Municipal Bond Offerings: Proposed SEC Rule Impacts Appointed Board Members

In a release dated December 20, 2010, the Securities and Exchange Commission (“SEC”) announced a proposed rule that, among other things, would create a permanent registration system for municipal advisors and broaden the SEC’s definition of the term “municipal advisor” to include appointed board members of municipal entities. The proposed rule was published in the Federal Register on January 6 and stems from provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Comments on the proposed rule are due February 22.

Click here to view the proposed rule.

The Dodd-Frank Act amended Section 15B of the Securities Exchange Act of 1934 (the “Exchange Act”) to subject “municipal advisors” to SEC registration and oversight by the Municipal Securities Rulemaking Board (“MSRB”). In the release, the SEC proposes new rules 15Ba1-1 through 15Ba1-7 that would establish a permanent registration regime for “municipal advisors.”

Under Section 15B(e)(4)(A) of the Exchange Act, “municipal employees” (with elected members of governing bodies being treated as “municipal employees”) would be excluded from classification as “municipal advisors.” However, the proposed rule is drafted broadly so that appointed board members of a municipal entity would not be excluded from classification as “municipal advisors.”

The proposed rule would impact a wide range of municipal issuers with appointed boards, including special districts, regional mobility authorities, transit authorities, economic development corporations, local government corporations, conduit issuers and state agencies (including university systems). If the proposed rule becomes final, it would subject appointed board members to SEC and MSRB registration and pay-to-play, fair dealing and disciplinary rules of the MSRB. Appointed board members would be required to submit information on new Form MA-I under the Exchange Act to disclose, among other things, basic identifying information, a five year residential history, a ten year employment history and information about business activities, felony charges or convictions, disciplinary history and bankruptcy proceedings. There may be a fee associated with the filing of such information and it may become publicly available. In addition, the proposed rule imposes heightened fiduciary standards of care on municipal advisors that would make them civilly and criminally liable for violations of SEC regulations. There has been a significant negative backlash to the proposed rule. In fact, in a recent Bond Buyer article the proposed rule was described as having a potentially “chilling effect on the ability of state officials to find volunteers willing to serve on the boards of bond-issuing authorities.”

Proposed SEC broad rules can be narrowed in response to public comment without restarting the rule-making process. Again, comments on the proposed rule are due February 22.

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