15Ba1-5 substantially as proposed in Rule 15Ba1-4, but is modifying the rule primarily to be consistent with the exemption of certain natural persons from municipal advisor registration that the Commission is adopting in Rule 15Ba1-3. Specifically, the Commission's modifications to Rule 15Ba1-5 are limited to removing or revising rule text to reflect that natural persons who are associated with a municipal advisor and engaged in municipal advisory activities on its behalf are not required to register as municipal advisors on Form MA and that Form MA-I is not an application for registration and to update citations in the rule text. Therefore, the requirement in Rule 15Ba1-5 to amend promptly Form MA and Form MA-I applies exclusively to registered municipal advisors since they will be responsible for amendments to their own Form MA and amendments to Form MA-I for each natural person who is a person associated with the municipal advisor and engaged in municipal advisory activities on its behalf. [1260]

Rule 15Ba1-5(a) requires that a registered municipal advisor must promptly amend the information in its Form MA: (1) At least annually, within 90 days of the end of the municipal advisor's fiscal year, or of the end of the calendar year for a sole proprietor; [1261] and (2) more frequently than annually if required by the General Instructions. [1262]

In addition to the annual update amendment to Form MA, General Instruction 8 specifies that a municipal advisory firm must amend its Form MA promptly whenever a material event has occurred that changes the information provided in the form. General Instruction 8 further states that, for purposes of Form MA, a material event will be deemed to have occurred if information provided in response to Item 1 (Identifying Information), Item 2 (Form of Organization), or Item 9 (Disclosure Information) becomes inaccurate in any way; or if information provided in response to Item 3 (Successions), Item 7 (Participation or Interest of Applicant, or of Associated Persons of Applicant in Municipal Advisory Client or Solicitee Transactions), or Item 8 (Owners, Officers and Other Control Persons) becomes materially inaccurate. [1263]

In addition, General Instruction 8 provides that a non-resident municipal advisory firm must promptly file an amendment to Form MA to attach an updated opinion of counsel after any changes in the legal or regulatory framework or the firm's physical facilities that would impact its ability, as a matter of law, to provide the Commission with access to its books and records or to inspect and examine the municipal advisory firm. [1264] As the Commission stated in the Proposal, [1265] an amendment in such case should include a revised opinion of counsel describing how, as a matter of law, the municipal advisor will continue to meet its obligations to provide the Commission with the required access to the municipal advisor's books and records and to be subject to the Commission's onsite [1266] inspection and examination under the new regulatory regime. If a registered non-resident municipal advisory firm becomes unable to comply with this requirement, then this may be a basis for the Commission to institute proceedings to revoke the municipal advisor's registration.

Regarding amendments to Form MA-I, Rule 15Ba1-5(b) provides that a registered municipal advisor must promptly amend the information contained in Form MA-I by filing an amended Form MA-I whenever the information contained in the Form MA-I becomes inaccurate for any reason. As discussed above, registered municipal advisors will be responsible for filing and amending Form MA-I for each natural person associated with the municipal advisor and engaged in municipal advisory activities on its behalf. [1267] As discussed in the Proposal, unlike municipal advisors filing Form MA, who must file annual updating amendments, the Commission is not requiring municipal advisory firms to update annually the Forms MA-I for each natural person who is associated with the municipal advisor and engaged in municipal advisory activities on its behalf. [1268] The Commission believes that the additional gains obtained by requiring the confirmation of an annual update would impose unnecessary burdens on municipal advisors and that the standard adopted in Rule 15Ba1-5(b) strikes an appropriate balance between maintaining current information regarding natural persons and minimizing the burden on municipal advisors to provide this information.

All amendments to Form MA and Form MA-I are required to be filed electronically with the Commission. [1269] In addition, amendments to Form MA and Form MA-I constitute “reports” for purposes of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78 o-4(c), 78q(a), 78r(a), 78ff(a)) and other applicable provisions of the Exchange Act. [1270] As discussed in the Proposal, these rules are consistent with the Commission's requirements for other registrants (e.g., national securities exchanges, securities information processors (“SIPs”), broker-dealers) to file updated and annual amendments with the Commission. [1271] The Commission believes that such amendments are important for obtaining updated information for registered municipal advisory firms and their associated natural persons engaged in municipal advisory activities on the firms' behalf so that the Commission can assess whether such persons continue to be in compliance with the federal securities laws and the rules and regulations thereunder. [1272] Obtaining updated information will also assist the Commission in its inspection and examination of municipal advisors and better inform the MSRB's regulation of municipal advisors. In addition, the Commission believes it is important for municipal entities and obligated persons, as well as the public generally, to have access to current information regarding advisors registered with the Commission.

6. Rule 15Ba1-6: Consent To Service of Process To Be Filed by Non-Resident Registered Municipal Advisors; Legal Opinion To Be Provided by Non-Resident Municipal Advisors; and Form MA-NR

a. Rule 15Ba1-6: Consent To Service of Process To Be Filed by Non-Resident Registered Municipal Advisors; Legal Opinion To Be Provided by Non-Resident Municipal Advisors

Proposed Rule 15Ba1-5 required each non-resident [1273] municipal advisor and each non-resident general partner and managing agent [1274] of a municipal advisor to furnish to the Commission, at the time of filing Form MA or Form MA-I, a written irrevocable consent and power of attorney on Form MA-NR to appoint an agent in the United States upon whom may be served any process, pleadings, or other papers in any action brought against the non-resident municipal advisor, general partner or managing agent. [1275] Proposed Rule 15Ba1-5 also specified circumstances when each non-resident municipal advisor, general partner and managing agent would be required to amend Form MA-NR. In addition, proposed Rule 15Ba1-5 required that each non-resident municipal advisor, other than a natural person, provide an opinion of counsel that the municipal advisor can provide the Commission with access to the advisor's books and records and submit to onsite inspection and examination by the Commission. The Commission received one comment letter regarding this proposed rule which supported the proposed rule. [1276]

While adopted Rule 15Ba1-6 retains the same purpose and focus of the proposed rule, the Commission is adopting Rule 15Ba1-6 with certain modifications to reflect the Commission's decision to exempt certain natural persons from municipal advisor registration in Rule 15Ba1-3, as adopted, and to clarify and update the rule text as described below. First, the Commission is removing certain references that contemplate individual registration on Form MA-I of natural persons associated persons with a municipal advisor and is revising the rule text to clarify that a municipal advisor is required to file a Form MA-NR for each of its non-resident general partners, managing agents, and associated natural persons engaged in municipal advisor activities on the municipal advisor's behalf. Second, since the term registered municipal advisor no longer includes natural persons who are associated with a municipal advisor and engaged in municipal advisory activity on its behalf, the Commission is adding new language to Rule 15Ba1-6 to address such persons. For example, Rule 15Ba1-6(a)(2) requires a registered municipal advisor, at the time of the Form MA-I filing, to file with the Commission a Form MA-NR for each non-resident natural person associated with a municipal advisor and engaged in municipal advisory activities on its behalf. [1277] Third, the Commission is modifying the rule to require registered municipal advisors to file a new Form MA-NR in the instances where the proposed rule required an amendment because, unlike Form MA and Form MA-I, Form MA-NR is not completed online and signed electronically. [1278] Form MA-NR must be printed out and signed manually and a scanned copy of the signed and notarized form must be attached as a PDF file to the Form MA or Form MA-I being submitted. [1279] Finally, the Commission made other clarifying revisions to and updated the citations in the rule text. [1280]

As discussed in the Proposal, [1281] the provisions in Rule 15Ba1-6, as adopted, are designed to allow the Commission and others to provide service of process to a registered non-resident municipal advisor, a non-resident general partner or managing agent of a registered municipal advisor, and non-resident natural person associated with a municipal advisor and engaged in municipal advisory activities on its behalf by requiring the municipal advisor to file a written irrevocable consent and power of attorney on Form MA-NR to appoint an agent in the United States for service of process. [1282] Rule 15Ba1-6 also requires a municipal advisor to file promptly a new Form MA-NR to reflect any change to the name or address of the agent for service of process for itself if the municipal advisor is a non-resident and for each of a municipal advisor's non-resident general partners, managing agents, or natural persons associated with the municipal advisor and engaged in municipal advisory activities on its behalf. [1283] The rule further requires a registered non-resident municipal advisor to appoint promptly a successor agent and file a new Form MA-NR if the non-resident municipal advisor discharges its agent or if its agent becomes unwilling or unable to accept service on behalf of the non-resident municipal advisor. [1284] Similarly, Rule 15Ba1-6(c)(2) provides that each registered municipal advisor must require each of its non-resident general partners or non-resident managing agents, or non-resident natural persons associated with the municipal advisor and engaged in municipal advisory activities on its behalf to appoint promptly a successor agent and the registered municipal advisor must file a new Form MA-NR if such non-resident general partner, managing agent, or associated natural person discharges the agent or if the agent is unwilling or unable to accept service on behalf of such person. Rule 15Ba1-6 also requires each non-resident municipal advisor applying for registration to provide an opinion of counsel on Form MA that the municipal advisor can, as a matter of law, provide the Commission with access to the municipal advisor's books and records and that the municipal advisor can, as a matter of law, submit to inspection and examination by the Commission. [1285] Finally, similar to the other forms in the MA series, Form MA-NR must be filed electronically. [1286]

b. Form MA-NR

The Commission received one comment letter on proposed Form MA-NR, which generally supported Form MA-NR. [1287] While Form MA-NR, as adopted, retains the same purpose and focus of the proposed Form MA-NR, the Commission is adopting Form MA-NR with certain modifications. First, the Commission has provided more detailed instructions to improve the form's readability and ease of use. For example, the Commission included an introductory direction to refer to the General Instructions for the forms in the MA series before completing Form MA-NR, a paragraph explaining the purpose of the form, and a specific instruction providing technical guidance for how to attach Form MA-NR to Form MA or Form MA-I. Second, the Commission has expanded its discussion of certain concepts in Form MA-NR so that persons executing the form have a clearer and more complete understanding of the information they are required to provide. For example, Section A of Form MA-NR, as adopted, instructs the person executing the form to “[i]dentify the agent for service of process for the non-resident municipal advisor, for the non-resident general partner or managing agent of a municipal advisor, or for the non-resident natural person associated with the municipal advisor and engaged in municipal advisory activities on its behalf. Fill in all lines.” [1288] The Commission expanded the discussions in several other parts of Form MA-NR, such as the description relating to the designation and appointment of the agent for service of process immediately following the agent's address and phone number in Section A.2, including language addressing the effect on partnerships of the irrevocable power of attorney appointment and consent to service of process, the designator's certification, and the method by which the designator discloses the capacity in which he or she is signing the form. Third, the Commission has included Section B and Section C in Form MA-NR, as adopted. Section B requires the municipal advisor to obtain the signature of the United States person identified in Section A as the agent for service of process to demonstrate that this person has accepted the designation and appointment as the agent for service of process. This certification that the agent for service of process has accepted the designation and appointment is necessary to ensure effective service of process upon a non-resident municipal advisor, non-resident general partner or managing agent of a municipal advisor, or non-resident natural person associated with the municipal advisor and engaged in municipal advisory activities on its behalf. Additionally, the Commission believes that the additional burden imposed on municipal advisors to obtain the signature of the U.S. agent for service of process would be minimal. Section C requires the person executing the form to disclose whether any signature is pursuant to a written authorization and whether there is a written contractual agreement or other written document evidencing the designation and appointment of the named agent for service of process and/or the agent's acceptance, and if so, to identify the document and provide an accurate and complete copy with submission of the Form MA or Form MA-I.

