More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Securities and Exchange Commission Monday extended the compliance date for the agency's final municipal advisor rule from Jan. 13 to July 1. On Friday, the SEC issued interpretive guidance to address questions from industry trade groups about implementing the agency’s final rules requiring municipal advisors to register with the SEC.
Both the Investment Adviser Association and the Securities Industry and Financial Markets Association’s asset management group queried the SEC’s Office of Municipal Securities on a number of issues.
The IAA notes that one of the clarifications among the interpretive guidance, which came in a Q&A format, is that advisors that use swaps or security-based swaps in municipal entity portfolios do not have to register as municipal advisors.
IAA and the Asset Management Group of the Securities Industry and Financial Markets Association said in a release that they had “actively advocated to obtain certain relief for SEC-registered investment advisors that may have been affected by the municipal advisor registration rule.”
In particular, the IAA and SIFMA argued that the RIAs’ exclusion should be read in light of the statutory background and context to cover investment management of portfolios that may include derivatives as “investment advice,” rather than as “advice concerning municipal derivatives.”
In September, the SEC issued final rules on municipal advisors, including defining what municipal advisory activity requires registration with the SEC. The SEC also designated FINRA as the examination and enforcement authority for municipal advisors that are regulated by FINRA. The final rules become effective July 1.
On Friday, the Municipal Securities Rulemaking Board released for comment its rule proposal, Rule G-42, which states that “irrespective of any fiduciary duties, draft Rule G-42 subjects municipal advisors to a duty of care in the conduct of their municipal advisory activities.” In addition, the draft rule requires municipal advisors “to disclose conflicts of interest and certain other information to their clients and document their municipal advisory relationship.”
Cipperman Compliance Services notes that the guidance distinguishes general information from advice. "Although the distinction between advice (requiring registration) and information is a fact-based analysis," Cipperman says, "the [SEC] staff offered some specific examples of permitted information: market statistics, a description of currently available investments and an outline of various financing structures including the advantages and disadvantages."
The staff warned in the FAQs that "more particularized information tends toward becoming a recommendation," and also indicated that "specific disclosures that the information provided is not intended to be a recommendation will help."
The FAQs also provides guidance in the following areas:
- 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 RIAs;
- the underwriter exclusion, including engagements as underwriters;
- issuance of municipal securities and post-issuance advice;
- remarketing agent services;
- opinions by citizens in public discourse; and
- the effective date of the final rules and the compliance period for using the final registration forms.
State and local governments frequently use paid advisors to help them decide how and when to issue municipal securities and how to invest proceeds from the sales.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required these advisors to register with the SEC like other market intermediaries. As it stands, more than 1,100 municipal advisors are registered with the SEC under a temporary registration regime. The SEC staff said it may provide periodic updates to the interpretive guidance issued Friday.
Check out MSRB Floats Muni Advisor Rule on ThinkAdvisor.