[Federal Register Volume 78, Number 218 (Tuesday, November 12, 2013)]
[Rules and Regulations]
[Pages 67467-67798]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23524]



[[Page 67467]]

Vol. 78

Tuesday,

No. 218

November 12, 2013

Part II





Securities and Exchange Commission





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17 CFR Parts 200, 240 and 249





Registration of Municipal Advisors; Final Rule

Federal Register / Vol. 78 , No. 218 / Tuesday, November 12, 2013 / 
Rules and Regulations

[[Page 67468]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240 and 249

[Release No. 34-70462; File No. S7-45-10]
RIN 3235-AK86


Registration of Municipal Advisors

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: Section 975 of Title IX of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act'') amended Section 15B of 
the Securities Exchange Act of 1934 (``Exchange Act'') to require 
municipal advisors, as defined below, to register with the Securities 
and Exchange Commission (``Commission'' or ``SEC''), effective October 
1, 2010. To enable municipal advisors to temporarily satisfy this 
requirement, the Commission adopted an interim final temporary rule, 
Exchange Act Rule 15Ba2-6T, and form, Form MA-T, effective October 1, 
2010. To enable municipal advisors to continue to register under the 
temporary registration regime until the applicable compliance date for 
permanent registration, the Commission is extending Rule 15Ba2-6T, in a 
separate release, to December 31, 2014. The Commission is today 
adopting new Rules 15Ba1-1 through 15Ba1-8, new Rule 15Bc4-1, and new 
Forms MA, MA-I, MA-W, and MA-NR under the Exchange Act. These rules and 
forms are designed to give effect to provisions of Title IX of the 
Dodd-Frank Act that, among other things, require the Commission to 
establish a registration regime for municipal advisors and impose 
certain record-keeping requirements on such advisors.

DATES: Effective Date: January 13, 2014, except that amendatory 
instruction 11 removing Sec.  249.1300T is effective January 1, 2015.
    Compliance Date: The applicable compliance dates are discussed in 
the section of the release titled ``V. Implementation and Compliance 
Dates''.

FOR FURTHER INFORMATION CONTACT:

Office of Municipal Securities: John Cross, Director, at (202) 551-
5839; Jessica Kane, Senior Special Counsel to the Director, at (202) 
551-3235; Rebecca Olsen, Attorney Fellow, at (202) 551-5540; or Mary 
Simpkins, Senior Special Counsel, at (202) 551-5683; at Office of 
Municipal Securities, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-7010.
Office of Market Supervision: Molly Kim, Senior Special Counsel, at 
(202) 551-5644; Ira Brandriss, Special Counsel, at (202) 551-5651; 
Brian Baltz, Special Counsel, at (202) 551-5762; Jennifer Dodd, Special 
Counsel, at (202) 551-5653; Derek James, Special Counsel, at (202) 551-
5792; Yue Ding, Attorney-Adviser, at (202) 551-5842; or Eugene Hsia, 
Attorney-Adviser, at (202) 551-5709; at Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is adopting Rules 15Ba1-1 to 
15Ba1-8 (17 CFR 240.15Ba1-1 to 240.15Ba1-8) and 15Bc4-1 (17 CFR 
240.15Bc4-1) under the Exchange Act; Forms MA, MA-I, MA-W, and MA-NR 
(17 CFR 249.1300, 1310, 1320, and 1330); and Rules 30-3a (17 CFR 
200.30-3a) and 19d (17 CFR 200.19d) under the Commission's Rules of 
Organization and Program Management. The Commission is amending Rules 
30-18 (17 CFR 200.30-18) and 19c (17 CFR 200.19c) under the 
Commission's Rules of Organization and Program Management.

Table of Contents

I. Executive Summary
II. Introduction
    A. Background
    1. Overview of Municipal Securities Market
    a. Municipal Advisors
    b. Municipal Entities and Municipal Financial Products
    2. Historical Regulation of Municipal Securities and Municipal 
Advisors
    a. Municipal Securities Market
    b. Municipal Advisors
    B. Dodd-Frank Act and the Need for Oversight
    C. Interim Final Temporary Rule 15Ba2-6T and Form MA-T
    D. Proposal To Establish a Registration Regime for Municipal 
Advisors
III. Discussion
    A. Rules for the Registration of Municipal Advisors
    1. Rule 15Ba1-1: Definition of ``Municipal Advisor'' and Related 
Terms
    a. Statutory Definition of ``Municipal Advisor''
    b. Interpretation of the Term ``Municipal Advisor''; Definition 
of Related Terms
    i. Advice Standard in General
    ii. Municipal Entity
    iii. Obligated Person
    iv. Municipal Financial Products
    v. Municipal Derivatives
    vi. Guaranteed Investment Contracts
    vii. Issuance of Municipal Securities
    viii. Investment Strategies
    ix. Pooled Investment Vehicles
    x. Solicitation of a Municipal Entity or Obligated Person
    c. Exclusions and Exemptions From the Definition of ``Municipal 
Advisor''
    i. Public Officials and Employees of Municipal Entities and 
Obligated Persons
    ii. Responses to Requests for Proposals or Requests for 
Qualifications
    iii. Municipal Entity or Obligated Person Represented by an 
Independent Municipal Advisor
    iv. Broker, Dealer, or Municipal Securities Dealer Serving as an 
Underwriter
    v. Registered Investment Advisers
    vi. Registered Commodity Trading Advisors; Swap Dealers
    vii. Accountants, Attorneys, Engineers and Other Professionals
    viii. Banks
    2. Rule 15Ba1-2
    a. Application for Municipal Advisor Registration
    b. Information Requested in Form MA
    c. Information Requested in Form MA-I
    3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated 
With Registered Municipal Advisors From Registration
    4. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration; 
Form MA-W
    a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration
    b. Form MA-W
    5. Rule 15Ba1-5: Amendments to Form MA and Form MA-I
    6. Rule 15Ba1-6: Consent to Service of Process To Be Filed by 
Non-Resident Registered Municipal Advisors; Legal Opinion To Be 
Provided by Non-Resident Municipal Advisors; and Form MA-NR
    a. Rule 15Ba1-6: Consent to Service of Process To Be Filed by 
Non-Resident Registered Municipal Advisors; Legal Opinion To Be 
Provided by Non-Resident Municipal Advisors
    b. Form MA-NR
    7. Rule 15Ba1-7: Registration of Successor to Municipal Advisor
    8. General Instructions and Glossary
    9. Rule 15Bc4-1: Persons Associated With Municipal Advisors
    B. Approval or Denial of Registration
    C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by 
Municipal Advisors
IV. Designation of FINRA To Examine FINRA Member Municipal Advisors
V. Implementation and Compliance Dates
VI. Delegation of Authority
    A. Delegation to the Director of the Office of Municipal 
Securities
    B. Delegation to the Director of the Office of Compliance 
Inspections and Examinations
VII. Paperwork Reduction Act
VIII. Economic Analysis
IX. Final Regulatory Flexibility Analysis
X. Statutory Basis and Text of Amendments

I. Executive Summary

    Section 975 of the Dodd-Frank Act creates a new class of regulated 
persons, ``municipal advisors,'' and requires these advisors to 
register with the Commission. This new registration requirement, which 
became effective on

[[Page 67469]]

October 1, 2010, makes it unlawful for any municipal advisor to provide 
certain advice to or on behalf of, or to solicit, municipal entities or 
certain other persons without registering with the Commission.\1\ A 
person is deemed under the Exchange Act to have a statutory fiduciary 
duty to any municipal entity for whom such person acts as a municipal 
advisor.
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    \1\ See 15 U.S.C. 78o-4(a)(1)(B).
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    The new registration requirements and regulatory standards are 
intended to mitigate some of the problems observed with the conduct of 
some municipal advisors, including ``pay to play'' practices, 
undisclosed conflicts of interest, advice rendered by financial 
advisors without adequate training or qualifications, and failure to 
place the duty of loyalty to their clients ahead of their own 
interests.\2\ According to a Senate Report related to the Dodd-Frank 
Act, ``[t]he $3 trillion municipal securities market is subject to less 
supervision than corporate securities markets, and market participants 
generally have less information upon which to base investment 
decisions. During the [financial] crisis, a number of municipalities 
suffered losses from complex derivatives products that were marketed by 
unregulated financial intermediaries.'' \3\ Accordingly, in response to 
the financial crisis that began in 2008, the Dodd-Frank Act amended the 
Exchange Act to require ``a range of municipal financial advisors to 
register with the [Commission] and comply with regulations issued by 
the [MSRB].'' \4\
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    \2\ See, e.g., Municipal Securities Rulemaking Board, 
Unregulated Municipal Market Participants--A Case for Reform, April 
2009, http://www.msrb.org/News-and-Events/Press-Releases/Press-
Releases/~/media/Files/Special-Publications/
MSRBReportonUnregulatedMarketParticipants--April09.ashx (``MSRB 
Study'').
    \3\ See S. Rep. No. 111-176, at 38 (2010).
    \4\ See id.
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    In September 2010, the Commission adopted, and subsequently 
extended, an interim final temporary rule establishing a temporary 
means for municipal advisors to satisfy the registration 
requirement.\5\ As of March 31, 2013, there were approximately 1,130 
Form MA-T registrants, including approximately 330 registrants that are 
also registered investment advisers and/or broker-dealers. In December 
2010, the Commission proposed a permanent registration regime to govern 
municipal advisor registration (``Proposal'').\6\ The Commission has 
considered comments received in connection with both the 2010 interim 
final temporary rules, as well as the Proposal, and is today 
establishing a permanent registration regime for municipal advisors and 
imposing certain record-keeping requirements on such advisors. Further, 
the Commission today, in a separate release, is extending the 
expiration date of the temporary registration regime to December 31, 
2014.\7\ This extension will enable municipal advisors that are 
required to register with the Commission on or after the Effective Date 
but before the applicable compliance date to continue to register under 
the temporary registration regime.
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    \5\ See Section II.C. below and Securities Exchange Act Release 
No. 62824 (September 1, 2010), 75 FR 54465 (September 8, 2010) 
(``Temporary Registration Rule Release'').
    \6\ See Section II.D. below and Securities Exchange Act Release 
No. 63576 (December 20, 2010), 76 FR 824 (January 6, 2011) 
(``Proposal'').
    \7\ See Rule 15Ba2-6T and Securities Exchange Act Release No. 
70468 (September 23, 2013) (``Form MA-T Extension Release'').
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    The statutory definition of a ``municipal advisor'' is broad and 
includes persons that may not have been considered to be municipal 
financial advisors prior to the enactment of the Dodd-Frank Act. 
Historically, municipal advisors have been largely unregulated.\8\ The 
Commission believes that the information disclosed pursuant to the 
rules and forms established by the permanent registration regime for 
municipal advisors will enhance the Commission's oversight of municipal 
advisors and their activities in the municipal securities markets. The 
publicly-available online information provided pursuant to these rules 
and forms should also aid municipal entities and obligated persons in 
choosing municipal advisors and help provide greater transparency when 
engaging in transactions or investments with municipal advisors.
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    \8\ See, e.g., MSRB Study, supra note 2.
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    The Exchange Act defines the term ``municipal advisor'' to mean a 
person (who is not a municipal entity or an employee of a municipal 
entity) that: (1) Provides advice to or on behalf of a municipal entity 
or obligated person with respect to municipal financial products or the 
issuance of municipal securities, including advice with respect to the 
structure, timing, terms, and other similar matters concerning such 
financial products or issues; or (2) undertakes a solicitation of a 
municipal entity.\9\ The definition of municipal advisor includes 
financial advisors, guaranteed investment contract brokers, third-party 
marketers, placement agents, solicitors, finders, and swap advisors 
that provide municipal advisory services, unless they are statutorily 
excluded.\10\
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    \9\ See 15 U.S.C. 78o-4(e)(4)(A).
    \10\ See 15 U.S.C. 78o-4(e)(4)(B).
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    The statutory definition of ``municipal advisor'' explicitly 
excludes: (1) A broker, dealer, or municipal securities dealer serving 
as an underwriter (as defined in Section 2(a)(11) of the Securities Act 
of 1933); (2) any investment adviser registered under the Investment 
Advisers Act of 1940, or persons associated with such investment 
advisers who are providing investment advice; (3) any commodity trading 
advisor registered under the Commodity Exchange Act or persons 
associated with a commodity trading advisor who are providing advice 
related to swaps; (4) attorneys offering legal advice or providing 
services of a traditional legal nature; and (5) engineers providing 
engineering advice.\11\
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    \11\ See 15 U.S.C. 78o-4(e)(4)(C).
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    The Exchange Act defines the term ``municipal financial product'' 
to mean municipal derivatives, guaranteed investment contracts, and 
investment strategies.\12\ ``Investment strategies'' is defined to 
include plans or programs for the investment of proceeds of municipal 
securities that are not municipal derivatives, guaranteed investment 
contracts, and the recommendation of and brokerage of municipal escrow 
investments.\13\
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    \12\ See 15 U.S.C. 78o-4(e)(5).
    \13\ See 15 U.S.C. 78o-4(e)(3).
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    The Proposal reflected the Commission's preliminary interpretation 
of the new statutory requirements, based on its understanding at that 
time of Congressional objectives and intent in adopting Section 975 of 
the Dodd-Frank Act. The Commission requested comment generally on the 
Proposal and also requested comment on over 175 specific issues. The 
Commission received over 1,000 comment letters on the Proposal, 
representing a wide range of viewpoints, which are discussed throughout 
this release. Commenters included municipal advisors, municipal 
entities, broker-dealers, banks, accountants, lawyers, engineers, 
registered investment advisers, organizations representing industry 
participants, investors, the Municipal Securities Rulemaking Board, 
members of Congress, and others.
    Commenters generally supported the goals of the Proposal, although 
many expressed concerns about its breadth and recommended that the 
Proposal be amended or clarified in certain respects. Major themes in 
the comments included: (1) Concerns about the proposed treatment of 
appointed board members and other public officials of municipal 
entities as advisors; (2)

[[Page 67470]]

concerns about the proposed application to advice on investments of all 
municipal funds (versus investments associated with proceeds of 
municipal securities); and (3) potential effects on securities 
activities of banks for which there are no statutory exclusions from 
the definition of ``municipal advisor.'' The Commission staff discussed 
many issues with other U.S. financial regulators, commenters, and 
interested market participants in devising a final rule that requires 
registration of parties engaging in municipal advisory activities 
without unnecessarily imposing additional regulation.
    One theme reflected in the statutory exclusions to the definition 
of a municipal advisor and in the Commission's consideration of 
additional regulatory exemptions involves an approach that focuses and 
limits the scope of these exclusions and exemptions based on identified 
activities (``activities-based exemptions'') rather than on the basis 
of the status of particular categories of market participants 
(``status-based exemptions''). This approach aims to ensure that 
exemptions apply in targeted circumstances to appropriate identified 
activities. By comparison, a concern with status-based exemptions is 
that they could provide inappropriate competitive advantages to covered 
categories of market participants.\14\
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    \14\ See infra Sections VIII.D.5.b. (discussing alternatives to 
the exclusions from the definition of municipal advisor) and 
VIII.D.6.b. (discussing alternatives to the exemptions from the 
definition of municipal advisor).
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    In consideration of the views expressed, suggestions for 
alternatives, and other information provided by commenters, the 
Commission is adopting the rules with significant modifications from 
the Proposal to narrow the scope of the registration requirement, 
including through certain activity-based exemptions from the definition 
of municipal advisor, and to provide additional guidance to market 
participants about what constitutes municipal advice and who is 
required to register as a municipal advisor. Some of the more 
significant changes made in this adopting release are summarized as 
follows.

Broad Exemption for Public Officials and Employees of Municipal 
Entities and Obligated Persons

    The Exchange Act excludes municipal entities and employees of 
municipal entities from the definition of municipal advisor.\15\ The 
Proposal did not extend the exclusion for ``employees of a municipal 
entity'' to include appointed officials. The Commission received 
approximately 670 comment letters to the effect that the proposed 
exclusion for employees of municipal entities was unduly narrow and 
that it failed to provide sufficient coverage for appointed board 
members and other public officials associated with municipal entities. 
The final rule provides a broad exemption from municipal advisor 
registration for all employees, governing body members, and other 
officials of municipal entities and obligated persons, to the extent 
that they act within the scope of their employment or official 
capacity.\16\ The Commission does not expect that the ordinary 
performance of the duties of an appointed member of a governing body of 
a municipal entity--such as voting, providing a statement or discussion 
of views, or asking questions at a public meeting--would cause that 
individual to be a municipal advisor with respect to the municipal 
entity on whose board he or she serves.
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    \15\ See 15 U.S.C. 78o-4(e)(4)(A).
    \16\ See infra Section III.A.1.c.i.
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Limitation to Investments Related to Proceeds of Municipal Securities 
Instead of All Public Funds

    The Exchange Act provides that the term ```investment strategies' 
includes plans or programs for the investment of the proceeds of 
municipal securities that are not municipal derivatives, guaranteed 
investment contracts, and the recommendation of and brokerage of 
municipal escrow investments'' (emphasis added).\17\ In the Proposal, 
the Commission proposed to interpret the ``investment strategies'' 
definition broadly to cover not only the statutorily-identified matters 
but also plans, programs, or pools of assets that invest any funds held 
by or on behalf of a municipal entity.
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    \17\ See 15 U.S.C. 78o-4(e)(3).
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    The Commission received approximately 60 comment letters to the 
effect that the Proposal interpreted the ``investment strategies'' 
definition too broadly to cover advice to municipal entities regarding 
plans or programs for the investment of all public funds of municipal 
entities (rather than investments more narrowly associated with 
proceeds of municipal securities and the recommendation of and 
brokerage of municipal escrow arrangements). The Commission has 
determined to adopt the statutory definition of ``investment 
strategies,'' but is also adopting an exemption for certain persons 
that will result in a narrower application of ``investment strategies'' 
than originally proposed, limiting such strategies to matters relating 
to the investment of the proceeds of municipal securities or the 
recommendation of and brokerage of municipal escrow investments, in 
lieu of all public funds of municipal entities.\18\ This more 
circumscribed approach to ``investment strategies'' has a narrowing 
effect throughout the municipal advisor registration regime (e.g., many 
investment advisers and a significant portion of the bank activities 
identified by commenters will not be subject to municipal advisor 
registration).
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    \18\ See infra Section III.A.1.b.viii.
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New Tailored Exemption for Banks

    The Exchange Act does not exclude banks from the definition of 
municipal advisor. The Commission received approximately 300 comment 
letters to the effect that the Proposal did not provide needed 
exemptions for so-called ``traditional banking'' activities. Most of 
these comments regarding the impact on banks related to the proposed 
broad interpretation of the ``investment strategies'' definition. Many 
commercial banks and banking associations asserted that the 
Commission's interpretation of ``investment strategies'' was overly 
broad and would potentially cover traditional banking products and 
services, such as deposit accounts, cash management products, and loans 
to municipalities. As a result, according to commenters, banks or bank 
employees that provide advice regarding such products and services 
could be considered municipal advisors, adding ``a new layer of 
regulation on bank products for no meaningful public purpose.'' \19\
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    \19\ See infra note 876 and accompanying text (discussing 
comments regarding an exemption for banks from the municipal advisor 
registration rules).
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    The narrowing of the application of ``investment strategies'' in 
the final rule is designed to address the main concerns raised by these 
commenters.\20\ In addition, the final rule provides a new tailored 
exemption from the definition of municipal advisor for a bank providing 
advice with respect to the following: (1) Any investments that are held 
in a deposit account, savings account, certificate of deposit, or other 
deposit instrument issued by a bank; (2) any extension of credit by a 
bank to a municipal entity or obligated person, including the issuance 
of a letter of credit, the making of a direct loan, or the purchase of 
a municipal security by the bank for its own account; (3) any funds 
held in a sweep account; or (4) any investment made by a bank acting in 
the capacity of an indenture trustee

[[Page 67471]]

or similar capacity (e.g., a bond indenture trustee, paying agent, or 
municipal escrow agent).
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    \20\ See infra Section III.A.1.c.viii.
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    The final rule preserves the municipal advisor registration 
requirement for banks that engage in municipal advisory activities, 
such as banks that act as financial advisors to municipal entities in 
structuring issues of municipal securities. Also, the final rule 
preserves the municipal advisor registration requirement for banks that 
provide advice with respect to municipal derivatives.

Advice Standard in General

    For purposes of the municipal advisor definition, the Dodd-Frank 
Act did not specifically define or otherwise provide a general standard 
to determine what constitutes ``advice'' to a municipal entity or 
obligated person. The Commission received comments requesting 
clarification of ``advice'' and suggesting general parameters for 
defining advice that distinguish between providing general information 
to a municipal entity and recommending a specific action to a municipal 
entity. While the Commission believes that the determination of whether 
a person provides advice to or on behalf of a municipal entity or 
obligated person depends on all the relevant facts and circumstances, 
the Commission also believes that additional guidance on the advice 
standard for purposes of the municipal advisor definition will provide 
greater clarity regarding the applicability of the municipal advisor 
registration requirement. Accordingly, the adopted rules provide that 
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).\21\
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    \21\ See infra Section III.A.1.b.i.
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Exemption for Certain Swap Dealers

    The Exchange Act does not exclude swap dealers from the definition 
of municipal advisor. The Commission received comments suggesting that 
regulation of swap dealers under the municipal advisor registration 
regime should be coordinated with other regulatory programs. The 
Commission recognizes that swap dealers are also subject to the 
provisions of Title VII of the Dodd-Frank Act,\22\ which provide the 
Commodity Futures Trading Commission (``CFTC'') with authority to 
register and implement business conduct standards for swap dealers with 
respect to their interactions with municipal entities and obligated 
persons that are ``special entities,'' as discussed further below in 
Section III.A.1.c.vi. The final rules exempt any registered swap dealer 
to the extent that such dealer recommends a municipal derivative or a 
trading strategy that involves a municipal derivative, so long as such 
dealer or associated person is not ``acting as an advisor'' to the 
municipal entity or obligated person, applying the standards applicable 
to the parties to such transactions under the existing regulatory 
regime of the CFTC.\23\
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    \22\ See Dodd-Frank Act sections 731 et seq., 764 et seq.
    \23\ See infra Section III.A.1.c.vi. The Commission also 
received similar comments regarding security-based swap dealers. As 
discussed herein, although the Commission is not providing an 
exemption in the rules as adopted for security-based swap dealers, 
security-based swap dealers may be eligible for exemption pursuant 
to another exemption, such as when there is a separate registered 
municipal advisor, and the Commission may in the future consider 
whether to provide a comparable exemption by rule. See id.
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Exemption When There Is an Independent Registered Municipal Advisor

    Several commenters suggested that a person providing advice with 
respect to municipal financial products or the issuance of municipal 
securities should not be regulated as a municipal advisor if the 
municipal entity or obligated person is otherwise represented by a 
municipal advisor. The Commission believes that if a municipal entity 
or obligated person is represented by a registered municipal advisor, 
parties to the municipal securities transaction and others who are not 
registered municipal advisors should be able to provide advice to such 
municipal entity or obligated person, so long as the responsibilities 
of each of the parties are clear.
    Accordingly, the final rules exempt persons providing advice with 
respect to municipal financial products or the issuance of municipal 
securities from the definition of municipal advisor so long as: (1) An 
independent registered municipal advisor is providing advice with 
respect to the same aspects of the municipal financial product or 
issuance of municipal securities, is registered pursuant to Section 15B 
of the Exchange Act and the rules and regulations thereunder, and is 
not, and within at least the past two years was not, associated with 
the person seeking to rely on this exemption; (2) such person receives 
from the municipal entity or obligated person a representation in 
writing that it is represented by, and will rely on the advice of, an 
independent registered municipal advisor; and (3) such person provides 
written disclosure to the municipal entity or obligated person that 
such person is not a municipal advisor and, with respect to a municipal 
entity, is not subject to the statutory fiduciary duty applicable to 
municipal advisors under the Exchange Act, and such person provides a 
copy of such disclosure to the municipal entity's or the obligated 
person's independent registered municipal advisor.\24\
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    \24\ See infra Section III.A.1.c.iii.
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Exclusion of Individuals From Registration

    In the Proposal, the Commission proposed to require registration of 
all individuals associated with municipal advisory firms who engage in 
municipal advisory activities, as contrasted with limiting registration 
to the municipal advisory firms themselves. For reasons further 
discussed in Sections III.A.2.a. and III.A.3. of this adopting release, 
the Commission is limiting the registration requirement to municipal 
advisory firms and sole proprietors.

II. Introduction

A. Background

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Act.\25\ The Dodd-Frank Act was enacted, among other things, to promote 
the financial stability of the United States by improving 
accountability and transparency in the financial system.\26\ With 
Section 975 of Title IX of the Dodd-Frank Act, Congress amended Section 
15B of the Exchange Act \27\ to, among other things, make it unlawful 
for municipal advisors \28\ to provide certain advice to, or solicit, 
municipal entities \29\ or certain other persons without registering 
with the Commission.\30\
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    \25\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \26\ See Public Law 111-203 Preamble.
    \27\ 15 U.S.C. 78o-4.
    \28\ See infra Section III.A.1. (discussing the term ``municipal 
advisor'').
    \29\ See infra Section III.A.1.b.ii. (discussing the term 
``municipal entity'').
    \30\ See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C. 
78o-4(a)(1)(B).

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[[Page 67472]]

1. Overview of Municipal Securities Market
a. Municipal Advisors
    As discussed in the Proposal,\31\ until the passage of the Dodd-
Frank Act, the activities of municipal advisors were largely 
unregulated, and municipal advisors were generally not required to 
register with the Commission or any other federal, state, or self-
regulatory entity with respect to their municipal advisory activities. 
As discussed below in this section and in the Proposal,\32\ some 
entities that are now subject to registration as municipal advisors 
pursuant to Section 15B of the Exchange Act and rules or regulations 
promulgated thereunder currently are subject to regulation by various 
federal and state regulators in other capacities. These entities 
include brokers, dealers, municipal securities dealers, investment 
advisers, and banks. Such regulations, however, generally do not apply 
specifically to these entities' municipal advisory activities.
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    \31\ See Proposal, 76 FR 825.
    \32\ See id.
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    Municipal advisors, commonly referred to as ``financial advisors,'' 
\33\ engage in municipal advisory activities in a variety of contexts. 
With respect to the issuance of municipal securities, municipal 
advisors (which may include entities registered as brokers, dealers, 
municipal securities dealers, or investment advisers acting as 
municipal advisors), among other things, may assist municipal entities 
in developing a financing plan, assist municipal entities in evaluating 
different financing options and structures, assist in the selection of 
other parties to the financing (such as bond counsel and underwriters), 
coordinate the rating process, ensure adequate disclosure, and/or 
evaluate and negotiate the financing terms.\34\ According to the 
Municipal Securities Rulemaking Board (``MSRB''), approximately $315 
billion (70%) \35\ of the municipal debt issued in 2008 was issued with 
the participation of municipal advisors.\36\ The MSRB also stated that 
participation by municipal advisory firms in the issuance of municipal 
securities is rising, noting a 63% participation rate in 2006, a 66% 
participation rate in 2007, and a 70% participation rate in 2008.\37\ A 
study that looked at historical involvement by ``financial advisors'' 
identified participation rates of approximately 50% in the period from 
1984 to 2002.\38\
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    \33\ See infra note 36 (referring to municipal advisors as 
``financial advisors'').
    \34\ See Jayaraman Vijayakumar and Kenneth N. Daniels, 2006, The 
Role and Impact of Financial Advisors in the Market for Municipal 
Bonds (``Vijayakumar and Daniels''), Journal of Financial Services 
Research, 30:43, at 46.
    \35\ See MSRB Study, supra note 2, at 1.
    \36\ See id. (referring to municipal advisors as ``financial 
advisors''). Approximately 43% of the $453 billion of municipal debt 
issued in 2008 (by par amount of bonds) (or 62% of the $315 billion 
of municipal debt issued with financial advisors) was issued with 
the assistance of ``financial advisors'' that were not part of 
dealer firms regulated by the MSRB. See id., at 2.
    \37\ See id., at 2.
    \38\ See Arthur Allen and Donna Dudney, May 2010, Does the 
Quality of Financial Advice Affect Prices? The Financial Review 45: 
389 (``Allen and Dudney'').
---------------------------------------------------------------------------

    As discussed in the Proposal,\39\ municipal advisors may also 
engage in municipal advisory activities with respect to municipal 
financial products.\40\ For example, as derivatives--which are 
municipal financial products--developed in the municipal securities 
market, some municipal advisory firms began marketing themselves as 
experts in derivatives. These municipal advisory firms are generally 
referred to as ``swap advisors.'' \41\ Swap advisors may provide advice 
solely with respect to a municipal derivative transaction or may 
provide advice in other types of municipal advisory capacities.
---------------------------------------------------------------------------

    \39\ See Proposal, 76 FR 825.
    \40\ See infra Section III.A.1.b.iv. (discussing the term 
``municipal financial products'').
    \41\ See MSRB Study, supra note 35.
---------------------------------------------------------------------------

    Further, municipal advisors may provide advice to municipal 
entities concerning guaranteed investment contracts and investment 
strategies.\42\ These advisory firms may assist in the investment of 
proceeds from bond offerings as well as manage other public monies. 
Such public monies include general and special funds of state and local 
governments, public pension plans, and other funds dedicated to public 
programs, such as public transportation, police and fire protection, 
public health, and public education. In addition, municipal advisors 
may help state and local governments find and evaluate other advisors 
that manage public funds and provide other types of services.\43\
---------------------------------------------------------------------------

    \42\ See infra Sections III.A.1.b.vi. and III.A.1.b.viii. 
(discussing the terms ``guaranteed investment contracts'' and 
``investment strategies,'' respectively).
    \43\ See Investment Advisers Act Release No. 3043 (July 1, 
2010), 75 FR 41018, 41019 (July 14, 2010) (``Political Contributions 
Final Rule'').
---------------------------------------------------------------------------

