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3From: Ed Marquez [ mailto :Edward.Marquez @firstsw.com] Sent: Monday, February 07, 2011 12:47 PM To: Ed Marquez Subject: Proposed SEC rules re: Registration of appointed board members as "municipal advisors" Importance: High Hi Folks, As some of you may already be aware, the SEC is proposing an expansion of regulations governing people offering financial advice to municipalities and other governmental units. While my firm, FirstSouthwest, is generally in favor of the expansion of regulations over compensated professional consultants, the regulations as proposed by the SEC, may have a chilling effect on those 'non-employees' willing to serve as appointed Board Members on investment, audit and finance committees as well as on pension boards, community redevelopment agencies and Downtown Development Authorities (particularly those with boards made up of volunteer members) and conduit bond issuers (e.g. Health Facility Authorities, Industrial Development Authorities etc.). I've attached a Bond Buyer article that introduces the issue as well as three write -ups from different law firms. I urge you to discuss this matter with your legal counsel to determine its applicability to your government's operations. if your entity has issues regarding the proposed regulations, we urge you to write to the SEC. The deadline for commenting on the proposed regulations is February 22, 2011. Comments may be emailed to rule- comments @sec.Bov or sent on paper in triplicate to: Elizabeth M. Murphy Secretary Securities and Exchange Commission loo F Street, NE Washington , DC 20549 If you have any questions or if you would like to see other write -ups on the issue, please call me at (305) 819 -8886 or email me. Thanks, Ed Ed Marquez Senior Vice President 2/9/2011 FirstSouthwest direct 305.819.8886 fax 305.819.9992 cell 305.321.3332 18851 NE 29th Avenue, Suite 520 , Aventura , FL 33180 - - - -- Original Message---- - From: "Squire, Sanders & Dempsey" <email @ssdpublications.com> To: Ed Marquez <Edward.Marquez @firstsw.com> Date: Thu, 20 Jan 2011 15:24:31 -0500 View this email as a webpaoe. Ij ?= January 2011 www.ssd.com Will Appointed Members of Boards of Municipal Bond Issuers Be Caught Under SEC's Proposed Regulations for Municipal Advisors? The Securities and Exchange Commission's (SEC) proposed final regulations for the registration of municipal advisors (the Rules), if approved in the form proposed, will affect more than traditional municipal advisors. Specifically, appointed board members of a municipal or other public bond - issuing authority (municipal entity) will find themselves subject to the restrictions and registration requirements imposed by the regulations. Under the Rules as proposed, anyone providing advice to a municipal entity or obligated person, whether solicited or unsolicited, compensated or not, will be required to register with the SEC as a "municipal advisor" and be subject to the scrutiny of the SEC regarding competence and background information, in addition to paying any required filing fees. Elected officials and municipal employees are 2/9/2011 Founded in 1890, Squire, Sanders & Dempsey has lawyers in 37 offices and 17 countries around the world and now Includes the nearly 500 lawyers from leading UK legal practice Hammonds. With one of the strongest integrated global platforms and our longstanding "one -firm firm" philosophy, Squire Sanders provides seamless legal counsel worldwide. Contact: For more information contact your principal Squire Sanders lawyer or any of the individuals in our Public & Infrastructure Finance Practice Group. Squire Sanders publishes on a number of other topics. To see a list of options and to sign up for a mailing, visit our subscription page. Beijing • Berlin • Birmingham Bratislava • Brussels • Budapest Caracas • Cincinnati • Cleveland excluded as are attorneys, accountants and engineers (to a limited extent). The proposed Rules have been met with a firestorm of criticism from municipal issuer groups and their advocates and must be approved in final form by the SEC before they become effective. If the proposed Rules concern you, you should let the SEC know by filing a comment with the SEC by February 22, 2011. The SEC has specifically requested comment on this and many other aspects of the proposed Rules. The full text of the proposed Rules, as well as a link to submit comments directly to the SEC, can be found on the SEC's website. The proposed Rules implement the Dodd -Frank Wall Street Reform and Consumer Protection Act (Dodd - Frank). Section 975 of Dodd -Frank makes it unlawful "for a municipal advisor to provide advice to or on behalf of a municipal entity... with respect to municipal financial products or the issuance of municipal securities... unless the municipal advisor is registered in accordance with this subsection." Dodd -Frank defines "municipal advisor" as "a person (who is not a municipal entity or an employee of a municipal entity) who (i) 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..." (emphasis added). Under Dodd - Frank, municipal advisors include financial advisors, guaranteed investment contract brokers, placement agents and swap advisors, and exclude broker - dealers (when acting in a capacity as an underwriter) and certain other persons. The current controversy arises from the SEC's interpretation of the definition of municipal advisor and those whom the SEC believes should be excluded from, and included in, that definition. In response to a comment received when the temporary registration system was instituted by the SEC on September 1, 2010 (prior to the October 1, 2010 effective date of the registration requirement), the SEC stated that elected members of a municipal bond - issuing authority are excluded from the