Pursuant to General Instruction 2, and consistent with the rule, every non-resident municipal advisor must file Form MA-NR in connection with the municipal advisor's initial application for registration on Form MA and file a new Form MA-NR when required. [1289] In addition, regardless of whether a municipal advisory firm is a resident of the United States, the firm must file a separately completed and executed Form MA-NR for (i) non-resident general partners and managing agents of the firm, and (ii) every non-resident natural person associated with the firm and engaged in municipal advisory activities on the firm's behalf. [1290] Form MA-NR for general partners and managing agents is filed by the firm together with the firm's Form MA. [1291] Form MA-NR for natural persons associated with the firm and engaged in municipal advisory activities on the firm's behalf is filed by the firm together with the Form MA-I relating to the natural person associated with the firm. [1292]

7. Rule 15Ba1-7: Registration of Successor to Municipal Advisor

Proposed Rule 15Ba1-6 was designed to govern the registration of a successor to a registered municipal advisor. [1293] The rule is substantially similar to Rule 15b1-3 under the Exchange Act, which governs the registration of a successor to a registered broker-dealer. [1294] The Commission received no comments on the proposed Rule 15Ba1-6 and is adopting the rule as Rule 15Ba1-7 without modification.

Succession by Application

Rule 15Ba1-7(a) provides that in the event that a municipal advisor succeeds to and continues the business of a municipal advisor registered pursuant to Exchange Act Section 15B(a), the registration of the predecessor will be deemed to remain effective as the registration of the successor if the successor, within 30 days after the succession, files an application for registration on Form MA and the predecessor files a notice of withdrawal from registration with the Commission on Form MA-W. The rule further provides that the registration of the predecessor municipal advisor will cease to be effective as the registration of the successor municipal advisor 45 days after the application for registration on Form MA is filed by the successor. [1295] In other words, the 45-day period will not begin to run until a complete Form MA has been filed by the successor with the Commission. This 45-day period is consistent with Exchange Act Section 15B(a)(2), pursuant to which the Commission has 45 days to grant a registration or institute proceedings to determine if a registration should be denied. [1296]

Succession by Amendment

Rule 15Ba1-7(b) provides that, notwithstanding Rule 15Ba1-7(a), if a municipal advisor succeeds to and continues the business of a registered predecessor municipal advisor, and the succession is based solely on a change in the predecessor's date or state of incorporation, form of organization, or composition of a partnership, the successor may, within 30 days after the succession, amend the registration of the predecessor municipal advisor on Form MA to reflect these changes. Such an amendment will be deemed an application for registration filed by the predecessor and adopted by the successor.

In all three types of successions specified in Rule 15Ba1-7(b) (change in the date or state of incorporation, change in form of organization, and change in composition of a partnership), the predecessor must cease operating as a municipal advisor. As stated in the Proposal, the Commission believes that it is appropriate to allow a successor to file an amendment to the predecessor's Form MA in these types of successions because such successions do not typically result in a change of control of the municipal advisor. [1297]

8. General Instructions and Glossary

The Commission proposed a set of instructions, which includes general instructions for proper completion and submission of Forms MA, MA-I, MA-W, and MA-NR (“General Instructions”), [1298] as well as specific instructions relating to each of the forms individually, as applicable. A glossary of terms (“Glossary”) is included at the end of the General Instructions to help applicants complete the forms. As discussed in the Proposal, the definitions in the Glossary generally are derived from the terms in Exchange Act Section 15B(e), [1299] the definitions in Rule 15Ba1-1, [1300] and Form ADV. [1301] For ease of reference, the Commission proposed one Glossary to define terms that may appear in any or all of the forms. All terms that are defined or described in the Glossary appear in the forms in italics.

The Commission did not receive any comments on the General Instructions and Glossary and is adopting the General Instructions and Glossary generally as proposed. However, some revisions have been made to clarify or modify instructions and definitions or to provide additional guidance, as discussed more fully below. In particular, the instructions are being revised to reflect that Form MA-I, as adopted, will not serve as a registration form and that municipal advisory firms, rather than natural persons (other than sole proprietors), have the obligation to file and complete Form MA-I. In addition, some sections of the General Instructions have been reorganized to enhance their readability, three new instructions have been added, additional defined terms have been introduced and included in the Glossary, and one term has been removed from the Glossary.

General Instruction 1, as proposed, directed applicants to the Commission's Web site for additional information about the Commission's rules regarding municipal advisors and the Exchange Act. General Instruction 1, as adopted, notes that a comprehensive explanation of the form requirements is provided in this release.

General Instruction 2, as proposed, discussed who should file Form MA and Form MA-I and explained that these forms must be used to register with the Commission and to amend previously submitted Forms MA and MA-I. The instruction also discussed the responsibility of sole proprietors to file both forms. General Instruction 2, as proposed, further included information regarding voluntary registration for certain individuals; the requirement that a Form MA-NR must be submitted for municipal advisors and general partners and managing agents of municipal advisors that are not residents of the United States; and the requirement that a municipal advisor that is no longer required to be registered must file Form MA-W.

As adopted, General Instruction 2 has been revised for clarity and now also provides more details about the use of Form MA. For example, it now notes the requirement for a municipal advisor that registers on Form MA to submit an annual update of that form. [1302]

General Instruction 2 has been revised to reflect the fact that Form MA-I is no longer a registration form. It explains that municipal advisory firms must complete and file Form MA-I on behalf of natural persons associated with the firm and engaged in municipal advisory activities on behalf of the firm, including employees of the firm. In addition, General Instruction 2 notes that independent contractors are included in the definition of “employee” of a municipal advisor for purposes of a firm's obligation to complete and file Form MA-I. [1303] The instruction explains that Form MA-I is also used to amend a previously submitted Form MA-I.

With regard to Form MA-NR, General Instruction 2 now more clearly indicates that every municipal advisory firm must file with the firm's Form MA a separately completed and executed Form MA-NR for every general partner and/or managing agent of a firm that is a non-resident. In addition, the instruction has been revised to indicate that municipal advisory firms must also file Form MA-NR for every non-resident natural person associated with the firm and engaged in municipal advisory activities on the firm's behalf together with the Form MA-I related to the person. General Instruction 2 indicates that firms have an obligation to file Form MA-NR in these circumstances, regardless of whether the firm itself is domiciled in the United States or is a non-resident filing a Form MA-NR on its own behalf. In addition, General Instruction 2 clarifies that a Form MA-NR for a non-resident general partner or managing agent of a municipal advisor must be filed with the Form MA of the municipal advisor. The instruction, as adopted, also explains that, unlike the other forms in the Form MA series, which are completed online and signed electronically, Form MA-NR must be printed out and signed manually by both the non-resident and the person designated as agent for service of process. Each of the signatures must be separately notarized, and a scanned copy of the signed and notarized form must then be attached as a PDF file to the electronically-completed Form MA or Form MA-I. To emphasize the importance of submitting a Form MA-NR, where required, General Instruction 2, as adopted, includes a warning that failure to attach a signed and notarized Form MA-NR for a non-resident municipal advisor, any non-resident general partner or managing agent of a municipal advisory firm, or non-resident natural person associated with a municipal advisory firm who engages in municipal advisory activities on behalf of the firm may delay Commission consideration of the municipal advisor's application for registration.

General Instruction 2 indicates that Form MA-W does not need to be completed when a natural person with respect to whom a municipal advisory firm filed Form MA-I is no longer associated with the firm or no longer engaged in municipal advisory activities on behalf of the firm. The instruction now explains that the firm must indicate this change by filing an amendment to Form MA-I.

The proposed instructions in General Instruction 2 regarding voluntary registration as a municipal advisor have been deleted, as the purpose for which this option was created is no longer relevant. [1304]

General Instruction 3, as proposed, instructed applicants with respect to the organization of Form MA (for example, that Form MA also includes Schedules A, B, C, and D, as well as Criminal Action, Regulatory Action, and Civil Judicial Action DRPs) and made clear that an applicant must complete all items in Form MA. General Instruction 3 is being adopted substantially as proposed, with only minor revisions, including an explanation that Form MA includes an “Execution Page” where the form is signed.

General Instruction 4, as proposed, provided comparable instructions with respect to the organization and completion of Form MA-I and the schedules and the DRPs required by that form. General Instruction 4 is being revised to state that Form MA-I asks questions about sole proprietors and natural persons associated with a municipal advisory firm and engaged in municipal advisory activities on behalf of the firm, and to reflect the fact that Form MA-I, as adopted, is not a registration form.

General Instructions 5-7 are being adopted substantially as proposed, with revisions to reflect the fact that municipal advisory firms, not natural persons associated with the firms and engaged in municipal advisory activities on behalf of the firms, must sign and file Form MA-I. However, the order of these instructions has been rearranged in their adopted version for purposes of clarity.

First, General Instruction 5 (in the order as adopted) sets forth who must sign Form MA or MA-I. General Instruction 5 explains that such person will be a sole proprietor (in the case of a sole proprietorship), a general partner (in the case of a partnership), an authorized principal (in the case of a corporation), and, for all others, an authorized individual who participates in managing or directing the municipal advisor's affairs. [1305] It further makes clear that in all cases the signature should be a typed name. Next, General Instruction 6 makes clear where Form MA must be signed, explaining that domestic municipal advisors are required to execute the Domestic Execution Page to Form MA, while non-resident municipal advisors are required to execute the Non-Resident Municipal Advisor Execution Page. [1306] General Instruction 7 provides that a municipal advisory firm signs Item 7 of Form MA-I.

General Instructions 8 and 9 discuss when to amend and/or update Forms MA and MA-I respectively, as discussed above. [1307] General Instruction 8 (which pertains to Form MA), has been adopted substantially as proposed, but has been revised to distinguish more clearly between an amendment and an annual update. To clarify how amendments and updates will work in the electronic filing system, the instruction also now explains that each time a firm accesses its Form MA after its initial filing of the form, the information from the firm's most recent previous filing will appear. Only the information that has changed will need to be amended; the applicant will not need to complete the entire form again. The statement in General Instruction 8 regarding the requirement for a non-resident municipal advisor to amend its form and attach an updated opinion of counsel has been revised to more accurately reflect the required content of the opinion of counsel as stated on Form MA. [1308] General Instruction 9, as proposed, concerned when Form MA-I (for natural person municipal advisors) needs “to be updated.” The instruction has been revised in its adopted form to state generally that Form MA-I must “be amended” whenever information previously provided on the form becomes inaccurate. [1309]

General Instruction 10, as proposed, provided that an applicant must complete and file the forms electronically. As adopted, General Instruction 10 provides that a municipal advisor must complete and submit the relevant form, including any required attachments, electronically. General Instruction 10 reflects the change to Rule 15Ba1-2(c), as adopted, [1310] that Form MA is considered filed upon submission of a completed Form MA, together with all additional required documents, including all required filings of Form MA-I (17 CFR 249.1310), to EDGAR. General Instruction 10 also explains that when a municipal advisor's submitted Form MA is accepted by the Commission, the municipal advisor will receive an SEC file number. General Instruction 11 is being adopted to provide more specific information about how to electronically file the forms in the Form MA series and, specifically, how to obtain access to EDGAR to do so. [1311]

A new General Instruction 12 has been added to the General Instructions, as adopted, to clarify what a municipal advisor (or, in the case of a firm, its authorized representative) represents by signing and executing the form as a whole. [1312] General Instruction 12 explains that, by signing the Execution Page of Form MA, the authorized signatory of a domestic municipal advisory firm is appointing the Secretary of State or other legally designated officer of the state in which the firm maintains its principal office and place of business as the firm's agent to receive service of process. [1313] The signatory is also attesting to the truth and correctness of the information provided in the form and declaring that the firm's books and records will be preserved and available for inspection and that any person having custody of the books and records is authorized to make them available to federal regulators.

General Instruction 12 further explains that a signatory on behalf of a non-resident municipal advisory firm must use the version of the Execution Page of Form MA that is specifically required for non-resident firms. Besides attesting to the truth and correctness of the information provided on the form and making the same representations as a U.S. firm regarding books and records, the signatory on behalf of the firm is agreeing to provide, at the firm's own expense, current, correct, and complete copies of its books and records to the SEC upon request. The instruction explains that a non-resident firm must designate an agent for service of process on a separate form, Form MA-NR.

