Preparing for Regulatory Compliance
Ehlers and Preparing for Regulatory Compliance July, 2011
Since the passage of the Dodd Frank Consumer Protection Act (the Act) in July, 2010, Ehlers has been preparing for Federal Regulatory Compliance as a Municipal Advisor (MA). As a result of the Act, all MA’s now have a federal fiduciary duty to their municipal client. We have been contacted by our clients asking us about the impact to them and asking us how to sort out who is and who is not acting as a MA. We are sharing with you some of the details we know at this point which will likely impact how to determine when a consulting relationship may fall into the category of a MA and what is required of a MA.
What We Do Know Today
The Security Exchange Commission (SEC) is to oversee the regulation of MA. They are to work closely with the municipal securities industry to educate state and local officials about disclosure and other risk management issues associated with municipal debt. They will review, process and approve the Rule filings by the Municipal Securities Rulemaking Board (MSRB) for MA’s.
The MSRB establishes rules that securities firms, banks and MA’s must follow when advising issuers and investors as part of municipal securities transactions. The MSRB and SEC have adopted various rules to date, proposed pending rules and will be adopting additional rules regulating municipal advisors. Our best guess is that most rules regulating MA’s will be in place by the end of 2011.
What We Are Doing to Comply
1. Definition of MA
As defined by the Act, a MA is a person (who is not a municipal entity or an employee of a municipal entity) that 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; undertakes a solicitation of a municipal entity for this work; or assists municipalities with investment products.
Each firm will need to assess whether they are providing services that fit within this definition. The general consensus is that any firm providing advice leading up to a municipal debt offering including feasibility reports are deemed to be a MA. The MSRB is expressing concern about unregistered municipal advisors as reflected in this link: http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2011/2011-32.aspx . The MSRB is also asking municipalities to check on the MSRB website to determine if a firm providing municipal advisor services is registered.
2. Registering with the SEC and the MSRB
MA’s must first comply by registering with the SEC. The SEC has a temporary registration process in place. To see the forms and list of registrants, visit http://www.sec.gov/info/municipal/form_ma-t.htm.
In addition to MA registration with the SEC via Form MA-T, MA’s must also register with the MSRB as municipal advisors and pay certain fees. Visit http://www.msrb.org/msrb1/PQweb/MARegistrants.asp to see who has registered with the MSRB.
3. Supervisory Policies
The MSRB has proposed rule G-44 which requires MA’s to establish supervisory and record keeping procedures. More importantly, at least one employee with a comprehensive understanding of the public finance industry and the regulatory requirements must be designated as “Principal” and be responsible for the firm’s regulatory compliance.
4. Other G-Rules currently approved or proposed by the MSRB and/or SEC
- Approved Rule G-17 which states, “In the conduct of its municipal securities or municipal advisory activities, each broker, dealer, municipal securities dealer, and municipal advisor shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.”
- Other proposed rules include G- 20 Gifts and Gratuities, G-42 Pay to Play, G-17 Interpretive guidance for MA’s, and G-36 Fiduciary Duty. The intent of these rules is to protect the municipal issuer, establish minimum competency standards for MA’s and help establish a fair and transparent municipal bond market.
5. Examination/Continuing Education
All registered MA’s will be required to take and pass a federal examination. The MSRB is developing the test which will likely be required starting in the fall of 2012. You can read more at http://www.msrb.org/msrb1/pdfs/PQ-Update.pdf
6. SEC Audits
To ensure that the rules and regulations are being followed each registered MA will be subject to periodic inspections and audits. The SEC is responsible for this compliance activity. When and how this compliance responsibility will be handled has yet to be determined.
What Should Be Your Next Steps
Our advice on what our clients and business partners should be doing will evolve as we learn more details about Regulatory Compliance. For now, we are suggesting that clients and business partners consider the following steps.
- Stay informed by signing up for Ehlers’ newsletters, Market Commentaries, and logging into our website to keep up to date with changes in policies and procedures.
- Stay informed to the latest policies and information provided by the SEC and MSRB.
- Review your practice to determine if you are being compliant to what is being legally required for the products and services you provide.
Please call one of us if you have questions. We value your relationship and hope that the information provided in this document will help you evaluate when a firm is or is not acting as a municipal advisor.
