The regulation of municipal advisors, a topic of great interest since it was initiated by the Dodd-Frank Act 14 years ago, may well be subtly expanding based on how the Securities and Exchange Commission enforces both its own and Municipal Securities Rulemaking Board rules.
That's according to panelists at the SEC, Financial Industry Regulatory Authority and MSRB co-hosted Compliance Outreach Forum in Denver Wednesday. MSRB Rule G-42 on the duties of non-solicitor municipal advisors contains a duty of care element, and some lawyers say they are beginning to see certain implications for what that means for municipal advisors.
"I will leave it at this," said Drew Kintzinger, counsel at Hunton Andrews Kurth. "After reading the enforcement actions and MSRB Rule G-42 and the SEC Municipal Advisor rule all together, I think where we're at is if a municipal advisor contracts with an issuer client to prepare an official statement, then that municipal advisor may have a duty to exercise care in the preparation of that official statement and to conduct due diligence to make sure there's a reasonable basis for how it is advising the issuer in that process."
"I don't want to forecast," Kintzinger continued. "I would guess this may be a next enforcement action to come, how duty of care for the municipal advisor extends to the disclosure process itself."
Panelists discussed the many precedent- setting cases that came before Dodd-Frank established the SEC's MA Rule and went further to discuss the current state of play and what could count as MA activity. But much is still left unanswered, even by the 2023 update to the SEC's FAQs on MA registration, which provides more information for MAs.
"While there are these certainties, let's talk about the great number of uncertainties that exist," said Susan Gaffney, executive director of the National Association of Municipal Advisors. "What is general information? That's not really explained in the FAQ but if you are just using general information, then it is not MA activity but that is not defined."
Dave Sanchez, director of the Office of Municipal Securities at the SEC in his recent speaking slots has made a point of using his time to talk about MAs, whether that's unregistered MAs in charter school financings or
"If an MA does include disclosure work in their MA contract, then it is likely MA activity and the question is, even if that MA is not providing a recommendation, not providing advice yet puts it in their contract as an MA service, then is it automatically MA activity with the duty of care and federal fiduciary standard applied?" Gaffney said.
"There are a lot of words that people use to describe what MAs may be doing to help their clients with disclosure: compiling, scribing, drafting, preparing, active role in preparing, participating, reviewing, all of these have different meanings to different firms and we would probably argue also to SEC examiners who may interpret these words very differently than the people who use them," Gaffney said. "So it's not clear right now if the SEC believes that if an MA touches disclosure using any of those words or others, are they taking on responsibilities that are not clear to them, that are greater than once thought of?"
"It's really important that MAs are clear and focused about their work in their contracts," Gaffney said. "The extent of their work, the limitations of their work and if they are providing this work as an MA activity or another activity that they're providing their client. This is especially true in an exam situation."
MAs can help issuers with their disclosures but that does not negate the role of bond counsel or disclosure counsel. Kintzinger recommends constantly going back to an MA's particular engagement letter with the issuer, and understanding what exactly the role is in disclosure and preparing disclosures. He also thinks that disclaimers are a good thing, whether that's in an engagement letter, offering documents or closing certificates.
"It's worth noting that municipal advisory activity includes an advice component, where the municipal advisor is providing advice to or on behalf of its municipal entity client," said SEC's Preston Swapp. "So not all services by an MA constitute advice and municipal advisors participation in the preparation of disclosure documents may constitute advice because, in my view, structure, timing, terms and other similar matters are frequently described in the disclosure documents, such as preliminary and final official statements and participation in the preparation of disclosure documents is one way in which a municipal advisor might convey its advice to the municipal entity clients on such matters."