definition, but appointed members should be included. The SEC explained its position by stating: The Commission does not believe that appointed members of a governing body of a municipal entity that are not elected ex officio members should be excluded from the definition of a 'municipal advisor.' The Commission believes that this interpretation is appropriate because employees and elected members are accountable to the municipal entity for their actions. In addition, the Commission is 2/9/2011 Columbus • Frankfurt • Hong Kong Houston • Kyly • Leeds • London Los Angeles • Madrid • Manchester Miami • Moscow • New York Northern Virginia • Palo Alto • Paris Phoenix • Prague • Rio de Janeiro San Francisco • Santo Domingo Sao Paulo • Shanghai • Tampa Tokyo • Warsaw • Washington DC West Palm Beach i Independent Network Firms: Beirut • Bogota • Bucharest Buenos Aires • La Paz • Lima Panama • Riyadh • Santiago concerned that appointed members, unlike elected officials and elected ex officio members, are not directly accountable for their performance to the citizens of the municipal entity. At least for now, appointed members of the governing body of a municipal issuer (such as a state -level bond authority, industrial development authority, housing finance authority, joint powers authority, municipal utility authority or similar entity) are not excluded from the definition of municipal advisor for purposes of the proposed Rules. This leads to the question of what it means to "provide advice to" a municipal entity or an obligated person. Would the simple act by an appointed member of the governing board of a municipal entity of publicly stating a basis for a vote in favor of or against a particular bond issue constitute "advice "? The answer is not clear under the Rules as proposed by the SEC, and the uncertainty has been met with sharp criticism in the financial press from state and local government officials and their advocates. The SEC should be urged to reverse its position by stating clearly in the final Rules that all governing board members are exempt under the Rules and all statements made or positions taken by any governing board member of the municipal entity will not be considered to be advice if the statements are made or actions taken as part of the fact - finding, deliberative or decision- making process of the governing board. Additionally, the SEC should be urged to exclude from the reach of these proposed Rules casual statements made or opinions offered to a municipal entity by any person who is not acting in any professional advisory capacity. Being required to register with the SEC as a municipal advisor has significant consequences - time, money and legal obligations, as well as becoming the subject of scrutiny by the SEC. The proposed application requires, among other things, that an individual certify that he or she has "sufficient qualifications, training, experience and competence;" will meet, within any applicable required time frames, "such standards of training, experience and competence and other qualifications, including testing, for a municipal advisor, required" by the SEC or other regulatory organizations; and have "necessary understanding of... all applicable regulatory obligations" under federal securities laws, as well as applicable rules promulgated by the SEC and Municipal Securities Rulemaking Board or other relevant self- regulatory organizations. Intentional misstatements in, or omissions of fact from, an application constitute a federal criminal violation. The proposed Rules also impose recordkeeping requirements, permit the SEC to inspect those records and require annual updates. Failing to comply with the Rules could subject a person to civil fines and sanctions, as well as criminal 2/9/2011 penalties. These and other issues raised by the proposed Rules are likely to be the subject of many comments to the SEC. Lawyers in the Squire Sanders Public & Infrastructure Finance Practice Group are available to answer any questions about or further discuss the implications of the proposed Rules. The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations. Counsel should be consulted for legal planning and advice. ©Squire, Sanders & Dempsey All Rights Reserved 2011 This email was sent by Squire, Sanders & Dempsey One Tampa City Center, 201 N. Franklin Street, Suite 2100, Tampa, FL 33602, USA We respect your right to privacy - view our policy Manage My Profile I One -Click Unsubscribe I Forward to a Friend Squire, Sanders & Dempsey (US) LLP is part of the international legal practice Squire, Sanders & Dempsey which operates worldwide through a number of separate legal entices. Please visit www.ssd.com for more information. SIDLEY AUSTIN LLP JANUARY 14, 2011 Proposed SEC Rule Regarding Registration of Municipal Advisors 1. Overview The Dodd -Frank Wall Street Reform and Consumer Protection Act (the "Dodd - Frank Act") requires municipal advisors to register with the United States Securities and Exchange Commission ( "SEC "). To address the Dodd -Frank Act, the SEC placed a temporary registration process in effect last fall and, on December 20, 2010, proposed a permanent registration process and accompanying rule that would establish a permanent registration and record - keeping regime for municipal advisors. The proposed rule is published in SEC Release No. 34 -63576 available at http //www sec ggv /rules/proposed /2010/34 -63576 pdf. On January 6, 2011, the proposed process and rule was published in the Federal Register, Volume 76, No. 4, p. 824 (January 6, 2011). The SEC is requesting comments on all aspects of the proposed rule by February 22, 2011. While the SEC's registration process is not particularly burdensome as it presently exists, the SEC's proposed rule includes, among other things, a far- reaching interpretation of activity that constitutes the business of being a municipal advisor. II. Application of Proposed Rule The proposed new Wile applies to "municipal advisors" who (i) provide advice to or on behalf of a "municipal entity" or an "obligated person" with respect to municipal derivatives, guaranteed investment contracts, and investment strategies or the issuance of municipal securities, including advice with respect to the structure, tuning, terms, and other similar matters concern ng such financial products or issues, or (ii) undertake a solicitation of a "municipal entity" or "obligated person." 