General Instruction 12 explains that an authorized signatory of a domestic municipal advisory firm filing Form MA-I with respect to a natural person who is associated with the firm and engaged in municipal advisory activities on behalf of the firm, by signing the Execution Page of Form MA-I, is attesting to the truth and correctness of the information provided in the form. The instruction also explains that the authorized signatory is attesting that the firm has obtained and retained written consent from the natural person associated with the firm that service of any civil action brought by, or notice of any proceeding before, the SEC or any SRO in connection with the individual's municipal advisory activities may be given by registered or certified mail to the individual's address provided in Item 1 of the form.

General Instruction 12 further explains that by signing the Execution Page of Form MA-I, a sole proprietor filing Form MA-I is consenting that service of process may be given by registered or certified mail to the address the sole proprietor has supplied in Item 1 of the form and is also attesting to the truth and correctness of the information he or she has provided in the form.

General Instruction 13, as adopted, (General Instruction 14 as proposed) discusses the requirement for a non-resident municipal advisory firm to attach a legal opinion to its Form MA that the municipal advisor can, as a matter of law, provide the Commission with access to its books and records and that the municipal advisor can, as a matter of law, submit to inspection and examination by the Commission. [1314] As adopted, General Instruction 13 reflects the fact that the opinion of counsel that non-residents must file no longer needs to state that the municipal advisor can submit to “onsite” inspection and examination. [1315]

The Commission has also added new General Instruction 14 to list together in one place all the circumstances in which additional documents must be attached to a Form MA or Form MA-I. The list of such documents does not include any new requirements that were not included in the Proposal. General Instruction 14 has been added for purposes of clarity and convenience. The required documents enumerated include: (1) any documents relating to criminal actions, as specified in the Criminal Action DRPs of Form MA and Form MA-I, and any other supporting documentation; (2) a manually-signed Form MA-NR for each non-resident for whom such form is required; [1316] (3) any written document (e.g., board resolution or power of attorney) authorizing a signatory to sign a Form MA-NR; and (4) any written contractual agreements relating to Form MA-NR; and (5) the required opinion of counsel for non-resident municipal advisory firms.

The Commission has added new General Instruction 15 to provide clarity with respect to filing deadlines. General Instruction 15 provides that if the deadline for submitting an initial filing, annual update, or amendment to a form occurs on a Saturday, Sunday, or holiday on which the Commission is not open for business, then the deadline shall be the next business day.

The General Instructions also provide some instructions and explanations specific to certain items in Form MA and Form MA-I. [1317] In addition, the General Instructions provide some instructions and explanations specific to Form MA-NR. Specific Instruction 1 for Form MA, as adopted, explains that a municipal advisor that is not currently registered as a municipal advisor and has taken over the business of another municipal advisor or was registered as a municipal advisor but has changed its structure or legal status will be a new organization with registration obligations under the Exchange Act. [1318] It further explains that an applicant not registered with the SEC as a municipal advisor that is acquiring or assuming substantially all of the assets and liabilities of the advisory business of a registered municipal advisor will be required to file a new application for registration on Form MA within 30 calendar days after the succession. The instruction also provides that, once the new registration is effective, Form MA-W (as described above) must be filed to withdraw the registration of the acquired municipal advisor. The instruction also explains that, if a new municipal advisor is formed solely as a result of a change in the form of organization or in the composition of a partnership or the date or the state of incorporation, and there has been no practical change in control or management, the applicant will be permitted to amend the existing registration to reflect the changes by filing an amendment within 30 calendar days after the change or reorganization.

Specific Instruction 2 for Form MA is being adopted substantially as proposed and has been revised only for clarity and to correct certain citations that have changed. The instruction provides guidance for newly-formed municipal advisors regarding how to respond to several questions in Item 4 of Form MA (described above) that may be difficult to answer when the applicant for registration has not been in existence for a significant amount of time. The instruction advises that, for a newly-formed municipal advisor, responses should reflect the applicant's current municipal advisory activities (i.e., its activities at the time of filing, with certain exceptions). With respect to specified questions regarding the applicant's compensation arrangements, the instructions provide that the applicant base its responses on the types of compensation it expects to accept. Further, with respect to its business activities relating to municipal securities, the applicant is instructed to base its responses on the types of municipal advisory activities in which it expects to engage during the next year.

Specific Instruction 3 for Form MA is being adopted substantially as proposed, with non-substantive revisions. The instruction explains that Schedule D is to be completed if any response to Form MA requires further explanation, or if the applicant wishes to provide additional information.

The Specific Instructions for Certain Items in Form MA-I, as adopted, have been revised to reflect the fact Form MA-I is not a registration form and that municipal advisory firms, rather than natural persons (other than sole proprietors), have the obligation to complete and file Form MA-I. Specific Instruction 1 for Form MA-I explains that, in Item 1 of Form MA-I, the municipal advisory firm must enter the individual's CRD Number (if assigned), the individual's social security number, [1319] and the addresses of all offices at which the individual is or will be physically located or from which the individual is or will be supervised, even if the individual does not work at that location. [1320]

Specific Instruction 2 for Form MA-I is being adopted substantially as proposed, with revisions made for clarity. The instruction emphasizes that, for purposes of completing Item 2 to Form MA-I, the firm must enter all the other names that the individual is using, has used, is known or has been known by, other than the individual's legal name, since the age of 18, which includes nicknames, aliases, and names used before and after marriage.

Specific Instruction 3 for Form MA-I is being adopted substantially as proposed, but expanded with more information. The instruction explains that, for purposes of Item 3, with respect to the individual's residential history for the past 5 years, post office boxes may not be used to complete the response and the firm may not leave any gaps in the individual's residential history greater than three months. As adopted, this instruction also includes the statement: “This information is needed for regulatory purposes. However, the version of completed Form MA-I that will be available for viewing by the public will not show the private residential addresses that you enter.”

Specific Instruction 4 for Form MA-I is being adopted substantially as proposed, with an added clarification. The instruction provides that, with respect to Item 4 of Form MA-I, the individual's employment history for the past 10 years must be provided with no gaps greater than three months; that the history should account for full-time and part-time employment, self-employment, military service and homemaking; and that unemployment, full-time education, extended travel, and other similar statuses should be included. The added clarification explains that such statuses should be entered on the line provided for “Name of Municipal Advisor or Company.”

Specific Instruction 5 for Form MA-I, regarding Item 5 of Form MA-I (“Other Business”), has been revised in its adopted version. Instead of restating, as proposed, some of the information requests specified in Item 5, the instruction explains that other businesses in which the individual “is engaged” is intended to capture such engagements as a proprietor, partner, officer, director, or employee (including independent contractor, trustee, agent or otherwise). As adopted, the instruction also informs firms that if the number of hours per week that individuals devote to the other business varies, the firms should provide an average.

Specific Instruction 6 for Form MA-I, regarding Item 6 of Form MA-I, is being adopted as proposed. The instruction advises firms that affirmative responses to certain disclosure questions in the form could make an individual subject to a statutory disqualification.

Specific Instruction 7 for Form MA-I is being adopted as proposed, with an added reminder for non-residents. The instruction indicates that, as with Form MA, the form is to be signed (in Item 7 of Form MA-I) by typing a signature in the designated field and makes clear that, by typing a name, the signatory acknowledges and represents that the entry constitutes in every way, use, or aspect, his or her legally binding signature. The added reminder advises the firm that if the individual is a non-resident, the firm must attach a manually-signed Form MA-NR to the form.

The General Instructions contain a new section called “General Instructions to Form MA-NR” that consists of instructions and explanations specific to Form MA-NR. General Instruction 1 to Form MA-NR repeats the information in General Instruction 2, discussed above, regarding when Form MA-NR must be filed.

General Instruction 2 to Form MA-NR describes the circumstances in which more than one Form MA-NR must be filed by a municipal advisory firm. For example, the instruction states that a non-resident municipal advisory firm filing a Form MA for itself would also need to file Form MA-NR for each of its non-resident general partners and managing agents, even if a Form MA-NR had been previously filed by another municipal advisor for the general partner or managing agent. In addition, a firm filing Form MA-I must attach Form MA-NR for every non-resident natural person associated with the firm and engaged in municipal activities on the firm's behalf.

General Instruction 3 to Form MA-NR describes when a Form MA-NR must be filed at times other than when a municipal advisor submits its initial application for registration. The instruction explains that a registered municipal advisory firm must file a Form MA-NR within 30 days of the firm becoming a non-resident. The same applies when a general partner or managing agent of the municipal advisory firm becomes a non-resident, or a non-resident becomes a general partner or managing agent of the firm after the firm's initial application for registration. In such cases, the municipal advisor must file an amendment to Form MA with the new Form MA-NR attached. The instruction explains that a municipal advisory firm must also file Form MA-NR with Form MA-I if, after the firm's initial registration, a non-resident natural person becomes associated with the firm and engages in municipal advisory activities on the firm's behalf. In addition, a firm must file Form MA-NR if a natural person associated with the firm and engaged in municipal advisory activities on behalf of the firm becomes a non-resident after the firm has filed Form MA-I relating to that individual. The firm must file Form MA-NR within 30 days of the individual becoming a non-resident. [1321]

General Instruction 4 to Form MA-NR describes when a new Form MA-NR must be filed. The instruction indicates that a new Form MA-NR must be filed promptly if a previously-filed Form MA-NR becomes invalid or inaccurate. [1322] This includes any change to the name or address of the non-resident municipal advisory firm, general partner, managing agent, or natural person associated with the firm and engaged in municipal advisory activities on behalf of the firm, or any change to the name or address of the agent of service of process of such non-resident, to which the previously-filed Form MA-NR relates. The instruction explains that a non-resident must promptly appoint a successor agent for service of process and the municipal advisor must file a new Form MA-NR if the non-resident discharges its identified agent for service of process or if its agent for service of process becomes unwilling or unable to accept service on behalf of the non-resident.

In the Proposal, the term “non-resident” was defined as an individual, corporation, or partnership or other unincorporated organization or association that resides in or has his or its principal office and place of business in “any place not in the United States.” As adopted, the language in the term “non-resident” that determines whether an individual, corporation, or partnership or other unincorporated organization or association is a “non-resident” has been slightly modified to whether the person resides in or has his or its principal office and place of business in “any place not subject to the jurisdiction of the United States.” The language has been changed to clarify that persons that reside or have their principal office and place of business in United States territories do not fall within the definition of “non-resident.”

The Glossary of Terms is being adopted substantially as proposed. However, the Glossary, as adopted, contains some revisions that are being made for clarity. As adopted, the Glossary includes some revisions to terms that reflect changes to the definitions being adopted in Rule 15Ba1-1. For example, the definition of “Guaranteed Investment Contract” has been revised to clarify that the contract at issue must relate to investments of proceeds of municipal securities or municipal escrow investments. The definition of the term “municipal advisor,” as adopted, has been revised to make clear that the definition is subject to the exclusions that are being adopted under Rule 15Ba1-1(d)(2) [1323] and the exemptions under Rule 15Ba1-1(d)(3). [1324] Likewise, the definition of the term “obligated persons,” consistent with the definition in adopted Rule 15Ba1-1, has been revised to state that the term does not include a person whose financial information or operating data is not material to a municipal securities offering or the federal government. The Glossary contains other revisions to terms that are consistent with revisions to the definitions in Rule 15Ba1-1, as adopted.

The Glossary includes some new definitions that were not in the Proposal. For example, the Glossary now defines the term “federal regulatory agency” to include any federal banking agency and the National Credit Union Administration. The Glossary also defines the term “state regulatory agency” to include any State securities commission (or any agency or officer performing like functions); State authority that supervises or examines banks, savings associations, or credit unions; or State insurance commission (or any agency or office performing like functions to the above). The definitions of the terms “federal regulatory agency” and “state regulatory agency” are consistent with the language in Exchange Act Section 15(b)(4)(H). [1325] The Glossary has also been revised to include a new definition of the term “affiliate, affiliated, affiliation,” which is derived from the definition of “advisory affiliate” for Form ADV.

The term “natural person municipal advisor” has been removed from the Glossary, as adopted. In the Proposal, the term was defined to mean any natural person that is a municipal advisor, including sole proprietors. The term had been included in the Proposal to collectively describe natural persons who were required to file Form MA-I. Because municipal advisory firms, rather than natural persons (other than sole proprietors), are now responsible for filing Form MA-I, the term is no longer necessary, and is therefore being removed from the Glossary.