    Other persons that may be required to register as municipal 
advisors include those who solicit municipal entities on behalf of 
brokers, dealers, municipal securities dealers, municipal advisors, and 
investment advisers. Such solicitation activities are discussed 
herein.\44\
---------------------------------------------------------------------------

    \44\ See infra Section III.A.1.b.x.
---------------------------------------------------------------------------

b. Municipal Entities and Municipal Financial Products
    The municipal securities market consists of approximately 44,000 
issuers,\45\ a diverse group that includes states, their political 
subdivisions (such as cities, towns, counties, and school districts), 
and their instrumentalities, authorities, agencies, and special 
districts. These public bodies are governed by state and local laws, 
including state constitutions, statutes, city charters, and municipal 
codes.\46\ Such constitutions, statutes, charters, and codes impose on 
municipal issuers requirements relating to governance, budgeting, 
accounting, and other financial matters.\47\ The governing bodies of 
municipal issuers are as varied as the types of issuers, ranging from 
state governments, cities, towns, counties, and school districts, to 
authorities, agencies, and other special districts.\48\
---------------------------------------------------------------------------

    \45\ See Commission Report on the Municipal Securities Market, 1 
(July 31, 2012), available at http://sec.gov/news/studies/2012/munireport073112.pdf (``2012 Report on the Municipal Securities 
Market'').
    \46\ See American Bar Association, Disclosure Roles of Counsel 
in State and Local Government Securities Offerings 1 (Third Edition, 
2009) (``Disclosure Roles of Bond Counsel'').
    \47\ See id., at 2.
    \48\ See id., at 78.
---------------------------------------------------------------------------

    Municipal securities are issued by government entities to pay for a 
variety of public projects, to obtain cash flow for other governmental 
needs, and to provide tax-exempt or taxable financing for non-
governmental private projects by acting as a conduit on behalf of 
private organizations.\49\ In 2011, there were over one million 
different municipal bonds outstanding, totaling $3.7 trillion in 
principal.\50\ Also, there were 13,463 municipal issuances, totaling 
$355 billion of principal.\51\ Further, in 2011, the average daily 
trading volume for the municipal bond market was $11.3 billion.\52\
---------------------------------------------------------------------------

    \49\ The Internal Revenue Code delineates the purposes for which 
tax-exempt municipal bonds may be issued for the benefit of 
organizations other than states and local governments, i.e., conduit 
borrowers. See 26 U.S.C. 142-145, 1394.
    \50\ See 2012 Report on the Municipal Securities Market, supra 
note 45, at 5. In 2011, there were fewer than 50,000 different 
corporate bonds, totaling $11.5 trillion in principal (this figure 
includes foreign bonds). See id. There were also $22.5 trillion of 
corporate equities outstanding. See id.
    \51\ See id., at 6.
    \52\ See id., at 21. Compare this to the corporate bond market, 
which in 2011 had an average daily trading volume of $20.6 billion. 
See id.
---------------------------------------------------------------------------

    Interests offered by college savings plans (``529 Savings Plans'') 
that comply with Section 529 of the Internal Revenue Code \53\ are 
another type of

[[Page 67473]]

municipal security. 529 Savings Plans involve offerings of interests in 
state tuition programs and qualified savings plans that are public 
instrumentalities of the particular state, and provide tax advantages 
designed to encourage saving for future college costs.\54\ 529 Savings 
Plan assets have increased from approximately $9 billion in 2000 to 
approximately $190 billion in 2012, and the number of 529 Savings Plan 
accounts has increased from approximately 1.3 million in 2000 to 
approximately 11 million in 2012.\55\
---------------------------------------------------------------------------

    \53\ See 26 U.S.C. 529.
    \54\ See 2012 Report on the Municipal Securities Market, supra 
note 45, at 8.
    \55\ See College Savings Plans Network 529 Report (March 2013), 
available at http://www.collegesavings.org/includes/pdfs/March%202013%20529%20Report%20Final.pdf and Investment Company 
Institute, 529 Plan Program Statistics, Fourth Quarter 2012, 
available at http://www.ici.org/research/stats/529s/529s_12_q4.
---------------------------------------------------------------------------

    A person that sells interests in 529 Savings Plans generally must 
be registered as a broker, dealer, or municipal securities dealer and 
comply with applicable MSRB rules.\56\ 529 Savings Plans are also 
relevant in the context of municipal advisor regulation, because an 
issuance of interests in 529 Savings Plans is an issuance of municipal 
securities.\57\ Further, 529 Savings Plans may engage in transactions 
involving municipal financial products and may also seek advice in 
connection with such products or issuances.\58\ Moreover, third parties 
seeking to advise 529 Savings Plans may solicit such plans for that 
purpose.\59\
---------------------------------------------------------------------------

    \56\ See, e.g., MSRB Notice 2002-19 (May 14, 2002) (Application 
of Fair Practice and Advertising Rules to Municipal Fund 
Securities).
    \57\ See MSRB, 529 Plan Basics, available at http://emma.msrb.org/EducationCenter/FAQs.aspx?topic=PlanBasics and MSRB, 
Interpretation Relating to Sales of Municipal Fund Securities in the 
Primary Market (January 18, 2001), available at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Definitional/Rule-D-12.aspx?tab=2#_4B905EF1-5F85-4D2E-B27C-6B94EF405F47 (citing Letter 
from Catherine McGuire, Chief Counsel, Division of Trading and 
Markets, Commission, to Diane G. Klinke, General Counsel, MSRB, 
dated February 26, 1999, in response to letter from Diane G. Klinke, 
General Counsel, MSRB, to Catherine McGuire, Chief Counsel, Division 
of Trading and Markets, Commission, dated June 2, 1998).
    \58\ See Political Contributions Final Rule, supra note 43, at 
41044-46.
    \59\ See id., at 41019.
---------------------------------------------------------------------------

    Public pension plans may also engage in transactions in municipal 
financial products and seek advice in connection with such 
transactions. Third parties may solicit these public pension plans on 
behalf of firms seeking to provide advice to these plans.\60\ According 
to the 2011 Census Bureau survey, there were 3,418 state- and locally-
administered pension systems in 2011.\61\ As of the first quarter of 
2013, public pension plans had over $3 trillion of assets and 
represented approximately 30 percent of all U.S. pension assets.\62\
---------------------------------------------------------------------------

    \60\ See id.
    \61\ See U.S. Census Bureau, Annual Survey of Public Pensions: 
State- and Locally-Administered Defined Benefit Data Summary Report: 
2011 (August 2013), available at http://www2.census.gov/govs/retire/2011summaryreport.pdf.
    \62\ See Federal Reserve Board, Financial Accounts of the United 
States--Flow of Funds, Balance Sheets, and Integrated Macroeconomic 
Accounts, Table L.117 (First Quarter 2013), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.
---------------------------------------------------------------------------

    In addition to public pension plans and 529 Savings Plans, state 
and local government agencies also maintain other pools of assets, 
including general funds and other special funds. Governmental entities 
generally invest such funds in a combination of individualized 
investments, investment agreements, and local government investment 
pools (``LGIPs'').\63\
---------------------------------------------------------------------------

    \63\ According to a 2009 article, 45 states have LGIPs with 
assets totaling more than $250 billion. See Jeff Pentages, Local 
Government Investment Pools and the Financial Crisis: Lessons 
Learned, October 2009, Government Finance Review 25. As of the first 
quarter of 2013, state and local governments had approximately $2.1 
trillion dollars in total financial assets. See Federal Reserve 
Board, Financial Accounts of the United States--Flow of Funds, 
Balance Sheets, and Integrated Macroeconomic Accounts, Table L.104 
(First Quarter 2013), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.
---------------------------------------------------------------------------

    Historically, the over-the-counter derivatives markets have been 
relatively opaque because of their privately negotiated, bilateral 
nature and the limited availability of transaction data such as prices 
and volumes.\64\ Accordingly, there is currently no comprehensive data 
on how many municipal issuers are active in the $162 trillion interest-
rate swap market,\65\ although reported estimates of the size of the 
municipal derivatives market range from $100 billion to $300 billion 
annually in notional principal amount.\66\ Further, estimates of the 
number of municipal issuers that have engaged in derivative 
transactions also vary. Some anecdotal evidence suggests a relatively 
wide use of municipal derivatives in recent years. For instance, a 2008 
review of Pennsylvania Department of Community and Economic Development 
records indicated that 185 school districts, towns, and counties in 
Pennsylvania have entered into derivative transactions since 2003, when 
the state's law was explicitly changed to allow for such 
transactions.\67\ Other estimates, however, have pointed to a less 
widespread use of derivatives among municipal issuers. For example, a 
2007 study by Standard & Poor's identified 750 municipal issuers that 
engaged in interest rate swaps.\68\ In addition, in October 2009, 
Moody's undertook a review of the state and local governments for which 
Moody's provides ratings and identified 500 entities with outstanding 
interest rate swaps.\69\ Moody's also estimated that Pennsylvania 
issuers accounted for 22% of all municipal derivative transactions, 
suggesting that a broad participation in derivative transactions by 
municipal entities in Pennsylvania did not necessarily translate into a 
broad participation by municipal entities nationwide.\70\ Since 2008, 
the use of derivatives by municipal entities has declined, and many 
municipal entities have terminated existing interest rate swaps.\71\
---------------------------------------------------------------------------

    \64\ The Dodd-Frank Act, however, will require more public 
reporting of derivative transactions in the future. For example, the 
CFTC has adopted rules to implement a framework for the real-time 
public reporting of swap transactions and pricing data for swap 
transactions. See 77 FR 1182 (January 9, 2012). Moreover, the Dodd-
Frank Act requires the Commission to adopt, and the Commission has 
proposed, rules to provide for the reporting of security-based swaps 
information to registered security-based swap data repositories or 
to the Commission and the public dissemination of security-based 
swap transaction, volume, and pricing information. See Securities 
Exchange Act Release No. 63346 (November 19, 2010), 75 FR 75208 
(December 2, 2010).
    \65\ See 2012 Report on the Municipal Securities Market, supra 
note 45, at 91.
    \66\ See MSRB Study, supra note 35, at 10.
    \67\ See Martin Z. Braun, Deutsche Bank Swap Lures County as 
Budgets Crumble, Bloomberg (Nov. 26, 2008), available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUYLG7W1nGpM.
    \68\ See Joe Mysak, California Declares War on State Bond Short-
Sellers, Bloomberg (Apr. 27, 2010), available at http://www.bloomberg.com/news/2010-04-28/california-declares-war-on-short-sellers-of-bonds-commentary-by-joe-mysak.html.
    \69\ See Joe Mysak, Swaps Nightmares Become Real for Amateur 
Financiers, Bloomberg (Dec. 15, 2009), available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVCDZ6c1PYC0.
    \70\ See id.
    \71\ See, e.g., William Selway, Derivatives Sold to Governments 
Get Dodd-Frank Disclosure: One Year Later, Bloomberg (Jul. 18, 
2011), available at http://www.bloomberg.com/news/2011-07-18/derivatives-sold-to-governments-get-dodd-frank-disclosure-one-year-later.html; Michael McDonald, Wall Street Collects $4 Billion From 
Taxpayers as Swaps Backfire, Bloomberg (Nov. 10, 2010), available at 
http://www.bloomberg.com/news/2010-11-10/wall-street-collects-4-billion-from-taxpayers-as-swaps-backfire.html; Transcript of the 
U.S. Securities and Exchange Commission Birmingham Field Hearing on 
the State of the Municipal Securities Market, at 239-240 and 243.
---------------------------------------------------------------------------

2. Historical Regulation of Municipal Securities and Municipal Advisors
a. Municipal Securities Market
    As discussed in the Proposal,\72\ the Securities Act of 1933 
(``Securities

[[Page 67474]]

Act'') \73\ and the Exchange Act \74\ were both enacted with exemptions 
for municipal securities, except for the antifraud provisions of 
Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, 
and Rule 10b-5 promulgated thereunder.\75\ In the early 1970s, the 
municipal securities market was still relatively small.\76\ Up until 
that time, the standard issue was usually a general obligation bond, 
with fairly standard features, and the typical participants were banks, 
underwriters, and bond counsel.\77\
---------------------------------------------------------------------------

    \72\ See Proposal, 76 FR 826.
    \73\ 15 U.S.C. 77a et seq.
    \74\ 15 U.S.C. 78a et seq.
    \75\ See, e.g., Securities Act Section 3(a)(2) (15 U.S.C. 
77c(a)(2)); Securities Act Section 12(a)(2) (15 U.S.C. 77l(a)(2)); 
Exchange Act Section 3(a)(12) (15 U.S.C. 78c(a)(12)); Exchange Act 
Section 3(a)(29) (15 U.S.C. 78c(a)(29)).
    \76\ There were $235.4 billion of municipal bonds outstanding in 
1975 after an issuance of $58 billion in that year. See The Bond 
Buyer's Municipal Finance Statistics, 1975 (June 1976). At the end 
of 1976, there were $323 billion of corporate bonds outstanding, 
which was about one third more than state and local government 
securities and about half as much as U.S. Treasury securities. See 
Federal Reserve Bank of New York, the Market for Corporate Bonds 
(Autumn 1977). As of the first quarter of 2013, there were 
approximately $3.7 trillion of municipal bonds outstanding, $13 
trillion of corporate and foreign bonds outstanding, and $12 
trillion of Treasury securities outstanding. See Federal Reserve 
Board, Financial Accounts of the United States--Flow of Funds, 
Balance Sheets, and Integrated Macroeconomic Accounts, Tables L.209, 
211 and 212, (First Quarter 2013), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.
    \77\ See Ann Judith Gellis, Municipal Securities Market: Same 
Problems--No Solutions, 21 Del. J. Corp. L. 427, 428 (1996).
---------------------------------------------------------------------------

    In 1975, Congress granted new authority to regulate intermediaries 
in the market for municipal securities. As part of the Securities Acts 
Amendments of 1975 (``1975 Amendments''), Congress created a limited 
regulatory scheme for the municipal securities market at the federal 
level.\78\ That scheme included mandatory registration with the 
Commission for brokers, dealers, and municipal securities dealers 
involved in effecting municipal securities transactions,\79\ and gave 
the Commission broad rulemaking and enforcement authority over such 
persons.\80\ In addition, the 1975 Amendments authorized the creation 
of the MSRB and granted it authority to promulgate rules concerning 
transactions in municipal securities by brokers, dealers, and municipal 
securities dealers. The 1975 Amendments, however, did not create a 
regulatory scheme for, or impose any new requirements on, municipal 
issuers. Rather, the 1975 Amendments expressly prohibited the 
Commission and the MSRB from requiring municipal securities issuers, 
either directly or indirectly, to file any application, report, or 
document with the Commission or the MSRB prior to any sale by the 
issuer.\81\
---------------------------------------------------------------------------

    \78\ See, e.g., Exchange Act Sections 15(c)(1), 15(c)(2), 
15B(c)(1), 15B(c)(2), 17(a), 17(b), and 21(a)(1) (15 U.S.C. 
78o(c)(1), 78o(c)(2), 78o-4(c)(1), 78o-4(c)(2), 78q(a), 78q(b), and 
78u(a)(1)).
    \79\ The Exchange Act defines a ``municipal securities dealer'' 
as any person (including a separately identifiable department or 
division of a bank) engaged in the business of buying and selling 
municipal securities for its own account other than in a fiduciary 
capacity, through a broker or otherwise. See 15 U.S.C. 78c(a)(30).
    \80\ See supra note 78. Enforcement activities regarding 
municipal securities dealers must be coordinated by the Commission, 
the Financial Industry Regulatory Authority (``FINRA''), and the 
appropriate bank regulatory agency. See Exchange Act Sections 
15B(c)(6)(A), 15B(c)(6)(B), and 17(c) (15 U.S.C. 78o-4(c)(6)(A), 
78o-4(c)(6)(B), 78q(c)).
    \81\ Section 15B(d)(1) of the Exchange Act (commonly known as 
the ``Tower Amendment'') provides that ``[n]either the Commission 
nor the Board is authorized under this title, by rule or regulation, 
to require any issuer of municipal securities, directly or 
indirectly through a purchaser or prospective purchaser of 
securities from the issuer, to file with the Commission or the Board 
prior to the sale of such securities by the issuer any application, 
report, or document in connection with the issuance, sale, or 
distribution of such securities.'' 15 U.S.C. 78o-4(d)(1).
---------------------------------------------------------------------------

    As noted above and in the Proposal, pursuant to the 1975 
Amendments, unless an exception or exemption applies, all brokers, 
dealers, and municipal securities dealers that underwrite or trade 
municipal securities are required to register with the Commission.\82\ 
All brokers, dealers, and municipal securities dealers that engage in 
municipal securities transactions also must register with the MSRB and 
comply with its rules.\83\ Furthermore, unless it is a bank, each 
broker, dealer, and municipal securities dealer that engages in 
municipal securities transactions must be a member of FINRA.\84\ FINRA 
is required to examine brokers, dealers, and municipal securities 
dealers for compliance with the Exchange Act, rules and regulations 
thereunder, and MSRB rules.\85\ Bank municipal securities dealers are 
examined by their appropriate regulatory agencies.\86\
---------------------------------------------------------------------------

    \82\ See 15 U.S.C. 78o-4(a)-(b). See also Proposal, 76 FR 827.
    \83\ See 15 U.S.C. 78o-4(c)(1). See also MSRB, Registration 
Guidelines for Regulated Entities, available at http://www.msrb.org/
Rules-and-Interpretations/~/media/Files/User-Manuals/
GuidelinesforRegistration.ashx.
    \84\ See 15 U.S.C. 78o(b)(8) and 78o-4(a).
    \85\ See 15 U.S.C. 78o-4(c)(7).
    \86\ The term ``appropriate regulatory agency,'' when used with 
respect to a municipal securities dealer, is defined in Section 
3(a)(34)(A) of the Exchange Act. 15 U.S.C. 78c(a)(34)(A). The 
Commission also has the authority to examine all registered 
municipal securities dealers. See 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    Since 1975, the municipal securities market has grown and evolved 
significantly to encompass a wide variety of bond structures \87\ and 
credit enhancements. The variety of financing options has led municipal 
entities to increasingly rely on external advisors to assist them in 
deciding among the structural choices for their debt and to help them 
negotiate with a variety of specialized intermediaries.\88\ For 
example, municipal bond insurance was first introduced in 1971.\89\ The 
introduction of variable rate municipal bonds in the early 1980s 
increased the use of letter of credit-supported municipal bonds.\90\ In 
1988, auction rate securities were introduced into the municipal 
market.\91\ In addition, derivative products have been utilized by 
municipal securities issuers beginning generally with interest rate 
swap transactions in the mid-1980s. The derivatives utilized since then 
have become more complex.\92\
---------------------------------------------------------------------------

    \87\ Although it is helpful to think of municipal securities as 
either (1) general obligation bonds backed by the ``full faith and 
credit,'' or an unlimited taxing power of the issuing entity, or (2) 
revenue bonds, these general categories mask a broad range of 
diversity and complexity in the underlying security for municipal 
bonds. See Gary Gray and Patrick Cusatis, Municipal Derivative 
Securities--Uses and Valuation 21 (1995) (discussion of revenue 
bonds). See also Disclosure of Bond Counsel, supra note 46, at 54-55 
(discussion of conduit bonds).
    \88\ See Vijayakumar and Daniels, supra note 34, at 43-44.
    \89\ See Gray and Cusatis, supra note 87, at 30-31.
    \90\ See id. As the Commission noted in the Proposal, although 
the use of letters of credit and bond insurance has declined since 
2008, these forms of credit enhancement remain an option for 
municipal entities to consider when issuing municipal securities. 
See 76 FR 827, note 48. See also 2012 Report on the Municipal 
Securities Market, supra note 45, at 10-11.
    \91\ See Gray and Cusatis, supra note 87, at 41.
    \92\ See id., at 49. Municipal derivatives must often be 
structured in accordance with the provisions of the tax code and 
other laws that apply to the issuance of tax-exempt financings. See 
David L. Taub, Understanding Municipal Derivatives, August 2005, 
Government Finance Review 21. The most common use for derivatives in 
the municipal securities market is the use of interest rate swaps 
for new, anticipated, or outstanding debt. See id.
---------------------------------------------------------------------------

b. Municipal Advisors
    As discussed above and in the Proposal,\93\ many market 
participants advise municipal entities about the issuance of municipal 
securities and municipal financial products. Historically, however, 
these participants have been largely unregulated with respect to their 
municipal advisory activities. In addition, Commission staff has taken 
the position that financial advisors that limit their advisory 
activities solely to advising municipal issuers as to the structuring 
of their

[[Page 67475]]

financings may not need to register as investment advisers.\94\
---------------------------------------------------------------------------

    \93\ See Proposal, 76 FR 827.
    \94\ See Division of Investment Management: Staff Legal Bulletin 
No. 11, Applicability of the Advisers Act to Financial Advisors of 
Municipal Securities Issuers (Sep. 19, 2000), available at http://www.sec.gov/interps/legal/slbim11.htm (``Staff Legal Bulletin No. 
11'') (explaining staff's views as to the circumstances under which 
financial advisors (a) may be investment advisers, and (b) may give 
advice to issuers of municipal securities regarding the investment 
of offering proceeds without being deemed to be investment 
advisers).
---------------------------------------------------------------------------

    Approximately fifteen states, however, as well as a number of 
municipalities, have rules relating to the conduct of some municipal 
advisors (generally, financial advisors and swap advisors). For 
example, these governmental entities have enacted pay-to-play 
prohibitions that range from broad proscriptions relating to all state 
and local contracts to narrowly defined rules that apply only to 
specific situations.\95\ Some state and local entities also require 
certain types of municipal advisors to disclose actual or apparent 
conflicts of interest.\96\
---------------------------------------------------------------------------

    \95\ See MSRB Study, supra note 35, at 4.
    \96\ See id., at 6.
---------------------------------------------------------------------------

B. Dodd-Frank Act and the Need for Oversight

    As discussed in more detail below and in the Proposal,\97\ the 
Dodd-Frank Act amended the Exchange Act to require municipal advisors 
to register with the Commission.\98\ In addition, the Exchange Act, as 
amended by the Dodd-Frank Act, grants the MSRB regulatory authority 
over municipal advisors \99\ and imposes a fiduciary duty on municipal 
advisors when advising municipal entities.\100\
---------------------------------------------------------------------------

    \97\ See, generally, Proposal, 76 FR 824.
    \98\ See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C. 
78o-4(a)(1)(B).
    \99\ See 15 U.S.C. 78o-4(b).
    \100\ See 15 U.S.C. 78o-4(c). Specifically, Exchange Act Section 
15B(c)(1) provides that: ``A municipal advisor and any person 
associated with such municipal advisor shall be deemed to have a 
fiduciary duty to any municipal entity for whom such municipal 
advisor acts as a municipal advisor, and no municipal advisor may 
engage in any act, practice, or course of business which is not 
consistent with a municipal advisor's fiduciary duty or that is in 
contravention of any rule of the Board.'' 15 U.S.C. 78o-4(c)(1). The 
Commission notes that a number of commenters discussed the 
applicability of fiduciary duty to municipal advisors. This adopting 
release generally does not address those comments, as this release 
generally concerns the registration of municipal advisors. The 
Commission notes, however, that the fiduciary duty of a municipal 
advisor, as set forth in Exchange Act Section 15B(c)(1), extends 
only to its municipal entity clients. The Exchange Act does not 
impose a fiduciary duty with respect to advice to obligated persons. 
See infra note 202 and accompanying text (discussing the definition 
of the term ``obligated person'').
---------------------------------------------------------------------------

    The Commission believes that regulation of municipal advisors is in 
the public interest and will improve the protection of municipal 
entities, including the protection of municipal entities in their 
capacities as investors, and those who invest in municipal securities. 
As noted above,\101\ according to a Senate Report related to the Dodd-
Frank Act, ``[t]he $3 trillion municipal securities market is subject 
to less supervision than corporate securities markets, and market 
participants generally have less information upon which to base 
investment decisions. During the [financial] crisis, a number of 
municipalities suffered losses from complex derivatives products that 
were marketed by unregulated financial intermediaries.'' \102\ 
Accordingly, in response to the financial crisis that began in 2008, 
the Dodd-Frank Act amended the Exchange Act to require ``a range of 
municipal financial advisors to register with the [Commission] and 
comply with regulations issued by the [MSRB].'' \103\
---------------------------------------------------------------------------

    \101\ See supra notes 3-4 and accompanying text.
    \102\ See S. Rep. No. 111-176, at 38 (2010).
    \103\ See id.
---------------------------------------------------------------------------

    A number of actions brought by the Commission against municipal 
market participants also highlight the abuses in the municipal 
securities market. For example, the Commission brought a number of 
actions alleging payments by J.P. Morgan Securities Inc. (now J.P. 
Morgan Securities LLC) to local firms whose principals or employees 
were friends of public officials of Jefferson County, Alabama in 
connection with a $5 billion bond underwriting and interest rate swap 
agreement business.\104\ In addition, the Commission has settled 
several actions against major financial institutions for their role in 
a series of complex, wide-ranging bid-rigging schemes involving 
derivatives utilized by municipalities and underlying obligors as 
reinvestment products.\105\ Further, in August 2011, the Commission 
filed a civil injunctive action against Stifel, Nicolaus & Co., Inc. 
and its former Senior Vice President, David Noack, for allegedly 
violating federal securities laws in connection with a $200 million 
sale of highly leveraged and unsuitably risky derivatives to five 
Wisconsin school districts.\106\ According to the complaint, Stifel and 
Noack misrepresented the risks of the investments and failed to 
disclose material facts to the school districts.
---------------------------------------------------------------------------

    \104\ The Commission had alleged that J.P. Morgan Securities 
engaged in an improper payment scheme in connection with obtaining 
municipal securities underwriting and interest swap agreement 
business from Jefferson County, Alabama. The Commission had alleged 
that J.P. Morgan Securities incorporated certain of the costs of 
these payments into higher swap interest rates that it charged the 
County, directly increasing the swap transaction costs to the County 
and its taxpayers. J.P. Morgan Securities was censured, paid a $25 
million civil penalty, made a $50 million payment to the County, and 
forfeited more than $647 million in claimed termination fees under 
the swaps. See In the Matter of J.P. Morgan Securities Inc., 
Securities Exchange Act Release No. 60928 (Nov. 4, 2009) (order 
instituting administrative and cease-and-desist proceedings, making 
findings, and imposing remedial sanctions and a cease-and-desist 
order). See also SEC v. Larry P. Langford, et al., Litigation 
Release No. 20545 (Apr. 30, 2008) and SEC v. Charles E. LeCroy and 
Douglas W. MacFaddin, Litigation Release No. 21280 (Nov. 4, 2009) 
(charging an Alabama local government official, a bond dealer and 
J.P. Morgan Securities employees with conducting undisclosed payment 
schemes in connection with awarding Jefferson County municipal bond 
and swap agreement business).
    \105\ Collectively, the five financial institutions, Banc of 
America Securities LLC, UBS Financial Services Inc., J.P. Morgan 
Securities LLC, Wachovia Bank, N.A., and GE Funding Capital Market 
Services, Inc., paid $205 million to settle the Commission actions, 
all of which was distributed to hundreds of harmed municipal 
entities or borrowers, located in 47 states, the District of 
Columbia, Guam, and Puerto Rico, as well as an additional $540 
million to settle parallel proceedings by other federal and state 
authorities for their misconduct. See In the Matter of Banc of 
America Securities, Securities Exchange Act Release No. 63451 (Dec. 
7, 2010); SEC v. UBS Financial Services Inc., Civil Action No. 11-
CV-2885 (D.N.J. May 4, 2011); SEC v. J.P. Morgan Securities LLC., 
Civil Action No. 11-CV-3877 (D.N.J. Jul. 7, 2011); SEC v. Wachovia 
Bank, N.A., Civil Action No. 2:11-cv-07135-WJM-MF (D.N.J. Dec. 8, 
2011); SEC v. GE Funding Capital Market Services, Inc., Civil Action 
No. 2:11-cv-07465-WJM-MF (D.N.J. Dec. 23, 2011).
    \106\ See SEC v. Stifel, Nicolaus & Co., Inc. and David W. 
Noack, Civil Action No. 2:11-cv-00755-AEG (E.D. Wisc. Aug. 10, 
2011). The Commission also charged, and settled with, RBC Capital 
Markets, LLC for their involvement in these sales. According to the 
order instituting administrative and cease-and-desist proceedings, 
RBC negligently recommended and sold these investments, despite 
significant internal concerns about the suitability of the 
investments for municipalities like the school districts. Moreover, 
RBC's marketing materials failed to explain adequately the risks 
associated with the investments. See In the Matter of RBC Capital 
Markets, LLC, Securities Exchange Act Release No. 65404 (Sept. 27, 
2011).
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C. Interim Final Temporary Rule 15Ba2-6T and Form MA-T

    The registration requirement for municipal advisors established by 
the Dodd-Frank Act became effective on October 1, 2010.\107\ To enable 
municipal advisors to temporarily satisfy the registration requirement, 
and to make relevant information available to the public and municipal 
entities, the Commission adopted interim final temporary Rule 15Ba2-6T 
\108\ on September 1, 2010.\109\ Pursuant to Rule 15Ba2-6T, a municipal 
advisor may temporarily satisfy the statutory registration requirement 
by submitting certain information electronically

[[Page 67476]]

through the Commission's public Web site on Form MA-T.\110\
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    \107\ See Section 975(i) of the Dodd-Frank Act.
    \108\ 17 CFR 240.15Ba2-6T.
    \109\ See Temporary Registration Rule Release, supra note 5.
    \110\ 17 CFR 249.1300T. A municipal advisor that completes the 
temporary registration form and receives confirmation from the 
Commission that the form was filed is temporarily registered for 
purposes of Section 15B. As of March 31, 2013, there were 
approximately 1,130 Form MA-T registrants.
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    Form MA-T requires a municipal advisor to indicate the purpose for 
which it is submitting the form (i.e., initial application, amendment, 
or withdrawal), provide certain basic identifying and contact 
information concerning its business, indicate the nature of its 
activities, and supply information about its disciplinary history and 
the disciplinary history of its associated municipal advisor 
professionals.\111\
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    \111\ See Temporary Registration Rule Release, supra note 5, for 
a full description of the requirements of Form MA-T.
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    As originally adopted, the interim final temporary rule provided 
that, unless rescinded, a municipal advisor's temporary registration by 
means of Form MA-T would expire on the earlier of: (1) The date that 
the municipal advisor's registration is approved or disapproved by the 
Commission pursuant to a final rule establishing a permanent 
registration regime; (2) the date on which the municipal advisor's 
temporary registration is rescinded by the Commission; or (3) December 
31, 2011.\112\ The temporary registration procedure was developed as a 
transitional step toward the implementation of a permanent registration 
regime, which, as discussed below, the Commission is adopting today. On 
December 21, 2011, the Commission extended the expiration date of the 
temporary registration regime to September 30, 2012, in order to 
continue to provide a method for municipal advisors to temporarily 
satisfy the statutory registration requirement.\113\ On September 21, 
2012, the Commission further extended the expiration date of the 
temporary registration regime to September 30, 2013.\114\ Today, in a 
separate release, the Commission is extending the expiration date of 
the temporary registration regime to December 31, 2014.\115\ This 
extension will enable municipal advisors that are required to register 
with the Commission on or after the Effective Date but before the 
applicable compliance date to continue to register under the temporary 
registration regime.
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    \112\ See Temporary Registration Rule Release, 75 FR 54471.
    \113\ See Securities Exchange Act Release No. 66020 (December 
21, 2012), 76 FR 80733 (December 27, 2011).
    \114\ See Securities Exchange Act Release No. 67901 (September 
21, 2012), 77 FR 59061 (September 26, 2012). As extended, all 
temporary municipal advisor registrations will expire on the earlier 
of: (1) The date that the municipal advisor's registration is 
approved or disapproved by the Commission pursuant to a final rule 
adopted by the Commission establishing another manner of 
registration of municipal advisors and prescribing a form for such 
purpose; (2) the date on which the municipal advisor's temporary 
registration is rescinded by the Commission; or (3) on September 30, 
2013. See 17 CFR 240.15Ba2-6T(e).
    \115\ See Rule 15Ba2-6T and Form MA-T Extension Release, supra 
note 7.
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D. Proposal To Establish a Registration Regime for Municipal Advisors

    In light of the requirements of Section 975 of the Dodd-Frank Act, 
and in anticipation of the expiration of Rule 15Ba2-6T, on December 20, 
2010, the Commission proposed Rules 15Ba1-1 to 15Ba1-7 under the 
Exchange Act and Forms MA, MA-I, MA-W, and MA-NR to establish a 
permanent registration regime for all persons meeting the definition of 
municipal advisor, including those persons currently registered on Form 
MA-T.\116\ The Proposal was published for comment in the Federal 
Register on January 6, 2011.\117\
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    \116\ See Proposal, 76 FR 824.
    \117\ See id.
---------------------------------------------------------------------------

    In response to the Proposal, the Commission received over 1,000 
unique comment letters from broker-dealers, investment advisers, 
individuals, banks, municipal entities, attorneys, engineers, and other 
market participants.\118\ In general, commenters supported the 
Proposal's overarching goal to establish a permanent registration 
regime for municipal advisors. As discussed further below, however, 
many commenters recommended that the Proposal be modified or clarified 
in certain respects.
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    \118\ See http://www.sec.gov/comments/s7-45-10/s74510.shtml. The 
Commission has also considered the comment letters that were 
submitted in response to the publication of the Temporary 
Registration Rule Release. See http://sec.gov/comments/s7-19-10/s71910.shtml (comments received on the Temporary Registration Rule 
Release).
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    The Commission has carefully considered these comments and is 
adopting Rules 15Ba1-1 to 15Ba1-8 and 15Bc4-1 under the Exchange Act 
and Forms MA, MA-I, MA-W, and MA-NR, with revisions as appropriate. In 
discussing these rules and forms, the Commission highlights and 
addresses below commenters' main issues, concerns, and suggestions.
    The Commission believes that the information required to be 
disclosed pursuant to the new rules and forms will enhance the 
Commission's oversight of municipal advisors and their activities in 
the municipal securities market. Moreover, the Commission believes the 
information provided pursuant to these rules and forms will aid 
municipal entities and obligated persons in choosing municipal advisors 
and engaging in transactions or investments with municipal advisors.

