Dodd Frank Act Definition of “Municipal Advisor”
A “municipal advisor” is a person (including a firm or an associated person) (but not including a municipal entity or an employee of a municipal entity) who (1) provides “advice” to “municipal entities” or “obligated persons” on the “issuance of municipal securities” or “municipal financial products,” or (2) undertakes a “solicitation of a municipal entity.”
On September 18, 2013, the SEC unanimously approved Release No. 34-70462 (Sept. 20, 2013)(Adopting Release), which contains final rules on the registration of municipal advisors (SEC Municipal Advisor Rule or Final Rule). The Final Rule includes eight rules under section 15B of the Securities Exchange Act of 1934 (Rule 15Ba1-1 through Rule 15Ba1-8) and a series of Forms for registration as a municipal advisor. Definitions are in Rule 15Ba1-1.
The Importance of the Term “Advice”
Each of the statutory terms in quotation marks in the first paragraph above is defined or amplified in the Dodd Frank Act, except the term “advice,” and while staff of the SEC in speeches has emphasized the importance of the term, it was not formally described until the Final Rule. After the definition of municipal advisor (15Ba1-1(d)(1)(i)), subparagraph (ii) is entitled “Advice standard.” The subparagraph is written in the negative, and states “advice excludes, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities (including with respect to the structure, timing terms and other similar matters concerning such financial products or issues).”
Turning the negative around, the Adopting Release states that “advice” includes a recommendation that is particularized to the specific needs, objectives, or circumstances of a “municipal entity” or “obligated person” with respect to municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, based on all the facts and circumstances. (p. 46) (emphasis added)
“Advice” does not include provision of the following “general information:”
- Information of a factual nature without subjective assumptions, opinions, or views.
- Information that is not particularized to a specific municipal entity or type of municipal entity.
- Information that is widely disseminated for use by the public, clients, or market participants other than municipal entities or obligated persons.
- General information in the nature of educational materials.
A key term in the advice standard is a “recommendation.” The term has long been used by FINRA in its suitability rule to define when a broker-dealer has an obligation to make a suitability determination. FINRA Regulatory Notice 11-02 (Jan., 2011), which describes the FINRA “Know Your Customer” and “Suitability” rules, states that the inquiry is “whether – given its content, context and manner of presentation – a particular communication from a firm or associated person to a customer reasonably would be viewed as a suggestion that the customer take action or refrain from taking action regarding a security or investment strategy.” (p.46)
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