9. Rule 15Bc4-1: Persons Associated With Municipal Advisors

As noted in the Proposal, Section 975(c)(5) of the Dodd-Frank Act provides the Commission with authority to censure or place limitations on the activities or functions of any person associated with a municipal advisor or to suspend or bar any such person from being associated with a municipal advisor. As discussed in the Proposal, however, it appears that a technical error was made in the final draft of this provision. [1326] Specifically, Section 975(c)(5) of the Dodd-Frank Act provides that Section 15B(c)(4) of the Exchange Act be amended “by inserting `or municipal advisor' after `municipal securities dealer or obligated person' each place that term appears.” [1327] At the time the Dodd-Frank Act was enacted, however, Section 15B(c)(4) of the Exchange Act included the term “municipal securities dealer,” but did not include the phrase “municipal securities dealer or obligated person” (emphasis added).

To address any ambiguity created by this error, the Commission stated in the Proposal its intent to recommend a technical amendment to Section 975(c)(5) of the Dodd-Frank Act. [1328] To date, however, the Exchange Act has not been amended to correct this technical error. Therefore, to clarify the Commission's interpretation of Section 15B(c)(4) of the Exchange Act, the Commission is adopting new Rule 15Bc4-1 to make clear the Commission's understanding of its authority with respect to associated persons of municipal advisors. Specifically, Rule 15Bc4-1 states that the Commission has the authority to, by order, censure or place limitations on the activities or functions of any person associated, seeking to become associated, or, at the time of the alleged misconduct, associated or seeking to become associated with a municipal advisor, or suspend for a period not exceeding 12 months or bar any such person from being associated with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, if the Commission finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or bar is in the public interest and that such person has committed any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), (E), (H), or (G) of paragraph (4) of Section 15(b) of the Exchange Act, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under section 15B(c)(4) of the Exchange Act, or is enjoined from any action, conduct, or practice specified in subparagraph (C) of Section 15(b)(4). Rule 15Bc4-1 also states the Commission's interpretation that Section 15B(c)(4) of the Exchange Act makes it unlawful for any person, as to whom an order is entered pursuant to Section 15B(c)(4) or Section 15B(c)(5) of the Exchange Act suspending or barring him from being associated with a municipal advisor is in effect, willfully to become, or to be, associated with a municipal advisor without the consent of the Commission. Further, Rule 15Bc4-1 sets forth the Commission's understanding that it is unlawful for any municipal advisor to permit such a person to become, or remain, an associated person without the consent of the Commission, if such municipal advisor knew, or, in the exercise of reasonable care should have known, of such order. Not only does the Commission believe that such interpretation is the only one that is consistent with the Congressional intent underlying Section 975(c)(5) of the Dodd-Frank Act, and that any other reading would produce the absurd result that no amendment would be made to Section 15(c)(4) of the Exchange Act, but the Commission also believes that this interpretation and the adoption of Rule 15Bc4-1 are necessary and appropriate to ensure that the Commission may censure or place limitations on the activities or functions of any person associated with a municipal advisor or to suspend or bar any such person from being associated with a municipal advisor.

B. Approval or Denial of Registration

As discussed in the Proposal, [1329] Exchange Act Section 15B(a)(2) provides that within forty-five days of the filing of an application to register as a municipal advisor, [1330] the Commission must either: “(A) by order grant registration, or (B) institute proceedings to determine whether registration should be denied. Such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing and shall be concluded within one hundred twenty days of the date of the filing of the application for registration. At the conclusion of such proceedings, the Commission, by order, shall grant or deny such registration. The Commission may extend the time for the conclusion of such proceedings for up to ninety days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the applicant consents.” [1331]

In accordance with Exchange Act Section 15B(a)(2), the Commission will grant the registration of a municipal advisor if the Commission finds that the requirements of Section 15B of the Exchange Act are satisfied. The Commission will deny the registration of a municipal advisor if the Commission does not make such a finding or if it finds that, if the applicant were registered, its registration would be subject to suspension or revocation under Section 15B(c) of the Exchange Act. [1332]

As discussed in the Proposal, the information currently required by Form MA-T is not reviewed by the Commission prior to registration, although the Commission retains full authority to review such information and examine any registered municipal advisor at any time. [1333] The Commission intends that the permanent registration process will entail a review of each filed Form MA.

In considering whether to grant an application for registration as a municipal advisor, the Commission will review the information provided on Form MA. For example, as discussed in the Proposal, the Commission may perform cross checks of applicants through the use of the applicant's other registration numbers, such as its CRD or other SEC registration numbers, to the extent available. [1334] Also, the Commission may review the disclosures required by Item 9 of Form MA, including the disciplinary history of an applicant. [1335] In addition, as discussed in the Proposal, the municipal advisor registration process will allow the Commission and staff to ask questions and, as needed, to request amendments before granting an application for registration. [1336]

C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by Municipal Advisors

Section 17(a)(1) of the Exchange Act provides, in pertinent part, that all registered municipal advisors shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. [1337] With proposed Rule 15Ba1-7, the Commission proposed to specify the books and records requirements applicable to municipal advisors. [1338] The Commission is adopting Rule 15Ba1-7 as proposed, but renumbered as Rule 15Ba1-8, with a few technical clarifications, the addition of general ledgers, and the addition of written consents to service of process from certain natural persons.

Record-Keeping for Municipal Advisors

As discussed in the Proposal, the Commission based Rule 15Ba1-7(a) (as adopted, Rule 15Ba1-8(a)) generally on the books and records requirements for broker-dealers and investment advisers. [1339] Rule 15Ba1-8(a), among other things, requires a municipal advisory firm to make and keep true, accurate, and current certain books and records relating to its municipal advisory activities. [1340] Specifically, Rule 15Ba1-8(a) requires all municipal advisory firms to make and keep originals or copies of all written communications received, and originals or copies of all written communications sent, by such municipal advisor (including inter-office memoranda and communications) relating to municipal advisory activities, regardless of the format of the communications. [1341] Municipal advisory firms also must keep all check books, bank statements, general ledgers, [1342] cancelled checks, and cash reconciliations; a copy of each version of the municipal advisor's policies and procedures, if any, that (i) are in effect or (ii) at any time within the last five years were in effect (not including those in effect prior to the effective date of Rule 15Ba1-8); and a copy of any document created by the municipal advisor that was material to making a recommendation to a municipal entity or obligated person that memorializes the basis for that recommendation. In addition, a municipal advisory firm must keep all written agreements (or copies thereof) entered into by the municipal advisor with any municipal entity, employee of a municipal entity, or an obligated person or otherwise relating to the business of the municipal advisor as such. Further, a municipal advisory firm is required to keep a record of the names of persons who are, or have been in the past five years, associated with the municipal advisor (not including persons associated with the municipal advisor prior to the effective date of Rule 15Ba1-8); names, titles, and business and residence addresses of all persons associated with the municipal advisor; [1343] all municipal entities or obligated persons with which the municipal advisor is engaging or has engaged in municipal advisory activities in the past five years (not including those prior to the effective date of Rule 15Ba1-8); the name and business address of each person to whom the municipal advisor provides or agrees to provide payment to solicit a municipal entity, an employee of a municipal entity, or an obligated person on its behalf; and the name and business address of each person that provides or agrees to provide payment to the municipal advisor to solicit a municipal entity, an employee of a municipal entity, or an obligated person on its behalf. [1344] Finally, a municipal advisory firm must keep written consents to service of process from each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities solely on behalf of such municipal advisor. [1345]

Rule 15Ba1-8(b)(1) requires municipal advisory firms to maintain and preserve all books and records required to be made for a period of not less than five years, the first two years in an easily accessible place. Further, corporate governance documents, such as articles of incorporation and stock certificate books of the municipal advisor, and those of any predecessor, excluding those that were only in effect prior to the effective date of Rule 15Ba1-8, must be maintained in the principal office of the municipal advisor and preserved until at least three years after termination of the business or withdrawal from registration as a municipal advisor.

As discussed in the Proposal, Rule 15Ba1-7(d) (as adopted, Rule 15Ba1-8(d)) is modeled on Rule 204-2 under the Investment Advisers Act. [1346] Specifically, Rule 15Ba1-8(d) permits, and sets forth the requirements for, electronic storage of the records required to be maintained and preserved pursuant to Rule 15Ba1-8. The rule further sets forth requirements with respect to the prompt [1347] provision of records upon request by the Commission or by its staff or other representatives. In addition, Rule 15Ba1-8(e) provides that any books or records made, kept, maintained, and preserved in compliance with Rules 17a-3 and 17a-4 under the Exchange Act, rules of the MSRB, or Rule 204-2 under the Investment Advisers Act, which are substantially the same as the books and records required to be made, kept, maintained, and preserved under Rule 15Ba1-8, will satisfy the record-keeping requirements under Rule 15Ba1-8. [1348] Subparagraph (e) of Rule 15Ba1-8 is designed to minimize the record-keeping burden for municipal advisory firms that are otherwise subject to similar record-keeping requirements. [1349]

In the Proposal, the Commission requested comment on the proposed books and records requirements. Specifically, the Commission requested comment regarding, among other things, the types of documents and data that should be retained; whether it is appropriate for the books and records requirements to be based on the books and records requirements for broker-dealers and investment advisers; the length of the period for maintaining and preserving books and records; the format of the records retained; and whether the proposed requirements are overly burdensome. [1350]

The Commission received several letters that specifically addressed the books and records requirements. One commenter generally supported the proposed record-keeping rule. This commenter stated it does not oppose establishing a five-year period for municipal advisor record retention and suggested that a record retention period of five years should be the same for broker-dealers, investment advisers, and municipal advisors. [1351] However, other commenters criticized some of the requirements as being too burdensome, especially for small independent municipal advisors. [1352] For example, one commenter noted that the expense required for firms to retain originals or copies of all written communications, internal or external, relating to their municipal advisory activities caused particular concern. [1353] This commenter recommended that this requirement be eliminated, while all other books and records requirements could remain. [1354] Alternatively, this commenter suggested that only certain communications with a client or generated internally be required to be kept. [1355] Another commenter stated that, because independent municipal advisors neither hold client accounts nor hold custody of monies from clients, audited financial statements should not be required, particularly as they are costly and burdensome for small firms. [1356] This commenter suggested that the Commission should narrow the record-keeping requirements to communication material specifically relevant to financing topics and financing recommendations or advice. [1357] One commenter also requested that the Commission clarify that every iteration of commonly used and routinely changing technical financial documents, typically referred to as “numbers runs,” need not be retained, and that only iterations either sent to a client or used internally to form the basis for a recommendation to a client must be retained. [1358]

The Commission has carefully considered the issues raised by commenters and is adopting Rule 15Ba1-7 generally as proposed, but renumbered as Rule 15Ba1-8 and with modifications to include general ledgers, as well as written consents to service of process from each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities solely on behalf of such municipal advisor.

General ledgers would reflect asset, liability, reserve, capital, income and expense accounts. [1359] In the Proposal, the Commission inadvertently omitted general ledgers from proposed Rule 15Ba1-7. The Commission notes that ledgers are part of the books and records requirements for broker-dealers and investment advisers, and would already be made and kept by dually-registered municipal advisors. [1360] The Commission believes that general ledgers will assist its staff in understanding a municipal advisor's business dealings and financial condition, identifying and tracking illicit expenses, identifying sources of revenue that were previously undisclosed or that pose a conflict of interest, identifying and tracing possible acts of fraud and violations of applicable laws and rules (e.g., MSRB Rule G-37 (Political Contributions and Prohibitions on Municipal Securities Business)), and conducting asset verification. In addition, the Commission notes that a municipal advisor's balance sheet and profit loss statement are derived from the general ledger.