III. Discussion

    Section 15B(a)(1) of the Exchange Act, as amended by the Dodd-Frank 
Act, makes it unlawful for a municipal advisor \119\ to provide advice 
to or on behalf of a municipal entity or obligated person with respect 
to municipal financial products or the issuance of municipal 
securities, or to undertake a solicitation of a municipal entity or 
obligated person, unless the municipal advisor is registered with the 
Commission.\120\ Section 15B(a)(2) of the Exchange Act, as amended by 
the Dodd-Frank Act, provides that a municipal advisor may be registered 
by filing with the Commission an application for registration in such 
form and containing such information and documents concerning the 
municipal advisor and any person associated with the municipal advisor 
as the Commission, by rule, may prescribe as necessary or appropriate 
in the public interest or for the protection of investors.\121\
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    \119\ See infra Section III.A.1. (discussing the term 
``municipal advisor'').
    \120\ See 15 U.S.C. 78o-4(a)(1)(B). For a discussion of the 
terms ``municipal entity,'' ``obligated person,'' ``municipal 
financial products,'' and ``solicitation of a municipal entity or 
obligated person,'' see infra Section III.A.1.b.
    \121\ See 15 U.S.C. 78o-4(a)(2).
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    Consistent with the requirements of the Dodd-Frank Act, as 
discussed in detail below, the Commission is adopting new rules and 
forms that establish a Commission registration regime for municipal 
advisors, which the Commission believes is necessary and appropriate in 
the public interest and will improve the protection of municipal 
entities and investors in municipal securities.

A. Rules for the Registration of Municipal Advisors

1. Rule 15Ba1-1: Definition of ``Municipal Advisor'' and Related Terms
a. Statutory Definition of ``Municipal Advisor''
    Section 15B(e)(4)(A) of the Exchange Act,\122\ as amended by the 
Dodd-Frank Act, defines the term ``municipal advisor'' to mean a person 
(who is not a municipal entity \123\ or an employee of

[[Page 67477]]

a municipal entity \124\) that (i) provides advice to or on behalf of a 
municipal entity or obligated person \125\ with respect to municipal 
financial products \126\ or the issuance of municipal securities,\127\ 
including advice with respect to the structure, timing, terms, and 
other similar matters concerning such financial products or issues, or 
(ii) undertakes a solicitation of a municipal entity.\128\ As discussed 
in the Proposal,\129\ the statutory definition of municipal advisor is 
broad and includes persons that traditionally have not been considered 
to be municipal financial advisors. Specifically, the definition of a 
municipal advisor includes ``financial advisors, guaranteed investment 
contract brokers, third-party marketers, placement agents, solicitors, 
finders, and swap advisors'' \130\ that engage in municipal advisory 
activities.\131\
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    \122\ 15 U.S.C. 78o-4(e)(4)(A).
    \123\ See infra Section III.A.1.b.ii. (discussing the term 
``municipal entity'').
    \124\ See infra Section III.A.1.c.i. (discussing the 
Commission's interpretation of the exclusion for employees of a 
municipal entity from the definition of the term ``municipal 
advisor'' and a parallel exemption for employees of obligated 
persons).
    \125\ See infra Section III.A.1.b.iii. (discussing the term 
``obligated person'').
    \126\ See infra Section III.A.1.b.iv. (discussing the term 
``municipal financial products'').
    \127\ See infra Section III.A.1.b.vii. (discussing the term 
``issuance of municipal securities'').
    \128\ See infra Section III.A.1.b.x. (discussing the term 
``solicitation of a municipal entity or obligated person'').
    \129\ See Proposal, 76 FR 828.
    \130\ See 15 U.S.C. 78o-4(e)(4).
    \131\ See infra note 143 and accompanying text (discussing the 
definition of ``municipal advisory activities'').
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    The statutory definition of municipal advisor includes distinct 
groups of professionals that offer different services and compete in 
distinct markets. As noted in the Proposal, the three principal types 
of municipal advisors are: (1) financial advisors, including, but not 
limited to, brokers, dealers, and municipal securities dealers already 
registered with the Commission, that provide advice to municipal 
entities with respect to their issuance of municipal securities and 
their use of municipal financial products; \132\ (2) investment 
advisers that advise municipal entities on the investment of public 
monies, including the proceeds of municipal securities; \133\ and (3) 
third-party marketers and solicitors.
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    \132\ See Proposal, 76 FR 829. For clarity, the Commission notes 
that financial advisors as referred to herein also include swap 
advisors, including some that are registered with the CFTC or the 
SEC in other capacities, that provide advice to municipal entities 
on their use of municipal financial products.
    \133\ See infra Section III.A.1.b.iv. (discussing the term 
``proceeds of municipal securities'').
---------------------------------------------------------------------------

    Relevant exclusions from the definition of a municipal advisor also 
limit the scope of the three types of municipal advisors. The statutory 
definition of municipal advisor explicitly excludes ``a broker, dealer, 
or municipal securities dealer serving as an underwriter . . ., 
attorneys offering legal advice or providing services that are of a 
traditional legal nature, [and] engineers providing engineering 
advice[.]'' \134\ Further, the statutory definition of municipal 
advisor excludes ``any investment adviser registered under the 
Investment Advisers Act of 1940 [(``Investment Advisers Act'')], or 
persons associated with such investment advisers who are providing 
investment advice'' and ``any commodity trading advisor registered 
under the Commodity Exchange Act or persons associated with a commodity 
trading advisor who are providing advice related to swaps[.]'' \135\ As 
discussed more fully below in Section III.A.1.c., the Commission also 
proposed Rule 15Ba1-1(d)(2), and is adopting with modifications as 
Rules 15Ba1-1(d)(2) and 15Ba1-1(d)(3) a definition of ``municipal 
advisor'' that interprets those exclusions and provides other activity-
based (but not status-based) exemptions.
---------------------------------------------------------------------------

    \134\ See 15 U.S.C. 78o-4(e)(4)(C).
    \135\ See 15 U.S.C. 78o-4(e)(4)(C).
---------------------------------------------------------------------------

    The Commission also noted in the Proposal that, in defining the 
term municipal advisor in Exchange Act Section 15B(e)(4), Congress did 
not distinguish between persons who are compensated for providing 
advice and those who are not. Accordingly, as explained in the 
Proposal, the Commission believes compensation for providing advice 
with respect to municipal financial products or the issuance of 
municipal securities should not factor into the determination of 
whether a person must register with the Commission as a municipal 
advisor.\136\ However, as clarified in this release, whether or not a 
person would have to register as a municipal advisor in connection with 
solicitation of a municipal entity or obligated person would depend 
upon whether such person receives compensation (direct or 
indirect).\137\
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    \136\ See Proposal, 76 FR 832, note 113 and accompanying text.
    \137\ See infra note 409 and accompanying text.
---------------------------------------------------------------------------

b. Interpretation of the Term ``Municipal Advisor''; Definition of 
Related Terms
    As noted above, Exchange Act Section 15B(e)(4) defines the term 
``municipal advisor'' to mean, in part, a person (who is not a 
municipal entity or an employee of a municipal entity) that (i) 
provides advice to or on behalf of a municipal entity or obligated 
person with respect to municipal financial products or the issuance of 
municipal securities, or (ii) undertakes a solicitation of a municipal 
entity or obligated person.\138\ The Commission discusses below the 
terms ``municipal entity,'' ``obligated person,'' ``municipal financial 
products,'' and ``solicitation of a municipal entity or obligated 
person'' as well as other terms relating to the definition of municipal 
advisor.\139\ Rule 15Ba1-1(d), as proposed \140\ and adopted, provides 
that the term ``municipal advisor'' has the same meaning as in Exchange 
Act Section 15B(e)(4),\141\ and, as discussed in Section III.A.1.c., 
provides certain exclusions and exemptions. For the purposes of 
clarity, however, Rule 15Ba1-1(d) as adopted also includes several non-
substantive and organizational changes. For example, it: (1) 
incorporates in Rule 15Ba1-1(d)(1) the language of the statutory 
definition, rather than cross referencing the statute; (2) sets forth 
in Rule 15Ba1-1(d)(2) the statutory exclusions from the definition, as 
interpreted by the Commission; and (3) sets forth in Rule 15Ba1-1(d)(3) 
certain exemptions.\142\
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    \138\ See 15 U.S.C. 78o-4(e)(4). As noted in the Proposal, the 
Commission interprets the definition of ``municipal advisor'' to 
include the solicitation of a municipal entity or obligated person, 
because, as noted in the Proposal, the definition of municipal 
advisor under Exchange Act Section 15B(e)(4)(A) means, in part, a 
person that ``undertakes a solicitation of a municipal entity,'' and 
in defining the phrase ``solicitation of a municipal entity,'' 
Exchange Act Section 15B includes within that phrase, ``or obligated 
person.'' Also, Exchange Act Section 15B(a)(1)(B) includes 
solicitations of obligated persons. See Proposal, 76 FR 831, note 
102 and accompanying text.
    See also Rule 15Ba1-1(d)(1)(i), which makes clear in the 
definition of ``municipal advisor'' that the Commission interprets 
the term ``municipal advisor'' to include persons that undertake 
solicitation of a municipal entity or obligated person.
    \139\ The Commission discusses the statutory exclusion for ``an 
employee of a municipal entity,'' along with other exclusions and 
exemptions from the definition of ``municipal advisor,'' in Section 
III.A.1.c. below.
    \140\ See proposed Rule 15Ba1-1(d)(1).
    \141\ 15 U.S.C. 78o-4(e)(4).
    \142\ See Rule 15Ba1-1(d). To the extent the Commission's 
exemptions or interpretations of the exclusions differ substantively 
from the Proposal, those differences are discussed in detail below.
---------------------------------------------------------------------------

    In certain of the rules and forms that the Commission is adopting 
with respect to the registration of municipal advisors, the Commission 
uses the term ``municipal advisory activities'' to refer to the 
activities that would generally require a person to register as a 
municipal advisor. In this regard, the Commission is adopting, 
substantially as proposed, a definition of the term ``municipal 
advisory activities'' with minor clarifying modifications. As

[[Page 67478]]

adopted, ``municipal advisory activities'' means ``(1) [p]roviding 
advice to or on behalf of a municipal entity or obligated person with 
respect to municipal financial products or the issuance of municipal 
securities, including advice with respect to the structure, timing, 
terms, and other similar matters concerning such financial products or 
issues; or (2) [s]olicitation of a municipal entity or obligated 
person.'' \143\ The Commission notes, for example, that advice to a 
municipal entity about whether to issue municipal securities would be 
``municipal advisor activity.''
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    \143\ In the Proposal, the Commission proposed to give 
``municipal advisory activities'' the same meaning as the term 
``municipal advisory services'' in Rule 15Ba2-6T (the temporary rule 
for the registration of municipal advisors). Thus, in proposed Rule 
15Ba1-1(e), the Commission proposed to define ``municipal advisory 
activities'' to mean ``advice to or on behalf of a municipal entity 
(as defined in Section 15B(e)(8) of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-4(e)(8)) or obligated person (as defined in 
Section 15B(e)(10) of the Securities Exchange Act of 1934 (15 U.S.C. 
78o-4(e)(10)) with respect to municipal financial products or the 
issuance of municipal securities, including advice with respect to 
the structure, timing, terms, and other similar matters concerning 
such financial products or issues; or a solicitation of a municipal 
entity or obligated person.'' See Proposal, 76 FR 829, note 77 and 
proposed Rule 15Ba1-1(e).
    While the Commission received a few comments that certain 
activities should not be ``municipal advisory activities,'' these 
comments were in the context of whether certain persons should be 
subject to registration as ``municipal advisors'' and are addressed 
below in the context of the various exemptions and exclusions from 
the definition of ``municipal advisor.'' See, e.g., notes 780, 807, 
835 and accompanying text (citing the Gilmore & Bell Letter, the 
Rose Letter, and the Brinckerhoff Letter, in the context of 
exclusions or exemptions for accountants, attorneys, and engineers, 
respectively). These comments are addressed in Section 
III.A.1.c.vii.
    The Commission is adopting the definition of ``municipal 
advisory activities'' substantially as proposed, but with minor non-
substantive modifications to provide greater clarity and consistency 
with other organizational changes the Commission is making to the 
definitions. Specifically, the Commission is defining ``municipal 
advisory activities'' to mean ``the following activities specified 
in section 15B(e)(4)(A) of the Act (15 U.S.C. 78o-4(e)(4)(A)) and 
paragraph (d)(1) of this section that, absent the availability of an 
exclusion under paragraph (d)(2) of this section or an exemption 
under paragraph (d)(3) of this section, would cause a person to be a 
municipal advisor: (1) [P]roviding advice to or on behalf of a 
municipal entity or obligated person with respect to municipal 
financial products or the issuance of municipal securities, 
including advice with respect to the structure, timing, terms, and 
other similar matters concerning such financial products or issues; 
or (2) [s]olicitation of a municipal entity or obligated person.'' 
See Rule 15Ba1-1(e).
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    Additionally, as discussed more fully below, in response to 
comments received on the Proposal and to provide additional clarity, 
the Commission is adopting rule text to provide guidance on the term 
``advice.'' The Commission also notes, as mentioned above and explained 
in more detail below, that the definitions of ``municipal advisor'' and 
related terms that it is adopting today include several non-
substantive, clarifying changes designed to reorganize and simplify the 
rule, including using defined terms, where possible, and providing 
greater clarity as to which statutory standards are being incorporated 
into the Commission's rules, the Commission's interpretation of such 
standards, and any exemptions the Commission is providing with these 
rules.
i. Advice Standard in General
    In the Proposal and as noted above, the Commission defined the term 
``municipal advisory activities,'' which includes certain advice to or 
on behalf of a municipal entity or obligated person,\144\ and addressed 
the scope of activities that would require a person to register as a 
municipal advisor. The Commission discussed the scope of such 
activities through its proposed interpretation of the definition of 
``municipal advisor,'' which included guidance on the particular 
statutory exclusions and exemptions therefrom.\145\
---------------------------------------------------------------------------

    \144\ See Proposal, 76 FR 829, note 77. See also supra note 143 
and accompanying text (discussing the term ``municipal advisory 
activities'').
    \145\ See, e.g., Proposal 76 FR 832, text accompanying note 113 
(discussing whether compensation for providing advice factors into 
the determination of whether a person must register as a municipal 
advisor), 833, note 118 and accompanying text (discussing the 
provision of certain kinds of advice by investment advisers), 833 
(discussing whether a commodity trading advisor would be required to 
register as a municipal advisor if the advisor provides certain 
kinds of advice), and 833-834 (discussing with respect to 
accountants, attorneys and engineers whether certain kinds of advice 
and activities are ``advice'' within the meaning of the Exchange Act 
or would otherwise cause such persons to meet the definition of 
``municipal advisor'').
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on its 
interpretation of the definition of ``municipal advisor'' and related 
terms, and particularly sought comment on whether any of its 
interpretations should be in any way modified or clarified.\146\ The 
Commission also requested comment on whether its interpretation of 
certain exclusions from the definition of ``municipal advisor'' should 
be narrowed or expanded to exclude or include various activities.\147\ 
More specifically, the Commission requested comment on whether it 
should exclude the following persons from the definition of municipal 
advisor: (1) An entity that provides to clients investment advice, such 
as research information and generic trade ideas or commentary that does 
not purport to meet the needs or objectives of specific clients, and is 
provided to a municipal entity as part of its ongoing ordinary 
communications; and (2) a broker-dealer that provides to a municipal 
entity a list of securities meeting specified criteria that are readily 
available in the marketplace, but without making a recommendation as to 
the merits of any investment particularized to the municipal entity's 
specific circumstances or investment objectives.\148\
---------------------------------------------------------------------------

    \146\ See Proposal, 76 FR 835.
    \147\ See id., at 836-838 (requesting comment on, among other 
things: whether there are other services or activities engaged in by 
accountants, engineers, attorneys or other professionals that should 
qualify such persons for exclusion from the definition of 
``municipal advisor;'' and whether there are other specific types of 
persons that should be excluded and the circumstances under which 
they should be excluded).
    \148\ See Proposal, 76 FR 838.
---------------------------------------------------------------------------

    In response to these requests for comment, commenters recommended 
additional guidance on the meaning and scope of the term ``advice'' 
both in general and, as addressed in more detail in subsequent sections 
on particular exclusions and exemptions, in the context of specific 
activities. A number of commenters requested that the Commission 
clarify the meaning of providing ``advice to a municipal entity or 
obligated person with respect to municipal financial products or the 
issuance of municipal securities.'' \149\ One commenter noted that 
``the concept of `advice' is central to the application

[[Page 67479]]

of Section 975,'' \150\ while another commenter stated that ``[a]bsent 
a clear understanding of the scope of `advice,' there will be 
substantial uncertainty as to which communications with municipal 
entity clients would be deemed `advice.''' \151\ The Commission also 
received comments suggesting general parameters for defining advice. 
For example, one commenter suggested that the Commission ``distinguish 
between situations in which information is provided to a municipal 
entity or obligated person as opposed to a recommendation as to a 
specific course of action.'' \152\ Similarly, another commenter 
suggested that ``advice'' is generally understood to contain a 
recommendation component as distinguished from the mere giving of 
factual, objectively-determinable information.\153\
---------------------------------------------------------------------------

    \149\ See, e.g., letters from Raymond J. Dorado, Executive Vice 
President, Deputy General Counsel, Bank of New York Mellon 
Corporation, dated February 23, 2011 (``BNY Letter''); Wayne A. 
Abernathy, Executive Vice President, Financial Institutions Policy 
and Regulatory Affairs, American Bankers Association, Cecelia A. 
Calaby, Executive Director and General Counsel, ABA Securities 
Association, and Eli K. Peterson, Vice President and Regulatory 
Counsel, The Clearing House Association LLC, dated February 22, 2011 
(``American Bankers Association Letter I''); Richard M. Whiting, 
Executive Director and General Counsel, Financial Services 
Roundtable, dated February 22, 2011 (``Financial Services Roundtable 
Letter''); John M. McNally, President, National Association of Bond 
Lawyers, dated February 25, 2011 (``NABL Letter''); Leslie M. 
Norwood, Managing Director and Associate General Counsel, Securities 
Industry and Financial Markets Association, dated February 22, 2011 
(``SIFMA Letter I''); Alexandra M. MacLennan, Chair, Disclosure 
Group, and D. Bruce Gabriel, Practice Group Leader, Public and 
Infrastructure Finance Group, Squire, Sanders & Dempsey (US) LLP, 
dated February 22, 2011 (``Squire Sanders & Dempsey Letter''); 
Adella M. Heard, Senior Vice President and Assistant General 
Counsel, First Tennessee Bank National Association, dated February 
18, 2011 (``First Tennessee Bank Letter''); Dale E. Brown, President 
and Chief Executive Officer, Financial Services Institute, dated 
April 28, 2011 (``Financial Services Institute Letter''); Sandra K-H 
Werner, Chief Executive Officer, First National Bank and Trust, 
dated February 18, 2011 (``First National Bank and Trust Letter'').
    \150\ BNY Letter.
    \151\ Financial Services Roundtable Letter.
    \152\ NABL Letter (emphasis in original).
    \153\ Letter from John J. Wagner, Kutak Rock, dated February 21, 
2011 (``Kutak Rock Letter'').
---------------------------------------------------------------------------

    Regarding the provision of general information, commenters made 
general and specific suggestions regarding the types of information 
that should not require registration as a municipal advisor. For 
example, one commenter suggested that the provision of general 
information should not be defined, in any instance, as municipal 
advisory activities that would give rise to a fiduciary duty.\154\ More 
specifically, other commenters suggested that broker-dealers be 
permitted to provide general market, transactional or financial 
information,\155\ attorneys be permitted to provide general educational 
information to clients and non-clients,\156\ and insurance companies be 
permitted to provide certain general information of an educational 
nature regarding retirement plans without being required to register as 
a municipal advisor.\157\ With respect to municipal derivatives, one 
commenter asked for clarification that the following activities do not 
constitute advice for purposes of the municipal advisor definition: (i) 
The provision of research, general market information, and product 
information that is not specific to a particular client and is provided 
to the bank's customers as part of its ordinary communications with 
clients or the public; and (ii) the provision of information describing 
product alternatives that may meet the needs of a client without giving 
a recommendation that the client engage in any specific 
transaction.\158\
---------------------------------------------------------------------------

    \154\ See letter from Anthony A. Kuznik, Vice President and 
General Counsel, Honeywell Building Solutions, Honeywell 
International Inc., dated February 22, 2011 (``Honeywell Letter'').
    \155\ See letter from Brad Winges, Head of Fixed Income Sales 
and Trading, Piper Jaffray & Co. and Rebecca S. Lawrence, Assistant 
General Counsel, Principal, Piper Jaffray & Co., dated March 18, 
2011 (``Piper Jaffray Letter'').
    \156\ See letter from Sherman & Howard L.L.C., dated February 
22, 2011 (``Sherman & Howard Letter'').
    \157\ See letter from Jeffrey W. Rubin, Chair of the Committee 
on Federal Regulation of Securities, Business Law Section, American 
Bar Association, dated March 1, 2011 (``ABA Letter'').
    \158\ See BNY Letter.
---------------------------------------------------------------------------

    Additionally, several commenters recommended that advice be defined 
in accordance with its commonly understood meaning--a recommendation to 
act.\159\ One of these commenters further recommended that the 
Commission clarify that a communication constitutes advice only when 
``it is provided with respect to and directly relates to an enumerated 
municipal financial product or the issuance of municipal securities, 
and it is a recommendation that is particularized to the needs and 
circumstances of the recipient such that, under the prevailing facts 
and circumstances, a municipal entity or obligated person would 
reasonably expect that it could rely and take action, without further 
input, based upon such communication.'' \160\ Another commenter 
suggested that registration be required only if a communication 
constitutes a recommendation that the municipal entity take an action 
and the recommendation is particularized to the entity's needs and is 
distinct from normal sales efforts.\161\
---------------------------------------------------------------------------

    \159\ See, e.g., BNY Letter; American Bankers Association Letter 
I; and SIFMA Letter I. See also Kutak Rock Letter.
    \160\ SIFMA Letter I.
    \161\ See American Bankers Association Letter I.
---------------------------------------------------------------------------

    The Commission agrees with commenters that clarifying guidance on 
what constitutes advice solely for the purposes of the municipal 
advisor definition will provide greater clarity regarding the 
applicability of the municipal advisor registration requirement. The 
Commission does not however believe that the term ``advice'' is 
susceptible to a bright-line definition. Instead, the Commission 
believes that ``advice'' can be construed broadly and that, therefore, 
the determination of whether a person provides advice to or on behalf 
of a municipal entity or an obligated person regarding municipal 
financial products or the issuance of municipal securities depends on 
all the relevant facts and circumstances.\162\ Accordingly, to address 
comments, the Commission is adopting Rule 15Ba1-1(d)(1)(ii), which 
provides that 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.\163\
---------------------------------------------------------------------------

    \162\ In contexts outside of the municipal advisor definition, 
whether certain activities constitute advice also is dependent on 
the facts and circumstances.
    For example, in the context of broker-dealer regulation, 
Commission staff has described that, although not a bright-line 
test, ``[t]he more individually tailored the communication is to a 
particular customer or targeted group of customers, the more likely 
it will be viewed as a recommendation.'' Study on Investment 
Advisers and Broker-Dealers (January 2011), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf (``Study on 
Investment Advisers and Broker-Dealers'') at 124.
     In the context of investment adviser regulation, the 
determination of whether a particular communication rises to the 
level of investment advice depends on the facts and circumstances 
and is construed broadly. For example, Commission staff has 
interpreted the definition of investment adviser to include persons 
who advise clients concerning the relative advantages and 
disadvantages of investing in securities in general as compared to 
other investments. See, e.g., Applicability of the Investment 
Advisers Act to Financial Planners, Pension Consultants, and Other 
Persons Who Provide Investment Advisory Services as a Component of 
Other Financial Services, Investment Advisers Act Release No. 1092 
(October 8, 1987).
     The Commission discusses below, with respect to its 
interpretation of the term ``municipal advisor'' and the various 
exclusions and exemptions therefrom, whether certain activities 
would be advice in the context of the municipal advisor registration 
regime.
    \163\ The Commission is providing this clarifying guidance 
regarding ``advice'' only with respect to municipal advisors and 
solely for purposes of the municipal advisor definition. The 
Commission further notes that, by establishing certain parameters 
for advice, Rule 15Ba1-1(d)(1)(ii) clarifies not only the type of 
information or communications that may constitute advice, but also 
the persons who may be subject to the municipal advisor definition 
in Section 15B(e)(4) of the Exchange Act (15 U.S.C. 78o-4(e)(4)). 
For example, the Commission believes that an individual performing 
by contract clerical or ministerial services for a municipal entity 
or obligated person as part of performing these services would 
generally not be providing advice, as defined in adopted Rule 15Ba1-
1(d)(1)(ii). Accordingly, such person would not be required to 
register as a municipal advisor.
---------------------------------------------------------------------------

    The Commission agrees with commenters that the provision of certain 
general information does not constitute advice for purposes of the 
municipal advisor definition. For example, the Commission believes that 
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,

[[Page 67480]]

clients, or market participants other than municipal entities or 
obligated persons; or
     General information in the nature of educational 
materials.