1 Id. at 828 -29. A. Municipal Entity "Municipal entity" means any State, political subdivision of a State, or municipal corporate instrumentality of a State, including (A) any agency, authority, or instrumentality of a State, political subdivision, or municipal corporate I The "solicitation of a municipal entity or obligated person" is the term used in the definition of municipal advisor in the proposed rule. Section 15B of the Securities Exchange Act of 1934 (as amended, the `Exchange Act ") provides a definition of solicitation of a municipal entity or obligated person as follows: "a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) that does not control, is not controlled by, or is not under common control . with the person undertaking such solicitation for the purpose of obtaining or retaining an engagement by a municipal entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity." Exchange Act §15B(c)(9). This Sidley update has been prepared by Sidle, Austin LLP for informational purposes only and does not constitute legal advice. This information Is not intended to create, and receipt of it does not constitute, a lawyer- client relationship. Readers should not act upon this without seeking advice from professional advisers. Attorney Advertising - For purposes of compliance with New York State Par rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and One South Dearborn, Chicago, It 60603, 312.853.7000. Prior results do not guarantee a similar outcome. PUBLIC FINANCE UPDATE Page 2 instrumentality, (B) any plan, program, or pool of assets sponsored or established by a State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof, and (C) any other issuer of municipal securities. Id. at 829. The definition of "municipal entity" includes, but is not limited to, public pension funds, local government investment pools and other State and local government entities or funds, as well as participant directed investment programs and certain saving and retirement plans, such as 529, 403(b), and 457 plans. Id. B. Obligated Person "Obligated person" means any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities. Id. The definition of "obligated person" does not include providers of municipal bond insurance, letters of credit or other liquidity facilities. Id. at 830. III. Definition of Municipal Advisor The broadly worded statutory definition of "municipal advisor" includes (A) a person (who is not a municipal entity or an employee of a municipal entity) who (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal derivatives, guaranteed investment contracts, and investment strategies 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; or (ii) undertakes a solicitation of a municipal entity; and (B) financial advisors, guaranteed investment contract brokers, third -parry marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described in any of items (i) and (ii) of clause (A). Exchange Act 6158(e)(4). The definition does not include a broker, dealer, or municipal securities dealer serving as an underwriter (as defined in section 2(a)(11) of the Securities Act of 1933) (15 U.S.C. 77b(a)(11)), any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice, any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps, attorneys offering legal advice or providing services that are of a traditional legal nature, or engineers providing engineering advice. Id. In addition to the express terms of the statutory definition of municipal advisor, the proposed rule indicates that the registration requirement may also apply to professionals and entities described herein, if certain circumstances exist. Federal Register Volume 76, No. 4, p. 824 Qanuary 6, 2011). A person engaging in municipal advisory activities may be considered a municipal advisor even if no contract exists or compensation is received. Id. at 832. The list on the following page illustrates the broad scope of the proposed rule's definition of municipal advisor and is not intended to be exhaustive. Under the proposed rule, "municipal advisory activities" means providing advice to or on behalf of a municipal entity or obligated person with respect to municipal derivatives, guaranteed investment contracts, and investment strategies 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; or solicitation of a municipal entity or obligated person. Id. at 882. PUBLIC FINANCE UPDATE Page 3 Professionals /Entities Circumstances Accountants Engaging in municipal advisory activities other than preparation of financial statements, auditing financial statements, or issuing letters for underwriters for or on behalf of a municipal entity or obligated person. Appointed members of governing bodies of a municipal Engaging in municipal advisory activities. entity who are not employees or elected officials of a municipal entity Attorneys Engaging in municipal advisory activities other than those of a traditional legal nature or legal advice to a client that is a municipal entity or obligated person. Banks Engaging in activities that would subject them to registration as municipal advisors such as acting as trustees with respect to an issuance of municipal securities or otherwise providing advice with respect