SEC Issues Interpretive Guidance on Municipal Advisor Registration Rules
The SEC Office of Municipal Securities has issued interpretive guidance to address questions from market participants regarding the implementation of new final SEC rules requiring municipal advisors to register with the SEC.
The staff guidance, in the form of answers to frequently asked questions, or FAQs, covers topics including:
- the advice standard, including the general information exclusion and the treatment of business promotional materials used by underwriters
- the request for proposals-request for qualifications exemption
- the exemption for independent municipal advisors
- the exclusion for registered investment advisers
- the underwriter exclusion, including engagements as underwriters
- issuance of municipal securities and post-issuance advice
- remarketing agent services
- opinions by citizens in public discourse
- the effective date of the final rules and the compliance period for using the final registration forms
As to the advice standard, the SEC noted the focus of the advice standard in the final rules is whether or not, under all the relevant facts and circumstances, the information presented to a municipal entity or obligated person is sufficiently limited so that it does not involve a recommendation that constitutes advice. In other words, the determination of whether a person provides advice under the advice standard for municipal advisor registration purposes generally involves whether the person makes a recommendation. In the adopting release, the SEC stated “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. 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.”
Examples of the General Information Exclusion from Advice
The staff believes that a person could rely on the general information exclusion from advice under the final rules when providing a municipal entity or obligated person with information that does not involve a recommendation, such as factual information that does not contain subjective assumptions, opinions, or views. Examples of this type of general information include:
- information regarding a person’s professional qualifications and prior experience (e.g., lists, descriptions, terms, or other information regarding prior experience on completed transactions involving municipal financial products or issuances of municipal securities);
- general market and financial information (e.g., market statistics regarding issuance activity for municipal securities or current market interest rates or index rates for different types of bonds or categories of credits);
- information regarding a financial institution’s currently-available investments (e.g., the terms, maturities, and interest rates at which the financial institution offers these investments) or price quotes for investments available for purchase or sale in the market that meet criteria specified by a municipal entity or obligated person;
- factual information describing various types of debt financing structures (e.g., fixed rate debt, variable rate debt, general obligation debt, debt secured by various types of revenues, or insured debt), including a comparison of the general characteristics, risks, advantages, and disadvantages of these debt financing structures; and
- factual and educational information regarding various government financing programs and incentives (e.g., programs that promote energy conservation and the use of renewable energy).
In addition, the staff believes that information that is particularized to the municipal entity or obligated person in limited respects could be consistent with the general information exclusion from advice, provided that the information is factual in nature and does not contain or express subjective assumptions, opinions, or views, or constitute a recommendation. For example, the staff believes that a person could provide general market information regarding a municipal entity’s particular outstanding bonds, such as current market prices and yields, without this information constituting a recommendation.
Potential Implied Recommendations
The staff further believes, however, that information that is particularized in more than the limited respects described above in the immediately preceding paragraph to a municipal entity or obligated person potentially could imply a recommendation that could constitute advice under the final rules, depending on all of the relevant facts and circumstances. The more individually tailored the information is to a specific municipal entity or obligated person or group of municipal entities or obligated persons that share similar characteristics, the more likely the information will be considered to be a recommendation. For example, if a person provided information regarding debt financing structuring options that was tailored to address the specific needs, objectives, or circumstances of a municipal entity or obligated person, such as information tailored to address particular fiscal needs or to incorporate particular revenue projections, the staff believes that presenting these particularized options likely would suggest a preferred financing approach that likely would imply a recommendation.
Effect of Disclosures and Disclaimers on Advice Analysis.
The staff believes that disclosures and disclaimers regarding a person’s intentions in providing information to a municipal entity or obligated person are factors that bear upon whether or not the person’s communications would be a recommendation that constitutes advice under the final rules. The staff believes that the following disclosures and disclaimers, clearly and conspicuously stated, in written materials that accompany communications to a municipal entity or obligated person, would be factors that weigh against treatment of information as a recommendation that constitutes advice:
- this person is not recommending an action to the municipal entity or obligated person;
- this person is not acting as an advisor to the municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to the municipal entity or obligated person with respect to the information and material contained in this communication;
- this person is acting for its own interests; and
- the municipal entity or obligated person should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material.
Effect of Overall Course of Conduct on Advice Analysis
The staff further believes that, while the presentation of information with the disclosures and disclaimers described above are factors that suggest that a person may not be making a recommendation that would constitute advice under the final rules, such disclosures and disclaimers are not controlling and must be considered in the context of a person’s overall course of conduct, taking into account all of the relevant facts and circumstances. Thus, any actions or communications that are inconsistent with these disclosures and disclaimers or inconsistent with the arm’s length nature of a non-advisory business relationship between a person and a municipal entity or obligated person could suggest that the person is making a recommendation and acting as a municipal advisor, which, absent an available exemption, would require registration with the SEC as a municipal advisor.
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