The Commission believes that educational materials constitute general 
information if the content is limited to instructional or explanatory 
information, such as materials that describe the general nature of 
financial products or strategies, do not include past or projected 
performance figures (including annualized rate of return), do not 
include a recommendation to purchase or sell any product or utilize any 
particular strategy, and to the extent additional disclosure is 
available about a product (such as a prospectus), the materials contain 
information about how to obtain such additional information.\164\
---------------------------------------------------------------------------

    \164\ The Commission has similarly interpreted ``educational 
materials'' in other contexts. See, e.g., Securities Act Release No. 
6426 (September 16, 1982), 47 FR 41950 (September 23, 1982) 
(adopting Rule 134a under the Securities Act to permit the 
preparation and dissemination of certain educational materials 
concerning options and options trading without deeming such 
materials to be a prospectus).
---------------------------------------------------------------------------

    Conversely, the definition of advice under Rule 15Ba1-1(d)(1)(ii), 
as adopted, does not exclude information that involves a recommendation 
\165\ regarding municipal financial products or the issuance of 
municipal securities. Further and more precisely, the Commission 
believes that, for purposes of the municipal advisor definition, advice 
includes, without limitation, 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. 
As discussed above and consistent with the FINRA approach to what 
constitutes a recommendation, for purposes of the municipal advisor 
definition, the Commission believes that the determination of whether a 
recommendation has been made is an objective rather than a subjective 
inquiry.\166\ An important factor in this inquiry is whether, 
considering its content, context and manner of presentation, the 
information communicated to the municipal entity or obligated person 
reasonably would be viewed as a suggestion that the municipal entity or 
obligated person take action or refrain from taking action regarding 
municipal financial products or the issuance of municipal 
securities.\167\
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    \165\ Whether a ``recommendation'' has taken place is not 
susceptible to a bright line definition, but turns on the facts and 
circumstances of the particular situation. See Securities Exchange 
Act Release No. 64766 (June 29, 2011), 76 FR 42396, 42415 (July 18, 
2011) (``Business Conduct Standards Proposal for Security-Based 
Swaps''). ``This is consistent with the FINRA approach to what 
constitutes a recommendation. In the context of the FINRA 
suitability standard, factors considered in determining whether a 
recommendation has taken place include whether the communication 
`reasonably could be viewed as a `call to action' ' and `reasonably 
would influence an investor to trade a particular security or group 
of securities.' The more individually tailored the communication to 
a specific customer or a targeted group of customers about a 
security or group of securities, the greater the likelihood that the 
communication may be viewed as a `recommendation.' '' Business 
Conduct Standards Proposal for Security-Based Swaps, 76 FR 42415, 
note 133 and accompanying text (citing FINRA Notice to Members 01-23 
(March 19, 2001), and Notice of Filing of Proposed Rule Change to 
Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability) 
in the Consolidated FINRA Rulebook, Securities Exchange Act Release 
No. 62718A (August 20, 2010), 75 FR 52562 (August 26, 2010)).
    FINRA suitability guidance has long provided that the 
determination of whether a ``recommendation'' has been made is an 
objective rather subjective inquiry. See FINRA Notice to Members 01-
23 (March 19, 2001). In guidance relating to FINRA rules 2090 and 
2011, FINRA reiterated this prior guidance, stating that an 
important factor in this 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.'' See FINRA 
Regulatory Notice 11-02 (Know Your Customer and Suitability), 
January 2011, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122778.pdf.
    The MSRB has provided similar guidance for dealers in connection 
with MSRB Rule G-19. See http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-19.aspx?tab=2.
    \166\ See supra note 165. See also Michael Frederick Siegel v. 
Securities and Exchange Commission, 592 F.3d 147, 156 (D.C. Cir. 
2010) (in sustaining the Commission's finding that Siegel, a broker, 
recommended an ``investment'' within the meaning of NASD rule 2310, 
the court held that the SEC properly considered the ``content, 
context and presentation'' of the communications and whether, as an 
``objective matter,'' the communication could reasonably have been 
viewed as a ``call to action'' and reasonably would influence an 
investor to trade a particular security or group of securities).
    \167\ See supra note 165.
---------------------------------------------------------------------------

    While the determination of whether a person provides advice depends 
on all the relevant facts and circumstances, the more individually 
tailored the information to a specific municipal entity or obligated 
person or a targeted group of municipal entities or obligated persons 
that share common characteristics, such as school districts or 
hospitals, with respect to municipal financial products or the issuance 
of municipal securities, the more likely it will be a recommendation 
that constitutes advice under the municipal advisor definition, which 
would require registration as a municipal advisor, absent the 
application of an exemption or exclusion from registration.\168\ For 
example, whether information describing municipal financial product 
alternatives constitutes advice under the municipal advisor definition 
generally depends on how individually tailored the information is to a 
particular municipal entity, obligated person, or targeted group of 
municipal entities or obligated persons that share common 
characteristics, as well as the content, context, and manner of 
presentation of the information communicated.
---------------------------------------------------------------------------

    \168\ See supra notes 162 and 165.
---------------------------------------------------------------------------

ii. Municipal Entity
    Exchange Act Section 15B(e)(8) provides that the term ``municipal 
entity'' means ``any State, political subdivision of a State, or 
municipal corporate instrumentality of a State, including--(A) any 
agency, authority, or instrumentality of the State, political 
subdivision, or municipal corporate instrumentality; (B) any plan, 
program, or pool of assets sponsored or established by the State, 
political subdivision, or municipal corporate instrumentality or any 
agency, authority, or instrumentality thereof; and (C) any other issuer 
of municipal securities.'' \169\ In the Proposal, the Commission 
proposed to clarify that, with respect to clause (B) of the definition 
of ``municipal entity,'' the definition includes, but is not limited 
to, public pension funds, LGIPs, and other state and local governmental 
entities or funds, as well as participant-directed investment programs 
or plans such as 529, 403(b), and 457 plans.\170\
---------------------------------------------------------------------------

    \169\ 15 U.S.C. 78o-4(e)(8).
    \170\ See infra note 191 (defining 403(b) and 457 plans).
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on whether the 
proposed interpretation of municipal entity for purposes of the 
proposed definition of municipal advisor is appropriate, and whether 
additional clarification is necessary.\171\ The Commission received 
approximately 20 comment letters regarding the scope of the 
Commission's interpretation of the term ``municipal entity.'' Based on 
consideration of the comments received, as further discussed below, the 
Commission is making one change to its interpretation.
---------------------------------------------------------------------------

    \171\ See Proposal, 76 FR 835.
---------------------------------------------------------------------------

    Several commenters suggested that the definition of ``municipal 
entity'' should be limited to issuers of municipal securities \172\ 
because the

[[Page 67481]]

phrase ``any other issuer of municipal securities'' in Section 
15B(e)(8)(C) would otherwise be unnecessary.\173\ In connection with 
these comments, one commenter stated that the text and legislative 
history of the Dodd-Frank Act ``are devoid of any indication that its 
provisions addressing municipal securities were intended to grant the 
[Commission] general prudential authority over State and local fiscal 
matters.'' \174\ This commenter further stated that the ``Dodd-Frank 
Act references to municipal securities were intended to address 
securities (primarily municipal bonds) issued by `municipal entities' 
to the class of nongovernmental investors that the [Commission] is 
charged with protecting.'' \175\ Another commenter, however, suggested 
that the definition, as proposed, should extend to public pension 
funds, LGIPs, other government asset pools, and investor-directed 
governmental plans only to the extent that they are political 
subdivisions of a state, or corporate instrumentalities of a state, 
that issue municipal securities in the public market.\176\ This 
commenter also stated that LGIPs, tax-sheltered annuities, and deferred 
compensation plans should not be deemed to be municipal entities, 
because they do not issue securities in the public municipal securities 
market.\177\ Finally, another commenter suggested that the definition 
of municipal entity should include obligated persons, because the 
definition includes issuers of municipal securities, and obligated 
persons can be issuers of municipal securities pursuant to other 
provisions of the federal securities laws.\178\
---------------------------------------------------------------------------

    \172\ See NABL Letter; letters from Hon. Kelly Schmidt, 
President, National Association of State Treasurers, dated February 
16, 2011 (``National Association of State Treasurers Letter''); Gail 
Schubert, Chair, Alaska Retirement Management Board, dated February 
18, 2011 (``Alaska Retirement Management Board Letter'').
    \173\ See, e.g., NABL Letter; National Association of State 
Treasurers Letter; Alaska Retirement Management Board Letter.
    \174\ National Association of State Treasurers Letter. See also 
NABL Letter (stating that Section 975 was not intended to address 
advice to an entity based on a mere possibility that it would become 
an issuer of municipal securities in the public market place, and 
that it was not intended to address advice concerning a municipal 
entity's fiscal affairs generally, except to the extent that such 
affairs relate directly to its issuance or administration of 
municipal securities).
    \175\ National Association of State Treasurers Letter.
    \176\ See NABL Letter.
    \177\ See id.
    \178\ According to this commenter, ``municipal entity'' is 
defined under the Dodd-Frank Act to include ``any other issuer of 
municipal securities,'' and ``issuer of municipal securities'' is 
defined under Exchange Act Rule 15c2-12 to mean ``the governmental 
issuer specified in section 3(a)(29) of the Act and the issuer of 
any separate security.'' See letter from Chapman and Cutler, dated 
February 22, 2011 (``Chapman and Cutler Letter''). Further, this 
commenter stated that ``municipal securities'' is defined in the 
Exchange Act to include both governmental bonds and tax-exempt 
``industrial development bonds.'' This commenter stated that, since 
the Commission has interpreted the term ``obligated person'' to have 
the same meaning as in Exchange Act Rule 15c2-12, conduit borrowers 
under tax exempt bond issues would be ``issuers of separate 
securities'' that are also ``issuers of municipal securities.'' As a 
result, the commenter suggested that obligated persons under tax-
exempt bond issues are ``municipal entities.''
    The Commission does not agree. Although the Commission believes 
that the definition of obligated person for purposes of municipal 
advisor registration should be consistent with the definition of 
obligated person for purposes of Rule 15c2-12, the Commission is not 
applying the definition of ``issuer of municipal securities'' in 
Rule 15c2-12 for purposes of interpreting the definition of 
``municipal entity'' in Exchange Act Section 15B(e)(8). The 
Commission does not believe that the definition of ``municipal 
entity'' should be interpreted to include obligated persons, because 
the Dodd-Frank Act amended Exchange Act Section 15B to separately 
define ``municipal entity'' (15 U.S.C. 78o-4(e)(8)) and ``obligated 
person'' (15 U.S.C. 78o-4(e)(10)).
---------------------------------------------------------------------------

    One commenter stated that, although Congress specifically referred 
to states, counties, cities, and other political subdivisions, Congress 
did not refer to their pension or retirement plans when it enacted 
Section 975 of the Dodd-Frank Act. This commenter further argued that 
governmental retirement plans are separate legal entities from the 
municipal entities and are not ordinarily funded by, or involved in, 
the types of transactions contemplated by Section 975 or the proposed 
rules.\179\ Another commenter questioned whether a public retirement 
system would be a municipal entity, a municipal financial product, or 
both.\180\
---------------------------------------------------------------------------

    \179\ See letter from Daniel J. Wintz, Fraser Stryker, dated 
February 21, 2011 (``Fraser Stryker Letter''). For example, this 
commenter stated that assets of plans qualified under Internal 
Revenue Code Section 401(a) must be held in trust for the benefit of 
employees and their beneficiaries, and qualified plan trusts 
maintained by governmental employers are prohibited from engaging in 
transactions such as self-dealing with the plan sponsor. The 
commenter also provided that 403(b) plans are typically funded with 
employee and employer contributions, which are used to purchase 
annuity contracts or are deposited in custodial accounts, the assets 
of which are invested in mutual funds. Finally, the commenter stated 
that 457 plans allow employees of political subdivisions to defer 
compensation. All amounts deferred under the plan, all property and 
rights purchased with the amounts, and all income attributable to 
such amounts, property, or rights, must be held in trust for the 
exclusive benefit of the participants and their beneficiaries. See 
also letter from Clifford E. Kirsch, Michael B. Koffler, and Susan 
S. Krawczyk, Sutherland Asbill & Brennan LLP, for the Committee of 
Annuity Insurers, dated February 22, 2011 (``Committee of Annuity 
Insurers Letter I'').
    \180\ See letter from Richard K. Matta, Groom Law Group, on 
behalf of the State Board of Administration of Florida, dated 
February 28, 2011 (``State Board of Administration of Florida 
Letter''). This commenter expressed this concern, because it is 
unsure as to how the employee exclusion from the definition of 
municipal advisor would apply to public retirement systems.
---------------------------------------------------------------------------

    Other commenters suggested that the definition of municipal entity 
should exclude public pension plans or participant-directed plans.\181\ 
One commenter stated that these plans have nothing to do with raising 
funds for a municipal entity or investing proceeds from an offering of 
municipal securities.\182\ This commenter also stated that once the 
funds are contributed to a governmental retirement plan, they are no 
longer the property or held for the benefit of the municipal entity 
that established the plan.\183\ Further, this commenter stated that the 
definition of municipal entity should not include individual 
participants in a governmental retirement plan.\184\
---------------------------------------------------------------------------

    \181\ See, e.g., Alaska Retirement Management Board Letter; 
Committee of Annuity Insurers Letter I; Fraser Stryker Letter.
    \182\ See Committee of Annuity Insurers Letter I. This commenter 
stated that, if the Commission were to modify the definition of 
``municipal entity'' so it did not include 457 plans and 403(b) 
plans, its concerns regarding the impact of the proposed rules on 
separate accounts, broker-dealers and investment advisers for 
insurance contracts would be mooted. See infra notes 386 and 405 and 
accompanying text.
    \183\ See Committee of Annuity Insurers Letter I.
    \184\ See id. As such, this commenter asked the Commission to 
clarify that the municipal advisor registration regime does not 
apply to persons providing investment advice to individual plan 
participants or investment education provided to plan participants.
---------------------------------------------------------------------------

    One commenter stated that the Commission should clarify that 
municipal entity only includes entities that are controlled by, or 
established for the benefit and enjoyment of, a state or any of its 
constituent political subdivisions or municipal corporations.\185\ This 
commenter noted that some public pension plans, ``sponsored or 
established'' by states or their political subdivisions or municipal 
corporations, are not controlled by the sponsoring governmental unit 
but are instead controlled by trustees with plenary authority.\186\ 
This commenter also suggested that private pension funds, mutual funds, 
and insurance companies recognized under state law as such entities as 
a result of a filing with a state official and issuance of a 
certificate of formation should not be included within clause (B) of 
the definition of municipal entity as a ``plan, program or pool of 
assets sponsored or established by the State. . . .'' \187\
---------------------------------------------------------------------------

    \185\ See NABL Letter.
    \186\ See id.
    \187\ See id. The commenter expressed concern that the 
Commission's proposed interpretation that the definition of 
municipal entity includes ``participant-directed investment programs 
or pools'' could be interpreted to include private plans established 
by an entity chartered by a state.

---------------------------------------------------------------------------

[[Page 67482]]

    The Commission has carefully evaluated comments received on its 
proposed definition of ``municipal entity'' and continues to believe 
that the definition of ``municipal entity'' should not be limited to 
issuers of municipal securities.\188\ The Commission believes that the 
phrase ``any other issuer of municipal securities'' does not limit 
clauses (A) and (B) of the definition to entities that can issue 
municipal securities. Many of the plans, programs and pools of assets 
included in clause (B) of Section 15B(e)(8) do not issue municipal 
securities. Further, the definition of municipal entity does not 
otherwise limit itself to those entities that issue municipal 
securities. To limit the entities listed in clause (A) and (B) of 
Section 15B(e)(8) to issuers of municipal securities would also limit 
the definitions of ``municipal financial products'' (and therefore 
``municipal derivatives'') and ``solicitation of a municipal entity'' 
to encompass only those entities that issue municipal securities. Under 
such a limited definition, advice with respect to municipal 
derivatives, for example, would not subject advisors to registration 
unless the municipal entity entering into a swap \189\ was also an 
issuer of municipal securities. This limited definition would also 
allow third parties to solicit various public pension funds and LGIPs 
on behalf of brokers, dealers, investment advisers, and municipal 
advisors without registering as municipal advisors. The Commission 
believes that such entities should have the protections provided by 
municipal advisor registration.\190\
---------------------------------------------------------------------------

    \188\ See supra notes 173-176 and accompanying text.
    \189\ Unless the context otherwise requires, for purposes of the 
discussion in this release, swap refers to swaps and security-based 
swaps.
    \190\ The Commission notes that Section 15B(b) of the Exchange 
Act, as amended by the Dodd-Frank Act, requires, among other things, 
that the MSRB adopt rules to effect the purposes of the Exchange Act 
with respect to, among other things, ``advice provided to or on 
behalf of municipal entities or obligated persons by . . . municipal 
advisors with respect to municipal financial products, the issuance 
of municipal securities, and solicitations of municipal entities or 
obligated persons undertaken by brokers, dealers, municipal 
securities dealers, and municipal advisors.'' See Section 15B(b)(2) 
of the Exchange Act. At a minimum, the rules of the MSRB, with 
respect to municipal advisors, must, among other things: ``(i) 
Prescribe means reasonably designed to prevent acts, practices, and 
courses of business as are not consistent with a municipal advisor's 
fiduciary duty to its clients; (ii) provide continuing education 
requirements for municipal advisors; [and] (iii) provide 
professional standards.'' See Section 15B(b)(2)(L) of the Exchange 
Act.
---------------------------------------------------------------------------

    The Commission believes public employee retirement systems and 
public employee benefit plans or public pension plans (including 
participant-directed plans, 403(b), and 457 plans) \191\ fall within 
the statutory definition of municipal entity. The Commission believes 
that each of these plans constitutes a ``plan, program, or pool of 
assets sponsored or established by the State, political subdivision, or 
municipal corporate instrumentality or any agency, authority, or 
instrumentality thereof.'' \192\
---------------------------------------------------------------------------

    \191\ In this release, the Commission uses the term ``public 
employee benefit plan'' to refer to a ``pension plan'' that is a 
``governmental plan'' (as such terms are described below). Such 
plans include ``participant-directed plans,'' ``403(b) plans,'' and 
``457 plans'' (as such terms are described below), and may be plans, 
funds, or programs (also described below). The Commission also uses 
the term ``public employee retirement system.'' As described below, 
a public employee retirement system is a special purpose government, 
and therefore, a public employee pension plan or a public employee 
retirement system may itself be a municipal entity. The Commission 
uses the term ``private employee benefit plan'' to refer to a 
pension plan that is not a governmental plan.
    The term ``governmental plan'' includes a plan established or 
maintained for its employees by the Government of the United States, 
by the government of any state or political subdivision thereof, or 
by any agency or instrumentality of any of the foregoing. See 
Section 3(32) of ERISA, 29 U.S.C. 1002(32).
    The term ``employee benefit plan'' or ``plan'' means an employee 
pension benefit plan or a plan which is both an employee welfare 
benefit plan and an employee pension benefit plan. See Section 3(3) 
of ERISA, 29 U.S.C. 1002(3).
    The terms ``employee pension benefit plan'' and ``pension plan'' 
mean any plan, fund, or program which was heretofore or is hereafter 
established or maintained by an employer or by an employee 
organization, or by both, to the extent that by its express terms or 
as a result of surrounding circumstances such plan, fund, or 
program--(i) provides retirement income to employees, or (ii) 
results in a deferral of income by employees for periods extending 
to the termination of covered employment or beyond, regardless of 
the method of calculating the contributions made to the plan, the 
method of calculating the benefits under the plan or the method of 
distributing benefits from the plan. See Section 3(2) of ERISA, 29 
U.S.C. 1002(2).
    Pursuant to the Governmental Accounting Standards Board 
(``GASB''), ``public employee retirement system'' means a special-
purpose government that administers one or more pension plans. 
Public employee retirement systems also may administer other types 
of employee benefit plans, including postemployment healthcare plans 
and deferred compensation plans. See GASB Statement No. 28: 
Accounting and Financial Reporting for Pensions.
    A ``participant-directed plan'' is a plan that provides for the 
allocation of investment responsibilities to participants or 
beneficiaries. See U.S. Department of Labor, Fact Sheet: Final Rule 
to Improve Transparency of Fees and Expenses to Workers in 401(k)-
Type Retirement Plans (February 2012), available at http://www.dol.gov/ebsa/pdf/fsparticipantfeerule.pdf.
    A ``403(b) plan'' is a tax-sheltered retirement plan, similar to 
a 401(k) plan, offered by public schools and certain 501(c)(3) tax-
exempt organizations. See Internal Revenue Service, IRC 403(b) Tax-
Sheltered Annuity Plans, available at http://www.irs.gov/Retirement-Plans/IRC-403(b)-Tax-Sheltered-Annuity-Plans.
    A ``457 plan'' is a deferred compensation plan as described in 
IRC section 457, which is available for certain state and local 
governments and non-governmental entities tax exempt under IRC 
section 501. See Internal Revenue Service, IRC 457(b) Deferred 
Compensation Plans, available at http://www.irs.gov/retirement/article/0,,id=172437,00.html.
    \192\ 15 U.S.C. 78o-4(e)(8) (defining ``municipal entity'').
---------------------------------------------------------------------------

    Further, the Commission believes that such plans should be afforded 
the protection granted to municipal entities by the statute. The 
Commission notes that the solicitation of public pension plans \193\ in 
connection with investment advisory services has been subject to 
multiple Commission enforcement actions. For example, in 2009, the 
Commission charged a former New York State official and top political 
advisor with allegedly defrauding the New York State Common Retirement 
Fund by causing the fund to invest billions of dollars with private 
equity funds and hedge fund managers who paid millions of dollars in 
the form of sham ``finder'' or ``placement agent'' fees.\194\
---------------------------------------------------------------------------

    \193\ See infra Section III.A.1.b.x. (discussing ``solicitation 
of a municipal entity or obligated person'').
    \194\ See SEC v. Henry Morris, Litigation Release No. 20963 
(March 19, 2009).
    As another example, the Commission charged the former CEO of the 
California Public Employees' Retirement System and his close 
personal friend with allegedly scheming to defraud an investment 
firm into paying $20 million in fees to the friend's placement agent 
firms. See SEC Charges Former CalPERS CEO and Friend With Falsifying 
Letters in $20 Million Placement Agent Fee Scheme, available at 
http://www.sec.gov/news/press/2012/2012-73.htm.
---------------------------------------------------------------------------

    The Commission notes, however, that individual natural person 
participants in a public employee benefit plan do not fall within the 
definition of municipal entity, because such persons would not be a 
state, political subdivision of a state, or municipal corporate 
instrumentality. Similarly, private employee benefit plans, mutual 
funds, and insurance companies that are not sponsored or established by 
a state, political subdivision, or municipal corporate instrumentality 
or any agency, authority, or instrumentality thereof, do not fall 
within the statutory definition of municipal entity.\195\ Such funds 
and entities are not ``established or sponsored by'' a state merely 
because they file with a state official or are issued a certificate of 
formation by a state.
---------------------------------------------------------------------------

    \195\ See supra note 187 and accompanying text.
---------------------------------------------------------------------------

    As noted above, three commenters \196\ stated that funds 
contributed to a governmental plan are no longer the property of, or 
held for the benefit of or

[[Page 67483]]

controlled by, the municipal entity that established the plan, and that 
such plans are not ordinarily funded by or involved in the types of 
transactions contemplated by Congress. These commenters argued that, as 
a result, these plans should be excluded from the definition of 
municipal entity. The Commission does not agree. Such a plan is 
``sponsored or established'' by the municipal entity and, therefore, 
falls within the statutory definition of municipal entity.
---------------------------------------------------------------------------

    \196\ See Fraser Stryker Letter and Committee of Annuity 
Insurers Letter I. See also NABL Letter (making a similar argument 
that the term ``municipal entity'' should only include entities that 
are controlled by or established for the benefit and enjoyment of a 
state or any of its political subdivisions or municipal 
corporations).
---------------------------------------------------------------------------

    One commenter suggested that the phrase ``any State, political 
subdivision of a State, or municipal corporate instrumentality of a 
State'' in the interpretation of the definition of ``municipal entity'' 
would be clearer if it were revised to read ``any State, political 
subdivision of a State, or municipal corporate instrumentality of a 
State or of a political subdivision of a State.'' \197\ The commenter 
noted, for example, that a charter school may be organized as an 
``instrumentality of a political subdivision of a State.''
---------------------------------------------------------------------------

    \197\ NABL Letter.
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    Because states delegate powers to their political subdivisions and 
one of the powers that may be delegated to political subdivisions is 
the ability of political subdivisions to create corporate 
instrumentalities,\198\ the Commission believes that a municipal entity 
organized as a municipal corporate instrumentality of a political 
subdivision of a state is properly considered a municipal corporate 
instrumentality of a state. Accordingly, the Commission is adopting 
Rule 15Ba1-1(g) to reflect such interpretation and define municipal 
entity to include municipal corporate instrumentalities of political 
subdivisions of states.\199\
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    \198\ See, e.g., MCL 117.4o: http://www.legislature.mi.gov/
(S(p3jhrzzb5hbiew45wy2fmz45))/
mileg.aspx?page=getobject&objectname=mcl-117-4o (authorizing cities 
in the state of Michigan to form nonprofit corporations under that 
state's nonprofit corporation act if they are organized for valid 
public purposes).
    \199\ See Rule 15Ba1-1(g), which defines municipal entity to 
mean ``any State, political subdivision of a State, or municipal 
corporate instrumentality of a State or of a political subdivision 
of a State, including: (1) [A]ny agency, authority, or 
instrumentality of the State, political subdivision, or municipal 
corporate instrumentality; (2) [a]ny plan, program, or pool of 
assets sponsored or established by the State, political subdivision, 
or municipal corporate instrumentality or any agency, authority, or 
instrumentality thereof; and (3) [a]ny other issuer of municipal 
securities.''
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iii. Obligated Person
    Exchange Act Section 15B(e)(10) provides that the term ``obligated 
person'' means ``any person, including an issuer of municipal 
securities, who is either generally or through an enterprise, fund, or 
account of such person, committed by contract or other arrangement to 
support the payment of all or part of the obligations on the municipal 
securities to be sold in an offering of municipal securities.'' \200\ 
In the Proposal, in response to a commenter's request for 
clarification,\201\ the Commission stated its belief that the 
definition of obligated person for purposes of the definition of 
municipal advisor should be consistent with the definition of obligated 
person for purposes of Rule 15c2-12.\202\ The Commission therefore 
proposed to exempt from the definition of obligated person providers of 
municipal bond insurance, letters of credit, or other liquidity 
facilities.\203\ In the Proposal, the Commission stated its belief that 
this interpretation would not conflict with the goals of the Dodd-Frank 
Act to provide further protections for certain entities that 
participate in borrowings in the municipal securities market and would 
help ensure uniformity among rules relating to such market, including 
uniformity relating to the definition of obligated persons.\204\ The 
Commission noted that providers of municipal bond insurance, letters of 
credit, or other liquidity facilities are generally non-governmental 
providers of credit enhancements.\205\ As providers of credit 
enhancements, these entities are not borrowing funds through a 
municipal entity. Therefore, the Commission stated in the Proposal its 
belief that they do not require the type of protection that should be 
provided to those who, in municipal securities transactions, borrow 
funds through municipal entities.
---------------------------------------------------------------------------

    \200\ 15 U.S.C. 78o-4(e)(10). Obligated persons can include 
entities acting as conduit borrowers, such as private universities, 
non-profit hospitals, and private corporations.
    \201\ See Proposal, 76 FR 829, note 88 and accompanying text.
    \202\ Rule 15c2-12 defines the term ``obligated person'' to mean 
``any person, including an issuer of municipal securities, who is 
either generally or through an enterprise, fund, or account of such 
person committed by contract or other arrangement to support payment 
of all, or part of the obligations on the municipal securities to be 
sold in the Offering (other than providers of municipal bond 
insurance, letters of credit, or other liquidity facilities).'' See 
17 CFR 240.15c2-12(f)(10). ``Offering'' as used in this definition 
is defined in Rule 15c2-12(a). See 17 CFR 240.15c2-12(a). See also 
Securities Exchange Act Release No. 34961 (November 10, 1994), 59 FR 
59590 (November 17, 1994).
    \203\ See proposed Rule 15Ba1-1(i) and 17 CFR 240.15c2-
12(f)(10).
    \204\ See Proposal, 76 FR 830.
    \205\ See id.
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    The Commission received approximately ten comment letters with 
regard to the definition of ``obligated person'' and the application of 
the proposed rules to such persons.
Definition of ``Obligated Person''
    Generally, most commenters agreed that the definition of 
``obligated person'' should be consistent with the definition of that 
term in Rule 15c2-12,\206\ or otherwise expressed support for the 
proposed definition of obligated person.\207\ Consequently, the 
Commission is adopting the definition substantially as proposed, but 
with modifications for general consistency with the application of the 
term in Rule 15c2-12 \208\ and certain clarifying modifications to 
address concerns raised by commenters. Specifically, Rule 15Ba1-1(k) 
provides that obligated person ``has the same meaning as in section 
15B(e)(10) of the Act (15 U.S.C. 78o-4(e)(10)); provided, however, the 
term obligated person shall not include: (1) A person who provides 
municipal bond insurance, letters of credit, or other liquidity 
facilities; (2) a person whose financial information or operating data 
is not material to a municipal securities offering, without reference 
to any municipal bond insurance, letter of credit, liquidity facility, 
or other credit enhancement; or (3) the federal government.''
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    \206\ See, e.g., Kutak Rock Letter; NABL Letter. See also ABA 
Letter; BNY Letter.
    \207\ See letter from Michael G. Bartolotta, Chairman, MSRB, 
dated February 22, 2011 (``MSRB Letter I'').
    \208\ See Rule 15Ba1-1(k). See also supra note 202.
---------------------------------------------------------------------------

    The Commission believes that there is no reason to differentiate 
the definition of obligated person for purposes of municipal advisor 
registration from the definition of obligated person for other Exchange 
Act purposes. As discussed in the Proposal and herein, the Commission 
believes that such definition will provide further protections for 
certain entities that participate in borrowings in, and help ensure 
uniformity among rules relating to, the municipal securities market. 
The continued use of a consistent definition will also provide clearer 
guidance to market participants.
    Although most commenters supported the proposed definition, some 
commenters asked for clarification. One commenter suggested that the 
definition should exclude persons who might otherwise be deemed to be 
an obligated person solely on the basis of a commitment to support 
payment of the underlying assets that secure such issue, other than a 
borrower, lessee, or installment purchaser who is contractually 
responsible for payments that exceed a specified and substantial 
materiality standard, or a guarantor of