to municipal financial products. Broker - dealers acting as placement agents for a private Soliciting a municipal entity (including pension funds) and equity fund obligated persons to invest in the fund. Brokers, Dealers, or Municipal Securities Dealers Engaging in municipal advisory activities while acting in a capacity other than as an underwriter on behalf of a municipal entity or obligated person. Commodity Trading Advisors or persons associated with Engaging in municipal advisory activities other than advice therewith related to swaps. Employees and Board Members of Obligated Persons The employees and board members of obligated persons are not expressly excluded under the definition of "municipal advisor" as are employees and elected officials of municipal entities. Engineers Engaging in municipal advisory activities other than providing engineering advice. For example, an engineer is engaging in municipal advisory activities when preparing a feasibility study that includes analysis beyond the engineering aspects of the study. Investment Advisors or persons associated with such Engaging in municipal advisory activities other than investment advisor not registered under the Investment providing investment advice that would subject such Advisers Act of 1940 advisor or person associated with such advisor to the Investment Advisers Act of 1940. Third Party Solicitors Seeking business on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser from a municipal entity. IV. Appointed Officials of Municipal Entities to Register as Municipal Advisors As noted above, the definition of "municipal advisor" excludes, among others, "employees of a municipal entity." Id. at 829. The SEC clarifies in its proposal whether the exclusion for "employees of a municipal entity" covers elected or appointed members of the entity's governing body, such as board members or county commissioners. Id, at 834. The SEC concludes that elected members of the governing body and those elected officials serving as members ex ofcio are generally included within the exclusion for "employees of a municipal entity." Id. Appointed members of that body under the proposed rule are, however, included in the definition of a "municipal advisor," because of the SEC's view that "appointed members, unlike elected officials and elected ex officio members, are not directly accountable for their performance to the citizens of the municipal entity." Id. The SEC has expressly requested comment on whether the PUBLIC FINANCE UPDATE Page 4 above elected /appointed distinction is "appropriate" and whether exclusions from the advisor registration /reporting requirements should be made for non - employee persons "associated with a municipal entity." Id. at 837. V. Municipal Advisor Registration Requirements A. Natural Personas The proposed rule would require natural persons, such as appointed members of a municipal entity's governing body, to register with the SEC as "municipal advisors" if they advise on the issuance of municipal securities ox swap transactions, guaranteed investment contracts, and investment strategies (including advice with respect to the structure, timing, terms, and other similar matters concerning such issues or financial products), or undertake a solicitation of a municipal entity or obligated person. Registration would require the electronic filing of a new Form MA -I with the SEC which upon completion would be made publically available. Id. at 867 -68. Form MA -I requires personal information, including the following • Identifying information • Residential history for the past five years • Employment history for the past 10 years • Other business activity, if any, in which the individual is currently engaged • Employment terminations following allegations of certain violations • Criminal, regulatory, and civil judicial history • Consumer complaints • Financial disclosures relating primarily to bankruptcy proceedings and unsatisfied judgments or liens Registered municipal advisors who are natural persons would be required to electronically amend Form MA -I whenever the information previously provided becomes inaccurate. Id. at 868. In addition, they would be required to certify initially and annually that, among other things, they meet the qualification standards of the SEC, Municipal Securities Rulemaking Board (the "MSRB "), and any other self - regulatory organization. Id. at 867. The SEC has expressly requested general comment on whether disclosure requirements are appropriate. Id. at 863. B. Organized Entities The proposed rule would also require organized entities, such as a partnership, corporation, trust or other organized entity to register with the SEC as "municipal advisors" if it advises on the issuance of municipal securities or swap transactions, guaranteed investment contracts, and investment strategies (including advice with respect to the structure, timing, terms, and other similar matters concerning such issues or financial products), or undertakes a solicitation of a municipal entity or obligated person. Registration would require the electronic filing of a Form MA with the SEC which upon completion would be made publically available. VI. Consequence of Becoming a Municipal Advisor Under the proposed rule, municipal advisors will be subject to various registration and reporting requirements. In addition, municipal advisors will have to comply with MSRB rules and regulations that have not yet been promulgated. The Dodd -Frank Act establishes a fiduciary duty with respect to municipal advisors and all persons associated with such municipal advisors. Exchange Act g15B(c)(1). No municipal advisor may engage in any act, practice, or course of business that is not consistent with a municipal advisor's fiduciary duty or that is in contravention of any rule