The Commission believes it is also appropriate to include in the record-keeping requirement written consents to service of process from each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities solely on behalf of such municipal advisor. Under proposed Rule 15Ba1-2(b), each natural person who met the definition of municipal advisor would have been required to register as a municipal advisor by filing Form MA-I. [1361] Proposed Form MA-I included consent to service of process that a natural person would have been required to execute. In contrast, adopted Rule 15Ba1-2(b) requires a person applying for registration or registered as a municipal advisor to complete Form MA-I with respect to each natural person who is a person associated with the municipal advisor and engaged in municipal advisory activities on its behalf. [1362] As such, Form MA-I no longer includes consents to service of process executed by such natural persons. Because the Commission would no longer receive these consents to service of process as part of Form MA-I, the Commission believes it is appropriate to include in the record-keeping requirement written consents to service of process from each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities solely on behalf of such municipal advisor. Specifically, the Commission believes that this requirement will help ensure that such natural persons have indeed executed consents to service of process and will allow Commission staff to examine such consents to service of process.

With respect to concerns related to the burden of the books and records requirements, including the burden for retaining originals or copies of all written communications relating to municipal advisory activities, [1363] the Commission continues to believe that the final books and records requirements are appropriate for all municipal advisors because they will facilitate the Commission's inspections and examinations of municipal advisors and assist the Commission in evaluating a municipal advisor's compliance with Section 15B of the Exchange Act, the rules and regulations thereunder, and MSRB rules. Moreover, even though it recognizes that such requirements may impose burdens and costs upon municipal advisors, the Commission understands that many municipal advisors already make and keep certain types of the books and records required to be made and kept under Rule 15Ba1-8(a) under other regulatory requirements or general industry practices. Specifically, because the books and records required to be made and kept under Rule 15Ba1-8(a) are generally based on the existing books and records requirements for broker-dealers and investment advisers, the Commission believes that many municipal advisors would already be familiar and in compliance with such requirements because they are also registered as broker-dealers or investment advisers. Moreover, as noted above, to reduce the burden that would result from the books and records requirements, Rule 15Ba1-8(e)(1) provides that any books or other records made, kept, maintained, and preserved in compliance with Rules 17a-3 and 17a-4 under the Exchange Act, rules of the MSRB, or Rule 204-2 under the Investment Advisers Act, which are substantially the same as the books and records required to be made, kept, maintained, and preserved under Rule 15Ba1-8, will satisfy the requirements of Rule 15Ba1-8.

With respect to those municipal advisors that are not also registered with the Commission as broker-dealers or investment advisers, the Commission recognizes that Rule 15Ba1-8 establishes new record-keeping requirements for these entities and may impact these entities to a greater degree than entities that have previously registered as broker-dealers or investment advisers. [1364] However, the Commission believes that all municipal advisors should be subject to the same record-keeping requirements, regardless of whether they have previously registered with the Commission in another capacity. As noted above, the Commission believes that Rule 15Ba1-8 is appropriate for all municipal advisors because it will facilitate the Commission's inspections and examinations of municipal advisors [1365] and assist the Commission in evaluating a municipal advisor's compliance with Section 15B of the Exchange Act, the rules and regulations thereunder, and MSRB rules. The Commission also believes that regulation of municipal advisors is in the public interest and will improve the protection of municipal entities and investors.

Further, because the Commission is adopting certain additional exemptions from the definition of municipal advisor, including an exemption for persons providing advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments, the burden of the books and records requirements is similarly reduced (i.e., fewer persons would be required to register as municipal advisors and the record-keeping requirements would not cover activities that fall under an exemption or exclusion from the definition of municipal advisor). The Commission also notes that the burden of the books and records requirements for municipal advisors depends on the complexity of the business of a municipal advisor, which means smaller municipal advisors would be subject to proportionately lower burden in complying with such requirements. [1366] Further, as noted below, the Commission assumes that municipal advisors will use the most cost-effective method available, depending on their size and specific circumstances, to comply with Rule 15Ba1-8. The Commission understands that many municipal advisors generally make and keep the required records in electronic form, which will likely minimize the burdens and costs associated with record-keeping. [1367] Therefore, the Commission does not believe Rule 15Ba1-8 will be overly burdensome for municipal advisory firms, including small municipal advisory firms. [1368]

Finally, in response to comments, the Commission confirms that only iterations of “numbers runs” sent to a client or that are used to form the basis for a recommendation to a client must be retained. [1369] With respect to a commenter's suggestion that audited financial statements should not be required, the Commission notes that the requirements of Rule 15Ba1-8 do not apply to audited financial statements. [1370]

Record-keeping After a Municipal Advisor Ceases To Do Business

As proposed, Rule 15Ba1-8(c) [1371] requires a municipal advisory firm, before ceasing to conduct or discontinuing business as a municipal advisor, to arrange and be responsible for the continued preservation of the books and records for the remainder of the period required by Rule 15Ba1-8. It also requires the municipal advisory firm to notify the Commission in writing of the exact address where such books and records will be maintained during such period. The Commission did not receive any comments on this aspect of the proposal and is adopting Rule 15Ba1-8(c) without modification.

Requirements for Non-Residents

As proposed, Rule 15Ba1-8(f), which is modeled on Rule 204-2(j) under the Investment Advisers Act, [1372] sets forth the books and records requirements for non-resident municipal advisory firms, including requirements for keeping, maintaining, and preserving copies of the books and records that these municipal advisors are required to make, keep, maintain, and preserve under any rule or regulation adopted under the Exchange Act, as well as requirements for providing written notice to the Commission of the location of such books and records. [1373] Specifically, Rule 15Ba1-8(f) requires non-resident municipal advisory firms to keep, maintain, and preserve all such books and records in the United States [1374] and provide notice to the Commission of the address of such location within 30 calendar days [1375] after Rule 15Ba1-8 becomes effective (in the case of municipal advisory firms that are already registered or in the process of applying for registration when the rule becomes effective) or when filing an application for registration (in the case of municipal advisory firms that file applications for registration after the rule becomes effective). [1376] A non-resident municipal advisory firm is not required to keep, maintain, and preserve such books and records in the United States if the municipal advisor timely files with the Commission a written undertaking (in a form acceptable to the Commission and signed by a duly authorized person) to furnish the Commission, upon demand, copies of any or all of such books and records at the municipal advisor's expense at the Commission's principal or regional office (as specified by the Commission). [1377] Specifically, a non-resident municipal advisory firm must furnish the requested books and records within 14 calendar days [1378] of the Commission's written demand to the offices of the Commission as specified in the written demand. [1379]

The Commission did not receive any comments on its proposed record-keeping requirements for non-resident municipal advisory firms and is adopting Rule 15Ba1-8(f) without substantive modification. [1380] The Commission believes the requirements for non-resident municipal advisory firms will help ensure the Commission's effective regulation of municipal advisors. Further, as discussed in the Proposal, such requirements are designed to ensure that the Commission has access to the books and records of municipal advisors located outside of the United States to enable it to perform effective examinations and inspections. The requirements will also serve to mitigate the time and cost burdens the Commission may otherwise face in attempting to gain access to books and records located outside of the United States, such as in the case of any jurisdictional dispute relating to such access. [1381]

IV. Designation of FINRA To Examine FINRA Member Municipal Advisors Back to Top

The Dodd-Frank Act amended the Exchange Act to, among other things, require new entities and individuals to register with the Commission and authorize the Commission to examine such registrants, including municipal advisors. Some entities that are currently registered, or will be registered, with the Commission as municipal advisors are also registered with the Commission as broker-dealers and are members of FINRA. The Commission anticipates that FINRA will conduct examinations of Commission-registered municipal advisors that are also FINRA members, subject to the Commission's oversight. The Commission will be responsible for examining registered municipal advisors that are not FINRA members, which comprise the vast majority of the anticipated registrants. [1382]

The Commission believes that Section 15A of the Exchange Act provides authority to FINRA to examine its members' municipal advisory activities. Section 15A provides, in relevant part, that an association of brokers and dealers shall not be registered as a national securities association unless the Commission determines that: (1) The association has the capacity to be able to enforce compliance by its members and persons associated with its members with the provisions of the Exchange Act, the rules and regulations thereunder, the rules of the MSRB, and the rules of the association; [1383] and (2) the rules of the association provide that the association shall provide information to the MSRB about the examinations of the association so that the MSRB may assist in such examinations. [1384] In accordance with these provisions, FINRA, as a registered national securities association, has traditionally conducted examinations of its members' activities in connection with municipal securities for compliance with the Exchange Act, rules and regulations thereunder, and MSRB rules.

Registered municipal advisors are subject to the Exchange Act, rules and regulations thereunder, and MSRB rules. As such, Section 15A provides FINRA with authority to conduct examinations of its members' activities as registered municipal advisors in order to evaluate their compliance with the applicable laws and rules. [1385] In addition, the Dodd-Frank Act amended Section 15B of the Exchange Act to expressly provide that “the Commission, or its designee, in the case of municipal advisors,” conduct periodic examinations. [1386] Accordingly, the Commission designates FINRA as a designee to examine its members' activities as registered municipal advisors and evaluate compliance by such members with federal securities laws, Commission rules and regulations, and MSRB rules applicable to municipal advisors.

V. Implementation and Compliance Dates Back to Top

As discussed above, Section 15B of the Exchange Act, as amended by the Dodd-Frank Act, 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, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered with the Commission. [1387] Section 15B of the Exchange Act also provides that a municipal advisor may be registered by filing with the Commission an application for registration in such form and containing such information and documents concerning the municipal advisor and any person associated with the municipal advisor as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. [1388] The temporary municipal advisor registration regime, also as discussed above, is set to expire on December 31, 2014. [1389] Rules 15Ba1-1 through 15Ba1-8, Rule 15Bc4-1, and Forms MA, MA-I, MA-W, and MA-NR will become effective 60 days after publication of the rules in the Federal Register, and municipal advisors must comply with the new rules within the applicable compliance filing periods described below.

The permanent municipal advisor registration system on EDGAR will be available to accept registration applications for municipal advisory firms, including sole proprietors, beginning July 1, 2014. As discussed below, however, the Commission is providing specific compliance filing periods for filing applications for registration under the permanent registration regime. To continue doing business as a municipal advisory firm, any firm that is registered as a municipal advisor under Rule 15Ba2-6T and Form MA-T as of the Effective Date must file a complete application for registration as a municipal advisor within the applicable filing period, as set forth below. In accordance with Section 15B(a)(2) of the Exchange Act, within forty-five days of the date such complete application is considered filed (or within such longer period as to which the applicant consents), the Commission shall grant registration or institute proceedings to determine whether registration should be denied. [1390] Before filing applications for registration as municipal advisors, municipal advisory firms will need to file a Form ID requesting an EDGAR access code as soon as possible, and should do so by no later than 30 days after the Effective Date to minimize processing delays. [1391]

To help ensure an orderly transition from the temporary registration regime to the permanent registration regime and the submission of applications through EDGAR, the Commission is providing the following compliance dates for municipal advisory firms to complete their applications for registration under the permanent registration regime. These compliance dates are based on the registration number a municipal advisor received (or will receive) when it registered (or will register) as a municipal advisor under Rule 15Ba2-6T and on Form MA-T (“temporary registration number”). A municipal advisory firm that has a temporary registration number falling within the range that begins on 866-00001-00 and ends on 866-00400-00 must file a complete application for registration under the permanent registration regime on or after July 1, 2014, but no later than July 31, 2014. A municipal advisory firm that has a temporary registration number falling within the range that begins on 866-00401-00 and ends on 866-00800-00 must file a complete application for registration under the permanent registration regime on or after August 1, 2014, but no later than August 31, 2014. A municipal advisory firm that has a temporary registration number falling within the range that begins on 866-00801-00 and ends on 866-01200-00 must file a complete application for registration under the permanent registration regime on or after September 1, 2014, but no later than September 30, 2014. A municipal advisory firm that has a temporary registration number that falls after 866-01200-00 must file a complete application for registration under the permanent registration regime on or after October 1, 2014, but no later than October 31, 2014.