[[Page 67484]]

such a payment obligation, who is not otherwise excluded from the 
definition of obligated person.\209\ One commenter specifically stated 
that guaranty agencies for loans under the Federal Family Education 
Loan Program (``FFELP'') should not be deemed obligated persons.\210\ 
Another commenter stated that companies registered under the Exchange 
Act, the federal government and its instrumentalities, foreign 
governments and their instrumentalities, religious organizations, and 
entities already subject to substantial oversight and regulation, such 
as banks, credit unions, regulated investment companies, and insurance 
companies, should be exempt from the definition of obligated 
person.\211\
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    \209\ See NABL Letter. The commenter stated that the 
interpretive guidance with respect to Rule 15c2-12 leaves open the 
possibility that some persons who are not directly committed to 
support payment of a municipal securities issue may nonetheless be 
deemed to be obligated persons by reason of their commitment to 
support payment of the underlying assets securing the issue, based 
upon a factual analysis of their relationship to the issue. See id. 
See also letter from Brett E. Lief, President, National Council of 
Higher Education Loan Programs, dated February 16, 2011 (``National 
Council of Higher Education Loan Programs Letter''). Another 
commenter stated that, according to the proposed rules, while some 
of its members would fall within the definition of obligated person 
in each of its capital market financings, under the materiality 
standard of Rule 15c2-12 under the Exchange Act, the commenter only 
designates as obligated persons those members participating in the 
projects being financed that have a significant percentage of the 
financial obligation that supports the debt service on the 
commenter's bonds. See letter from Robert W. Trippe, Senior Vice 
President and Chief Financial Officer, American Municipal Power, 
Inc., dated February 21, 2011 (``American Municipal Power Letter'').
    \210\ See National Council of Higher Education Loan Programs 
Letter.
    \211\ See Kutak Rock Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered these comments. The 
Commission continues to believe that there is no reason to 
differentiate the definition of obligated person for purposes of 
municipal advisor registration from the definition of obligated person 
for purposes of Rule 15c2-12. The Commission, however, is modifying the 
rule text of Rule 15Ba1-1(k) to clarify that the definition of 
obligated person excludes persons whose financial information or 
operating data is not material to a municipal securities offering, 
without reference to any municipal bond insurance, letter of credit, 
liquidity facility, or other credit enhancement.
    The continuing disclosure requirements of Rule 15c2-12 exclude 
certain obligated persons whose financial information or operating data 
is not material to the issuance of municipal securities.\212\ 
Therefore, consistent with Rule 15c2-12, the Commission is clarifying 
that an entity whose financial information or operating data is not 
material to an issuance of municipal securities would not be an 
obligated person under Rule 15Ba1-1(k). Any advisor to such entity 
would not be required to register as a municipal advisor, because such 
person would not be a municipal advisor within the meaning of Rule 
15Ba1-1(d).\213\ In addition to promoting consistency, the Commission 
believes that the materiality standard for secondary market disclosure 
in Rule 15c2-12 also serves as an appropriate standard to identify 
those obligated persons that should have the protections afforded by 
Section 15B of the Exchange Act. Using a similar approach ensures 
uniformity, provides municipal market participants with existing 
guidance about how the rules should be applied, and limits the 
application of the definition to only those persons whose financial 
information or operating data is material to a municipal securities 
offering and for whom registration provides significant benefits to the 
municipal marketplace.
---------------------------------------------------------------------------

    \212\ For example, Rule 15c2-12 requires a written agreement or 
contract to provide ongoing information (1) with respect to any 
obligated person for whom financial information or operating data is 
presented in the final official statement or (2) for each obligated 
person meeting the objective criteria specified in the undertaking 
and used to select the obligated persons for whom financial 
information or operating data is presented in the final official 
statement, except that in the case of pooled obligations the 
undertaking shall specify such objective criteria. See Rule 15c2-
12(b)(5)(i)(A). The issuer and the other participants determine at 
the time of preparation of the official statement which obligated 
persons are material to the offering. See Securities Exchange Act 
Release No. 34961 (November 10, 1994), 59 FR 59590, 59596 (November 
17, 1994).
    \213\ A person advising a guarantor that is a municipal entity 
(such as a state credit enhancer) must separately determine whether 
its advice to that municipal entity would trigger the municipal 
advisor registration requirement.
---------------------------------------------------------------------------

    While the definition of obligated person in the Proposal excluded 
only providers of municipal bond insurance, letters of credit, or other 
liquidity facilities, the Commission understands that credit 
enhancement for municipal securities is not necessarily limited to 
those three categories and that many municipal securities may be credit 
enhanced indirectly. Prior guidance from Commission staff provides that 
``[e]ntities that insure or guarantee performance of assets that have 
been pledged to secure the repayment of the municipal obligation may 
fall within the definition of `obligated person' . . . unless such 
insurance or guarantee has been obtained prior to and not in 
contemplation of any offering of municipal securities, the insurance or 
guarantee relates only to the individual pledged assets, and the 
insurance or guarantee exists independent of the existence of a 
municipal obligation.'' \214\ Consistent with this prior guidance from 
Commission staff, the Commission is adopting a definition of 
``obligated person'' for purposes of Rule 15Ba1-1(k), which provides 
that the ultimate determination as to whether an insurer or guarantor 
is an obligated person under Rule 15c2-12 depends on the relationship 
to the financing itself, which is a factual analysis.\215\ Similarly, a 
determination of whether a guarantor or insurer falls within the 
exclusion from the definition of obligated person for the purposes of 
the municipal advisor registration regime also depends on the 
particular facts and circumstances.\216\
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    \214\ Response to Question 9 in letter from Catherine McGuire, 
Chief Counsel, Division of Market Regulation, Commission to John S. 
Overdorff, Chair, Securities Law and Disclosure Committee, NABL, 
dated September 19, 1995.
    \215\ See id.
    \216\ See id.
---------------------------------------------------------------------------

    In addition, the Commission notes that although the federal 
government and its instrumentalities, as providers of credit 
enhancement, could fall within the definition of obligated person under 
Rule 15c2-12, the federal government does not require the type of 
protection that should be applicable generally to those who borrow 
funds through municipal entities in municipal securities 
transactions.\217\ Accordingly, for purposes of the municipal advisor 
registration regime, the Commission is interpreting the definition of 
obligated person to exclude the federal government. Therefore, advisors 
to the federal government and its instrumentalities providing credit 
enhancements in connection with issuances of municipal securities are 
not required to register as municipal advisors.
---------------------------------------------------------------------------

    \217\ The federal government, as a credit enhancer, would not be 
borrowing any funds through a municipal entity, and would therefore 
be in a position similar to that of providers of municipal bond 
insurance, letters of credit, or other liquidity facilities that are 
excluded from the definition of ``obligated person'' in Rule 15c2-
12. In addition--unlike for the definition of special entity--
Congress did not include the federal government in the definition of 
municipal entity. See infra note 275 (noting differences in the two 
definitions).
---------------------------------------------------------------------------

    Another commenter stated that buyers of municipal securities rely 
on the letter of credit and the credit rating of the lender issuing the 
bonds rather than the ``ultimate borrower,'' and the security or 
collateral provided by a borrower goes to the lender or letter of 
credit issuer,

[[Page 67485]]

not bondholders.\218\ The commenter stated that the real borrower-
lender relationship is between the borrower and the bank issuing the 
letter of credit.\219\ This commenter noted that these and other 
factors distance conduit borrowers \220\ from direct obligations to 
bondholders, but they nonetheless would be obligated persons under the 
Proposal.
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    \218\ See letter from Andrew S. Rose, dated April 10, 2011 
(``Rose Letter'').
    \219\ See id.
    \220\ Many commenters used the term ``conduit borrower'' in 
their letters. Although the term ``conduit borrower'' and 
``obligated person'' do not have identical meanings, for purposes of 
this release, the Commission is treating the comments regarding 
``conduit borrowers'' as applying to ``obligated persons.''
---------------------------------------------------------------------------

    The Commission understands this commenter to be suggesting that 
such conduit borrowers should not be considered obligated persons, such 
that their advisors would not have to register as municipal advisors. 
The Commission, however, has taken the position that, regardless of 
whether an obligated person obtains a letter of credit from a bank to 
guarantee the payment of municipal securities, an obligated person has 
an obligation to investors.\221\ The Commission has long been of the 
view that the presence of credit enhancements generally would not be a 
substitute for material disclosure concerning the primary obligor on 
municipal bonds.\222\ Thus, an advisor to an obligated person that has 
obtained a letter of credit from a bank to guarantee the payment of 
municipal securities should not be treated differently from an advisor 
to an obligated person that has not obtained such credit enhancements, 
and would therefore have to register as a municipal advisor.\223\
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    \221\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799, note 89 (July 10, 1989). See also Securities 
Exchange Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33107 
(June 10, 2010) (stating: ``As noted in [Securities Exchange Act 
Release No. 60332 (July 17, 2009), 74 FR 36831 (July 24, 2009)], the 
Commission believes that information regarding conduit borrowers is 
material to investors in credit enhanced offerings and therefore 
should be included in the official statements'').
    \222\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799, 28812 (July 10, 1989).
    \223\ The text of Rule 15Ba1-1(k) has also been clarified to 
provide that the definition of obligated person excludes persons 
whose financial information or operating data is not material to a 
municipal securities offering, without reference to any municipal 
bond insurance, letter of credit, liquidity facility, or other 
credit enhancement.
---------------------------------------------------------------------------

Application of Rules to Advisors to Obligated Persons
    One commenter suggested generally that the proposed rules should be 
more strictly applied to advisors dealing with municipal entities than 
to advisors dealing with obligated persons. The commenter asserted that 
there is less public interest in regulating advice to private entities, 
and such regulation is better handled outside of municipal markets 
regulation.\224\ As stated above, obligated persons assume the same 
role as municipal entities in an issuance of municipal securities, 
because obligated persons are committed by contract or other 
arrangement to support the payment of all or part of the obligations on 
the municipal securities. Further, defaults by private entity obligated 
persons with respect to municipal securities can have negative 
consequences for municipal entities.\225\ Section 15B of Exchange Act 
(as amended by the Dodd-Frank Act), moreover, provides for the 
protection of both municipal entities and obligated persons.\226\ 
Accordingly, the Commission believes that the municipal advisor 
registration regime should generally apply in the same manner to 
advisors of obligated persons as to advisors of municipal 
entities.\227\
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    \224\ See letter from Kendra York, Public Finance Director, 
State of Indiana, dated February 22, 2011 (``State of Indiana 
Letter''). This commenter stated that it is unrealistic to expect 
board members, attorneys, and accountants of obligated persons to be 
aware that their activities would be subject to Commission 
regulation. The commenter stated that it seems more appropriate to 
regulate improvident and risky usage of derivatives by 
unsophisticated borrowers by focusing on suitability rules 
applicable to the providers of these services, rather than focusing 
on their use in the municipal market.
    \225\ According to a Standard and Poor's study of municipal bond 
defaults in the 1990s, bonds for the three major types of conduit 
bond issues (healthcare, multi-family housing, and industrial 
development) accounted for more than 70% of defaulted principal. 
More recent reports have also indicated that non-governmental 
conduit borrowers account for more than 70% of municipal bond 
defaults. For example, a 2011 report stated that the largest share 
of modern era defaults consists of industrial development revenue 
bonds, followed by bonds supporting healthcare and housing. The 
report states that these three sectors accounted for 67% of all 
defaulting issues during the period of 1980 to 2011. See 2012 Report 
on the Municipal Securities Market, supra note 45, at 24.
    \226\ See 15 U.S.C. 78o-4(b)(2)(C).
    \227\ The Commission notes, however, that the Exchange Act, as 
amended by the Dodd-Frank Act, imposes a fiduciary duty on municipal 
advisors when advising municipal entities. See 15 U.S.C. 78o-
4(c)(1). The statute does not impose a fiduciary duty with respect 
to advice to obligated persons. See also supra note 100.
---------------------------------------------------------------------------

    As described more fully below, however, the Commission is providing 
an exemption from the definition of municipal advisor for persons 
providing advice with respect to certain ``investment strategies,'' 
which will narrow the range of activities that would cause an advisor 
to an obligated person to meet the definition of municipal 
advisor.\228\ Also as described more fully below, the Commission is 
limiting the scope of its definition of the term ``municipal 
derivative'' and its interpretation of the term ``solicitation of a 
municipal entity or obligated person'' as each applies to obligated 
persons, such that an obligated person must be acting in its capacity 
as such and the relevant activity is in connection with municipal 
securities (or, in the case of a solicitation, municipal financial 
products).\229\
---------------------------------------------------------------------------

    \228\ See infra Section III.A.1.b.viii.
    \229\ See infra note 236 and accompanying text.
---------------------------------------------------------------------------

When does a person become an obligated person?
    One commenter asked when a client would become an obligated 
person.\230\ Specifically, the commenter asked whether it would be 
rendering advice as a municipal advisor if it was engaged to consider a 
client's options regarding conventional versus conduit financing, but 
the client subsequently chose not to engage in conduit financing.\231\ 
In addition, the commenter asked whether only registered municipal 
advisors can solicit clients that are eligible to use conduit 
financing.\232\ Lastly, the same commenter asked whether a financial 
advisor would be required to register as a municipal advisor if a 
client is examining its debt alternatives, among which is conduit 
financing.\233\
---------------------------------------------------------------------------

    \230\ See letter from Jonathan Roberts, Principal, Roberts 
Consulting, LLC, dated February 18, 2011 (``Roberts Consulting 
Letter'').
    \231\ See id.
    \232\ See id.
    \233\ See id.
---------------------------------------------------------------------------

    Whether a financial advisor that advises clients about conduit 
financing or other financing options would be required to register as a 
municipal advisor would depend on the facts and circumstances. A person 
will not be a municipal advisor to an obligated person until the 
obligated person has begun the process of applying to, or negotiating 
with, a municipal entity to issue conduit bonds on behalf of the 
obligated person. Activity that never results in solicitation of or 
actual contact with a municipal entity does not have a sufficient nexus 
to municipal financial products or the issuance of municipal securities 
to require registration as municipal advisor. Merely advising a client 
on debt financing alternatives that include conduit financing is not a 
municipal advisory activity, because the client would not be 
sufficiently close to being an obligated person with respect to an 
issuance of municipal securities.\234\ If a

[[Page 67486]]

client is only considering conduit financing, the client is not an 
obligated person. However, if the client applies to, or negotiates 
with, the municipal entity to issue conduit bonds, the person advising 
the conduit borrower would be required to be registered as a municipal 
advisor, regardless of whether or not the financing successfully 
closes.
---------------------------------------------------------------------------

    \234\ Conversely, providing advice to a client who is a 
municipal entity regarding debt financing alternatives would 
constitute a municipal advisory activity.
---------------------------------------------------------------------------

    One commenter argued that a person that is an obligated person does 
not remain an obligated person indefinitely and is not an obligated 
person with respect to unrelated matters.\235\ The Commission agrees 
and has limited the scope of the rules as applied to advice concerning 
municipal financial products used by, and third-party solicitations of, 
obligated persons as described herein.\236\
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    \235\ See SIFMA Letter I.
    \236\ See infra Section III.A.1.b.v. (discussing the definition 
of ``municipal derivatives'' and its scope with respect to obligated 
persons) and Section III.A.1.b.x. (discussing the definition of 
``solicitation of a municipal entity or obligated person'' and its 
scope with respect to obligated persons).
---------------------------------------------------------------------------

    The same commenter also argued that a person should not be deemed 
an obligated person if it is not the initial obligor, but rather comes 
to support the payment of obligations on municipal securities after the 
offering, through an assumption or other arrangement, and asked the 
Commission to clarify that any relationship between an obligated person 
and its advisor will only be considered a municipal advisory 
relationship to the extent that it directly involves a transaction in 
which the person is an obligated person.\237\ The Commission does not 
agree. It is the Commission's view that such a person would be an 
obligated person if the municipal securities remain outstanding after 
the substitution of the obligated person, and such a person is an 
obligated person for purposes of Rule 15c2-12. The obligated person's 
responsibilities and need for protection would be similar regardless of 
whether it was an initial obligor or a subsequent obligor. The 
Commission notes that, as discussed, a person is only a municipal 
advisor to an obligated person if it provides advice to, or on behalf 
of, the obligated person ``with respect to municipal financial products 
or the issuance of municipal securities, including advice with respect 
to the structure, timing, terms, and other similar matters concerning 
such financial products or issues'' or that meets the definition for 
``solicitation'' of such obligated person.\238\ The Commission also 
notes that Exchange Act Section 15B(e)(10) defines obligated person to 
mean, among other things, ``any person . . . who is either generally or 
through an enterprise, fund, or account of such person, committed by 
contract or other arrangement to support the payment of all or part of 
the obligations on the municipal securities to be sold in an offering 
of municipal securities.'' \239\
---------------------------------------------------------------------------

    \237\ See SIFMA Letter I. Further, another commenter stated that 
if an entity related to a borrower agrees to guarantee, or be 
jointly obligated, on a borrowing, it should be treated as the 
primary borrower and not as a municipal advisor. See letter from 
Kasey Kesselring, President, South Lake County Hospital District, 
dated February 16, 2011 (``South Lake County Hospital Letter''). The 
Commission notes that such an entity is not acting as an advisor to 
its affiliated borrower merely by agreeing to guarantee or be 
jointly obligated on a borrowing.
    \238\ See 15 U.S.C. 78o-4(e)(4).
    \239\ See 15 U.S.C. 78o-4(e)(10).
---------------------------------------------------------------------------

Charter Schools
    In the Proposal, the Commission noted that a charter school would 
generally fall under the definition of municipal entity, but may, in 
certain circumstances, fall under the definition of obligated 
person.\240\ With respect to municipal financial products or the 
issuance of municipal securities, the Commission asked in what 
circumstances should charter schools be considered municipal entities 
or obligated persons.\241\ Further, the Commission asked how the 
treatment of charter schools under different state laws affects their 
classification as municipal entities or obligated persons.\242\
---------------------------------------------------------------------------

    \240\ 15 U.S.C. 78o-4(e)(8). See also infra note 241.
    \241\ See Proposal, 76 FR 835.
    In the Proposal, the Commission clarified, in response to a 
commenter, that charter schools are considered to be public schools 
and generally derive their charter from a political subdivision of a 
state (for example, local school boards, state universities, 
community colleges, or state boards of education) and, therefore, 
would fall under the definition of municipal entity. See id., at 
829, notes 83-85 and accompanying text.
    Charter schools, or persons that operate charter schools, such 
as charter school management organizations that are organized as 
non-profit corporations, may issue municipal securities through a 
municipal entity for capital needs, such as facilities that are not 
provided for by state funding. In that instance, the charter school, 
or charter school management organization, would be an obligated 
person with respect to the issuance of municipal securities and any 
related municipal financial products. See id., at 829, note 85.
    \242\ See id., at 835.
---------------------------------------------------------------------------

    One commenter stated that charter schools that have bonds issued on 
their behalf by a local financing governmental entity are classic 
examples of obligated persons.\243\ This commenter suggested that, if a 
charter school receives tax money from a state or school district, the 
school should be treated as a municipal entity.\244\ Otherwise, the 
school should be treated as an obligated person.\245\ Another commenter 
stated that a charter school should be considered a municipal entity if 
it is organized as a political subdivision of a state or an 
instrumentality of a political subdivision of a state.\246\ This 
commenter stated that, in other circumstances when providing for 
payment of municipal securities, a charter school should be considered 
an obligated person.\247\
---------------------------------------------------------------------------

    \243\ See Kutak Rock Letter.
    \244\ See id.
    \245\ See id.
    \246\ See NABL Letter.
    \247\ See id.
---------------------------------------------------------------------------

    As stated in the Proposal, the Commission continues to believe that 
charter schools are generally municipal entities, because they are 
public schools and derive their charter from a political subdivision of 
a state. While charter schools generally receive a portion of their 
funds from the state, they may also raise funds through conduit 
borrowing, and may pledge funds other than state money for the payment 
on the conduit borrowing. Thus, a charter school is an obligated person 
under Section 15B(e)(10) and Rule 15Ba1-1(k) when it engages in conduit 
borrowing using and/or pledging solely monies derived from sources 
other than the state or political subdivision of a state.\248\ A 
municipal entity that is an obligated person on bonds issued by another 
municipal entity is still a municipal entity for purposes of this rule, 
and advisors to such municipal entities are subject to a statutory 
fiduciary duty.\249\
---------------------------------------------------------------------------

    \248\ See also supra note 241 and accompanying text (recognizing 
that a charter school may be an obligated person).
    \249\ See 15 U.S.C. 78o-4(c).
---------------------------------------------------------------------------

iv. Municipal Financial Products
    Exchange Act Section 15B(e)(5) defines ``municipal financial 
product'' to mean ``municipal derivatives, guaranteed investment 
contracts, and investment strategies.'' \250\ The Commission proposed 
to incorporate into the rule the statutory definition of municipal 
financial product.\251\ The Commission received approximately ten 
comment letters regarding the proposed definition. The issues raised by 
these commenters are discussed below in the ``Municipal Derivatives,'' 
``Guaranteed Investment Contracts,'' and ``Investment Strategies'' 
sections. The Commission is adopting the definition of ``municipal 
financial product'' as proposed.\252\
---------------------------------------------------------------------------

    \250\ 15 U.S.C. 78o-4(e)(5).
    \251\ See proposed Rule 15Ba1-1(g) (providing that ``municipal 
financial product'' has the same meaning as in Section 15B(e)(5) of 
the Exchange Act).
    \252\ See Rule 15Ba1-1(i).

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[[Page 67487]]

v. Municipal Derivatives
    As discussed in the Proposal, Exchange Act Section 15B does not 
define the term ``municipal derivatives.'' Accordingly, the Commission 
proposed Rule 15Ba1-1(f) to define the term to mean any swap \253\ or 
security-based swap \254\ to which a municipal entity is a counterparty 
or to which an obligated person, acting in its capacity as an obligated 
person, is a counterparty.\255\ Thus, as stated in the Proposal, the 
Commission included in the definition of municipal derivatives the 
definitions of ``swap'' and ``security-based swap,'' as those terms are 
defined by statute (and any rules and regulations thereunder). In the 
Proposal, the Commission asked whether the proposed definition of 
municipal derivatives should be modified or clarified in any way.\256\
---------------------------------------------------------------------------

    \253\ As proposed and adopted, the definition specifies that 
``swap'' is as defined in Section 1a(47) of the Commodity Exchange 
Act (7 U.S.C. 1a(47)) and Section 3(a)(69) of the Exchange Act (15 
U.S.C. 78c(a)(69)), including any rules and regulations thereunder.
    \254\ As proposed and adopted, the definition specifies that 
``security-based swap'' is as defined in Section 3(a)(68) of the 
Exchange Act (15 U.S.C. 78c(a)(68)), including any rules and 
regulations thereunder.
    \255\ See proposed Rule 15Ba1-1(f).
    \256\ See Proposal, 76 FR 836.
---------------------------------------------------------------------------

    One commenter stated that the proposed definition of municipal 
derivatives is too broad, because it encompasses too many types of 
advisory entities and transactions and the definition goes beyond 
securities.\257\ The commenter expressed concern that a person must 
register as a municipal advisor regardless of the type of swap advice 
contemplated or the relationship between the municipal entity and the 
person seeking to offer the advice.\258\
---------------------------------------------------------------------------

    \257\ See David J. Tudor, President and CEO, ACES Power 
Marketing LLC, dated March 2, 2011 (``ACES Power Marketing 
Letter'').
    \258\ See id.
---------------------------------------------------------------------------

    Another commenter stated that there is no statutory basis or 
legislative history for the proposed expansion of the industry's common 
usage of the term ``municipal derivatives,'' which is limited to 
derivatives of a municipal security.\259\ The commenter stated that the 
proposed definition would mean that any public plan (if not exempted 
from the definition of municipal entity) using swaps in the management 
of its overall portfolio would be dealing in municipal financial 
products, merely by virtue of being a counterparty to the swap.\260\
---------------------------------------------------------------------------

    \259\ See letter from Robert V. Newman, Executive Director, Utah 
Retirement Systems, dated February 22, 2011 (``Utah Retirement 
System Letter'').
    \260\ See id.
---------------------------------------------------------------------------

    Additionally, one commenter stated that many municipal entities 
enter into commodity hedging transactions in connection with their 
operations to avoid mid-year operating budget disruptions and rate 
hikes. Accordingly, this commenter asked the Commission to confirm that 
hedging transactions by municipal entities related to their operations 
(rather than municipal securities) do not constitute municipal 
derivatives.\261\
---------------------------------------------------------------------------

    \261\ See NABL Letter.
---------------------------------------------------------------------------

    One commenter asked the Commission to clarify how a person engaging 
in a transaction or assignment with respect to a municipal derivative 
would determine that the person it is advising is ``an obligated 
person, acting in its capacity as an obligated person.'' \262\ The 
commenter stated that the Commission should clarify that a person 
(presumably acting as a dealer or counterparty) must have actual 
knowledge that the counterparty is an obligated person acting as such 
and have actual knowledge that the municipal derivative implicates or 
is related to the underlying transactions or funds that make such 
person an obligated person.\263\ Further, the commenter stated that a 
person should not need to affirmatively inquire as to the 
counterparty's or the funds' status.\264\
---------------------------------------------------------------------------

    \262\ See SIFMA Letter I.
    \263\ See id.
    \264\ See id.
---------------------------------------------------------------------------

    Another commenter suggested narrowing the definition of municipal 
derivatives to only include debt-related derivatives entered into (a) 
by a municipal entity in connection with an issue of municipal 
securities or (b) by an obligated person as a pledged security or a 
source of payment for municipal securities.\265\ This commenter also 
stated that the phrase ``in its capacity as an obligated person'' is 
not sufficiently tailored, because it would include any derivative 
entered into by the obligated person to hedge a conduit borrowing, not 
merely those that ``by contract or other arrangement . . . support the 
payment'' of municipal securities.\266\ In addition, this commenter 
stated that, given the use of the term ``municipal financial product,'' 
Congress did not intend to regulate transactions with non-municipal 
entities that do not affect municipal entities or investors, simply 
because they result from a municipal securities transaction.\267\
---------------------------------------------------------------------------

    \265\ See NABL Letter. This commenter stated that by narrowing 
the definition of municipal derivatives accordingly, ``swaps that 
are entered into by a municipal entity to hedge the interest rate on 
variable rate securities, or to hedge the value of municipal 
securities to be issued in the future, as well as swaps that are 
part of a structured municipal securities financing (e.g., a 
structured student loan or mortgage revenue bond issue) would be 
covered, but derivatives that are unrelated to municipal securities 
issues (e.g., swaps to hedge bank loans or fuel costs) or are 
entered into by a conduit borrower and [not] pledged as security or 
a source of payment for, the municipal securities issue would be 
excluded.''
    \266\ See id.
    \267\ See id.
---------------------------------------------------------------------------

    In contrast, one commenter agreed with the Commission that 
municipal derivatives includes both swaps and security-based swaps to 
which a municipal entity or obligated person is a counterparty, but 
stated that this definition is too narrow.\268\ This commenter stated 
that, because the term ``municipal derivatives'' (rather than the term 
``swap'') was used in the definition of municipal financial products, 
Congress intended to ``provide flexibility to address problems that may 
arise in the future in connection with the use of other existing or 
yet-to-be-developed forms of derivatives by municipal entities.'' \269\
---------------------------------------------------------------------------

    \268\ See MSRB Letter I.
    \269\ See id. See also infra note 271 (discussion of the 
definition of swap and security-based swap, which includes 
flexibility to address yet-to-be developed forms of derivatives).
     The Commission also notes that on July 18, 2012, it adopted 
rules jointly with the CFTC to, among other things, further define 
the terms swap, security-based swap, and security-based swap 
agreement. See Securities Exchange Act Release No. 67453 (July 18, 
2012), 77 FR 48208 (August 13, 2012) (Further Definition of 
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement;'' Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping).
---------------------------------------------------------------------------

    The Commission has carefully considered these comments and is 
adopting the definition of municipal derivatives substantially as 
proposed. The Commission, however, is clarifying herein the scope of 
application of the definition to obligated persons, in response to 
issues raised by commenters.\270\ Specifically, the Commission is 
adopting Rule 15Ba1-1(f), which now provides that the term ``municipal 
derivatives'' means ``any swap (as defined in Section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)) and section 3(a)(69) of the 
Act (15 U.S.C. 78c(a)(69)), including any rules and regulations 
thereunder) or security-based swap (as defined in section 3(a)(68) of 
the Act (15 U.S.C. 78c(a)(68)), including any rules and regulations 
thereunder) to which: (1) [a] Municipal entity is a counterparty; or 
(2) [a]n obligated person, acting in such capacity, is a 
counterparty.'' \271\
---------------------------------------------------------------------------

    \270\ See Rule 15Ba1-1(f).
    \271\ See id. The Commission notes that the definitions of swap 
and security-based swap are quite broad and that Section 712(d) of 
the Dodd-Frank Act gives the Commission and CFTC joint authority to 
further define such terms. Under the Commodity Exchange Act, as 
amended by the Dodd-Frank Act, the term ``swap'' is defined to mean, 
in part, any agreement, contract, or transaction that is, or in the 
future becomes, commonly known to the trade as a swap. See 7 U.S.C. 
1a(47). In addition, under the Exchange Act, as amended by the Dodd-
Frank Act, the term ``security-based swap'' incorporates the 
definition of ``swap'' under the Commodity Exchange Act. See 15 
U.S.C. 78c(a)(68).

