On February 14, 2013, SEC Chairman Elisse Walter at long last indicated, in testimony for the Senate Banking Committee, that the SEC’s final regulations regarding “municipal advisors” will “address ,,, the need for an exception” to the definition of “municipal advisor” for appointed board members of municipal securities issuers.  This acknowledgment came more than two years after the firestorm ignited by the SEC’s suggestion in proposed regulations issued December 20, 2010 that appointed board members of issuers of municipal securities were or might be required to register as “municipal advisors,”  That suggestion provoked a substantial share of the over 1,000 comment letters received by the SEC on the proposed regulations.

The SEC’s final regulations have not yet been issued and the phrasing of the exception remains to be seen.  However, Chairman Walter’s testimony is consistent with the conclusion long since reached by most municipal market participants that the SEC’s interpretation of the Dodd-Frank legislation as requiring or potentially requiring registration as municipal advisors by non-elected board members who provide input relating to issuance of municipal securities in the course of their board duties was an overreach that would not be implemented.  For board members appointed to municipal bond issuers or to issuers of state-sponsored Section 529 program municipal fund securities, Chairman Walter’s pronouncement is as close to a valentine as the SEC dispenses.



Various comment letters have been filed, and more are being prepared, on the can of worms opened up by the SEC’s December 20, 2010 interpretation that the term “municipal advisor” includes unelected board members of municipal entities who provide “advice” to the entity they serve regarding the issuance of municipal securities, swap transactions and/or investments.

The SEC has not officially addressed the most pressing question: is its interpretation a “proposed” interpretation, so that unelected board members need not be concerned about its application to them before the SEC reviews and reacts to the comments?

The answer, apparently, is that the interpretation is currently effective, but that most board members should not be concerned about needing to register as municipal advisors.  What sort of activity might require registration?  Unfortunately, that remains unclear.

Based on discussions with an SEC official with knowledge of the matter, it appears that to this point the SEC has not been persuaded to back off its distinction between elected and unelected board members.  According to the SEC official, the SEC is concerned about the scenario of a Governor-appointed board member who may dictate, or attempt to dictate, financial decisions to one or more boards.  Apparently, the SEC has particular examples in mind.

The SEC is aware that its interpretation has raised concerns with the large number of unelected board members on state authorities and agencies.  Unfortunately, the SEC official with whom I spoke indicated that the SEC could not offer any comfort that its interpretation is not effective at this time.  However, the SEC official indicated that “we never intended for our interpretation to cover voting on a board resolution or ordinary course board discussions.”  The SEC apparently is actively considering issuing an interim clarification that such “ordinary course” board participation does not constitute “advice” that would cause an unelected board official to be a “municipal advisor”, but is having some difficulty illustrating where ordinary course discussion stops and “advice” starts.

It is understandable why the SEC is struggling with a line-drawing exercise around the meaning of “advice.”  In other contexts, such as the Investment Advisers Act of 1940, there is no definition of “advice” – the need to register arises when a party holds itself out as being in the business of providing investment advice and provides such advice to another party for compensation.  However, the SEC, by suggesting that unelected board members may be “municipal advisors”, has already indicated that a person can be a “municipal advisor” even if the only “advice” the person renders is to the entity or entities  on whose board(s) the person sits, and the SEC has expressly rejected compensation as a factor in whether a person is a “municipal advisor.”

If, as appears to be the case, the SEC wishes to be able to exercise regulatory jurisdiction over certain appointed board members acting in the course of their duties as board members in extraordinary or particularly aggressive ways, it is indeed a difficult line to draw.  And the difficulty in drawing the line, of course, is not just the SEC’s, but that of unelected board members who, apparently, are currently required to figure out whether or not they have crossed that as yet undefined line.

As noted in our advisory on this subject, this same dilemma is being faced by board members and employees of conduit borrowers from municipal issuers (a/k/a “obligated persons”), who may likewise be deemed “municipal advisors” if they provide “advice” to their entity regarding municipal bond issuance, swaps or investment of bond proceeds.

As they say, stay tuned.



Per today’s Bond Buyer, an “attorney who asked not to be named” dismissed as “hysteria”  concerns about whether unelected board members of municipal entities that issue bonds or invest public funds are currently, or will be, required to register with the SEC and MSRB as municipal advisors.

As an arguable contributor to such “hysteria” (see Andrew Ackerman’s Jan. 6 Bond Buyer article), I don’t disagree that the odds favor some sort of modification or dilution of the SEC’s stated position on this point.  But of course the reason it is unlikely that unelected board members will be subject to a blanket registration requirement is that the SEC will be hearing from numerous municipal entities and trade associations that the SEC’s position on this is unwarranted and problematic.  So the “hysteria” is a necessary element of ultimately getting to the right place on these requirements.

What’s more, a dispassionate don’t-worry-about-it reaction would be easier to adopt if this did not involve an SEC interpretation of existing law.  Unelected board members who “advise” their municipal entities (as well as board members and financial officers of conduit borrowers who advise their “obligated person” entities) may be out of compliance with the registration requirements unless the SEC changes its interpretation.  That’s easier for unidentified attorneys to shrug off than for the affected board members and CFOs.

The SEC would do everyone a favor by clearly stating that it does not expect such board members to register unless and until the proposed rules that accompanied its interpretation are finalized.