A municipal advisory firm that enters into the municipal advisory business on or after October 1, 2014 and does not have a temporary registration number as of October 1, 2014, must file a complete application for registration under the permanent registration regime on or after October 1, 2014 and be registered with the Commission before engaging in municipal advisory activities. The Commission believes that this staggered compliance approach will help to facilitate an orderly transition from the temporary registration regime to the permanent registration regime.

For a municipal advisory firm that files a complete application during the applicable filing period, its temporary municipal advisor registration will continue in effect until the Commission grants or denies the application for registration, unless the temporary registration is rescinded by the Commission or withdrawn by the municipal advisory firm. Any complete application for registration received prior to the start of the applicable filing period for a municipal advisory firm will be considered filed [1392] on the first day of the applicable filing period. [1393] For a municipal advisory firm that engages in municipal advisory activities before and during the applicable filing period but that fails to file a complete application within the applicable filing period, the firm's temporary registration will expire forty-five days after the end of the applicable filing period. Therefore, a firm that continues to engage in municipal advisory activities after the expiration of its temporary registration would be in violation of Section 15B of the Exchange Act until it submits a complete application and the Commission grants its application for registration under the permanent registration regime.

A municipal advisory firm that is required to register as a municipal advisor with the Commission on or after the Effective Date but before the applicable filing period must register under the temporary registration regime as a municipal advisor and must file an application for registration under the permanent registration regime during the applicable filing period. Such municipal advisory firm's temporary registration will continue to be in effect until the date that its registration is granted or denied by the Commission under the permanent registration regime, unless the municipal advisory firm's temporary registration is rescinded by the Commission or withdrawn by the municipal advisory firm. A municipal advisory firm that is required to register as a municipal advisor with the Commission after the commencement of the applicable filing period must file an application with the Commission under the permanent registration regime.

VI. Delegation of Authority [1394] Back to Top

A. Delegation to the Director of the Office of Municipal Securities

Rule 30-3a of the Commission's Rules of Organization and Program Management

The Commission is amending its existing delegations of authority by adding Rule 30-3a to its Rules of Organization and Program Management, which governs the delegations of authority to the Director of the Office of Municipal Securities (“Director”). [1395] Section 15B(a)(2) of the Exchange Act, as amended by the Dodd-Frank Act, provides that “[w]ithin forty-five days of the date of the filing of [a municipal advisor registration] application (or within such longer period as to which the applicant consents), the Commission shall . . . by order grant registration, or . . . institute proceedings to determine whether registration should be denied.” [1396] New Rule 30-3a delegates to the Director the authority to issue orders granting registration of municipal advisors within forty-five days of the filing of an application for registration as a municipal advisor (or within such longer period as to which the applicant consents). [1397]

Section 15B(c)(3) of the Exchange Act, as amended by the Dodd-Frank Act, provides the Commission with the authority to cancel the registration of a municipal advisor if it finds that such municipal advisor is no longer in existence or has ceased to do business as a municipal advisor. [1398] Rule 30-3a delegates to the Director the authority to issue orders canceling the registration of a municipal advisor, if such municipal advisor is no longer in existence or has ceased to do business as a municipal advisor. [1399]

The delegations of authority to the Director in Rule 30-3a will allow the staff, on behalf of the Commission, pursuant to Section 15B of the Exchange Act, [1400] to review and act upon applications for registration, and to issue orders canceling municipal advisor registrations. The Commission believes that these delegations of authority will facilitate efficient registration and regulation of municipal advisors. Also, pursuant to Rule 30-3a, the Director may submit matters to the Commission for consideration as it deems appropriate. [1401]

Rule 19d of the Commission's Rules of Organization and Program Management

The Commission is also amending its existing Rules of Organization and Program Management by adding Rule 19d, which sets forth the responsibilities of the Director. [1402] In light of the changes made by the Dodd-Frank Act to Section 15B of the Exchange Act regarding the registration and regulation of municipal advisors, the Commission is adding Rule 19d, which states that the Director is responsible to the Commission for the administration and execution of the Commission's programs under the Exchange Act relating to the registration and regulation of municipal advisors. Rule 19d also states that the functions involved in the regulation of municipal advisors include recommending the adoption and amendment of Commission rules, and responding to interpretive and no-action requests. Therefore, Rule 19d specifies the role of staff in the registration and regulation of municipal advisors.

B. Delegation to the Director of the Office of Compliance Inspections and Examinations

Rule 30-18 of the Commission's Rules of Organization and Program Management

The Commission is amending its existing delegations of authority by amending Rule 30-18 of its Rules of Organization and Program Management governing the delegations of authority to the Director of the Office of Compliance Inspections and Examinations (“OCIE Director”). [1403] As noted above, Section 15B(a)(2) of the Exchange Act, as amended by the Dodd-Frank Act, provides that “[w]ithin forty-five days of the date of the filing of [a municipal advisor registration] application (or within such longer period as to which the applicant consents), the Commission shall . . . by order grant registration, or . . . institute proceedings to determine whether registration should be denied.” [1404] The Commission delegates to the OCIE Director the authority to issue orders granting registration of municipal advisors within 45 days of the filing of an application for registration as a municipal advisor (or within such longer period as to which the applicant consents), and to grant registration of municipal advisors sooner than 45 days after the filing of an application for registration. [1405]

Section 15B(c)(3) of the Exchange Act, as amended by the Dodd-Frank Act, provides the Commission with the authority to cancel the registration of a municipal advisor if the Commission finds that such municipal advisor is no longer in existence or has ceased to do business as a municipal advisor. [1406] The amendment to Rule 30-18 delegates to the OCIE Director the authority to issue orders to cancel the registration of a municipal advisor, if such municipal advisor is no longer in existence or has ceased to do business as a municipal advisor. [1407]

Section 15B(c)(3) of the Exchange Act, as amended by the Dodd-Frank Act, also provides for the withdrawal of municipal advisors from registration under such terms and conditions that the Commission deems necessary in the public interest or for the protection of investors or municipal entities or obligated persons. [1408] The amendment to Rule 30-18 delegates to the OCIE Director the authority to determine whether notices of withdrawal from registration on Form MA-W may become effective sooner than the 60-day waiting period. [1409]

These delegations of authority to the OCIE Director will allow the staff, on behalf of the Commission, pursuant to Section 15B of the Exchange Act, [1410] to review and act upon applications for registration and withdrawals from registration, and to make determinations with regard to the cancellation of municipal advisor registrations. These delegations of authority will facilitate efficient registration and regulation of municipal advisors. Also, the OCIE Director may submit matters to the Commission for consideration as it deems appropriate. [1411]

Rule 19c of the Commission's Rules of Organization and Program Management

The Commission is also amending its existing Rules of Organization and Program Management by amending Rule 19c, which sets forth the responsibilities of the OCIE Director. [1412] Currently, Rule 19c provides that the OCIE Director is responsible for the compliance inspections and examinations relating to the regulation of exchanges, national securities associations, clearing agencies, securities information processors, the MSRB, brokers and dealers, municipal securities dealers, transfer agents, investment companies, and investment advisers. Under Sections 15B and 17(a) of the Exchange Act, as amended by the Dodd-Frank Act, municipal advisors are now required to be registered with the Commission and are subject to record-keeping requirements promulgated by the Commission. [1413] Further, Section 17(b) of the Exchange Act provides that all records of persons described in Section 17(a) are subject “to such reasonable periodic, special, or other examinations by representatives of the Commission . . . as the Commission * * * deems necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title.” [1414] In light of the changes made by the Dodd-Frank Act, the Commission is amending Rule 19c to reflect the responsibilities of the OCIE Director with respect to all persons subject to compliance inspections and examinations, including municipal advisors. These amendments specify the role of OCIE staff in the inspection and examination of records kept by municipal advisors.

VII. Paperwork Reduction Act Back to Top

Certain rules that the Commission is adopting impose new “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). [1415] An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. In accordance with 44 U.S.C. 3507 and 5 CFR 1320.11, the Commission submitted these collections of information to the Office of Management and Budget (“OMB”) for review. The title for the collection of information requirement is “Rules 15Ba1-1 to 15Ba1-8—Registration of Municipal Advisors.” The collection of information was assigned OMB Control No. 3235-0681.

In the Proposal, the Commission solicited comments on the collection of information requirements. In particular, the Commission solicited comments on whether the calculations of either the burden hours or associated costs were too high or too low. [1416] Some commenters addressed the collection of information aspects of the Proposal.

Many commenters opined generally that municipal advisor registration under the proposed rules would be overly burdensome and would impose significant costs that would prove detrimental, especially to smaller “community banks” and local and state municipalities. [1417] Although most of these letters neither provided specific suggestions to revise the Commission's estimates, nor provided specific alternative figures or calculations for actual burden hour figures, the Commission addresses the comments below.

A. Summary of Collection of Information

Section 15B(a)(2) of the Exchange Act, as amended by the Dodd-Frank Act, provides that a municipal advisor may be registered by filing with the Commission an application for registration in such form, and containing such information and documents concerning the municipal advisor and any persons associated with the municipal advisor, as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. [1418]

Under the final rules and forms, the permanent registration regime for municipal advisors will be more comprehensive than the temporary one and will require more detailed disclosures. Under Rule 15Ba1-2(a), each firm applying for registration with the Commission as a municipal advisor is required to complete and file electronically with the Commission Form MA. In addition, each person applying for registration, or registered with, the Commission as a municipal advisor must complete and file electronically with the Commission Form MA-I with respect to each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities on its behalf. [1419] Each Form MA shall be considered filed with the Commission upon acceptance of Form MA, together with all additional required documents, including all required Form MA-Is, by the Commission's EDGAR system. [1420] A sole proprietor will have to complete both Form MA and Form MA-I. [1421]

Under the permanent registration regime, municipal advisors will include sole proprietorships and firms of varying sizes. In addition, municipal advisors will include firms that engage in municipal advisory activities as part of a broader array of financial services, serving many types of clients, and that have many associated persons. Thus, the paperwork burden will reflect these differences in size and types of other financial services in which the municipal advisors engage.

Pursuant to Rule 15Ba1-5(a), a municipal advisory firm that registers on Form MA must amend its Form MA at least annually, within 90 days of the end of the municipal advisor's fiscal year in the case of firms or within 90 days of the end of the calendar year for sole proprietors, and more frequently as required by the General Instructions. In addition, a registered municipal advisor must promptly amend Form MA-I whenever any information previously provided therein becomes inaccurate. [1422] Municipal advisory firms must also amend Form MA-I to indicate that an individual is no longer an associated person of the municipal advisory firm filing the form or no longer engaged in municipal advisory activities on its behalf. Finally, registered municipal advisors must report successions of registration on Form MA. [1423]

Pursuant to Rule 15Ba1-4, all registered municipal advisors are required to file Form MA-W to withdraw from registration with the Commission as a municipal advisor. As will be the case with both Forms MA and MA-I, Form MA-W will be required to be filed electronically with the Commission.

Rule 15Ba1-6 sets forth the general procedures for serving non-residents. Pursuant to Rule 15Ba1-6 and the instructions to Form MA-NR, each non-resident municipal advisor applying for registration, at the time of filing of the municipal advisor's application on Form MA, must file with the Commission a written irrevocable consent and power of attorney on Form MA-NR to appoint an agent in the United States upon whom may be served any process, pleadings, or other papers in any action brought against the non-resident municipal advisor. In addition, each municipal advisor applying for registration pursuant to, or registered under, Section 15B of the Exchange Act must file Form MA-NR with the Commission for each non-resident general partner, non-resident managing agent, and non-resident natural person associated with the municipal advisor who engages in municipal advisory activities on behalf of the municipal advisor. [1424] Rule 15Ba1-6(d) requires each non-resident municipal advisor to provide an opinion of counsel that the municipal advisor can, as a matter of law, provide the Commission with access to its books and records and submit to inspection and examination by the Commission.

Rule 15Ba1-8 requires all registered municipal advisors to maintain true, accurate, and current books and records relating to their municipal advisory activities. Generally, Rule 15Ba1-8 requires such books and records to be maintained and preserved for a period of not less than five years, the first two years in an easily accessible place.