of the PUBLIC FINANCE UPDATE Page 5 MSRB. Id. In addition, the municipal advisor will likely have to comply with additional federal and fraud regulations as set forth by the final SEC rule. VII. Conclusion The SEC's proposed Wile includes a far - reaching interpretation of activity that constitutes the business of being a municipal advisor. If you have questions concerning this client update, or would like assistance in commenting on the proposed rule, please contact the Sidley Austin LLP lawyer with whom you usually work. The Public Finance Practice of Sidley Austin LLP Sidley's over 90 years of experience in Public Finance includes substantial experience as bond counsel and disclosure counsel, advising cities, counties, school districts, states (including Puerto Rico and the District of Columbia) and other public entities throughout the United States with respect to the issuance of municipal bonds. Our Public Finance lawyers assist in finding creative and innovative solutions to the various types of debt management issues facing our municipal, nonprofit and financial institution clients. Our Public Finance practice is supported by a full complement of experienced tax lawyers and a department that focuses on the development and stmctri of financial derivative instruments. To receive future copies of this and other Sid(ey updates via email, please sign up at www.sidley.com /subscribe BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. www.sidley.com Sidley Austin 0.P, a Delaware limited liability partnership which operates at the firm's offices other than Chicago, London, Hong Kong, Singapore and Sydney, is affiliated with other Partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley Austin LLP, a separate Delaware limited liability Partnership (London); Sidley Austin 0.P, a separate Delaware limited liability partnership (Singapore); Sidley Austin, a New York general partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nehikawa Foreign Law Joint Enterprise (Tokyo). The of bated partnerships are referred to herein collectively as side, Austin, Sidley, or the firm. SIDLEY AUSTIN LLP Mr 11 iIDLE I y r Adviser Proposal Targeted 'Chilling Effect' Seen on Boards Thursday, January 6, 2011 By Andrew Ackerman ° Print ° Email % Reprints RELATED STORIES • Advisers Stow to Register With MSRB - January 4, 2011 • SEC Proposes New Rule for Muni Advisers and Advisory Firms - December 21, 2010 WASHINGTON — Issuers and their attorneys are fighting a provision in the Securities and Exchange Commission's proposed rules for municipal advisers that would require appointed board members of municipal entities to register with both the SEC and the Municipal Securities Rulemaking Board if they advise on the issuance of municipal securities. They warn that if the rules are approved, they would have a chilling effect on the ability of state officials to find volunteers witting to serve on the boards of bond - issuing authorities. In addition to submitting to SEC and MSRB registration, these appointed board members would be subject to fiduciary duties, pay -to -play, and other rules the MSRB plans to implement. Volunteers would find these rules unduly burdensome, issuers claim. "It's a bizarre distinction that the SEC created in the release," said Len Weiser - Varon, a shareholder at Mintz, Levin, Cohn, Ferris, Gtovsky and Popeo PC. He noted the proposed rules would only require registration for appointed, not elected, members of issuer or borrower boards. "Board members are the clients of advisers, they're not the advisers," Weiser - Varon said. "They're not the people who act on behalf of a municipality or conduit borrower. it just makes no sense to treat them as advisers who have to register." He added that employees of conduit borrowers also would need to register if they provide "advice" to the borrowers related to munis. "It's an astounding overreach," said Robert Lenna, executive director of the Maine Health and Higher Education Facilities Authority and the Maine Municipal Bond Bank. Many states already have statutory provisions concerning the fiduciary responsibility of volunteer board members of such authorities, he said. "So not only is the SEC reaching down deep into the day -to -day operations of state governments, but this would just be redundant," he said. Lenna added that his board members receive $55 per monthly meeting, plus gas reimbursement, as payment for their work. Since the MSRB currently charges advisers $600 in initial and annual registration fees, most volunteers would have to fork over the bulk of their remuneration from the state if they were required to register as advisers. As with the temporary registration system for advisers the SEC implemented in September — which will remain in effect through at least the end of 2011 — the proposed rules for a permanent registration system stem from provisions in the Dodd -Frank Watt Street Reform and Consumer Protection Act requiring that muni advisers be subject to SEC registration and MSRB oversight. Under Dodd - Frank, the registration requirements apply to all municipal advisers who provide advice to "municipal entities" and other borrowers involved in the issuance of municipal securities. The advice may be related to derivatives, guaranteed investment contracts, "investment strategies," or the issuance of municipal securities. It also applies to advisers who solicit business from a state or local government for a third party. The definition excludes employees of "municipal entities," but not employees of conduit borrowers. In addition, neither the law nor the proposed SEC rules explain if appointed board members receiving a salary would count as employees. "That's an area that the SEC could flesh out," said one market participant who asked not to be named. Though the SEC agreed that