Dodd-Frank Financial Reform Act Will Impact Municipal Securities Market

July 22, 2010

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 Commission (SEC).

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.

Municipal Advisors

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 municipal securities.

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 MSRB.

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’ Public Finance  practice. Prior legal updates are available in our news archive.