More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
Editor's Note: Tom Giachetti is one of our 2014 IA 25 honorees. Read his profile from the May issue of Investment Advisor here, and look for his extended profile on ThinkAdvisor.com on May 21.
Do you provide advice to government entities about financial products or the issuance of municipal securities? Do you advise government entities or persons about the structure, timing and terms concerning such financial products or issuances? Do you or have you solicited a municipal entity on behalf of third parties? If so, then you may be required to register as a municipal advisor.
The new municipal advisor law was created by Section 975 of the Dodd-Frank Act to amend Section 15B of the Exchange Act. It makes it “unlawful for a municipal advisor to provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered in accordance with [the law].”
This prohibition against providing advice to a municipal entity without registration is a maze. To understand the law fully, a more thorough understanding of the definitions of “advice” and “municipal advisor” is needed.
The term “municipal advisor” includes a person or entity (other than a municipal entity or employee of a municipal entity) that: “(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; or (ii) undertakes a solicitation of a municipal entity.”
For purposes of the municipal advisor definition, the law does not hammer down what constitutes “advice” to a municipal entity.
The SEC has said that the term “advice” is not susceptible to a bright-line definition. Instead, the SEC has stated that advice can and should be construed broadly. Therefore, a person providing advice to a municipal entity or person regarding municipal financial products or the issuance of municipal securities should err on the side of caution, because such analysis depends on all the facts and circumstances.
The final rules adopted by the SEC provide that a recommendation with respect to the structure, timing, terms or similar matters concerning a municipal financial product or an issuance of municipal securities will constitute “advice.” Therefore, a person or firm providing forecasting, modeling or other similar services should be very cautious continuing these activities without registration.
Exemptions for RIAs, Accountants
The law specifically excludes from the definition of municipal advisor “any investment advisor registered under the Investment Advisers Act of 1940, or persons associated with such investment advisors who are providing investment advice.” This exemption only applies to advisors registered with the SEC! State-registered advisors may not rely on this exemption. Also important to note, RIAs would not be exempt if they “engage in municipal advisory activities other than providing investment advice.” RIAs should ensure that they are only providing investment advice to municipal entities, otherwise they may need to register as municipal advisors.
The law does not explicitly exclude accountants from the definition of municipal advisor. However, the final rules state that the term “municipal advisor” shall not include accountants who provide audit or other attest services, prepare financial statements or issue letters for underwriters for, or on behalf of, a municipal entity or obligated person.
Before advising a municipal entity about financial products or the “structure, timing, terms and other similar matters concerning such financial products or [municipal] issuances,” ensure that you are registered as a municipal advisor or are exempt from registration. A full copy of the final 778-page release can be found at the following link: https://www.sec.gov/rules/final/2013/34-70462.pdf.