Rule 15Ba1-1(d)(3)(vi) exempts from the definition of “municipal advisor” any person engaging in municipal advisory activities in a circumstance in which a municipal entity or obligated person is otherwise represented by an independent registered municipal advisor with respect to the same aspects of a municipal financial product or an issuance of municipal securities, provided that certain requirements are met. First, an independent registered municipal advisor must be providing advice with respect to the same aspects of the municipal financial product or issuance of municipal securities. [1425] Second, the person seeking to rely on Rule 15Ba1-1(d)(3)(vi) must receive from the municipal entity or obligated person a representation in writing that the municipal entity or obligated person is represented by, and will rely on the advice of, an independent registered municipal advisor. [1426] Third, the person must make certain disclosures to the municipal entity or obligated person and provide a copy of such disclosures to the municipal entity's or obligated person's independent registered municipal advisor. [1427] With respect to a municipal entity, the person seeking to rely on the exemption must disclose in writing that, by obtaining the representation discussed above from the municipal entity, such person is not a municipal advisor and is not subject to the fiduciary duty set forth in Section 15B(c)(1) of the Exchange Act [1428] with respect to the municipal financial product or the issuance of municipal securities. [1429] With respect to an obligated person, the person seeking to rely on the exemption must disclose in writing that, by obtaining the representation discussed above from the obligated person, such person is not a municipal advisor with respect to the municipal financial product or issuance of municipal securities. [1430]

Rule 15Ba1-1(h) defines “municipal escrow investments” to mean proceeds of municipal securities and any other funds of a municipal entity that are deposited in an escrow account to pay the principal of, premium, if any, and interest on one or more issues of municipal securities. In determining whether or not funds to be invested or reinvested constitute municipal escrow investments, a person may rely on representations in writing made by a knowledgeable official of a municipal entity or obligated person whose funds are to be invested or reinvested regarding the nature of such investments, provided that the person seeking to rely on such representations has a reasonable basis for such reliance. [1431]

Similarly, the Commission is adopting a qualification to the definition of “proceeds of municipal securities” that provides that in determining whether or not funds to be invested constitute proceeds of municipal securities, a person may rely on representations in writing made by a knowledgeable official of a municipal entity or obligated person whose funds are to be invested regarding the nature of such funds, provided that the person seeking to rely on such representations has a reasonable basis for such reliance. [1432]

B. Use of Information

The Commission believes Form MA and Form MA-I will help to ensure that the Commission can make information about municipal advisors transparent and easily accessible to the investing public, including municipal entities and obligated persons who engage municipal advisors; investors who may purchase securities from offerings in which municipal advisors participated; and other regulators. Further, the information provided on Form MA and Form MA-I will expand the amount of publicly available information about municipal advisors, including conflicts of interest and disciplinary history. Although much of the information required by Form MA is already publicly available with respect to municipal advisors that are already registered with the Commission as investment advisers or broker-dealers, many municipal advisors that are not currently registered with the Commission in another capacity will make this information available for the first time. In addition, while municipal advisors are currently required to disclose disciplinary history for some of their associated persons on Form MA-T, municipal advisors will be required to disclose on Form MA disciplinary history for all associated persons. Consequently, the final rules and forms will allow municipal entities and obligated persons, as well as others, to become more fully informed about municipal advisors in a more efficient manner.

In addition, the requirement that each municipal advisory firm register with the Commission on Form MA and complete Form MA-I with respect to each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities on its behalf will help ensure that the Commission has information to oversee respondents and their activities in the municipal securities market effectively. In particular, the information provided in Form MA will be used to determine whether to grant a municipal advisor's application for registration or to institute proceedings to determine whether registration should be denied. The information will also be used to focus examinations and aid in risk-based examination. Moreover, Form MA and Form MA-I will enable the Commission to obtain an accurate estimate of the number of municipal advisors, by size and by municipal advisory activity; analyze data regarding the various types of municipal advisory activities in which municipal advisors engage; and evaluate the disciplinary history of all municipal advisors and associated persons, including all regulatory, civil, and criminal proceedings.

The requirement that a municipal advisor make and keep books and records, including written communications and records of associated persons, will help to ensure that records of the respondent's primary municipal advisory activities, as well as the activities of its associated persons, exist. The Commission and other regulators could potentially request books and records during an examination to evaluate the municipal advisor's compliance with the Exchange Act, the rules thereunder, and MSRB rules, as well as for other regulatory purposes.

The requirement that a non-resident municipal advisor complete Form MA-NR, and furnish Form MA-NR for its non-resident general partners, non-resident managing agents, and associated persons engaged in municipal advisory activities, will help minimize legal or logistical obstacles that the Commission may encounter when attempting to effect service, conserve Commission resources, and avoid potential conflicts of law. The requirement that a non-resident municipal advisor provide an opinion of counsel on Form MA will help ensure that such non-resident municipal advisor can provide access to its books and records and submit to inspection and examination by the Commission.

The requirement that certain written representations and disclosures be made in order for a person to be exempt from the definition of municipal advisor where a municipal entity or obligated person is represented by an independent registered municipal advisor with respect to the same aspects of a municipal financial product or an issuance of municipal securities will allow the Commission staff to determine whether a person engaging in municipal advisory activities has failed to register with the Commission. Further, the information will allow municipal entities and obligated persons to understand whether a person is acting as a municipal advisor. Similarly, the exceptions from the definitions of municipal escrow investments and proceeds of municipal securities for reasonable inquiries will allow the Commission staff to determine whether a person engaging in municipal advisory activities has failed to register with the Commission.

C. Respondents

In the Proposal, the Commission estimated that the proposed “collections of information” would initially apply to approximately 1,000 municipal advisory firms, including sole proprietors. [1433] This estimate was based partly on the number of municipal advisors that had registered with the Commission under Rule 15Ba2-6T. As of October 2010, there were approximately 800 total unique electronic temporary registrations for municipal advisors where Form MA-T was completed and not withdrawn. [1434] In the Proposal, the Commission stated its belief that the number of Form MA-T registrants would likely increase beyond 800 because numerous applicants that would have been required to register might have missed the October 1, 2010, deadline for a variety of reasons, such as concluding, based on their interpretation of the Dodd-Frank Act, that they were not required to register as municipal advisors. [1435] For the PRA analysis of Rule 15Ba2-6T, the Commission estimated that approximately 1,000 applicants would be required to complete Form MA-T. [1436] The Commission therefore believed that 1,000 applicants would remain an appropriate estimate for the total number of municipal advisory firms that would be required to register on Form MA under the proposed permanent registration regime. The Commission also estimated that the average number of new Form MA applicants per year would be 100. [1437]

In the Proposal, the Commission also estimated that approximately 21,800 individuals would be required to register as natural person municipal advisors on Form MA-I, [1438] while the average number of new Form MA-I applicants per year would be 1,800. [1439] These estimates were based on trends observed in registrations of investment advisers and Form U4 applications submitted to FINRA.

In the Proposal, the Commission solicited comments on how many municipal advisors would incur collection of information burdens if the proposed rules and forms were adopted by the Commission. [1440] The Commission received no comments regarding the estimated number of municipal advisory firms that would be required to register initially on Form MA [1441] and no comments regarding estimates for the average annual number of new Form MA and Form MA-I applicants. Nevertheless, the Commission is revising its initial estimates of the numbers of applicants required to complete Form MA. The Commission's decision to revise its estimates is based, in part, on a comparison between the current number of Form MA-T registrants and the number of municipal advisors that are registered with the MSRB.

In October 2010, there were approximately 800 Form MA-T registrants. According to Form MA-T data, as of December 31, 2012, there were approximately 1,110 Form MA-T registrants. Of these Form MA-T registrants, as of December 31, 2012, approximately 901 were also registered as municipal advisors with the MSRB, as they are required to do prior to engaging in municipal advisory activities. [1442] For the reasons discussed below, the Commission believes that the number of Form MA-T registrants may not be an accurate representation of the number of municipal advisors and that MSRB data represents a better basis on which to estimate the number of municipal advisors active in the market.

The Commission believes that a number of persons, recognizing that the Commission does not impose any fees for registration, may have registered with the Commission as municipal advisors out of an initial overabundance of caution. Although some current Form MA-T registrants may not have registered with the MSRB because of uncertainty regarding the scope of the temporary registration regime, others may have determined in the intervening time after October 1, 2010, that registration with the MSRB was not required because they were not engaging in municipal advisory activities. The Commission staff understands based on discussions with market participants that these Form MA-T registrants may have retained Commission registration because there are no associated fees to maintain such registration. [1443] In addition, the Commission anticipates that the exemption for persons providing advice with respect to investment strategies that are not plans or programs for the investment of proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments [1444] will reduce the estimated number of initial Form MA applicants. Likewise, the Commission anticipates the additional exemptions adopted today will also reduce the estimated number of initial Form MA applicants. [1445] For these reasons, the Commission now estimates that the “collections of information” will initially apply to approximately 910 municipal advisory firms, including sole proprietors. [1446]

In addition, the Commission is revising its estimate of the number of Form MA-I submissions the Commission expects municipal advisory firms will be required to file. [1447] For reasons discussed below, the Commission is revising its estimate of approximately 21,800 Form MA-I submissions downward and currently estimates that, during the first year, municipal advisors will need to complete a Form MA-I for approximately 11,250 individuals. [1448]

In the Proposal, the Commission divided the number of Form MA-I applicants into three main categories: (1) Individuals who are currently also registered as investment adviser representatives, registered representatives of broker-dealers, or both, and who are employed at investment advisory firms, broker-dealer firms, or banks; (2) individuals who are employed at financial advisor firms that are not registered as broker-dealers or investment advisers; and (3) individual solicitors who are employed at third-party marketing and solicitor firms. [1449] First, the Commission estimated the number of individuals who are currently registered as investment adviser representatives, registered representatives of broker-dealers, or both, and would register on Form MA-I. To calculate this estimate in the Proposal, the Commission compared the proportion of FINRA Form U4 filers (i.e., individuals who are investment adviser representatives and/or registered representatives of broker-dealers) to the sum of all investment advisers registered on Form ADV and all broker-dealers registered on Form BD. FINRA estimated that, as of October 2010, 637,000 individuals had registered as investment adviser representatives and/or registered representatives of broker-dealers on Form U4. [1450] The Commission estimated that as of October 2010, 11,888 investment advisers had registered on Form ADV, while as of March 2010, 5,163 broker-dealers had registered on Form BD. The proportion of Form U4 registrants to the sum of Form ADV and Form BD registrants was approximately 37.36 to 1. [1451] According to Form MA-T data that had been collected as of October 2010, the Commission estimated that approximately 450 of 1,000 Form MA-T registrants would be investment adviser and/or broker-dealer firms. Thus, in the Proposal, the Commission estimated that approximately 16,800 individuals who are registered as investment adviser representatives, registered representatives of broker-dealers, or both, would be required to register on Form MA-I. [1452]

Based on data collected as of December 31, 2012, the Commission is revising its estimate of the number of individuals who are employed at municipal advisors registered with the Commission as investment advisers and/or broker-dealers and for whom a municipal advisor will be required to file Form MA-I. FINRA estimates that, as of December 31, 2012, 670,016 individuals had registered as investment adviser representatives and/or registered representatives of broker-dealers on Form U4. [1453] The Commission estimates that, as of December 31, 2012, there were 32,645 broker-dealer and investment advisory firms. [1454] Thus, the revised estimate of the average number of individuals who are employed at municipal advisors registered with the Commission as investment advisers and/or broker-dealers and for whom a municipal advisor will be required to file Form MA-I is approximately 20.52. [1455] The Commission estimates that approximately 273 of the 910 Form MA registrants will be municipal advisors registered with the Commission as investment advisers and/or broker-dealers. [1456] Accordingly, the Commission currently estimates there to be approximately 5,602 individuals who are employed at municipal advisors registered with the Commission as investment advisers and/or broker-dealers for whom a Form MA-I will need to be filed. [1457]

