GFOA Issue Brief : SEC Municipal Advisor Rule

In September, the Securities and Exchange Commission (SEC) gave final approval to the definition of "municipal advisor" (MA), and, this month, produced supplementary Frequently Asked Questions about the rule. The SEC municipal advisor rule specifies which activities will be covered by the Dodd-Frank Act imposed fiduciary duty of a municipal advisor to its government client, may result in the need for new written representations by issuers, and may limit the manner in which the underwriters and other professionals interact with issuers. Additionally, forthcoming rulemaking by the Municipal Securities Rulemaking Board (MSRB) may cause further changes to the manner in which state and local government are able to interact with the outside finance professionals. 

Most importantly for GFOA members, unlike the proposed rule, all state and local government employees, board members, committee members and others are clearly exempted from the rule when acting in their official capacity. The exemption also applies to government employees and officials who may have to participate on other government boards and committees as part of their job. The rule also specifically states that, if a government official is also a municipal advisor outside of his or her government responsibilities (e.g., a part time city council member may have a career as a financial advisor), those professionals are still bound by the municipal advisor rules for their work unrelated to their official government capacity.

Top Items Issuers Need to Know About the Rule

  • The effective date has been extended from January 13, 2014 to July 1, 2014.
  • Municipal advisors have an explicit fiduciary duty to their government clients.
  • Under the Rule, underwriters and other professionals that do not have a fiduciary duty to issuers will not be able to provide advice to governments unless certain exemptions are met. For instance, an underwriter may not recommend a specific type of financing to the issuer unless the issuer has a MA or has a RFP out for underwriting services related to a specific transaction.
  • Underwriters will be able to communicate with issuers about general market issues, facts and ideas, however, unless an exemption is met, they can not advise a government to take a specific action.
  • When an issuer has a MA on a transaction and wants to receive certain types of advice or recommendations from the underwriter or other professionals, the issuer will need to represent to the underwriter or other professionals in writing that they have a MA. The SEC has stated that an issuer may post this representation on their web site as long as the posting states that the representation is intended to establish the independent MA exemption.
  • It is important to note that the GFOA’s Best Practices strongly recommend that governments hire a municipal advisor for their bond transactions (BPs – Selecting a Financial Advisor, Selecting and
  • Managing the Method of Sale of State and Local Government Bonds).
  • Responses to RFPs or RFQs (including mini RFPs) are not considered to be municipal advice. An RFP must be for a specific objective (e.g., ideas on how to structure a particular issuance of municipal securities to finance an identified capital project or program), although it does not need to be a formal procurement. The SEC has recently stated that governments must send RFPs out to at least three firms and/or the RFP may be posted on the government’s website, and the RFP must not be out for response longer than six months. Please note that GFOA recommends that all governments utilize an RFP process to engage professionals involved in their bond transaction (BPs – Selecting a Financial Advisor, Selecting Underwriters).
  • Advice on the “issuance of municipal securities” includes advice during the entire lifespan of the transaction – from the earliest pre-planning stages through maturity or earlier redemption.
  • MAs will be mandated to take professional exams, and adhere to forthcoming MSRB rulemaking. Issuers that want advice on how to invest monies that are not bond proceeds or in escrows to pay for bonds, may be requested by their broker to represent in writing that those monies are not bond proceeds or in escrows to pay for bonds.

Below is a 2-page summary of the rule, as well as more detailed discussion of the various provisions. Please note that throughout this document the term “municipal entities” refers to state and local governments and other political subdivisions within a state, as well as other types of entities as summarized below.

Highlights of the Rule

Who is a municipal advisor?

  • A municipal advisor is a person who provides “advice” to a state or local government on municipal financial products or the issuance of municipal securities. No compensation is required.
  • Certain firms that are compensated by unrelated broker-dealers, financial advisors, or investment advisors to solicit business from municipal entities or obligated persons including state and local pension plans, local government investment pools, other participant-directed investment programs or plans, and state and local governments are also municipal advisors.
  • Underwriters, attorneys, engineers, accountants, investment advisors, commodity trading advisors and swap dealers are not considered municipal advisors when meeting the exemption standards explained below. This includes when the issuer has made a written representation that it has hired an independent financial advisor for the transaction.

What is advice?

