Preparing for Regulatory Compliance
Ehlers and Preparing for Regulatory Compliance September, 2012
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) will oversee the regulation of MA. They will review, process and approve the Rule filings by the Municipal Securities Rulemaking Board (MSRB) for MA’s. In December of 2010, they issued a release (Release No. 34-63576; File No. S7-45-10) requesting comments on who is a Municipal Advisor, Municipal Advisor requirements and a permanent registration process. We are waiting their final release on these questions.
The Municipal Securities Rulemaking Board (MSRB) establishes rules that broker/dealers and MA’s must follow when advising issuers and investors as part of municipal securities transactions. The MSRB with approval by the SEC has adopted a limited number of rules to date. Most importantly, MA’s are now required to deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. Eight additional rules have been proposed but they have been withdrawn pending a final definition of a MA by the SEC.
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 has asked that municipalities 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
In the withdrawn proposed rules, the MSRB has proposed (Proposed MSRB Rule G-44) requiring 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. Proposed Rules
The MSRB has proposed various rules is to protect the municipal issuer, establish minimum competency standards for MA’s and help establish a fair and transparent municipal bond market. Other G-Rules previously proposed by the MSRB include:
- G-17 Interpretive Notice on the Role of a Municipal Advisor
- G- 20 Gifts and Gratuities Limits
- G-21 Advertising
- G-36 Fiduciary Duty Responsibilities
- G-42 Political Contributions to curb “Pay to Play”
- G-46 Activities of a Municipal Advisor
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 be required once the final rules are in place. You can read more at http://www.msrb.org/msrb1/pdfs/PQ-Update.pdf .
6. SEC Office 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 is being developed by the SEC.
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.