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[[Page 67488]]

    As proposed and adopted, with respect to municipal entities, the 
Commission has determined not to qualify the definition of municipal 
derivatives as being limited to those entered into in connection with, 
or pledged as security or a source of payment for, existing or 
contemplated municipal securities. Municipal entities seeking advice 
with respect to municipal derivative transactions (including commodity 
hedging transactions in connection with their operations, which fall 
within the definition of municipal derivatives) are subject to risks, 
regardless of whether the municipal derivatives are entered into in 
connection with or pledged as security or a source of payment for 
existing or contemplated municipal securities, and should have the 
protections provided by municipal advisor registration.\272\
---------------------------------------------------------------------------

    \272\ See supra note 190 and accompanying text.
---------------------------------------------------------------------------

    As proposed and adopted, with respect to obligated persons, the 
coverage of the registration requirement is limited to advice relating 
to derivatives entered into by an obligated person in its capacity as 
an obligated person with respect to municipal securities. Thus, with 
respect to obligated persons, municipal derivatives include those 
derivatives entered into by obligated persons in connection with, or 
pledged as security or a source of payment for, existing municipal 
securities or municipal securities to be issued in the future.\273\ By 
contrast, advice with respect to other types of derivative transactions 
entered into by obligated persons outside of their capacity as 
obligated persons will not trigger the municipal advisor registration 
requirement. For example, a person advising a nonprofit hospital to 
hedge an interest rate swap entered into in connection with a variable 
rate conduit borrowing (by such hospital) would be a municipal advisor. 
However, a person would not be required to register as a municipal 
advisor if it is advising an airline company that is an obligated 
person with respect to airport revenue bonds about whether the airline 
company should hedge its exposure on aviation fuel costs with a 
derivatives transaction that is unrelated to any particular issuance of 
municipal securities and that is outside of its capacity as an 
obligated person. The Commission believes that this clarification with 
respect to obligated persons addresses the concerns of commenters 
regarding scope of the advisors' responsibilities to conduit borrowers 
and the ability to identify situations where advising obligated persons 
triggers a registration requirement.
---------------------------------------------------------------------------

    \273\ The Commission believes it is appropriate to refer to 
``existing or contemplated'' municipal securities because an 
obligated person could enter into a swap or security-based swap 
before or after an issuance of municipal securities (e.g., a 
forward-starting interest rate swap as part of a synthetic advanced 
refunding). See also supra note 265 (discussing the comment in the 
NABL Letter that the definition of municipal derivatives should be 
narrowed in a way that would still cover, among other things, swaps 
entered into to hedge the value of municipal securities to be issued 
in the future).
---------------------------------------------------------------------------

    The Commission notes that the Exchange Act and the Commodity 
Exchange Act, as amended by the Dodd-Frank Act, provide heightened 
protection to special entities, in connection with swaps and security-
based swaps. The Commission interprets the term special entity to 
generally include municipal entities, because the definition of 
municipal entity is substantially similar to the definition of special 
entity in the Exchange Act and the Commodity Exchange Act.\274\ The 
heightened protection afforded by the Acts to special entities applies 
to all swaps and security-based swaps, irrespective of whether the 
swaps and security-based swaps are entered into in connection with or 
pledged as security or a source of payment for existing or contemplated 
securities.\275\ Accordingly, the Commission's determination not to 
qualify its interpretation of the term ``municipal derivatives'' with 
respect to municipal entities is designed to provide a level of 
protection to such entities with respect to swaps and security-based 
swaps that is consistent with the protection afforded to special 
entities and the Commission's interpretation of that term with respect 
to obligated persons is intended to reflect the scope of the role of 
obligated persons with respect to municipal securities.
---------------------------------------------------------------------------

    \274\ The Commission notes that there are some differences 
between the statutory definitions of municipal entity and special 
entity. In particular, the statutory definitions of special entity 
do not explicitly include authorities, instrumentalities or 
corporate instrumentalities of a state. The definition of municipal 
entity includes plans, programs, or pools of assets established by a 
state, political subdivision, or municipal corporate instrumentality 
(or any agency, authority, or instrumentality thereof), and 
therefore includes 529 Savings Plans and LGIPs, while the statutory 
definitions of special entity do not explicitly include such 
entities. Also, the statutory definitions of special entity include 
governmental plans as defined by ERISA. The Commission notes that 
the CFTC, in adopting rules to implement business conduct standards 
for swap dealers, included in the definition of ``special entity'' 
(for purposes of Commodity Exchange Act Section 4s): ``A State, 
State agency, city, county, municipality, other political 
subdivision of a State, or any instrumentality, department, or a 
corporation of or established by a State or political subdivision of 
a State.'' See Standards for Swap Dealers and Major Swap 
Participants with Counterparties (January 11, 2012), 77 FR 9734 
(February 17, 2012) (adopting rules proposed by the CFTC prescribing 
external business conduct standards for swap dealers and major swap 
participants) (``Business Conduct Standards for Swaps'').
     The CFTC's final rules state that all State and municipal 
special entities are municipal entities. See Business Conduct 
Standards for Swaps, 77 FR 9739.
    \275\ As discussed herein, with Title IX of the Dodd-Frank Act, 
Congress provided certain protections for municipal entities and 
obligated persons with respect to their interaction with certain 
advisors, including persons providing advice with respect to, among 
other things, municipal derivatives.
    Moreover, with Section 764 of Title VII of the Dodd-Frank Act, 
by adding new Section 15F to the Exchange Act, Congress provided 
certain protections for special entities with respect to their 
interaction with security-based swap dealers and major security-
based swap participants. See Pub. L. 111-203, 124 Stat. 1376, 1789-
1792, section 764(a) (adding Exchange Act Section 15F).
    Among other things, Section 15F(h)(4) of the Exchange Act 
establishes that a security-based swap dealer that ``acts as an 
advisor to a special entity shall have a duty to act in the best 
interests of the special entity'' and ``shall make reasonable 
efforts to obtain such information as is necessary to make a 
reasonable determination'' that any security-based swap recommended 
by the security-based swap dealer is in the best interests of the 
special entity . . . .'' Section 15F(h)(5) requires that security-
based swap entities that offer to, or enter into a security-based 
swap with, a special entity comply with any duty established by the 
Commission that requires a security-based swap entity to have a 
``reasonable basis'' for believing that the special entity has an 
``independent representative'' that meets certain criteria and 
undertakes a duty to act in the ``best interests'' of the special 
entity. See Pub. L. 111-203, 124 Stat. 1376, 1791 (to be codified at 
15 U.S.C. 78o-10(h)(5)). This provision is intended to operate 
together with the municipal advisor regulatory scheme, which would 
apply to such an ``independent representative'' unless the 
representative is an employee of the municipal entity. Similarly, 
Section 731 of the Dodd-Frank Act amends the Commodity Exchange Act 
by adding Section 4s, which contains language parallel to Section 
15F of the Exchange Act that applies to swap dealers and major swap 
participants. See Pub. L. 111-203, 124 Stat. 1376, 1789-1792, 
section 731 (adding Commodity Exchange Act Section 4s).
    The term ``special entity'' is defined to include a ``State, 
State agency, city, county, municipality, or other political 
subdivision of a State.'' This definition is consistent with, but 
not identical to, the statutory definition of ``municipal entity'' 
in Section 15B(e)(8). (``[T]he term `municipal entity' means any 
State, political subdivision of a State, or municipal corporate 
instrumentality of a State, including--(A) any agency, authority or 
instrumentality of the State, political subdivision, or municipal 
corporate instrumentality; (B) any plan, program, or pool of assets 
sponsored or established by the State, political subdivision, or 
municipal corporate instrumentality or any agency, authority or 
instrumentality thereof; and (C) any other issuer of municipal 
securities[.]'').

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[[Page 67489]]

vi. Guaranteed Investment Contracts
    Section 15B(e)(2) of the Exchange Act, as amended by the Dodd-Frank 
Act, defines ``guaranteed investment contract'' to include ``any 
investment that has specified withdrawal or reinvestment provisions and 
a specifically negotiated or bid interest rate, and also includes any 
agreement to supply investments on two or more future dates, such as a 
forward supply contract.'' \276\ In the Proposal, the Commission 
proposed to include the statutory definition of guaranteed investment 
contract in Rule 15Ba1-1(a).\277\
---------------------------------------------------------------------------

    \276\ 15 U.S.C. 78o-4(e)(2).
    \277\ See proposed rule 15Ba1-1(a).
---------------------------------------------------------------------------

    The Commission received one comment supporting the proposed 
definition.\278\ Another commenter, however, suggested that the 
definition does not include all guaranteed investment contracts entered 
into by municipal entities.\279\ Instead, this commenter stated that 
the statutory definition of guaranteed investment contracts refers only 
to those contracts related to issues of bonds and similar municipal 
securities.\280\ Another commenter stated that it is ``cognizant of 
special issues arising in the investment of bond proceeds in guaranteed 
investment contracts, particularly in the tax area, but [is] unclear 
how the situation is improved . . . . by additional regulation of 
[guaranteed investment contract] providers by the SEC.'' \281\
---------------------------------------------------------------------------

    \278\ See MSRB Letter. This commenter did not suggest any 
changes to the proposed definition.
    \279\ See NABL Letter.
    \280\ See id.
    \281\ See State of Indiana Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered these comments and is 
adopting a definition of guaranteed investment contract substantially 
as proposed but with changes designed to respond to commenters.\282\ 
Specifically, the Commission is interpreting the statutory definition 
of guaranteed investment contract so that it ``has the same meaning as 
in section 15B(e)(2) of the Act (15 U.S.C. 78o-4(e)(2)); provided, 
however, that the contract relates to investments of proceeds of 
municipal securities or municipal escrow investments.'' \283\
---------------------------------------------------------------------------

    \282\ See Rule 15Ba1-1(a).
    \283\ See id.
---------------------------------------------------------------------------

    For the same reasons that the Commission is narrowing the 
application of the term investment strategies as discussed further 
herein,\284\ the Commission is persuaded by commenters that, at this 
time, it is appropriate to apply the definition of guaranteed 
investment contract more narrowly. Guaranteed investment contracts are 
investment products,\285\ and this more limited interpretation is 
consistent with the approach the Commission is adopting with respect to 
the application of ``investment strategies,'' which will be limited to 
plans or programs for the investment of proceeds of municipal 
securities and the recommendation of and brokerage of municipal escrow 
investments.\286\ A municipal entity could invest any funds held by or 
on behalf of such municipal entity, as opposed to just proceeds of 
municipal securities, in a guaranteed investment contract. Under the 
rule as adopted, a provider of a guaranteed investment contract is 
generally not a municipal advisor as long as such provider does not 
engage in municipal advisory activities, such as providing advice to 
the municipal entity or obligated person about the purchase of a 
guaranteed investment contract that relates to investments of proceeds 
of municipal securities or municipal escrow investments.\287\ The 
Commission, therefore, believes it is in the public interest and 
consistent with the purposes of Section 15B to interpret the definition 
of guaranteed investment contract as described herein.
---------------------------------------------------------------------------

    \284\ See Section III.A.1.viii.
    \285\ The Commission notes that, by comparison, swaps and 
security-based swaps are not investment products, but instead are 
often used to hedge the risk from other financial transactions. 
Also, the Commission notes that the protections established by the 
Dodd-Frank Act with respect to swap and security-based swap 
transactions discussed above, are not applicable to guaranteed 
investment contracts or other investment strategies. See supra note 
275 and accompanying text.
    \286\ See infra Section III.A.1.b.viii. (discussing the term 
``investment strategies'' and the exemption in Rule 15Ba1-
1(d)(3)(vii)).
    \287\ The Commission also notes that it has brought several 
enforcement actions involving investment of proceeds in guaranteed 
investment contracts. See, e.g., In the Matter of Banc of America 
Securities, now known as Merrill Lynch, Pierce, Fenner & Smith 
Incorporated, successor by merger, AP File No. 3-14153, Securities 
Exchange Act Release No. 63451 (December 7, 2010) (Banc of America 
Securities LLC agreed to settle Commission charges of securities 
fraud for allegedly engaging in improper practices in connection 
with the bidding of reinvestment instruments used by municipal 
entities) (``Banc of America Settlement''); Securities and Exchange 
Commission v. UBS Financial Services Inc., Civil Action No. 11-CV-
2885 (D.N.J. May 4, 2011) (UBS agreed to settle Commission charges 
of securities fraud for allegedly fraudulently rigging over 100 
municipal bond reinvestment transactions) (``UBS Settlement''); 
Securities and Exchange Commission v. J.P. Morgan Securities LLC., 
Civil Action No. 11-CV-3877 (D.N.J. July 7, 2011) (J.P. Morgan 
agreed to settle Commission charges of allegedly fraudulently 
rigging at least 93 municipal bond reinvestment transactions) (``JP 
Morgan Settlement''); Securities and Exchange Commission v. Wachovia 
Bank N.A, now known as Wells Fargo bank, N.A., successor by merger., 
Civil Action No. 2:11-cv-07135-WJM-MF (D.N.J. December 8, 2011) 
(Wachovia Bank N.A. agreed to settle Commission charges of allegedly 
fraudulently rigging at least 58 municipal bond reinvestment 
transactions) (``Wachovia Settlement''); and Securities and Exchange 
Commission v. GE Funding Capital Market Services, Inc., Civil Action 
No. 2:11-cv-07465-WJM-MF (D.N.J. December 23, 2011). The 
reinvestment transactions in these cases involved the reinvestment 
of municipal bond proceeds in reinvestment instruments, including 
guaranteed investment contracts, forward purchase contracts, and 
repurchase agreements.
---------------------------------------------------------------------------

vii. Issuance of Municipal Securities
    Section 15B(e)(4)(A) of the Exchange Act provides in relevant part 
that a municipal advisor includes a person that provides advice to or 
on behalf of a municipal entity or obligated person with respect to the 
``issuance of municipal securities,'' including advice with respect to 
``the structure, timing, terms, and other similar matters'' concerning 
such issues. Section 3(a)(29) of the Exchange Act defines the term 
``municipal securities.'' \288\ The broad statutory language in Section 
15B(e)(4)(A) of the Exchange Act regarding advice on ``the structure, 
timing, terms and other similar matters'' concerning such issues 
suggests that advice on a broad range of activities potentially may be 
included within advice with respect to the issuance of municipal 
securities.
---------------------------------------------------------------------------

    \288\ Specifically, Section 3(a)(29) of the Exchange Act defines 
the term ``municipal securities'' to mean ``securities which are 
direct obligations of, or obligations guaranteed as to principal or 
interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States, or any security which is an industrial development bond (as 
defined in section 103(c)(2) of the Internal Revenue Code of 1954) 
the interest on which is excludable from gross income under section 
103(a)(1) of such Code if, by reason of the application of paragraph 
(4) or (6) of section 103(c) of such Code (determined as if 
paragraphs 4(A), (5), and (7) were not included in such section 
103(c)), paragraph (1) of such section 103(c) does not apply to such 
security.'' See 15 U.S.C. 78c(a)(29) (emphasis added). Section 
3(a)(10) of the Exchange Act defines the term ``security.'' See 15 
U.S.C. 78c(a)(10).
---------------------------------------------------------------------------

    The scope of the concept of an ``issuance of municipal securities'' 
is particularly relevant to the ``advice'' aspect of the municipal 
advisor definition, as discussed previously herein,\289\ because a 
person's provision of advice to a municipal entity or obligated person 
only results in municipal advisor status if the subject of that advice 
involves either the ``issuance of municipal securities'' or ``municipal 
financial products.'' \290\ Several commenters recommended that the 
Commission provide guidance on the extent to which activities would be

[[Page 67490]]

considered ``advice with respect to the issuance of municipal 
securities.'' \291\ One commenter suggested that the municipal advisor 
registration provision in Section 975 of the Dodd-Frank Act is intended 
to cover advice on certain listed activities within broad categories, 
including certain ``strategic services,'' ``transaction-related 
services, and ``post-issuance related services.'' \292\ One commenter 
recommended that such advice should be construed broadly, from a timing 
perspective, to include ``any advice provided in connection with a 
municipal securities issue . . . at any point during the pre-issuance 
planning process as well as throughout the life of the issuance through 
final payment of principal and interest on the securities (by reason of 
maturity, earlier redemption, or otherwise, or for such longer period 
due to delayed payment such as the case of a payment default). . . .'' 
\293\ Another commenter recommended that such advice should not extend 
to advice after the closing of a specific bond issue.\294\
---------------------------------------------------------------------------

    \289\ See supra Section III.A.1.b.i. (discussing the advice 
standard in general).
    \290\ See supra Section III.A.1.b.iv. (discussing the term 
``municipal financial products'').
    \291\ See, e.g., MSRB Letter I and NAIPFA Letter I.
    \292\ See MSRB Letter II. Other commenters discussed whether the 
types of covered activities described by the MSRB should be narrower 
or broader in the context of the underwriter exclusion. See NAIPFA 
Letter II and Baum Letter.
    \293\ See MSRB Letter I.
    \294\ See NAIPFA Letter I.
---------------------------------------------------------------------------

    The Commission generally agrees that activities covered by the 
subject of the ``issuance of municipal securities'' should be construed 
broadly as a matter of statutory construction and policy to ensure 
appropriate protection of municipal entities with respect to advice 
received relating in some way to the issuance of municipal securities 
and to limit the potential for circumvention of the municipal advisor 
registration provision. As discussed previously herein, however, the 
determination of whether any particular activity constitutes ``advice'' 
in the first instance for purposes of the municipal advisor definition 
depends on all the facts and circumstances.\295\ The Commission also 
agrees that ``advice with respect to the issuance of municipal 
securities'' should be construed broadly from a timing perspective to 
include advice throughout the life of an issuance of municipal 
securities, from the pre-issuance planning stage for a debt transaction 
involving the issuance of municipal securities to the repayment stage 
for those municipal securities. This interpretation would afford 
municipal entities and investors with the protections of the municipal 
advisor registration provision during a time frame that may involve 
advice on significant matters affecting issues of municipal securities. 
In this regard, municipal issuers may make significant decisions 
affecting the structure, timing, terms, or other similar matters 
concerning an issue of municipal securities early in the planning 
stages of a transaction and may make significant decisions affecting 
ongoing compliance, repayment, or refinancing throughout the term of an 
outstanding bond issue.
---------------------------------------------------------------------------

    \295\ See supra Section III.A.1.b.i. (discussing the advice 
standard in general).
---------------------------------------------------------------------------

    In addition, the scope of the concept of the issuance of municipal 
securities also is particularly relevant to the statutory exclusion to 
the municipal advisor definition for broker-dealers serving as 
underwriters, because the underwriting function involves certain 
activities that relate to the issuance of municipal securities. The 
exclusion for underwriters from the definition of municipal advisor is 
limited to activities that are within the scope of an underwriting of a 
particular issuance of municipal securities. For purposes of the 
underwriting exclusion to the municipal advisor definition, the 
function of serving as underwriter on a particular issuance of 
municipal securities is more circumscribed and encompasses services on 
a particular transaction during a narrower time frame than the overall 
focus of the municipal advisor definition with respect to advice on the 
issuance of municipal securities (which involves a broader focus and 
longer time frame), as discussed further herein.\296\
---------------------------------------------------------------------------

    \296\ See generally infra Section III.A.1.c.iv. (discussing the 
underwriter exclusion). The time frame for the underwriter role 
generally begins upon the municipal issuer's engagement of the 
underwriter for a particular issuance of municipal securities and 
ends at the end of the underwriting period for that issuance. See 
infra notes 589-591 and accompanying text.
---------------------------------------------------------------------------

viii. Investment Strategies
    Exchange Act Section 15B(e)(3) provides that the term ``investment 
strategies'' ``includes'' plans or programs for the investment of the 
proceeds of municipal securities that are not municipal derivatives, 
guaranteed investment contracts, and the recommendation of and 
brokerage of municipal escrow investments.\297\ The Commission proposed 
to interpret the term to mean that it includes, without limitation, the 
investment of the proceeds of municipal securities and plans, programs, 
or pools of assets that invest any other funds held by, or on behalf 
of, a municipal entity.\298\ As such, under the proposed interpretation 
of the statutory definition, any person that provides advice with 
respect to such funds would have to register as a municipal advisor 
unless the person was covered by an exclusion or exemption.\299\
---------------------------------------------------------------------------

    \297\ 15 U.S.C. 78o-4(e)(3).
    \298\ See Proposal, 76 FR 830.
    \299\ See id.
---------------------------------------------------------------------------

Plans or Programs for the Investment of the Proceeds of Municipal 
Securities
    In the Proposal, the Commission asked whether its interpretation of 
the term ``investment strategies'' should be modified or clarified in 
any way.\300\ Specifically, the Commission asked whether it should 
exclude plans, programs, or pools of assets that invest funds that are 
not proceeds of the issuance of municipal securities.\301\ The 
Commission also asked how it would determine when funds should no 
longer be considered ``proceeds of municipal securities'' if it were to 
limit investment strategies to ``plans or programs for the investment 
of the proceeds of municipal securities (other than municipal 
derivatives and guaranteed investment contracts) or the recommendation 
of or brokerage of municipal escrow investments.'' \302\
---------------------------------------------------------------------------

    \300\ See id., at 835.
    \301\ See id.
    \302\ See id.
---------------------------------------------------------------------------

    Commenters generally opposed the proposed interpretation of 
investment strategies. Many commenters stated that the proposed 
interpretation was too broad, because it covers any fund held by a 
municipal entity, regardless of its source.\303\ Some commenters 
asserted that the proposed interpretation is contrary to the language 
and intent of the Dodd-Frank Act \304\ and suggested

[[Page 67491]]

that the definition be restricted so that it applies only to the 
statutorily-identified categories of investments of proceeds of 
municipal securities and recommendation of and brokerage of municipal 
escrow investments.\305\ One commenter stated that the ``expanded 
definition'' of investment strategies is not required or even implied 
by the Dodd-Frank Act and would subject a ``vast swath of activity--
which was not intended to be, and need not be, further regulated--to 
additional regulation.'' \306\
---------------------------------------------------------------------------

    \303\ See, e.g., letter from Representative Kenny Marchant, 
dated March 11, 2011 (``Marchant Letter''); SIFMA Letter I; NABL 
Letter; American Bankers Association Letter I; letter from Mike 
Nicholas, Chief Executive Officer, Bond Dealers of America, dated 
February 22, 2011 (``Bond Dealers of America Letter''). See also 
letters from Representative Todd Russell Platts, dated April 7, 2011 
(``Platts Letter''); Representatives Peter Welch, Thomas Petri and 
Bill Shuster, dated April 5, 2011 (``Welch Letter''); John Walsh, 
Acting Comptroller of the Currency, Office of the Comptroller of the 
Currency, dated May 24, 2011 (``OCC Letter''); Senator Tim Johnson, 
dated June 9, 2011 (``Johnson Letter''); Brian H. Graff, Craig P. 
Hoffman, Ilene H. Ferenczy, Judy A. Miller, Mark Dunbar, and James 
Paul, American Society of Pension Professionals & Actuaries and the 
National Tax Sheltered Accounts Association, dated April 15, 2011 
(``American Society of Pension Professionals Letter''); Brian D. 
McCoubrey, President and Chief Executive Office, The Savings Bank, 
dated February 17, 2011 (``Savings Bank Letter''); Celeste Embrey, 
Assistant General Counsel, Texas Bankers Association, dated February 
21, 2011 (``Texas Bankers Association Letter''). See also infra 
Section III.A.1.c.viii. (discussing an exclusion from the definition 
of ``municipal advisor'' for banks).
    \304\ See, e.g., Marchant Letter; SIFMA Letter I; NABL Letter; 
Kutak Rock Letter; letter from Michael B. Koffler, Sutherland Asbill 
& Brennan LLP on behalf of Massachusetts Life Insurance Company, 
Nationwide Life Insurance Company and The Prudential Insurance 
Company of America, dated February 22, 2011 (``Insurance Companies 
Letter''). See also Platts Letter; Welch Letter; Johnson Letter; 
American Society of Pension Professionals Letter. Other than 
referring to statutory language, none of these letters offered other 
evidence of such intent.
    \305\ See, e.g., SIFMA Letter I; NABL Letter; ABA Letter; Bond 
Dealers of America Letter; letter from Karrie McMillan, General 
Counsel, Investment Company Institute, dated February 22, 2011 
(``ICI Letter''). See also Marchant Letter and Platts Letter.
    \306\ SIFMA Letter I. See also NABL Letter.
---------------------------------------------------------------------------

    On the other hand, one commenter agreed with the Commission that 
the use of the word ``includes'' in the statutory definition of 
investment strategies suggests that the term is not limited to plans or 
programs for the investment of the proceeds of municipal 
securities.\307\ This commenter stated its belief, however, that 
Congress intended the definition to be limited to investment activities 
that relate to the securities and securities-like vehicles of a 
municipal entity, rather than all investment activities of municipal 
entities.\308\
---------------------------------------------------------------------------

    \307\ See MSRB Letter.
    \308\ See id.
---------------------------------------------------------------------------

    In a similar vein, commenters suggested that the definition should 
encompass only plans or programs for investments in financial 
instruments, as opposed to investments in, for example, infrastructure, 
real estate, social welfare, and other non-financial investments.\309\ 
Another commenter stated that, with respect to the funds held by or on 
behalf of a municipal entity, whether a person is providing advice 
regarding the ``investment of'' those funds, not other expenditure or 
use of the funds for non-investment purposes, is the determining factor 
for deciding that a person is a municipal advisor.\310\
---------------------------------------------------------------------------

    \309\ See NABL Letter. See also SIFMA Letter I (stating that 
``the [Commission] should clarify that the term [investment 
strategies], in any case, does not include local government 
investment pools, purchases of real estate or expenditures for, 
among others, infrastructure, equipment and personnel, which often 
are described as `infrastructure investments' '').
    \310\ See SIFMA Letter I.
---------------------------------------------------------------------------

    One commenter stated that a ``plan or program,'' as used in the 
statutory definition of investment strategies, is a series of 
investment related actions that would be generally akin to a financial 
plan, not merely advice incidental to a particular trade or 
investment.\311\ Another commenter urged the Commission to limit 
investment strategies to advice articulated as a part of the investment 
plan for the proceeds of a municipal securities offering at or before 
the time the proceeds are received.\312\
---------------------------------------------------------------------------

    \311\ See SIFMA Letter I. See also American Bankers Association 
Letter I (stating that the term ``investment strategy'' by 
definition ``contemplates a series of steps to reach a particular 
investment goal'') and Financial Services Institute Letter.
    \312\ See James S. Keller, Chief Regulatory Counsel, The PNC 
Financial Services Group, Inc., dated February 22, 2011 (``PNC 
Financial Services Letter'').
---------------------------------------------------------------------------

    Some commenters asserted that public pension plans, participant 
directed investment programs or plans such as 529 Savings Plans and 
403(b) and 457 plans were not intended to be regulated under the 
Exchange Act or the Dodd-Frank Act and should not be covered under the 
definition of investment strategies.\313\ According to these 
commenters, the Dodd-Frank Act was intended to regulate those who 
provide advice regarding the issuance of municipal bonds and the 
investment of offering proceeds.\314\ Therefore, these commenters 
argue, all governmental retirement plans should be excluded from the 
definition of investment strategies. Alternatively, one commenter 
suggested that, at the very least, governmental retirement and savings 
plans that are funded exclusively through the contribution of the 
employees as participants should be excluded.\315\ Another commenter 
stated that the phrase ``plans or programs for the investment of 
proceeds of municipal securities'' implies that the purpose of the plan 
or program is to invest proceeds of municipal securities, whereas the 
purpose of public pension plans is to provide retirement benefits.\316\ 
Another commenter suggested that municipal securities regulation was 
originally intended to regulate the issuance of investment instruments 
by a municipal entity under which the municipal entity is required to 
pay the investor in accordance with the terms of the investment.\317\ 
The commenter stated that state employee pension plans, 529 Savings 
Plans, and assets invested by the state are not investment instruments 
issued by the state to investors.\318\ As such, the commenter stated 
that they were never intended to be, nor should they now be, regulated 
under the Exchange Act or the Dodd-Frank Act.\319\
---------------------------------------------------------------------------

    \313\ See, e.g., Utah Retirement Systems Letter; letter from 
Jeffrey W. States, State Investment Officer, Nebraska Investment 
Council, dated February 15, 2011 (``Nebraska Investment Council 
Letter''); letter from Lisa Tate, Vice President, Litigation & 
Associate General Counsel, dated February 22, 2011 (``ACLI 
Letter''); letter from Gary A. Sanders, Vice President--Securities & 
State Government Relations, National Association of Insurance and 
Financial Advisors, dated June 13, 2011 (``National Association of 
Insurance and Financial Advisors Letter''); letter from Ethan E. 
Kra, Vice President, Pension Practice Council and William R. 
Hallmark, Chair, Public Plans Subcommittee, American Academy of 
Actuaries, dated June 15, 2011 (``American Academy of Actuaries 
Letter'').
    \314\ See American Society of Pension Professionals Letter; 
American Academy of Actuaries Letter; Fraser Stryker Letter.
    One commenter stated that governmental retirement plans should 
not be considered investment strategies unless the employer funds 
such plans with proceeds from the issuance of pension obligation 
bonds. See Fraser Stryker Letter.
    \315\ See American Society of Pension Professionals Letter.
    \316\ See American Academy of Actuaries Letter.
    \317\ See Nebraska Investment Council Letter.
    \318\ See id.
    \319\ See id. This commenter pointed out that the terms 
``securities'' and ``municipal securities'' were not changed by the 
Dodd-Frank Act. As such, this commenter stated that, ``[w]ith 
respect to the grant of authority to the [Commission] over the 
`issuance of municipal securities,' there has been no change under 
the Dodd-Frank Act to justify the expansion of the [Commission's] 
authority.'' Further, the commenter noted that the statutory 
definition of investment strategies indicates that plans and 
programs that are intended to be covered must relate to the proceeds 
of municipal securities. The commenter argued that the definition of 
municipal entity was not intended to expand the types of assets 
regulated by the Commission and stated that ``[t]he underlying 
notion that the [Commission] is still regulating `municipal 
securities' should not be disregarded without a clear Congressional 
mandate, which must necessarily include a change to the definition 
of `municipal security.' '' Additionally, this commenter stated 
that, since government plans are specifically exempt from ERISA, 
``[t]he proposed rule seems to be an end-run around ERISA, now 
subjecting the fiduciaries of these state plans to federal oversight 
without a Congressional directive to do so.'' But see infra note 320 
and accompanying text (discussing the MSRB Letter, which argues that 
some 529 Savings Plans are municipal fund securities).
---------------------------------------------------------------------------

