By Cyril Tuohy
A new “registration regime” recently adopted by the Securities and Exchange Commission (SEC) to regulate who is qualified to give advice and under what circumstances appears to have more exemptions than the tax code.
Well, not exactly, but it’s worth pointing out who isn’t required to register as a municipal advisor now that the SEC has adopted rules regarding experts who dispense advice in the $3.7 trillion municipal bond market.
More than 1,100 municipal advisors have registered with the SEC under Section 975 of the Dodd-Frank Act of 2010, but many more may not have to. Special interest groups pushed hard to be excluded.
Who doesn’t have to register? Public officials and employees, underwriters, registered investment advisors, registered commodity trading advisors, attorney, engineers, banks, accountants, independent registered municipal advisors and swap dealers.
That covers a wide range of professionals who are involved in the municipal securities marketplace.
There are caveats, of course.
Public or appointed officials who serve on a governing body, advisory boards, a committee, or as university trustees don’t have to register “to the extent that they are acting within the scope of their official capacity.”
Supporters of the exemptions such as Sen. Orin Hatch, R-Utah, said it was only fair. For example, how could the government register students and nonvoting ex officio members of the 19-member Utah Board of Regents on the grounds that they would be serving as municipal advisors?
“Preposterous,” the senator said in testimony to the SEC.
So there’s an argument to be made for excluding public officials from the registration regime. But underwriters?
“Brokers, dealers and municipal securities dealers serving as underwriters do not have to register if their advisory activities involve the structure, timing and terms of a particular issue of municipal securities,” the SEC said.
The exemption does not apply to advice on the investment of proceeds of municipal securities or derivatives since it is outside the scope of underwriting, according to the SEC.
But registered investment advisors (RIAs), registered commodity trading advisors (RCTAs) and independent registered municipal advisors (IRMAs)? They, too, are exempt.
Sensitive to the costs and to the benefits of its own rules, the SEC said there’s no reason to require registration of advisors who are already registered by other government or registering bodies.
RIAs, who are held to a fiduciary standard under the Investment Advisors Act of 1940, don’t have to register as long as they provide “investment advice regarding the investment of the proceeds of municipal securities or municipal escrow investments,” the SEC said.
“This exemption helps ensure the rule does not create duplicative regulation of investment advisors,” the SEC also said.
For their part, RCTAs who are regulated by the U.S. Commodity Futures Trading Commission, don’t have to register if the advice they are dispensing relates to swaps. Similar to RIAs, the SEC wanted to avoid registration duplication with regard to RCTAs.
IRMAS are also exempt “provided that certain requirements are met and certain disclosures are made,” the SEC said.
The SEC said that attorneys do not have to register if they are providing “legal advice or “traditional legal services with respect to the issuance of municipal securities or municipal financial products,” the SEC said.
The exemption does not apply, however, when attorneys offer advice “that is primarily financial in nature” to a municipal client.
Accountants don’t have to register either if they are providing audit or “attest services, preparation of financial statements, or issuance of letters for underwriters,” the SEC said.
Nor do engineers if they provide feasibility studies and cash flow analysis “related to engineering aspects of a project,” according to the SEC. But the moment an engineer provides advice regarding financial products, they will have to register.
Banks? As long as they provide advice on banking products like deposit accounts, credit extensions or bond indenture trustee services, they are exempt, the SEC said. When banks provide advice on municipal derivatives and securities, they will have to register, the SEC said.
What types of organizations must register?
Registered companies include blue-chip Wall Street financial services giant Oppenheimer & Co. and JP Morgan Securities, smaller consulting and advisory firms like Harrisburg, Pa.-based Catlin Consulting and Inglewood, Calif.-based Top Capital Advisors Inc., and individual advisors like Houston-based Geraldo Perez, and Norristown, Pa.-based George Allen Majors.
Exemptions aside, the registration rule represents significant progress, Mary Jo White, chairwoman of the SEC, said in a statement.
Complex derivatives and other financial transactions leading up to the financial crisis of 2008 left many investors “largely unprotected,” White said. High-profile bankruptcies also pointed to the vulnerability of taxpayers to public officials’ poor decisions.
“These rules set forth clear, workable requirements and guidance for municipal advisors and other market participants, which will provide needed protections for investors in the municipal securities markets.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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