the employee exclusion should extend to elected members of a governing body of a municipal entity, and ex- officio members who serve on the governing body because they hold elective office, the SEC said it was not persuaded that unpaid volunteers siting on boards should be categorically exempted from the municipal adviser definition, Weiser -Varon said in a public finance alert distributed earlier this week. In declining to extend the exemption to volunteers in the proposed rules, the SEC said it "is concerned that appointed members, unlike elected officials and elected ex officio members, are not directly accountable for their performance to the citizens of the municipal entity." An SEC spokesman declined to comment for this story. But a market participant said there are a number of situations going back 35 years where appointed officials, particularly for special districts, have found themselves or their issuers the subject of SEC enforcement actions for accepting bribes or not disclosing conflicts of interest, among other things. Weiser -Varon faulted the SEC for not referencing its rationale in the proposal. "The justification for the distinction in the release was simply that elected board members are accountable to the public and appointed ones aren't, which has no apparent bearing on whether they should or shouldn't be registered as municipal advisers," he said. "If there were some applicable case support for this proposition, my guess is it would have been referenced in the release." Weiser -Varon added that unless or until the proposed rules are finalized in a manner that requires such registration, the commission should indicate that neither appointed municipal board members nor obligated person board members or employees need to register as municipal advisers. The SEC is seeking comments on the proposal for 45 days after its publication in the Federal Register, possibly this week. More articles in Washington T ON ISSUER AND OBLIGOR BOARDS BACKGROUND Section 975 of the Dodd -Frank Wall Street Reform and Con - sumerProtectionAct (the "Dodd -Frank Act ") amended Section 15B of the Securities Exchange Act of 1934 (as amended, the "Exchange Act"), effective October 1, 2010, to, among other things (1) require municipal advisors to register with the Securi- ties and Exchange Commission (the "SEC"), (2) establish a fiduci- ary duty between a municipal advisor and a municipal entity for which it is acting as a municipal advisor,% and (3) subject munici- pal to additional anti -fraud provisions.' The SEC adopted an interim final temporary rule (RulelSBa2 -6T; the "Temporary Rule ") to enable municipal advisors to satisfy the statutory requirement to register with the SEC, which rule be- came effective October 1, 2010, and expires on December 31, 2011. The SEC on December 20, 2010 (ReL No, 34- 63576; the "Proposing Release")' proposed permanent rules (Rules 15Ba1- 1' through -7; collectively, the "Proposed Rule" and, together with the Temporary Rule, the "Rules ") to implement Section 975, which would take effect on a date yet to be determined. The Proposing Release requests comments on the Proposed Rule to be received on or before February 22, 2011. - - .Prior to the Dodd -Frank Act, a municipal financial advisor was not subject to registration with the SEC unless it was either a broker or dealer (subject to registration under the Exchange Act) or an investment adviser (subject to registration under the Investment Advisers Act of 1940; the "40 Act").. Section 3(a)(4) of the Exchange Act defines "broker" as "any person engaged in the business of effecting transactions in securities for the ac- r "A municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor, and no municipal advi- sor may engage in any act, practice, or course of business which is not consistent with a municipal advisor's fiduciary duty or that Is in cwwaven- tion of any rule of the [Municipal Securities Rulemaking] Board," [Exchange Act § _ ,No municipal advisor shall make use of the mails or any means or instru- mentality of interstate commerce to provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products; the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, in connection with which such municipal advisor engages in any fraudulent, deceptive, or manipulative act or practice." (Exchange Act §158(a)(5)] 3 76 Fed. Reg. 824 (!an- 6, 2011). count of others." Section 3(a)(5) of the Exchange Act defines "dealer" as "any person engaged in the business of buying and selling securities for such person's own account." Section 202 (a)(11) of the 40 Act defines "investment adviser" as "any per- son who, for compensation, engages in the business of advising others , as to the value of securities or as to the advisability of investing in, purchasing, or selling securities." The underlying purpose of Section 975 of the Dodd -Frank Act was to subject independent municipal financial advisors to SEC registration and regulatory requirements without regard to whether they can be characterized as a "broker," a "dealer," or an "investment adviser." In doing so, however, as analyzed in detail below, it created a very sweeping definition of "municipal advisor," which does not include either an "engaged in the business" or a compensation component as a requirement, both of which have been core elements of the existing regulatory scheme. Although other aspects of the Pro - posed Rule also require further consideration, this Advisory focuses upon the potential effects of the Proposed Rule upon municipal security issuer and obligor boards. DEFINITION; EXCLUSIONS Section 975 defines the term "municipal advisor' to mean "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 persons with respect to municipal financial products [ "municipal derivatives," "guaranteed invest- ment contracts" including