Yesterday, President Obama signed into law the
Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank or the Act). Among other things,
Dodd-Frank: (a) regulates certain previously unregulated participants in the
municipal market, which the Act calls “municipal advisors”; (b) changes and
enhances the role of the Municipal Securities Rulemaking Board (MSRB); and (c)
establishes an Office of Municipal Securities within the Securities and Exchange
Dodd-Frank also directs certain federal agencies to conduct studies of
aspects of the municipal securities market and to submit recommendations to
Congress for improving current law. Congress specifically has requested in one
such study that the SEC make a recommendation as to whether Congress should
amend or repeal Section 15B(d) of the Securities Exchange Act of 1934, as
amended (Exchange Act), also commonly known as the Tower Amendment.
What is a Municipal Advisor?
A municipal advisor generally is any person or entity that: (a) provides
advice to or on behalf of a municipal entity or obligated person with respect to
municipal financial products (e.g., swaps and other derivatives, guaranteed
investment contracts and investment strategies) or the issuance of municipal
securities; or (b) undertakes a solicitation of a municipal entity with respect
to municipal financial products, investment advisory services or the issuance of
Examples of entities that may qualify as municipal advisors include
guaranteed investment contract brokers, financial advisors, third-party
marketers, placement agents, solicitors, finders and swap advisors. The
following generally are NOT municipal advisors: municipal entities and their
employees, brokers, dealers, municipal securities dealers serving as
underwriters, investment advisors providing investment advice, certain commodity
traders and attorneys providing traditional legal services.
How are Municipal Advisors Regulated under the Act?
Generally, the Act amends the Exchange Act to: (a) to prevent municipal
advisors from engaging in fraud; (b) require municipal advisors to be registered
with the SEC; and (c) provide that municipal advisors have a fiduciary duty to
the municipal entities for whom they act as municipal advisor, requiring
municipal advisors generally to act in the best interests of the municipal
entities they represent. These amendments take effect on Oct. 1, 2010. In
addition, the Act directs the MSRB to promulgate rules further regulating
municipal advisors, as discussed below.
How does Dodd-Frank Change the MSRB?
The Act changes the MSRB primarily by reconstituting the board of directors
of the MSRB (the Board) such that at least eight members of the Board are
“independent” of municipal securities dealers, municipal advisors, brokers and
dealers. The Act requires that the Board initially have 15 members, each serving
a three-year term.
How does Dodd-Frank Enhance the Role of the MSRB?
The Act directs the MSRB to: (a) promulgate rules governing advice provided
to or on behalf of municipal entities relating to municipal financial products;
(b) set professional standards for municipal advisors and test individuals
associated with municipal advisors on their proficiency and competency; and (c)
ameliorate the regulatory burden on “small municipal advisors.” Dodd-Frank also
permits the MSRB to provide guidance and assist in the enforcement of and
compliance with MSRB rules to registered securities associations, the SEC, and
any other federal agency. Any fines collected by the SEC or any registered
securities association for violations of MSRB rules are to be shared with the
Other Provisions of Dodd-Frank Relating to Municipal Securities
Office of Municipal Securities
Dodd-Frank creates the Office of Municipal Securities within the SEC. This
new division of the SEC will administer SEC rules relating to municipal
securities brokers, dealers, issuers, investors and advisors, and serve as a
liaison between the SEC and the MSRB. The director of the Office of Municipal
Securities will report directly to the SEC chairman.
Dodd-Frank orders studies to be undertaken relating to, among other things,
the efficiency and adequacy of disclosure in the municipal securities market. In
particular, the Act orders an evaluation of the efficacy of repealing or
otherwise amending the Tower Amendment, which currently limits the ability of
the SEC or the MSRB to require a municipal securities issuer to make any filing
with the SEC or the MSRB prior to the issuance of such securities. Any
modification to or repealing of the Tower Amendment likely would have
significant ramifications for municipal securities issuers.
In the coming months, we will monitor rules and regulations promulgated by
the MSRB and the SEC pursuant to the Act and any other related guidance from
federal agencies. If you have any questions regarding the municipal securities
provisions of the Act, Dodd-Frank in general, or other recent changes to the
municipal securities regulatory framework, including recent changes to
Rule 15c2-12 relating to municipal securities disclosure, please visit our
website for a replay of McGuireWoods’
complimentary webinar on important aspects of the Act.
You also can contact the authors or visit McGuireWoods'
practice. Prior legal updates are available in our