    On the other hand, one commenter stated that the term ``investment 
strategies'' should include any type of investment strategy or advice 
relating to the investment of funds of investors or other vested 
persons held in any plan, program, or pool of assets sponsored or 
established by a state, political subdivision, or municipal corporate 
instrumentality, or any agency, authority, or instrumentality thereof, 
such as those created in connection with municipal fund securities, 
including but not limited to 529 Savings Plans and state and local 
government investment pools.\320\ This commenter further stated that 
public defined contribution pension plans should also fall within the 
definition, because these plans share many of the same potential 
impacts on third-party beneficiaries and

[[Page 67492]]

are generally exempt from the protections afforded by ERISA to private 
pension funds.\321\
---------------------------------------------------------------------------

    \320\ See MSRB Letter.
    \321\ See id.
---------------------------------------------------------------------------

    The same commenter stated that funds should cease to be subject to 
the definition of investment strategies once their investment is no 
longer governed by legal documents or covenants governing the use of 
such funds.\322\ Similarly, another commenter stated that proceeds 
should mean proceeds raised in securities offerings, until they are 
used for the purposes described in the use of proceeds section in the 
offering document, or otherwise commingled with the general funds of 
the municipal entity.\323\ Additionally, one commenter suggested that 
``proceeds'' should not extend to ``replacement proceeds'' such as 
pledge funds.\324\
---------------------------------------------------------------------------

    \322\ See id. This commenter stated that professionals advising 
on, or executing investments of, public funds that are not subject 
to specific restrictions or covenants, other than municipal 
derivatives or guaranteed investment contracts, would instead be 
subject to existing applicable investment adviser, broker-dealer, or 
bank regulations governing such transactions.
    \323\ See ABA Letter.
    \324\ See NABL Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered the issues raised by 
commenters on the Proposal. As noted above, Exchange Act Section 
15B(e)(3) defines investment strategies to include plans or programs 
for the investment of the proceeds of municipal securities that are not 
municipal derivatives, guaranteed investment contracts, and the 
recommendation of and brokerage of municipal escrow investments.\325\ 
In response to comments on the proposed definition of ``investment 
strategies,'' the Commission is adopting Rule 15Ba1-1(b), which defines 
``investment strategies'' as having ``the same meaning as in section 
15B(e)(3) of the Act (15 U.S.C. 78o-4(e)(3)), and includes plans or 
programs for the investment of proceeds of municipal securities that 
are not municipal derivatives or guaranteed investment contracts, and 
the recommendation of and brokerage of municipal escrow investments.'' 
\326\
---------------------------------------------------------------------------

    \325\ The application of the term ``municipal financial 
products'' to ``municipal derivatives'' and ``guaranteed investment 
contracts'' is discussed above. See supra Sections II.A.1.b.v. and 
vi., respectively. The term ``municipal escrow investments'' is 
described in more detail below in this Section III.A.1.b.viii.
    \326\ While the definition of ``investment strategies'' in Rule 
15Ba1-1(b), as adopted, is consistent with the definition of 
``investment strategies'' in Section 15B(e)(3) of the Act, this 
definition, as adopted, clarifies the Commission's interpretation 
that investment strategies specifically excludes municipal 
derivatives and guaranteed investment contracts, as these products 
are expressly included in the definition of municipal financial 
product, as defined by Section 15B(e)(5) of the Act and Rule 15Ba1-
1(i), as adopted. This interpretation is consistent with the 
Commission's interpretation in the Proposal. See Proposal, 76 FR 
830-831.
---------------------------------------------------------------------------

    While the Commission continues to believe that the term 
``includes'' is not limiting,\327\ the Commission is adopting a 
definition of ``investment strategies'' that, as compared to the 
definition in the Proposal, focuses more narrowly on the statutorily-
identified categories of ``proceeds of municipal securities'' and 
``municipal escrow investments.'' In this regard, the Commission is 
adopting Rule 15Ba1-1(d)(3)(vii), which will effectively narrow the 
focus of the term ``investment strategies'' to investments of proceeds 
of municipal securities and the recommendation of and brokerage of 
municipal escrow investments. Specifically, Rule 15Ba1-1(d)(3)(vii), as 
adopted, exempts from the definition of municipal advisor any person 
that provides advice to a municipal entity or obligated person with 
respect to municipal financial products to the extent that such person 
provides advice with respect to investment strategies that are not 
plans or programs for the investment of the proceeds of municipal 
securities or the recommendation of and brokerage of municipal escrow 
investments.
---------------------------------------------------------------------------

    \327\ Section 15B(e)(3) of the Exchange Act uses the word 
``including'' as expanding or illustrative, not as exclusive or 
limiting.
---------------------------------------------------------------------------

    Pursuant to Section 15B(a)(4) of the Exchange Act, the Commission 
may exempt any class of municipal advisors from any provision of 
Section 15B or the rules and regulations thereunder, if it finds that 
such an exemption is consistent with the public interest, the 
protection of investors, and the purposes of Section 15B.\328\ The 
Commission believes that providing the exemption described above is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 15B of the Exchange Act. The exemption tailors 
protection of municipal entities to those activities related to the 
investment of the proceeds of municipal securities and related 
municipal escrow investments, which are the specific categories of 
activities that Congress identified in the statutory definition of the 
term ``investment strategies'' and that the Commission believes have 
the most direct nexus to municipal securities and the protection of 
investors and municipal issuers in furtherance of the purposes of 
Section 15B.
---------------------------------------------------------------------------

    \328\ See 15 U.S.C. 78o-4(a)(4).
---------------------------------------------------------------------------

    In the Proposal, the Commission asked how it should determine when 
funds should no longer be considered proceeds of municipal securities, 
if it were to limit investment strategies to proceeds of municipal 
securities or the recommendation of or brokerage of municipal escrow 
investments.\329\ While the Exchange Act does not define the term 
``proceeds of municipal securities,'' the Federal tax laws provide a 
longstanding, known definition of ``proceeds'' of tax-exempt bonds 
issued by State and local governments, including related definitions of 
various types of proceeds (including ``gross proceeds,'' ``sale 
proceeds,'' ``investment proceeds,'' and ``transferred proceeds'') 
under Section 148 of the Internal Revenue Code of 1986, as 
amended,\330\ and Section 1.148-1 through 1.148-11 of the Regulations 
\331\ for the purpose of the arbitrage \332\ investment restrictions 
applicable to investments of proceeds of tax-exempt municipal 
securities. The arbitrage rules apply as long as the tax-exempt 
municipal securities are outstanding, and non-compliance with the 
arbitrage rules can result in the loss of the tax-exempt status of the 
interest on the municipal securities retroactively to the date of 
issuance. The Commission believes that the well-developed concept of 
proceeds of tax-exempt

[[Page 67493]]

municipal securities under the arbitrage rules is well-known to issuers 
and to the professional participants in the municipal marketplace.
---------------------------------------------------------------------------

    \329\ See Proposal, 76 FR 835.
    \330\ 26 U.S.C. 148.
    \331\ 26 CFR 148.1-148.11.
    \332\ Arbitrage, in the municipal securities context, is the 
profit earned by the municipal entity from borrowing funds in the 
tax-exempt market and investing them in the taxable market. The 
arbitrage rules have two main branches. The yield restriction branch 
of the rules generally limit the yield permitted on investments of 
proceeds of tax-exempt municipal securities to a yield that is not 
materially higher than the yield on the municipal securities; 
provided, however, specific exceptions permit unrestricted 
investment during certain temporary periods. The second branch of 
the arbitrage rules, the rebate branch, requires that any arbitrage 
that the municipal entity earns, including during a temporary 
period, must be rebated to the federal government, unless one of the 
several specific exceptions to the rebate requirement applies to the 
issue of municipal securities. Any issue of tax-exempt municipal 
securities can be subject to yield restriction, rebate, or both. The 
arbitrage rules and the various exceptions are important factors in 
the structuring of any tax-exempt issue of municipal securities. 
Under the arbitrage rules, gross proceeds include amounts covered by 
the following interrelated definitions. Sale proceeds are the gross 
cash amount paid by the purchasers for the securities at the initial 
sale of the issue. Investment proceeds are the amounts received from 
investing the proceeds of the issue. If proceeds of a refunding 
issue are used to pay off a prior issue, any remaining proceeds of 
the prior issue become, for tax purposes, transferred proceeds of 
the refunding issue. Proceeds, then, are sales proceeds plus 
investment proceeds plus transferred proceeds. Replacement proceeds 
are amounts that may be used to pay debt service. Gross proceeds are 
defined as proceeds plus replacement proceeds. See Frederic L. 
Ballard, Jr., ABCs of Arbitrage: Tax Rules for Investment of Bond 
Proceeds by Municipalities (Section of State and Local Government 
Law, American Bar Association, 2007) (``Ballard, ABCs of 
Arbitrage'').
---------------------------------------------------------------------------

    Some commenters that discussed ``proceeds of municipal securities'' 
did so by reference to Federal tax regulations and terms defined 
therein.\333\ Because the arbitrage rules governing the investment of 
bond proceeds are central to an issue of tax-exempt municipal 
securities and well-known in the municipal market, the Commission has 
determined to define proceeds of municipal securities in a similar 
manner and to apply the term to tax-exempt municipal securities and 
also to taxable \334\ municipal securities. Therefore, for purposes of 
the application of the definition of investment strategies and in 
response to comments raised on this issue,\335\ the Commission is 
adopting Rule 15Ba1-1(m)(1), which defines ``proceeds of municipal 
securities'' as (i) monies derived by a municipal entity from the sale 
of municipal securities, (ii) investment income derived from the 
investment or reinvestment of such monies, (iii) any monies of a 
municipal entity or obligated person held in funds under legal 
documents for the municipal securities that are reasonably expected to 
be used as security or a source of payment for the payment of the debt 
service on the municipal securities, including reserves, sinking funds, 
and pledged funds created for such purpose,\336\ and (iv) the 
investment income derived from the investment or reinvestment of monies 
in such funds.\337\ Further, consistent with the general definition of 
proceeds under the arbitrage rules, Rule 15Ba1-1(m)(1) also provides 
that when such monies are spent to carry out the authorized purposes of 
municipal securities, they cease to be proceeds of municipal 
securities.
---------------------------------------------------------------------------

    \333\ See, e.g., NABL Letter. In addition, as discussed below, 
some commenters suggested that a municipal entity should have the 
responsibility for tracking and characterizing proceeds because it 
is already required to do so under certain tax laws, implying that 
the definition of proceeds of municipal securities should be 
consistent with such definition under tax laws. See infra notes 361-
362 and accompanying text.
    \334\ Municipal issuers sometimes issue small amounts of taxable 
bonds in combination with tax-exempt bonds in the same offerings to 
finance costs that are ineligible for tax-exempt bond financing. The 
most significant recent type of taxable municipal securities was the 
temporary stimulus ``Build America Bond'' program, with respect to 
which approximately $181 billion were issued in 2009-2010 and the 
arbitrage rules on bond proceeds notably applied directly to those 
taxable municipal securities due to a Federal subsidy. The taxable 
bond sector of the municipal securities market represents a 
relatively small portion of the overall municipal securities market. 
For example, less than 9% of new issues in the municipal securities 
market in 2012 were taxable bonds, according to Thomson-Reuters 
data.
    \335\ See supra note 333 and accompanying text.
    \336\ Such applicable legal documents include, for example, the 
indentures, ordinances, or resolutions of the issuer of the 
municipal securities, and the resolutions, leases, loan agreements, 
or other agreements of an obligated person.
    \337\ See Rule 15Ba1-1(m)(1). See also supra notes 330-331 and 
accompanying text (discussing Federal tax laws and regulations 
related to the definition of proceeds).
---------------------------------------------------------------------------

    Rule 15Ba1-1(m), however, establishes an exception from the 
definition of proceeds of municipal securities. The exception provides 
that, solely for purposes of Rule 15Ba1-1(m), monies derived from a 
municipal security issued by an education trust established by a State 
under Section 529(b) of the Internal Revenue Code are not proceeds of 
municipal securities.\338\ Although interests in 529 Savings Plans may 
be municipal fund securities, and therefore municipal securities, 
monies derived from a municipal security issued by an education trust 
established under Section 529(b) come from individuals making 
investments for the purpose of prepaying or accumulating savings for 
higher education costs, and do not come from municipal entities. 
Because these monies are derived from individuals primarily for the 
benefit of these individuals and not municipal entities, the Commission 
does not believe persons engaged in activities with respect to these 
monies are appropriately governed by this registration regime.\339\
---------------------------------------------------------------------------

    \338\ See Rule 15Ba1-1(m)(2). See also supra notes 313-319 
(discussing comments regarding the inclusion of certain plans under 
``investment strategies'').
    \339\ Because monies in accounts of 529 Savings Plans are not 
included in the definition of proceeds of municipal securities for 
purposes of Rule 15Ba1-1(m), persons providing advice with respect 
to the investment of monies in 529 Savings Plans will not be 
required to register as municipal advisors based on this prong of 
the municipal advisor definition to the extent their municipal 
advisory activities are limited to such advice. See note 338 and 
accompanying text. However, a person that advises a municipal entity 
with respect to how to structure a 529 Savings Plan may be required 
to register as a municipal advisor. Interests in 529 Savings Plans 
are municipal securities, and such a person would be engaging in 
municipal advisory activities to the extent he or she provides 
advice with respect to the structure, timing, terms, or other 
similar matters concerning such an issuance unless an exclusion or 
exemption applies.
---------------------------------------------------------------------------

    Rule 15Ba1-1(m) also states that in determining whether or not 
funds to be invested constitute proceeds of municipal securities for 
purposes of Rule 15Ba1-1(m), a person may rely on representations in 
writing made by a knowledgeable official of the municipal entity or 
obligated person whose funds are to be invested regarding the nature of 
such funds, provided that the person has a reasonable basis for such 
reliance.\340\ This exemption is discussed in more detail below.
---------------------------------------------------------------------------

    \340\ See Rule 15Ba1-1(m)(3).
---------------------------------------------------------------------------

    The Commission notes that the exemption from the definition of 
``municipal advisor'' in Rule 15Ba1-1(d)(3)(vii) does not permit a 
person to avoid registering as a municipal advisor by stating that its 
advice is isolated or incidental and thus not within the meaning of 
``plan or program'' in the definition of investment strategies. The 
Commission is not persuaded by commenters who have stated that ``plan 
or program'' means a series of investment decisions \341\ and does not 
agree that this would be an appropriate interpretation of the statute. 
Any advice or recommendation with respect to the investment of proceeds 
not otherwise subject to an exclusion or exemption \342\ would be a 
municipal advisory activity, even if such advice or recommendation is 
not part of a series of investment-related actions or articulated as 
part of the investment plan for the proceeds at or before the time the 
proceeds are received.\343\ For example, advice or a recommendation 
with respect to a single trade or investment not otherwise subject to 
an exemption would be a municipal advisory activity, and the person 
providing such advice would not be exempt from the definition of 
municipal advisor pursuant to Rule 15Ba1-1(d)(3)(vii).
---------------------------------------------------------------------------

    \341\ See supra notes 311-312 and accompanying text.
    \342\ See, e.g., infra Section III.A.1.c.iv. (discussing an 
exemption for broker-dealers serving as underwriters).
    \343\ See supra notes 311-312 and accompanying text.
---------------------------------------------------------------------------

Commingling of Proceeds of Municipal Securities With Other Funds and 
Proceeds Determinations Generally
    In the Proposal, the Commission provided that commingled proceeds, 
regardless of when they lose their character as proceeds, would still 
constitute ``funds held by or on behalf of a municipal entity,'' but 
asked whether that interpretation was too broad.\344\ Additionally, the 
Commission asked what obligations parties other than a municipal entity 
should have in determining whether funds held by or on behalf of the 
municipal entity are proceeds of municipal securities.\345\
---------------------------------------------------------------------------

    \344\ See Proposal, 76 FR 836.
    \345\ See id., at 835.
---------------------------------------------------------------------------

    The Commission received a number of comments in response to these 
questions. One commenter stated ``[t]he Commission's proposed 
definition effectively reads out the statutory requirement to trace 
assets to the

[[Page 67494]]

proceeds of municipal securities[,]'' and ``[t]hus, an adviser 
providing advice to a municipal entity with respect to any plan, 
program or pool of assets--even if the plan, program or pool of assets 
did not consist of the proceeds of municipal securities (such as, for 
example, 529 Savings Plans and public pension plans)--would be required 
to register with the Commission if no exclusion is available.'' \346\ 
Some commenters stated that once the proceeds of a municipal offering 
are commingled with other funds, they lose their character as 
proceeds.\347\ Commenters also stated that subsequent investments of 
proceeds are not proceeds of municipal securities, unless the 
subsequent investment is part of the plan or program that was developed 
at the time of, and in connection with, the initial investment.\348\
---------------------------------------------------------------------------

    \346\ See ICI Letter. See also American Bankers Association 
Letter I and American Society of Pension Professionals Letter 
(stating that the Proposal indicated that the expansive definition 
of ``investment strategies'' avoids the need to trace the investment 
of proceeds of municipal securities commingled with other public 
funds and that this ``regulatory shortcut'' exceeds the authority 
granted under the Dodd-Frank Act).
    \347\ See, e.g., SIFMA Letter I; NABL Letter; letter from 
Catherine McClellan, Legal & Regulatory Affairs, SunTrust Banks, 
Inc., dated February 22, 2011 (``SunTrust Letter''); and Financial 
Services Roundtable Letter.
    \348\ See SIFMA Letter I. See also American Bankers Association 
Letter I.
---------------------------------------------------------------------------

    One commenter stated that a person should not be considered to be 
providing advice with respect to an investment strategy if he 
reasonably believes that the relevant funds are not from an account 
specifically for the proceeds of municipal securities issuances, unless 
the municipal entity or obligated person communicated otherwise.\349\ 
This commenter also stated that, depending on the Commission's 
interpretation of investment strategies, the adviser should only be 
considered a municipal advisor if the funds invested are proceeds of 
municipal securities, the adviser is aware of this fact, and there is 
no evidence of a sham.\350\ Another commenter further suggested that a 
municipal entity should have the responsibility for tracking and 
characterizing municipal proceeds.\351\ This commenter suggested that 
advisors should be entitled to reasonably rely on the municipal 
entity's representation since it is already required to track proceeds 
under certain state and Federal tax laws.\352\
---------------------------------------------------------------------------

    \349\ See SIFMA Letter I. See also BNY Letter (stating that 
``the Commission should clarify that a person would not be 
considered to provide advice that triggers municipal advisor status 
if the person reasonably believes that the funds for the financial 
activity on which the person is advising are from an account of the 
municipal entity or obligated person other than an account 
specifically for the proceeds of municipal securities or escrow 
funds that contains [sic] funds from multiple sources other than the 
initial proceeds of a municipal security'').
    \350\ See SIFMA Letter I.
    \351\ See Kutak Rock Letter. See also Financial Services 
Roundtable Letter.
    \352\ See Kutak Rock Letter (stating that commingled proceeds 
are required by federal tax laws (applicable to tax-exempt bonds) 
and state laws to be traced for use and investment purposes). 
Another commenter suggested that municipal entities, and not their 
municipal advisors, should have the responsibility for identifying 
any assets in accounts maintained at banks or broker-dealers that 
should be deemed proceeds. See Financial Services Roundtable Letter.
---------------------------------------------------------------------------

    One commenter stated that, in the context of obligated persons, 
only the investment of the proceeds of municipal securities, and not 
all monies of the obligated person, could be considered proceeds of 
municipal securities, even if the proceeds may be commingled with other 
monies for investment purposes.\353\ Further, another commenter urged 
the Commission to exclude investments of bond proceeds for the accounts 
of obligated persons when the investment is not pledged as security for 
a municipal securities issue.\354\ On the other hand, a different 
commenter stated that in no event should the definition of investment 
strategies apply to engagements with obligated persons, because 
obligated persons' funds are not held in plans, programs, or pools of 
assets that invest funds held by or on behalf of a municipal 
entity.\355\
---------------------------------------------------------------------------

    \353\ See Kutak Rock Letter.
    \354\ See NABL Letter. This commenter argued that, ``[s]ince 
only a small portion of an obligated person's investible assets may 
represent unspent proceeds of a municipal securities issue, and 
since it would not be apparent to investment advisors whether 
private entities are obligated persons unless the Commission limits 
municipal financial products to those pledged as security for a 
municipal securities issue, any more expansive reading of the term 
would impose an impossible diligence burden on corporate investment 
advisors.'' Id.
    \355\ See SIFMA Letter I.
---------------------------------------------------------------------------

    As discussed above, in response to comments, the Commission is 
adopting a definition of ``proceeds of municipal securities'' for 
purposes of the term ``investment strategies,'' which is consistent 
with Federal tax laws and regulations related to the definition of 
proceeds. This definition provides that when monies are spent to carry 
out the authorized purposes of the municipal securities, they cease to 
be proceeds of municipal securities.\356\ Under this definition and 
except as otherwise noted below, the mere fact that proceeds are 
commingled with other funds generally does not cause such monies to 
lose their character as proceeds. However, once the proceeds are spent 
to carry out an authorized purpose of the issuance of municipal 
securities, and the applicable legal documents or any other agreement 
pertaining to the investment of proceeds of municipal securities are no 
longer in effect, such funds will no longer constitute proceeds of 
municipal securities.
---------------------------------------------------------------------------

    \356\ See Rule 15Ba1-1(m)(1).
---------------------------------------------------------------------------

    The Commission does not agree with those commenters who argued that 
once the proceeds of a municipal offering are commingled with other 
funds, they lose their character as proceeds.\357\ The adopted 
definition of ``proceeds of municipal securities'' and the treatment of 
commingled proceeds are familiar concepts to market participants 
because they are consistent with Federal tax laws and regulations 
related to the definition of proceeds. The Commission believes this 
treatment of commingled proceeds will help to ensure that municipal 
advisors are registered and regulated as such until commingled proceeds 
are spent to carry out the authorized purposes of the municipal 
securities. Further, as discussed above, to assist a person in 
determining whether or not funds to be invested constitute proceeds of 
municipal securities, such person may rely on representations in 
writing made by a knowledgeable official of the municipal entity or 
obligated person whose funds are to be invested regarding the nature of 
such funds, provided that the person seeking to rely on such 
representations has a reasonable basis for such reliance.\358\ As noted 
below, municipal entities and obligated persons generally already track 
investments and ultimate expenditures of proceeds of tax-exempt 
municipal securities for authorized purposes in order to comply with 
certain state and tax Federal laws and governing legal documents 
pertaining to the investment of proceeds of municipal securities.\359\
---------------------------------------------------------------------------

    \357\ See supra note 347 and accompanying text.
    \358\ See Rule 15Ba1-1(m)(3).
    \359\ See infra note 361 and accompanying text.
---------------------------------------------------------------------------

    With respect to the tracing of proceeds after commingling, Federal 
tax arbitrage rules provide that if amounts of proceeds constituting 
investment earnings (excluding those of municipal escrow investments) 
on certain tax-exempt municipal securities (particularly governmental 
bonds and certain governmentally-owned private activity bonds) are 
deposited in a commingled fund with substantial tax or other revenues 
from governmental operations of the municipal issuer and the amounts 
are reasonably expected to

[[Page 67495]]

be spent for governmental purposes within six months from the date of 
the commingling, those proceeds are treated as spent at the time of 
commingling.\360\ This Federal tax arbitrage rule mainly benefits 
general purpose municipal entities (e.g., States, cities, and counties) 
with respect to very short-term investment practices involving their 
general fund accounts. The Commission likewise considers proceeds as 
spent at the time of such commingling in the context of municipal 
advisors because, as noted above, arbitrage rules governing the 
investment of bond proceeds are central to an issue of tax exempt 
municipal securities and are well-known in the municipal market. 
Because the approach the Commission is taking today is consistent with 
Federal tax arbitrage rules, it should be consistent with the current 
practice of municipal entities and obligated persons related to tracing 
proceeds of municipal securities. Further, because such proceeds are 
reasonably expected to be spent for governmental purposes within six 
months from the date of commingling, the Commission believes these 
proceeds involve shorter term investments and therefore are subject to 
lower risk. As a result, they raise less concern.
---------------------------------------------------------------------------

    \360\ See Treas. Reg. Sec.  1.148-6(d)(6).
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    The Commission believes that any person that does not satisfy the 
conditions for an exclusion or exemption from the definition of 
municipal advisor should know whether the person it is advising is a 
municipal entity or obligated person and whether the relevant funds 
constitute proceeds of municipal securities. As commenters stated, 
municipal entities and obligated persons generally already track 
investments and ultimate expenditures of proceeds of tax-exempt 
municipal securities for authorized purposes in order to comply with 
certain state and Federal tax laws and governing legal documents 
pertaining to the investment of proceeds of municipal securities.\361\ 
Thus, with respect to the tracing of proceeds of municipal securities 
to investments and expenditures for authorized purposes, the Commission 
does not believe that the municipal advisor registration regime will 
impose any significant additional burden on municipal entities, 
obligated persons, or municipal advisors.\362\
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    \361\ See Kutak Rock Letter. See also Financial Services 
Roundtable Letter.
    \362\ See, e.g., Kutak Rock Letter (noting that ``[a]dvisors 
should be entitled to reasonably rely on a municipal entity's 
tracking and characterization of the proceeds of municipal 
securities, as they are already entitled to do so under state and 
federal tax laws'').
---------------------------------------------------------------------------

Reasonable Reliance on Representations for Proceeds Determinations
    As set forth in Rule 15Ba1-1(m)(3), in determining whether or not 
relevant funds constitute proceeds of municipal securities for purposes 
of Rule 15Ba1-1(m), a person may rely on representations in writing 
made by a knowledgeable official of the municipal entity or obligated 
person whose funds are to be invested regarding the nature of such 
funds, provided the person has a reasonable basis for such 
reliance.\363\ Under Rule 15Ba1-1(m)(3), a person need not obtain a 
separate written representation each time an investment is made, and 
can instead rely on a prior written representation if the person has a 
reasonable basis for reliance. The Commission believes that a 
determination of whether or not a person has a reasonable basis to rely 
on a written representation requires reasonable diligence, based on all 
the facts and circumstances, including review of the written 
representation and other relevant information reasonably available to 
the person. For example, a person should not ignore information \364\ 
in the person's possession as a result of which such person would know 
that the representation is inaccurate. In such a circumstance, the 
person seeking to rely on the representation should make further 
inquiry to verify the accuracy of the representation in order to show a 
reasonable basis for the reliance. However, a person relying on a 
written representation generally need not independently verify all the 
information underlying the representation. Depending on the particular 
facts and circumstances, however, a person seeking to rely on such 
representations should take into account other information, including, 
but not limited to, information that is reasonably available to such 
person either as a result of the person's relationship with the 
municipal entity or obligated person or that is provided by other 
parties to the relevant transaction.\365\
---------------------------------------------------------------------------

    \363\ See Rule 15Ba1-1(m)(3).
    \364\ For example, such person may have acquired other 
information as a result of its interaction with the municipal entity 
or obligated person, either in connection with the transaction with 
respect to which it received the written representation or 
otherwise.
    \365\ The Commission notes that it has in other contexts 
expressed similar views on whether a person's reliance on 
information is reasonable. For example, under Regulation R, a bank 
or a broker-dealer satisfies its customer eligibility requirements 
if the bank or broker-dealer ``has a reasonable basis to believe 
that the customer'' is an institutional customer or high net worth 
customer before the time specified in the rule. See 17 CFR 247.701. 
When adopting Regulation R, the Commission stated that a bank or 
broker-dealer would have a ``reasonable basis to believe'' if it 
obtains a signed acknowledgment that the customer met the applicable 
standards, unless it had information that would cause it to believe 
that the information provided by the customer was or was likely to 
be false. See Definitions of Terms and Exemptions Relating to the 
``Broker'' Exceptions for Banks, Securities Exchange Act Release No. 
56501 (September 28, 2007), 72 FR 56514 (October 3, 2007).
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Municipal Escrow Investments
    Section 15B(e)(3) of the Exchange Act provides that the term 
investment strategies includes, in part, ``the recommendation of and 
brokerage of municipal escrow investments.'' \366\ However, Section 
15B(e) of the Exchange Act does not define the term ``municipal escrow 
investments.''
---------------------------------------------------------------------------

    \366\ 15 U.S.C. 78o-4(e)(3).
---------------------------------------------------------------------------

    Several commenters discussed the term ``municipal escrow 
investments'' as used in the context of investment strategies and some 
asked for further Commission guidance on the meaning of this term.\367\ 
For example, one commenter stated that Congress intended the term to be 
limited to accounts holding the proceeds of municipal securities 
pending deployment.\368\ Another commenter stated that municipal escrow 
investments means investments deposited in an escrow account to 
``defease'' \369\ municipal securities.\370\ Another commenter stated 
that municipal escrow investments are