forward supply contracts, or "investment strategies" j6 or the issuance of municipal securi- ties, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial "(A]ny State, political subdivision of a State, or municipal corporate instru- mentality of a State, Including (A) any agency, authority, or instrumentality of the State, political subdivision, or municipal corporate instrumentality; (B) any plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or Instrumentality thereof; and (C) any other Issuer of municipal securities." (Exchange Act § 13B(e)(8)) "(A]ny person, Including an issuer of municipal securities, who is either generally or through an enterprise, fund or account of such person, com- mitted by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal. securities." [Exchange Act § 15B(e)(10)) This definition tracks the definition of "obligated person" in SEC Rule 15c2.12. 6 Proposed Rule § 240.158a1.1(f), Exchange Act § 158(e)(2), Exchange Act § 1513(e)(3), and Proposed Rule § 240.158a1 -1(b), respectively. products or issues; or (ii) undertakes a solicitation of a munici- pal entity." Section 975 further provides, however, that the term "municipal advisor" does not include, among others, (1). "a broker, dealer, or municipal securities dealer serving as an un- derwriter," (2) "any investment adviser registered under the Investment Advisers Act of 1940,' or (3) "attorneys offering legal advice or providing services that are of a traditional legal nature." The term has basically the same meaning in the Rules.7 MEMBERS OF GOVERNING BODIES The definition of "municipal advisor" in the Dodd -Frank Act expressly excludes "a municipal entity or an employee of a mu- nicipal entity." The Dodd -Frank Act does not provide a definition of the term "employee." In the Proposing Release, the SEC draws a distinction between elected and non- elected members of the governing body of a municipal entity: The Commission believes that the exclusion from the definition of a "municipal advisor" for "employees of a municipal entity" should include any person serving as an elected member of the governing body of the municipal entity to the extent that person is acting within the scope . of his or her role as an elected member of the governing . body of the municipal entity. "Employees of a municipal entity" should also include appointed members ofa,gov- erning body to the extent such appointed members are ex . officio members of the governing body by virtue of hold- ing an elective office. The Commission does not believe that appointed members of a governing body of munici- pal entity that are not elected ex officio members should be excluded from the definition of "municipal advisor." The Commission believes that this interpretation is appro- priate because employees and elected members are ac- countable to the municipal entity for their actions. In ad- dition, the Commission is concerned that appointed mem- bers, unlike elected, officials and elected ex officio mem- bers, are not directly accountable for their performance to the citizens of the municipal entity. In 'short, the SEC is determining that the exclusion for "employees" applies only to elected members of the governing body and not to non - elected members. The SEC requests com- ments on whether such a distinction is appropriate: The Commission is proposing to exclude from the defi- nition -of "municipal advisor" elected members of a gov- erning body of a municipal entity, but to include ap- pointed members of a municipal entity's governing body unless such appointed members are ex officio members of the governing body by virtue of holding an elective office. 7 In the Proposed Rules, notwithstanding the text of the definition of municipal advisor enacted by Section 975 of the Dodd - Frank. Act, the Commission inter- prets clause (ii) above to include solicitation of either a municipal entity or an obiigotedperson. Are these distinctions appropriate? Please explain. Are there other persons associated with a municipal entity who might not be "employees" of a municipal entity that the Commission should exclude from the definition of a "municipal advisor"? Note that none of this applies to obligated persons, and "a person ... that provides advice to or on behalf of a municipal entity or obligated person [,if not itself a municipal entity,] with respect to municipal financial products or the issuance of mu- nicipal securities" would be required under the Proposed Rule to register as a municipal advisor. The obligated person defini- tionis broad, and would embrace a wide range of obligors re- ceiving the benefit of exempt facility, qualified 501(c)(3), and other municipal finance vehicles, including not only for - profit entities, such as airlines, but also for - profit and non - profit health care systems, universities, etc., to the extent they are committed to support the payment of municipal securities. ANALYSIS The construct reflected in the Proposing Release is funda- mentally flawed, The SEC treats members of a governing body of any municipal entity or obligated person as municipal advi- sors, subject (with respect to municipal entities) to a limited exclusion for "elected" members! The problem is not simply the artificial distinction between elected and non - elected members, but more fundamentally the Proposed Rule fails to recognize that the governing board of a municipal entity can- not be a municipal advisor to such entity. The municipal entity acts through its governing body, which is necessarily comprised of .individual members. Accordingly, the exception for a "municipal entity' should properly be interpreted to mean all governing body members. The same is the case for obligated persons. Thus, comments to the SEC should not be limited to responding to the SEC's question of whether the