  • A recommendation on financial products entered into by state and local governments (“municipal financial products”) or the issuance of municipal securities is “advice” if the information communicated to the municipal entity is reasonably viewed as a “call to action” to be taken by the issuer. That would be the case if an underwriter or other professional recommends a course of action that is particularized to the government’s needs.
  • Advice on the “issuance of municipal securities” includes advice throughout the life of an issue of municipal securities, from the pre-issuance planning stage for a debt transaction involving the issuance of municipal securities until the bonds mature or are redeemed.
  • Advice on “municipal financial products” includes advice on swaps, GICs, and investment strategies (i.e., the investment of bond proceeds or municipal escrows established to pay for bonds). Investment strategies with respect to the investment of other state and local funds are exempted from the rule.

What is the duty of a municipal advisor?

  • Municipal advisors have a fiduciary duty to their state and local government clients. They have a more limited duty of Fair dealing to their obligated person clients (e.g. conduit borrowers) if the obligated person is not a state or local government. Fair dealing in this context means that a proposal must be fairly presented and executed. The material terms and risks of the proposal must be disclosed.

Who is exempt from the definition of “municipal advisor”?

  • State and local government employee and official exemption. All state and local employees, governing body members, and other officials are exempt from municipal advisor regulation to the extent that they act within the scope of their employment or official capacity.
  • When a government has an independent municipal advisor exemption. State and local governments that are represented by independent municipal advisors may receive advice from underwriters and others on the issuance of municipal securities or municipal financial products as long as an independent municipal advisor is providing advice to the issuer on the same aspects of the municipal financial product or issuance of municipal securities AND the municipal entity represents in writing it is relying on their own municipal advisors. Note: This exemption is not limited to underwriters. The rule does not specify who has to provide the representation on behalf of the municipal entity.
  • RFP exemption. Firms responding to RFPs, include mini RFPs, may respond to the RFP with recommendations and advice without becoming municipal advisors. The SEC stated in its 1/10/14 FAQs that an RFP must be for a specific objective (e.g., ideas on how to structure a particular issuance of municipal securities to finance an identified capital project or program), although it does not need to be a formal procurement, may not be out for responses longer than six months, and must be sent to at least three firms and/or posted on the government’s website.

  • Underwriter exemption. Underwriters may provide advice on the structure, timing, terms, and similar matters concerning a transaction under the “underwriter exemption” only during the period of time beginning when they are engaged for a particular transaction and ending at the end of the underwriting period (the later of closing or the date the underwriter no longer has an unsold balance) (see page 6). The SEC’s 1/10/13 FAQs further detail by example the types of information that an underwriter can and can not provide. The SEC has also stated in those FAQs that an underwriter and issuer may sign an engagement letter or letter of intent early in the process, in order for the underwriter exemption to apply. That letter may subject to conditions, such as formal approval of the selection of the underwriter by the governing body or finalizing the structure of the issue of municipal securities. It may also state the engagement is nonbinding and that it can be terminated by either party. It may also limit the liability of the parties to the engagement letter.
  • Note: Underwriters may also provide further advice when the government has hired an independent MA and meets the requirements for that exemption or when within the “RFP” exemption applies. Underwriters may also provide many other types of information to municipal entities (including general market information and information about their qualifications) that does not rise to the level of advice without acting as a municipal advisor.
  • Others. As discussed further below, the rule also provides specific exemptions for attorneys, engineers, accountants, registered investment advisors, commodity trading advisors, registered swap dealers, and most banking activities.

When does the rule take effect?

  • The rule is effective July 1, 2014. Permanent registration of municipal advisors by the SEC will start in July 2014. In the interim, the temporary registration rule expiration date has been extended to December 31, 2014. It is important to note that further MSRB rulemaking on issues such as fiduciary duty, political contributions, fair dealing, gifts and gratuities, supervision, and professional qualifications will need to be completed before specific rules are in place for these professionals. However, a fiduciary duty standard is already in place, per the Dodd-Frank Act, although it has yet to be specifically defined in final rulemaking by the MSRB.
  • Municipal advisors are already required to register with the SEC and the MSRB. A state or local government can determine whether a firm is registered as a municipal advisor by the MSRB by going to the MSRB website. A list of firms registered with SEC as municipal advisors may be found by going to the SEC website.


The GFOA wishes to acknowledge the assitance that Peg Henry of Jeffries LLC  provided in preparation of this brief.