Second, in the Proposal, the Commission estimated the number of individuals who are employed at municipal financial advisors and who would register on Form MA-I. The Commission staff learned from discussions with industry and market participants that it was reasonable to estimate that there is an average of approximately 10 professional employees per financial advisor. According to Form MA-T data that had been collected as of October 2010, the Commission estimated that approximately 450 of 1,000 MA-T registrants would be financial advisors. Thus, in the Proposal, the Commission estimated that approximately 4,500 individuals who are employed at financial advisors would be required to register on Form MA-I. [1458]

The Commission now estimates that approximately 491 of the 910 Form MA registrants will be municipal advisors not otherwise registered with the Commission. [1459] Accordingly, the Commission currently estimates there to be approximately 4,910 individuals employed by a municipal advisor not otherwise registered with the Commission for whom a Form MA-I will need to be filed. [1460]

Third, in the Proposal, the Commission estimated the number of individual solicitors who would register on Form MA-I. The Commission examined the data of all Form MA-T registrants as of October 2010, and estimated that approximately 100 out of 1,000 registrants were solicitors. For purposes of the Proposal's PRA, the Commission assumed that there were five individual solicitors who would register on Form MA-I for every solicitor firm that would register on Form MA. [1461] Thus, in the Proposal, the Commission estimated that approximately 500 individual solicitors would be required to register on Form MA-I. [1462]

The Commission now estimates that approximately 146 of the 910 Form MA registrants will be solicitors. [1463] Accordingly, the Commission currently estimates there to be approximately 730 individuals employed by solicitors for whom a Form MA-I will need to be filed. [1464]

One commenter noted that, for the Proposal's estimate of 21,800 natural persons who will be required to register initially on Form MA-I, the Commission “completely disregards” governing body appointees “who may number in the tens of thousands and will likely require significantly more time and expense per person to ensure compliance than the population of financial professionals assumed in the Proposed Rule.” [1465] In the Proposal, the Commission stated that it did not believe that appointed members of a governing body of a municipal entity that are not elected ex officio members should be excluded from the definition of “municipal advisor.” [1466] As discussed above, however, Rule 15Ba1-1(d)(3)(ii) now provides an exemption from the definition of municipal advisor for any person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, a municipal entity or obligated person to the extent that such person is acting within the scope of such person's official capacity, regardless of whether such person is an employee of the municipal entity or obligated person. [1467] Therefore, the Commission does not believe that it should increase the current estimated number of Form MA-I to account for appointed board members of governing bodies.

The Commission is not revising its initial estimate of the average number of firms that will newly register as a municipal advisor each year. In the Proposal, the Commission estimated that the average number of new Form MA applicants per year would be approximately 100. [1468] The Commission staff has reviewed Form MA-T data as of December 31, 2012, and estimates that approximately 205 municipal advisors filed an initial Form MA-T in 2011 and approximately 115 filed an initial Form MA-T in 2012. In the Proposal, the Commission stated that it believed that the number of Form MA-T registrants would likely increase beyond 800 because numerous applicants that would have been required to register might have missed the October 30, 2010, deadline for a variety of reasons, such as concluding, based on their interpretation of the Dodd-Frank Act, that they were not required to register as municipal advisors. [1469] The Commission believes this could explain the higher number of municipal advisors that filed an initial Form MA-T in 2011 than in 2012. Thus, the Commission believes that, going forward, it is appropriate to estimate approximately 115 new Form MA-T registrations per year (assuming the temporary regime were to continue). Based on the estimate of the number of new Form MA-T registrations per year, the Commission continues to estimate that approximately 100 new municipal advisory firms will register on Form MA each year. [1470]

The Commission, however, is revising its estimate of the average number of individuals for whom municipal advisory firms will need to submit a new Form MA-I. In the Proposal, the Commission estimated that the average number of new Form MA-I applicants per year would be 1,800. [1471] The Commission now estimates that municipal advisors will need to submit a new Form MA-I for approximately 950 individuals annually. [1472]

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Initial Registration Burden

a. Form MA

In the Proposal, the Commission estimated that it would take a municipal advisory firm an average of 3.5 hours to complete Form MA. [1473] This estimate was based on the estimated average amount of time for a municipal advisory firm to complete Form MA-T and the estimated average amount of time for an investment adviser to complete Part 1A of Form ADV. The Commission stated in the Proposal that this estimate would apply to all municipal advisory firms because even those that had already completed Form MA-T under the temporary registration regime would be required to register anew under the permanent registration regime. [1474]

Additionally, the Commission stated in the Proposal that, at the time it initially files Form MA, a municipal advisory firm would be required to conduct an initial review of its business and certify that, among other things, it and every natural person associated with the municipal advisory firm would meet standards required by the Commission, the MSRB, or any other relevant SRO to engage in municipal advisory activities. The Commission estimated that the initial burden to comply with the Form MA self-certification requirement would be, on average, approximately 3.0 hours per applicant. [1475] The Commission based this estimate on burden estimates for Form N-CSR (“Certified Shareholder Report of Registered Management Investment Companies”) and Form N-Q (“Quarterly Schedule of Portfolio Holdings of Registered Management Investment Company”), which include similar self-certification requirements. [1476] Thus, the Commission estimated that the total average initial burden for Form MA would be 6.5 hours per applicant. [1477]

As noted above, the Commission is making some revisions to clarify the questions asked in the forms and to elicit additional information. The Commission recognizes that some revisions will increase the burden for municipal advisors to complete the relevant forms, while others will decrease the burden. For example, to reduce the burden for municipal advisory firms with many offices, Form MA will require information pertaining only to the five largest offices. On the other hand, Form MA now requires certain additional information that will result in additional burdens, including additional identifying information and information regarding disciplinary history.

Because of these reasons and because most of the changes to Form MA are clarifications not requiring additional information, [1478] on balance, the Commission does not believe the additional information requirements will impose additional burdens on municipal advisors in the aggregate. As noted in the Proposal, the average time necessary to complete Form MA-T is 2.5 hours, while the average time necessary to complete Part 1A of Form ADV, a lengthier registration form, is 4.32 hours. [1479] Based on the comparative estimated burdens to complete Form MA-T and Part 1A of Form ADV, the Commission continues to believe that its burden estimate for the completion of Form MA is reasonable. As discussed above, however, the Commission is not adopting a self-certification requirement. [1480] Therefore, the Commission estimates that the total average initial burden for Form MA will be 3.5 hours per applicant.

In the Proposal, the Commission estimated that the total initial paperwork burden for completion and submission of Form MA during the first year would be 6,500 hours. [1481] Given its revised estimates for Form MA applicants, as described above, and its decision not to adopt a self-certification requirement, the Commission now estimates that the total initial paperwork burden for completion and submission of Form MA during the first year will be 3,185 hours. [1482]

In the Proposal, the Commission solicited comments on the collection of information burdens associated with the proposed rules and forms. [1483] The Commission received two comment letters that addressed the Commission's burden estimates for Form MA. Both commenters argued that completing Form MA would require significantly more than the estimated 6.5 hours. [1484] One commenter, in particular, asserted that:

[T]he cost estimates included in the Proposal are grossly underestimated. Rather than the 6.5 hours estimated by the Commission, our members estimate that the initial preparation of Form MA would require significantly greater hours and much higher costs. Annual updates are estimated to require exponentially higher hours to update and maintain the filing. In this regard, some of our members have observed that the time required to prepare the Form MA-T to register under the Commission's temporary rules required well in excess of 6.5 hours. [1485]

However, this commenter did not provide specific figures by which to recalculate the Commission's estimates, making it difficult to evaluate these assertions.

While the Commission recognizes that some applicants will require well in excess of 3.5 hours to complete Form MA, the Commission reiterates that the hourly estimate is meant to reflect an average and emphasizes that, as noted in the Proposal, depending on the specific circumstances of the municipal advisory firm, the initial burden to complete Form MA will vary greatly from respondent to respondent. [1486] Factors that will affect the initial burden include the size of the municipal advisory firm, the complexity of its business activities, and the amount and type of information to be included on Form MA. Moreover, as noted above, Form MA generally allows applicants for municipal advisor registration to incorporate by reference information that already has been submitted on other forms under other Commission regulatory requirements. [1487] The Commission believes that the ability of registrants to incorporate by reference will lower the hourly average burden for many applicants. The Commission anticipates that, generally, many smaller municipal advisory firms will require less time than the 3.5 hour average burden estimate, while larger municipal advisory firms that offer a variety of services to municipal entities will require considerably more time since they will have more information to disclose in Form MA.

The collection of information made pursuant to Form MA is mandatory and generally will not be confidential and will be made publicly available. Some information, such as social security numbers, will be kept confidential subject to applicable law.

b. Form MA-I

In the Proposal, the Commission estimated that the average amount of time for a natural person municipal advisor to complete Form MA-I would be 3.0 hours. [1488] The Commission determined this figure by estimating the paperwork burden for Form MA-I compared to that of Form MA-T, which is estimated to be 2.5 hours per applicant. [1489] The Commission believed that the paperwork burden of completing Form MA-I would not be significantly greater than the amount of time required to complete Form MA-T because some of the information required for Form MA-I would have already been gathered to complete Form MA-T. [1490] In the Proposal, the Commission stated that the estimate of 3.0 hours to complete Form MA-I would apply to all natural person municipal advisors because even those that had already completed Form MA-T under the temporary registration regime would be required to register anew under the permanent registration regime. [1491]

As noted above, a natural person municipal advisor who is not a sole proprietor is no longer required to register as a municipal advisor by completing Form MA-I. However, the Commission has determined that a municipal advisory firm must submit Form MA-I to provide information pertaining to each associated person who engages in municipal advisory activities on the firm's behalf. Although the person responsible for submitting Form MA-I has changed since the Proposal, the Commission does not believe that its estimate regarding the number of hours required to complete Form MA-I would materially change. Rather, the Commission believes that it would take an individual and a municipal advisory firm substantially the same number of hours to complete Form MA-I. Similarly, although municipal advisory firms may, over time, become more efficient in completing Form MA-I, the Commission does not believe the time savings would be substantial enough to cause the Commission to revise its estimate.

As discussed above, the Commission is also making some revisions to clarify the questions asked in Form MA-I and to elicit additional information. The Commission recognizes that some revisions will change the estimated burden provided in the Proposal to complete Form MA-I, while others will decrease the burden. For example, to reduce the paperwork burden, an individual's disciplinary history reported on Form MA can be incorporated by reference in Form MA-I. On the other hand, Form MA-I now requires certain additional information that would result in additional burden, including additional identifying information and information regarding disciplinary history.

As with Form MA, because most of the changes to Form MA-I are clarifications not requiring additional information, on balance, the Commission does not believe the additional information requirements will impose additional burdens on municipal advisors in the aggregate. [1492] Moreover, as noted above, Form MA-I generally allows information that already has been submitted on other forms to be incorporated by reference. [1493] Based on the comparative estimated burden to complete Form MA-T and the ability to incorporate by reference, the Commission continues to believe that its hourly burden estimate for the completion of Form MA-I is reasonable and is retaining the estimate as originally proposed. Therefore, the Commission estimates that the average amount of time for a municipal advisory firm to complete Form MA-I with respect to each natural person who is a person associated with the municipal advisor and who engages in municipal advisory activities on its behalf will be 3.0 hours.

In the Proposal, the Commission estimated that, during the first year, the total paperwork burden for completion and submission of Form MA-I would be 65,400 hours. [1494] Given its revised estimate of the number of individuals for whom municipal advisory firms will need to complete a Form MA-I, as described above, the Commission now estimates that the total initial paperwork burden for completion and submission of Form MA-I during the first year will be 33,750 hours. [1495]

The Commission received two comment letters addressing the estimated burden to complete Form MA-I. One commenter contended that Form MA-I, as proposed, contained many questions that are irrelevant to board trustees who are not involved in investment transactions. [1496] According to the commenter, completion of the form would likely take longer than three hours, would not benefit the Commission, and would impose unnecessary burdens and costs. [1497] Another commenter argued that the registration process would create burdens that would significantly outweigh any benefits created for a citizen to volunteer its services and that the registration requirements, such as paying fees, meeting multiple disclo