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The New Rules for Advisors to Municipal Retirement Plans

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Are you familiar with the new penalties and registration requirements being imposed on advisors selling into the municipal market? If you’re considering selling in the municipal market and are uninformed about the new Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requirements, you could be knocked out of the game before you get a chance to start.

The American Society of Pension Professionals & Actuaries (ASPPA) and the National Tax Sheltered Accounts Association (NTSAA) recently expressed concern regarding the application of the Dodd-Frank financial reform act. “Clearly, a law aimed at regulating the practices associated with municipal bonds should not be applied inappropriately and inconsistently to those advising participants in governmental retirement and savings arrangements,” said Craig Hoffman, General Counsel and Director of Regulatory Affairs of ASPPA.

First, Do You Know the Rules?

Section 975 of the Dodd-Frank Act amended the Securities Exchange Act of 1934 by requiring municipal advisors to register with the Securities and Exchange Commission (“SEC”) by October 1, 2010.  The SEC adopted a temporary rule – effective until the end of 2011 – to help advisors comply during this transitional phase.

The SEC’s proposed rule includes a permanent registration requirement and record-keeping requirements. It will enable regulators, investors, and state and local governments to better understand the roles municipal advisors serve by requiring municipal advisors to complete certain forms. These forms will require municipal advisors to provide their identification and contact information. Advisors will indicate which services they provide by checking selections on a


pre-determined list. Municipal advisors will also keep up-to-date profiles regarding any disciplinary actions.

If approved, the proposed rules will become effective on January 1, 2012. Yearly form renewals will be imposed.

Second, Do You Know the Players?

A municipal advisor is generally defined as a person who provides financial advice concerning the issuance of municipal securities and investment of bond proceeds to states, local governments and other borrowers.

The Dodd-Frank Act definition of “municipal advisor” includes the following:

  • financial advisors
  • guaranteed investment contract brokers
  • third-party marketers
  • placement agents
  • solicitors
  • finders
  • certain swap advisors.

Do You Know How to Play the Game?

The ASPPA and the NTSAA say that advisors to governmental retirement and savings arrangements should be exempted from the requirements. For instance, financial advisors who give advice about 403(b) school-sponsored savings plans to teachers in public schools should not be subject to the SEC’s financial reform. Although these advisors may advise on municipal-related issues, they are not dedicated municipal advisors—it is only one item on a long list of services offered.

The SEC has exempted the following categories of advisors from the municipal advisor rules:

  1. advisors solely to venture capital funds;
  2. advisors solely to private funds (if less than $150 million in assets under management (AUM) in the U.S.)
  3. certain foreign advisors who have no place of business in the United States.

The SEC may, however, impose alternate reporting requirements on these advisors.

If the SEC’s proposed rules are passed, they will create a uniform regulation of municipal advisors. By


implementing these new rules, municipal advisors will not escape notice as they have in the past.

Proponents of the rules say that they will strengthen the municipal advisory market by creating a more stable, reliable environment. More important, it will help prevent financial professionals from taking advantage of the system and jeopardizing the re-growth of our economy.

Contrary to the rules’ supporters, ASPPA’s Hoffman argues that extending the proposed rules to non-dedicated municipal advisors could create “a severe chilling effect on the availability of advisory services, and may cause market disruption in favor of larger, SEC-registered investment advisors by subjecting only smaller, local investment advisors to the municipal advisor registration requirements and associated MSRB rules.”

Even if the regulations extend to non-dedicated municipal advisors, the new rules may end up being more of a help than a hindrance to your municipal plan business—that is, if all goes according to the SEC’s plan. Who wins the game will ultimately depend on how each side plays their cards.


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See also The Law Professor's blog at AdvisorFYI.