distinction between elected and non - elected is appropriate; but should note the fundamental misunderstanding and confusion under- lying the construct set forth in the Proposing Release as it ap- plies to both municipal entities and obligated persons. Furthermore, the notion that non - elected members of boards of municipal entities are not accountable is incorrect. Even non - elected members are generally treated as public offi- cers and are subject to removal for cause. In addition, non- elected board members are in almost all cases appointed by elected officials pursuant to explicit provisions of a statute passed by elected officials. That state statute does not distin- guish board members or voting strength on a board between elected and appointed members. For a federal provision to now intrude on this basic form of state governance without a Section 158(e)(4) excludes from the definition of "municipal advisor" an "employee of a municipal entity." Thus, an employee of a particular govern. mental entity who serves in an ex officio capacity on the board of another governmental entity should be excluded from the definition of "municipal advisor". The SEC should confirm that such reading is correct. t a s +o. e• 3 any Congressional history or legislative intent support seems quite arbitrary. The issuance of municipal securities and municipal financial products are legitimate matters to be examined, debated, and acted upon by municipal entities and obligated persons. To subject non- elected governing body members of municipal enti- ties, and all employees and governing body members of obli- gated persons, to the registration requirements and expense, federal fiduciary standards, and federal securities law liability, can only have the effect of discouraging participation. This is flawed public policy and counter - productive to good govern- ance. Moreover, subjecting members of municipal entities' gov- erning bodies to these requirements may violate the Tenth Amendment to the United States Constitution, which reserves to the States those powers not delegated to the United States by the Constitution. The legislative history of the Dodd -Frank Act is devoid of legislative intent on this point. The SEC may argue that registration is required only for those persons who are in fact providing financial advice. The problem with such a defense of the Proposing Release construct is that the definition of financial advice is so broad ( "municipal financial products or the issuance of municipal securities ") as to potentially include the adoption of an approval resolution au- thorizing a municipal bond issuance if at such meeting ques- tions are asked by board members probing the "structure, tim- ing, terms, or other similar matters," or a finance committee recommendation to the governing board relating to the issu- ance of municipal securities or financial products. Indeed, it is common practice for a proposed financial transaction to be considered first by a finance committee (or other specially ,� x formed committee) of a board with a recommendation made by such committee to the full board as to its structure, timing, terms and related matters Regulation in this manner is ill - conceived. The SEC has other means to encourage and enforce the proper conduct of governing bodies of municipal entities and obligated persons, including interpretive releases and mu- nicipal enforcement actions. Moreover, many obligated per- sons are already subject to regulation, including SEC registrants, public utilities, and financial institutions. Rather than discour- aging participation on governing bodies by requiring registra- tion and additional potential liabilities, the SEC should be en- couraging greater participation of individuals knowledgeable and experienced in finance, and the potential for the municipal advisor provisions to attach being dependent upon whether "advice" is given by a board member would have a chilling ef- fect on board members expressing their views. As a matter of public policy, the expression of such views should be encour- aged, not discouraged, Hawkins Delafield & Wood LLP expects to submit a com- ment letter to the SEC on the Proposed Rule. In that comment letter, we will expand upon and provide additional support for the concerns summarized above. We encourage you to submit your own comment letter, and please let us know if there are additional concerns you would like us to bring to the attention of the SEC. s In New York State, for example, board members of each state and local authority that Issues debt are required to establish a finance committee, and by statute It "shall be the responsibility of the members of the finance com- mittee to review proposals for the Issuance of debt by the authority and its subsidiaries and make recommendations." N.Y. Public Authorities Law § 2824(8). The Hawkins Advisory is intended to provide occasional general comments on new developments in Federal and State law and regulations which we believe might be of interest to our clients. Articles in the Hawkins Advisory should not be considered opin- ions of Hawkins Delafield & Wood LLP, The Hawkins Advisory is not intended to provide legal advice as a substitute for seeking professional counsel; readers should not under any circumstance act upon the information in this publication without seeking specific professional counsel. Hawkins Delafield & Wood LLP will be pleased to provide additional details regarding any article upon request. This Hawkins Advisory is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding pen- alties that the Internal Revenue Service may impose on the taxpayer. Additional copies of this edition of this Hawkins Advisory may be obtained by contacting any attorney in the Firm. 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