The Impact of Municipal Advisor Regulation on the Municipal Market
Federal Registration as a Municipal Advisor
Ehlers as a firm and our municipal advisors are registered with the SEC (Registration No. 866-00266-00. Central Key Index (CKI) # 0001604197) and the MSRB (Registration No. K0165). Ehlers’ registration can be viewed on the agencies’ respective websites (https://www.sec.gov/edgar/searchedgar/companysearch.html & http://www.msrb.org/MARegistrants.aspx. Our financial advisors are now called Municipal Advisors to reflect the fact that they meet the requirements under the Dodd Frank Act as set forth by the SEC and MSRB.
Ehlers and Municipal Advisor Regulatory Compliance
Since the passage of the Dodd Frank Consumer Protection Act (the Act) in July, 2010, Ehlers and Associates, Inc. (Ehlers) has been changing to meet the new regulatory requirements of a Municipal Advisor (MA). As a result of the Act, all MA’s now have a federal fiduciary duty to their municipal client. We are also now MA’s instead of Financial Advisors. We have been contacted by our clients asking us about the impact to them and what it means for MA’s.
With the final MA Rule adopted by the Security Exchange Commission (SEC), the Rule provides guidance on when a consulting relationship may fall into the category of a MA and then what is required to be a MA. There is not, however, a clear bright line established that makes this determination quickly clear. Ehlers is a MA and will need to comply with all the Rules. We do not see substantial changes, however, in how we advised clients in our role as a Municipal Advisor.
MSRB-Registered Municipal Advisor Firms and Associated Series 50 Representatives
The Firms tab displays municipal advisor firms registered with the MSRB. The Representatives tab displays associated persons who have passed the MSRB’s Municipal Advisor Representative Qualification Examination (Series 50). Qualification information is dependent upon data about associated persons submitted to the Securities and Exchange Commission (SEC) on SEC Form MA-I.
Click here to verify Ehlers and Ehlers Municipals Advisors on the MSRB website.
The Municipal Advisor Rule
Security Exchange Commission (SEC)
The Act charges the SEC with the responsibility to regulate MA’s. After four years, the SEC MA Rule release (Release No. 34-70462; File No. S7-45-10) became effective July1, 2014. The Rule provides guidance on MA activities, defines MA requirements, and details a permanent registration process for MA’s.
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 MA services described within the SEC’s 777 page Rule release. Our view is that any firm providing advice leading up to a municipal debt offering including feasibility reports is deemed to be a MA. SEC staff has provided additional interpretative guidance on certain aspects of the Rule in “FAQ’s” dated January 10, 2014 and May 19, 2014.
The SEC also reviews, processes and approves all Rule filings from the Municipal Securities Rulemaking Board (MSRB) for MA’s.
Municipal Securities Rulemaking Board (MSRB)
The Act charges the MSRB with the responsibility to protect the municipal issuer, the investor as well as help establish a fair and transparent municipal bond market. To date, the MSRB with approval by the SEC has adopted certain rules that MA’s must follow when advising issuers as part of a municipal securities transaction. Current Rules protecting issuers that are in effect are:
Professional Qualification Requirements (MSRB Rule G-3). Each MA’s must pass a qualifications competency test and then comply with ongoing continuing education standards established by the MSRB.
Conduct of Municipal Securities and Municipal Advisory Activities (MSRB Rule G-17). MA’s are now required to deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.
Supervisory and Compliance Obligations of Municipal Advisors (MSRB Rule G-44). MA’s are required to establish a supervisory structure including the appointment of Principals and a Chief Compliance Officer. The Principals are required to establish, maintain, review, test and modify written compliance policies and supervisory procedures.
Three additional rules have been proposed by the MSRB include:
- Gifts and Gratuities Limits (MSRB Rule G-20). The Rule would limit gifts and gratuities provided by MA’s or provided by persons related to the MA firm.
- Political Contributions to curb “Pay to Play” (MSRB Rule G-37). The Rule would limit political contributions to no more than $250 per election per any political candidate for which the MA is legally able to vote.
- Duties of Non-solicitor Municipal Advisors (MSRB Rule G-42). The Rule would require written client disclosure for all client engagements. The client disclosure must include disclosures of all conflicts of interest, the scope of service for the engagement and the basis for all charges.
You can read more about the MA Rules from the MSRB by clicking here.
What Ehlers Has Done to Comply
1. Ehlers is registered with the SEC and the MSRB
MA’s must register with the SEC. The SEC has a permanent registration process in place. To see the forms and list of registrants, click here.
In addition to MA registration with the SEC, MA’s must also register with the MSRB as municipal advisors and pay certain fees. Click here to see who has registered with the MSRB. The MSRB has also asked that municipalities check on the MSRB website to determine if a firm providing municipal advisor services is registered.
2. The Ehlers Board of Directors has appointed Principals and a Chief Compliance Officer. They have established a supervisory structure as required by MSRB Rule G-44.
3. Ehlers has developed draft approaches to address the proposed MSRB Rules. Likely the biggest change for Clients will be written client engagements that will be required to address a much broader scope of topics in the engagement letter and include specific required language.
4. The SEC is responsible for the periodic inspection and audit to ensure that the rules and regulations are being followed by each registered MA firm. Ehlers expects to be audited 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, click here.
- Stay informed to the latest policies and information provided by the SEC and MSRB.
- Please call one of us at Ehlers if you have questions.
We value your relationship and hope that the information provided will be helpful in understanding this significant change in the municipal market.