The Securities and Exchange Commission passed Wednesday a long-awaited final rule on the definition of who is a municipal advisor, laying the foundation for the regulation of this previously unregulated class of advisors by both the SEC and the Municipal Securities Rulemaking Board.
The agency also floated a controversial proposed rule on executive compensation, which would require public companies to disclose the ratio of its CEO pay to the median compensation of its employees. The SEC voted 3-2 to put the proposal out for public comment.
Under the newly adopted rule advisors to municipal securities will now be subject to audit compliance reviews, licensing, continuing education, written supervisory procedures, restrictions on political contributions and gifts, record retention requirements, and disclosures of third-party fees and conflicts of interest.
The final rule would provide a phase-in period for compliance, with permanent registrations starting on July 1, 2014.
In general, under the final rules, a municipal advisor would be required to register with the SEC if it:
—Provides advice on the issuance of municipal securities;
—Provides advice on certain “investment strategies,” specifically, investments of the proceeds of municipal securities and related municipal escrow investments in refinancings; and
—Provides advice on municipal derivatives.
As SEC Chairwoman Mary Jo White stated during the open meeting, in the wake of the financial crisis, “many municipalities suffered significant losses from complex derivatives and other financial transactions. They entered into these transactions, in many cases, after receiving advice from a group of largely unregulated intermediaries known as ‘municipal advisors.’”
These advisors, White stated, “generally were not required to comply with any particular standard of conduct, they did not have to meet any particular training requirements, and they did not have to disclose any potential conflicts of interest.”
To address the issue, the Dodd-Frank Act created a new regulatory regime for municipal advisors intended to protect municipalities and investors participating in the municipal securities market. As White explained, the Dodd-Frank Act provided that these advisors “are required to register with the SEC, act in the best interests of their municipal clients and, for the first time, be overseen by both the SEC and the Municipal Securities Rulemaking Board.”
Registered investment advisors exempt from registering as municipal advisors would be those that advise on the investment of the proceeds of municipal securities or municipal escrow investments. “This exemption helps ensure the rule does not create duplicative regulation of investment advisors,” the SEC says.
The exemption, however, would not apply to advice on the structure, timing and terms of issues of municipal securities or municipal derivatives. “That is because advice in these areas is outside the focus of investment advisor regulation,” the SEC says.