[[Page 67496]]

investments of funds in a segregated escrow account established by the 
municipal entity or obligated person to hold funds that have been 
allocated for satisfying a specific and identified obligation of the 
municipal entity or obligated person and maintained by an escrow agent 
for the municipal entity or obligated person.\371\ One commenter stated 
that the Commission should recognize that the term ``municipal escrow 
investments'' has a different and narrower meaning than ``proceeds of 
municipal securities'' and is limited to investments held in an escrow 
account.\372\ This commenter also suggested that the Commission should 
clarify that merely providing brokerage of municipal escrow investments 
does not make a person a municipal advisor.\373\
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    \367\ See, e.g., ABA Letter and SIFMA Letter I.
    \368\ See letter from Charles W. Cary, Jr., Chief Investment 
Officer, Division of Investment Services, Employees' Retirement 
System of Georgia and Teachers Retirement System of Georgia, dated 
February 21, 2011 (``Teachers Retirement System Letter'').
    \369\ The MSRB provides the following definition for 
``defeasance'' or ``defeased''--``Termination of certain of the 
rights and interests of the bondholders and of their lien on the 
pledged revenues or other security in accordance with the terms of 
the bond contract for an issue of securities. This is sometimes 
referred to as a `legal defeasance.' Defeasance usually occurs in 
connection with the refunding of an outstanding issue after 
provision has been made for future payment of all obligations 
related to the outstanding bonds, sometimes from funds provided by 
the issuance of a new series of bonds. In some cases, particularly 
where the bond contract does not provide a procedure for termination 
of these rights, interests and lien other than through payment of 
all outstanding debt in full, funds deposited for future payment of 
the debt may make the pledged revenues available for other purposes 
without effecting a legal defeasance. This is sometimes referred to 
as an `economic defeasance' or `financial defeasance.' If for some 
reason the funds deposited in an economic or financial defeasance 
prove insufficient to make future payment of the outstanding debt, 
the issuer would continue to be legally obligated to make payment on 
such debt from the pledged revenues.'' See definition of 
``Defeasance'' or ``Defeased'' in Glossary of Municipal Securities 
Terms, MSRB (3d ed. 2013), available at http://msrb.org/glossary.aspx (``MSRB Glossary'').
    \370\ See Kutak Rock Letter.
    \371\ See SIFMA Letter I.
    \372\ See ABA Letter.
    \373\ See id. Rather, the commenter asserted that providing 
advice with respect to the recommendation of, and brokerage of, 
municipal escrow investments makes a person a municipal advisor.
---------------------------------------------------------------------------

    The Commission has carefully considered the issues raised by 
commenters on the Proposal and has determined to provide a definition 
for ``municipal escrow investments.'' \374\ For purposes of the 
definition of investment strategies, the Commission is defining 
``municipal escrow investments'' as proceeds of municipal securities 
and any other funds of a municipal entity that are deposited in an 
escrow account to pay the principal of, premium, if any, and interest 
on one or more issues of municipal securities.\375\ Because it is a 
separate component of the statutory definition of investment 
strategies, the Commission agrees with the comments that ``municipal 
escrow investments'' does not necessarily have the same meaning as 
``proceeds.'' \376\ At the same time, however, municipal escrow 
investments generally are funded with proceeds raised from the issuance 
of municipal securities in refunding or refinancing transactions to be 
used to provide for repayment of prior outstanding issues of municipal 
securities and these escrows also may include certain other funds, such 
as an issuer's cash contribution derived from revenues.\377\ In 
addition, municipal escrow investments may be funded in part from 
equity-type funds which may be viewed as equity or as a broad category 
of proceeds as a result of their escrow pledge to secure the 
outstanding municipal securities to be refinanced and their attendant 
close nexus to those municipal securities.\378\ The definition of 
municipal escrow investments provided herein, consistent with Rule 
15Ba1-1(d)(3)(vii), protects funds that are used for payment of the 
municipal securities issue, whether or not they are derived from the 
sale of municipal securities.
---------------------------------------------------------------------------

    \374\ See Rule 15Ba1-1(h).
    \375\ See Rule 15Ba1-1(h)(1).
    \376\ See Rule 15Ba1-1(m) (defining proceeds of municipal 
securities).
    \377\ See, e.g., Ballard, ABCs of Arbitrage at 169 (``A 
refunding escrow is any fund that contains proceeds of a refunding 
issue for use in paying principal or interest on a prior issue. 
Normally, an issuer will contribute either revenues or unspent prior 
issue proceeds to a refunding escrow in addition to proceeds of the 
refunding issue.). See also Treas. Reg. Sec.  1.148-1(b), which 
defines a ``refunding escrow'' generally to mean ``one or more funds 
established as part of a single transaction or a series of related 
transactions, containing proceeds of a refunding issue and any other 
amounts to provide for payment of principal or interest on one or 
more prior issues.'')
    \378\ See Treas. Reg. Sec.  1.148-1(b) (definitions of 
``proceeds'' and ``replacement proceeds,'' respectively).
---------------------------------------------------------------------------

    The Commission believes that this definition of municipal escrow 
investments is appropriate in order to protect both investors in 
municipal securities and municipal entities for reasons discussed 
further below. These municipal escrow investments typically involve 
investments of significant amounts of proceeds of municipal securities 
for long periods of time linked to call restrictions or maturities of 
refunded debt. These features make municipal escrow investments 
particularly vulnerable to abuse, and in fact significant investment 
pricing abuses have occurred in the area of municipal escrow 
investments in the past and the potential for future pricing abuses 
continues to exist in this area.\379\ In one particularly notable 
historic example, pricing abuses involving municipal escrow investments 
were the subject of a major joint enforcement initiative involving the 
Commission, the Internal Revenue Service, and the U.S. Attorney for the 
Southern District of New York that affected a large number of major 
broker-dealers with respect to artificially high prices on U.S. 
Treasury securities charged by such dealers in sales of such securities 
to municipal entities to fund municipal escrow investments.\380\
---------------------------------------------------------------------------

    \379\ See generally Robert A. Fippinger, The Securities Law of 
Public Finance (3rd Ed. 2012) at Sec.  14:12 entitled ``Markup 
Fraud: Yield Burning.''
    \380\ See SEC Press Release No. 2000-45 (April 6, 2000), in 
which the SEC announced a global settlement with 17 broker-dealers 
with respect to pricing abuses in municipal escrow investments. The 
artificial pricing practices are known as ``yield-burning'' and this 
settlement is known as the ``global yield-burning settlement.''
---------------------------------------------------------------------------

    The Commission notes that a person merely providing brokerage of 
municipal escrow investments would not be a municipal advisor if such 
person does not provide advice with respect to such investments.\381\ 
The purchase and sale of escrow investments upon the direction of an 
obligated person or its financial advisor without rendering advice is 
merely a provision of brokerage services and does not render such 
person a municipal advisor. It is the provision of advice to or on 
behalf of a municipal entity or obligated person with respect to 
municipal escrow investments that renders a person a municipal 
advisor.\382\
---------------------------------------------------------------------------

    \381\ See infra Section III.A.1.c.iv. at notes 642-645 and 
accompanying text (discussing that certain routine selling 
activities would not constitute municipal advisory activities).
    \382\ See also infra notes 637-641 and accompanying text 
(discussing when advice given by a broker-dealer is considered to be 
``solely incidental'' to the conduct of his business as a broker or 
dealer).
---------------------------------------------------------------------------

    Also, consistent with the definition of proceeds of municipal 
securities that the Commission is adopting, the Commission is including 
a written representation component in the definition of municipal 
escrow investments. Accordingly, Rule 15Ba1-1(h)(2) states that, in 
determining whether or not funds to be invested or reinvested 
constitute municipal escrow investments for purposes of Rule 15Ba1-
1(h), a person may rely on representations in writing made by a 
knowledgeable official of the municipal entity or obligated person 
whose funds are to be invested or reinvested regarding the nature of 
such investments, provided that the person seeking to rely on such 
representations has a reasonable basis for such reliance.\383\ As with 
the written representation component under the definition of proceeds 
of municipal securities, under Rule 15Ba1-1(h), a person need not 
obtain a separate written representation each time an investment is 
made, and can instead rely on a prior written representation if the 
person has a reasonable basis for reliance. For this purpose, the same 
standard and principles apply in determining whether a person has a 
reasonable basis for such reliance as discussed previously with respect 
to reliance on representations regarding proceeds determinations.\384\
---------------------------------------------------------------------------

    \383\ See Rule 15Ba1-1(h)(2).
    \384\ See supra notes 364-365 and accompanying text.
---------------------------------------------------------------------------

Other Comments on the Scope of the Proposed Interpretation of 
``Investment Strategies''
    In addition to responses to specific requests for comment, the 
Commission received a number of other comments regarding its proposed 
interpretation of the statutory definition of investment

[[Page 67497]]

strategies. For example, one commenter requested that the Commission 
clarify that the term ``investment strategies'' does not include 
separate accounts supporting insurance contracts or their underlying 
investment vehicles.\385\ The commenter reasoned that the funds 
invested in such insurance contracts are not proceeds of municipal 
securities, but are employer and employee contributions.\386\ Another 
commenter argued that the term ``municipal financial product'' should 
not include ``an insurance product tailored to a municipal entity,'' 
because ``such products . . . are already quite well regulated.'' \387\
---------------------------------------------------------------------------

    \385\ See Committee of Annuity Insurers Letter I.
    \386\ See id. The commenter explained that variable annuity 
contracts issued by its members are supported by insurance company 
separate accounts. Insurance company separate accounts could be 
limited to insurance contracts issued only to governmental 
retirement plans. The commenter noted that, if the Commission adopts 
its proposal to define municipal entity as including 457 plans and 
403(b) plans, these insurance company separate accounts could then 
be viewed as pooled investment vehicles limited to municipal entity 
investors (i.e., 457 plans and 403(b) plans). The commenter noted 
that the definition of investment strategies could be read to imply 
that an insurance company separate account, whose assets are limited 
to contributions from insurance contracts held by governmental 
retirement plans, is an investment strategy. The commenter stated 
that it has found no indication in the legislative history that 
Congress intended this result. The commenter noted that the funds 
invested in these insurance contracts are not proceeds of municipal 
securities, but rather employer and employee contributions. In the 
case of employee contributions from salary deduction arrangements, 
such salary funds are equity funds of the employees upon receipt, 
regardless of the source of those salaries, and thus are not 
proceeds of municipal securities.
    \387\ See Kutak Rock Letter.
---------------------------------------------------------------------------

    The Commission agrees that employee contributions are not proceeds 
of municipal securities because these funds are derived from salary 
deduction arrangements with individual employees and not from the 
issuance of a municipal security. Therefore, a person providing advice 
with respect to such contributions would be exempt from the definition 
of municipal advisor to the extent their municipal advisory activities 
are limited to such advice. Whether a person providing advice with 
respect to employer contributions will be exempt, however, will depend 
upon whether such funds are proceeds of municipal securities. In 
general, public pension plans do not include proceeds of municipal 
securities because proceeds of tax-exempt municipal securities 
generally cannot be spent to fund investments for pension 
liabilities.\388\ Further, the Commission agrees that a person 
providing advice with respect to other insurance products tailored to a 
municipal entity would not be engaged in municipal advisory activities 
if the insurance products do not involve the investment of proceeds of 
municipal securities because the final rules narrow the focus of the 
term ``investment strategies'' to those involving investments of 
proceeds of municipal securities and municipal escrow investments with 
a new exemption in Rule 15Ba1-1(d)(3)(vii).
---------------------------------------------------------------------------

    \388\ See 26 U.S.C. 148(a)(2) and Treas. Reg. Sec.  1.148-1(e) 
(investment property definition).
---------------------------------------------------------------------------

ix. Pooled Investment Vehicles
    As discussed above, the Commission proposed to interpret the 
statutory definition of the term ``investment strategies'' to include 
``pools of assets that invest funds held by or on behalf of a municipal 
entity.'' \389\ Further, as part of the discussion of the term 
``investment strategies,'' the Commission noted in the Proposal that, 
to the extent a person is providing advice to certain pooled investment 
vehicles in which a municipal entity has invested funds along with 
other investors, such pooled investment vehicles would not be 
considered funds ``held by or on behalf of a municipal entity.'' \390\ 
Consequently, a person providing advice to such vehicle would not have 
to register as a municipal advisor. However, the Commission noted that, 
to the extent that the pooled investment vehicle is a LGIP, the pooled 
investment vehicle would be considered to be funds ``held by or on 
behalf of'' a municipal entity and a person providing advice with 
respect to a LGIP would have to register as a municipal advisor, absent 
eligibility for some other exclusion or exemption.\391\
---------------------------------------------------------------------------

    \389\ See supra Section III.A.1.b.viii. See also proposed Rule 
15Ba1-1(b).
    \390\ See Proposal, 76 FR 830.
    \391\ See id., at note 98.
---------------------------------------------------------------------------

    The Commission requested comment on whether it should modify or 
clarify its proposed interpretation of the circumstances under which a 
pooled investment vehicle would be considered to involve funds ``held 
by or on behalf of a municipal entity,'' including whether the proposed 
interpretation should no longer apply if municipal entities are not 
considered to be the ``primary investors'' in the pooled investment 
vehicle or if funds of municipal entities exceed a certain threshold in 
the pooled investment vehicle.\392\ The Commission received several 
comment letters addressing the interpretation.
---------------------------------------------------------------------------

    \392\ See id., at 835.
---------------------------------------------------------------------------

    One commenter supported the Commission's proposed interpretation, 
without further request for modification.\393\ Two commenters opposed 
any approach to determine municipal advisory status based on whether 
municipal entities were the ``primary investors'' in the pooled 
vehicle, citing the difficulty of making such a determination on an 
ongoing basis.\394\ Another commenter urged the Commission to reiterate 
that an adviser to a pooled investment vehicle in which a municipal 
entity or obligated person invests is not a municipal advisor by virtue 
of providing advice to such a vehicle, and that purchasing an interest 
in a vehicle does not create an advisory engagement between the 
investor and the vehicle's adviser.\395\ This commenter suggested that, 
``so long as there is at least one bona fide investor that is not a 
municipal entity or obligated person, the adviser to the vehicle should 
not be a municipal advisor.'' \396\ The commenter also stated that not 
exempting advisors to pooled vehicles would particularly limit 
investment choices for public pension funds.\397\
---------------------------------------------------------------------------

    \393\ See American Bankers Association Letter I. This commenter 
urged the Commission to reiterate its position in the final rules 
and clarify that the interpretation applies to collective investment 
funds. A collective investment fund (``CIF'') is a bank-administered 
trust that holds commingled assets that meet specific criteria 
established by 12 CFR 9.18. The bank acts as a fiduciary for the CIF 
and holds legal title to the fund's assets. CIFs allow banks to 
avoid costly purchases of small lot investments for their smaller 
fiduciary accounts. See Office of the Comptroller of the Currency, 
Collective Investment Funds, available at http://www.occ.treas.gov/topics/capital-markets/asset-management/collective-investment-funds/index-collective-investment-funds.html. The Commission notes that a 
CIF would have to contain no proceeds of municipal securities or 
fall within an exclusion or exemption to not require municipal 
advisor registration. See infra Section III.A.1.c.viii. (discussing 
the bank exemption).
    \394\ See letter from Stuart J. Kaswell, Executive Vice 
President and Managing Director, General Counsel, Managed Funds 
Association, dated February 22, 2011 (``MFA Letter'') (stating that 
``imposing such an artificial threshold would create uncertainty for 
private fund managers, require burdensome, ongoing monitoring of the 
level of municipal entity investments, and limit or even prevent 
municipal entities from investing in private funds''). See also 
Kutak Rock Letter (suggesting that terminology involving the concept 
of ``municipal entities are the primary investors'' not be utilized, 
because ``it is too difficult to determine just what `primary' 
means[,]'' and that too many difficult questions regarding an 
objective, numbers-based approach used to determine primary 
investorship would arise).
    \395\ See SIFMA Letter I.
    \396\ Id.
    \397\ See id. Specifically, the commenter stated that absent the 
suggested exemptions, fewer pooled investment vehicles would be 
offered to municipal entities (particularly public pension plans) 
and obligated persons, which would disserve municipal entities and 
obligated persons by limiting their access to important vehicles for 
the long-term investment of their funds. The commenter also stated 
that local government investment pools are often the only available 
option for the short-term investment of operating funds and are 
subject to state laws, which often include a fiduciary duty. The 
commenter stated that the Proposal likely would reduce the number of 
local government investment pool options available to 
municipalities.

---------------------------------------------------------------------------

[[Page 67498]]

    The Commission has carefully considered these comments and is not 
adopting its proposed interpretation of when a pooled investment 
vehicle will be considered to be funds held by or on behalf of a 
municipal entity. It is also not adopting an interpretation that would 
tie the determination of whether a person providing advice to a pooled 
investment vehicle is a municipal advisor, to whether municipal 
entities are the primary investors in the pooled investment vehicle. 
Instead, consistent with the narrowed approach that the Commission is 
adopting for ``investment strategies,'' the Commission is interpreting 
a pooled investment vehicle to be an investment strategy, and an 
advisor to such a pool to be a municipal advisor, when the pooled 
investment vehicle contains proceeds of an issuance of municipal 
securities, regardless of whether all funds invested in the vehicle are 
funds of municipal entities.\398\ In such a case, an advisor to such a 
pooled investment vehicle will be required to register as a municipal 
advisor, unless an exclusion or exemption applies.
---------------------------------------------------------------------------

    \398\ See Rule 15Ba1-1(d)(1) (defining ``municipal advisor'') 
and Rule 15Ba1-1(b) (defining ``investment strategies'' as including 
the statutorily identified items: ``plans or programs for the 
investment of proceeds of municipal securities that are not 
municipal derivatives or guaranteed investment contracts, and the 
recommendation of and brokerage of municipal escrow investments'').
---------------------------------------------------------------------------

    The Commission recognizes commenters' concerns that requiring 
advisors to pooled investment vehicles that include funds of municipal 
entities to register as municipal advisors could have the effect of 
limiting investment choices for municipal entities, including 
investment choices for public pension funds. As noted above, however, 
the Commission is exempting from the definition of municipal advisor 
persons that provide advice with respect to investment strategies that 
are not plans or programs for the investment of the proceeds of 
municipal securities or the recommendation of and brokerage of 
municipal escrow investments.\399\ Contrary to the construction under 
the proposed definition of ``investment strategies,'' \400\ under the 
definition of ``investment strategies'' as adopted and the exemption in 
Rule 15Ba1-1(d)(3)(vii), whether or not the funds invested in a pooled 
investment vehicle are considered to be ``funds held by or on behalf of 
a municipal entity'' does not determine whether a person providing 
advice to such a vehicle is required to register as a municipal 
advisor. Rather, under the rule as adopted, the determination of 
whether a person providing advice to a pooled investment vehicle is 
required to register as a municipal advisor depends upon the narrower 
inquiry of whether the funds in the pooled investment vehicle 
constitute ``proceeds of municipal securities that are not municipal 
derivatives or guaranteed investment contracts, and the recommendation 
of and brokerage of municipal escrow investments.'' \401\ Also, the 
Commission notes that many advisors to pooled investment vehicles will 
be registered investment advisers or employees of municipal entities. 
Therefore, many advisors would or could be either exempted or excluded 
from registration as municipal advisors.\402\ Moreover, the Commission 
believes that this approach to pooled investment vehicles appropriately 
focuses protection on those activities related to investment of the 
proceeds of municipal securities and related escrow investments, with 
respect to which there has been significant enforcement activity.\403\
---------------------------------------------------------------------------

    \399\ See supra Section III.A.1.b.viii. (discussing the 
exemption as it relates to the application of the statutory 
definition of ``investment strategies'').
    \400\ See supra note 389 and accompanying text.
    \401\ See Rule 15Ba1-1(b).
    \402\ See infra Sections III.A.1.c.v. and III.A.1.c.i. 
(discussing, respectively, the exclusion for registered investment 
advisers and their associated persons and an exemption for employees 
of municipal entities and obligated persons).
    \403\ See supra note 287.
---------------------------------------------------------------------------

    One commenter expressed concern that pooled investment vehicles 
whose investors are limited to one or more municipal entities (e.g., a 
government retirement pension plan) would be considered investment 
strategies under the Proposal.\404\ This commenter suggested that the 
term ``investment strategies'' should not include insurance company's 
separate accounts supporting variable annuity contracts (and their 
underlying investment vehicles) offered to or held by municipal 
entities, even if the assets of the separate account are limited only 
to contributions from municipal entities.\405\
---------------------------------------------------------------------------

    \404\ See Committee of Annuity Insurers Letter I.
    \405\ See id.
---------------------------------------------------------------------------

    To the extent that an insurance company's separate accounts 
supporting variable annuity contracts offered to or held by municipal 
entities do not include ``proceeds of municipal securities,'' persons 
providing advice with respect to such accounts would not be required to 
register as municipal advisors because they would be exempt with 
respect to such municipal advisory activity.\406\ Specifically, the 
Commission notes that, as a result of the exemption in Rule 15Ba1-
1(d)(3)(vii) adopted today, a person providing advice with respect to 
investment strategies that are not ``plans or programs for the 
investment of the proceeds of municipal securities or the 
recommendation of and brokerage of municipal escrow investments'' will 
be exempt from the definition of municipal advisor with respect to such 
activities. Further, the definition of ``proceeds of municipal 
securities'' is limited to the monies derived by a municipal entity 
from the sale of municipal securities, investment income derived from 
such monies, and other monies of a municipal entity (or obligated 
person) held in funds under legal documents for the municipal 
securities that are reasonably expected to be used as security or a 
source of payment for the debt service on the municipal securities, and 
investment income from the investment or reinvestment of such 
funds.\407\ If, however, such separate accounts supporting variable 
annuity contracts offered to or held by municipal entities do include 
``proceeds of municipal securities,'' advice with respect to such 
accounts would not be eligible for the exemption in Rule 15Ba1-
1(d)(3)(vii) and such activity could be municipal advisory activity 
triggering the registration requirement.
---------------------------------------------------------------------------

    \406\ See Rule 15Ba1-1(d)(3)(vii).
    \407\ See supra Section III.A.1.b.viii. (discussing the 
exemption pursuant to Rule 15Ba1-1(d)(3)(vii), and the terms 
``investment strategies'' and ``proceeds of municipal securities'').
---------------------------------------------------------------------------

x. Solicitation of a Municipal Entity or Obligated Person
    The definition of municipal advisor in Exchange Act Section 
15B(e)(4) includes a person that undertakes a solicitation of a 
municipal entity or obligated person on behalf of specified 
persons.\408\ Exchange Act Section 15B(e)(9) provides that the term 
``solicitation of a municipal entity or obligated person''

[[Page 67499]]

means ``a direct or indirect communication with a municipal entity or 
obligated person made by a person, for direct or indirect compensation, 
on behalf of a broker, dealer, municipal securities dealer, municipal 
advisor, or investment adviser (as defined in section 202 of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-2]) that does not 
control, is not controlled by, or is not under common control with the 
person undertaking such solicitation for the purpose of obtaining or 
retaining an engagement by a municipal entity or obligated person of a 
broker, dealer, municipal securities dealer, or municipal advisor for 
or in connection with municipal financial products, the issuance of 
municipal securities, or of an investment adviser to provide investment 
advisory services to or on behalf of a municipal entity.'' \409\
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    \408\ See 15 U.S.C. 78o-4(e)(4)(A)(ii). The Commission notes 
that the definition of municipal advisor under Section 15B(e)(4)(A) 
means, in part, a person that ``undertakes a solicitation of a 
municipal entity.'' Also, Section 15B(a)(1)(B), which establishes 
the registration requirement, specifically refers to solicitations 
of obligated persons. Notwithstanding the omission of the term 
``obligated person'' in the definition of municipal advisor, the 
Commission interprets the definition of municipal advisor to include 
a person who engages in the solicitation of an obligated person 
acting in the capacity of an obligated person for the reasons 
discussed above. See supra note 138 and accompanying text.
    See also supra note 178 (citing Chapman and Cutler Letter and 
discussing that an obligated person does not become a municipal 
entity by virtue of issuing securities with respect to which it is 
an obligated person).
    \409\ 15 U.S.C. 78o-4(e)(9).
    The Commission notes that Rule 15Ba1-1(n) (which, as adopted, 
provides that the term ``solicitation of a municipal entity or 
obligated person'' has the same meaning as Section 15B(e)(9) of the 
Exchange Act, with certain exemptions) is only applicable with 
respect to whether or not a person meets the definition of municipal 
advisor and therefore will be required to register with the 
Commission (unless an exemption or exclusion applies). The 
Commission is not otherwise altering its interpretation of 
``solicitation'' as used in other contexts.
    As the Commission has explained, the Commission generally views 
solicitation, in the context of broker-dealers, as including any 
affirmative effort intended to induce transactional business. See 
Registration Requirements for Foreign Broker-Dealers, Securities 
Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30017-
18 (July 18, 1989) (explaining that solicitation includes, among 
other things, calls encouraging use of a party to effect 
transactions).
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    In connection with the statutory definition, the Commission 
discussed in the Proposal its interpretation of ``solicitation of a 
municipal entity or obligated person'' and stated in the Proposal that, 
unless an exclusion applies, any third-party solicitor that seeks 
business on behalf of a broker, dealer, municipal securities dealer, 
municipal advisor, or investment adviser from a municipal entity must 
register as a municipal advisor.\410\ The Commission noted that the 
determination of whether a solicitation of a municipal entity requires 
registration is not based on the number, or size, of investments that 
are solicited.\411\ The Commission also specifically stated that the 
exclusion from the definition of municipal advisor for a broker-dealer 
serving as an underwriter would not apply to a broker-dealer acting as 
a placement agent for a private equity fund that solicits a municipal 
entity or obligated person to invest in the fund.\412\
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    \410\ See Proposal, 76 FR 831. Thus, as stated in the Proposal, 
a third-party solicitor seeking business on behalf of an investment 
adviser from a municipal pension fund or LGIP would be required to 
register as a municipal advisor.
    In addition, depending on the facts and circumstances, the 
third-party solicitor may also need to register as a broker-dealer 
pursuant to Section 15(a) of the Exchange Act. See 15 U.S.C. 
78o(a)(1). See also supra note 409 (discussing solicitation in the 
context of broker-dealer regulation).
    \411\ See Proposal, 76 FR 831. As discussed in the Proposal, a 
solicitation of a single investment of any amount from a municipal 
entity would require the person soliciting the municipal entity to 
register as a municipal advisor.
    \412\ See id., at 832, note 108 and accompanying text.
    The Commission also noted that including such activities within 
the scope of municipal advisory activities is consistent with the 
Exchange Act. See id. (citing Exchange Act Sections 15B(e)(4)(A) and 
(B) (including placement agents and solicitors that undertake a 
solicitation of a municipal entity in the definition of municipal 
advisor); S. Rep. No. 176 at 148, 111th Cong., 2d. Sess. 148 (2010) 
(noting that Section 975 would not prohibit solicitation of a 
municipal entity, but would subject solicitors to the registration 
requirement and MSRB regulation); and letter from Senator 
Christopher J. Dodd, U.S. Senate Committee on Banking, Housing and 
Urban Affairs, to Elizabeth M. Murphy, Secretary, Commission, dated 
February 2, 2010).
---------------------------------------------------------------------------

    The Commission received approximately 14 comment letters regarding 
the definition of ``solicitation of a municipal entity or obligated 
person.'' As discussed in more detail below, a number of commenters 
requested further clarification regarding the statutory definition of, 
and the Commission's proposed interpretations of, that term. The 
Commission has carefully considered issues raised by commenters on its 
proposed interpretation and is adopting a rule \413\ to define 
``solicitation of a municipal entity or obligated person.'' The 
Commission's interpretation of ``solicitation of a municipal entity or 
obligated person'' in Rule 15Ba1-1(n) is substantially the same as its 
proposed interpretation, and includes certain clarifications discussed 
below designed to address commenters' concerns.\414\ In addition, the 
Commission notes that, both in its proposed interpretation and adopted 
rule, a broker, dealer, municipal securities dealer, municipal advisor, 
or investment adviser, soliciting on its own behalf, as explained below 
\415\--or an affiliate of a broker, dealer, municipal securities 
dealer, municipal advisor, or investment adviser soliciting on behalf 
of such entity--would not fall within the definition of ``solicitation 
of a municipal entity or obligated person.'' Accordingly, such person 
would not need to register as a municipal advisor.
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    \413\ See Rule 15Ba1-1(n).
    \414\ See id. See notes 419-420 and 446-447, and accompanying 
text (discussing Rule 15Ba1-1(n)).
    \415\ See text accompanying infra note 418.
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Mailings, Advertisements, and Other General Information
    Commenters stated that the Commission should explicitly exclude 
certain activities from the definition of solicitation of a municipal 
entity or obligated person. For example, one commenter recommended that 
``generic `mass mailing' solicitations, or institutional advertising'' 
should not be considered solicitation under the proposed rules, 
especially if such mass mailings are not targeted to a small group of 
particular municipal entities or obligated persons.\416\ This commenter 
noted that the same argument would apply with respect to newspaper or 
periodical ads, brochures, TV, radio, or Internet ads.\417\
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    \416\ See Kutak Rock Letter.
    \417\ See id.
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    The Commission agrees with commenters that advertisements \418\ or 
solicitations do not trigger an obligation for a third-party to 
register as a municipal advisor, provided such activity is undertaken 
by a broker, dealer, municipal securities dealer, municipal advisor, or 
investment adviser on behalf of itself as opposed to on behalf of a 
third party. Accordingly, the Commission is adopting Rule 15Ba1-1(n) 
with a clarification to address advertising and the scope of the rule 
with respect to solicitation of obligated persons.\419\ Specifically, 
Rule 15Ba1-1(n), as adopted, clarifies that ``solicitation of a 
municipal entity or obligated person'' does not include ``advertising 
by a broker, dealer, municipal securities dealer, municipal advisor, or 
investment adviser.'' \420\
---------------------------------------------------------------------------

    \418\ See, e.g., FINRA Rule 2210(a)(5) (defining a ``retail 
communication'' as meaning ``any written (including electronic) 
communication that is distributed or made available to more than 25 
retail investors within any 30 calendar-day period'').
    \419\ See Rule 15Ba1-1(n).
    \420\ Id.
    The Commission notes, however, that while such communications 
would not trigger the requirement to register as a municipal adviser 
under the solicitation prong of the definition of ``municipal 
adviser,'' depending on the facts and circumstances, including the 
content of such communications, such activity may be considered to 
be advice for purposes of the registration requirement. See supra 
Section III.A.1.b.i. (discussing the advice standard in general).
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Assistance With Requests for Proposals
    It is a relatively common industry practice for municipal entities 
to request that a financial advisor, bond counsel, or other market 
professional assist in the review of requests for proposals (``RFP'') 
for underwriter, financial advisory, or

[[Page 67500]]

investment advisory services.\421\ A person assisting a municipal 
entity or obligated person in selecting a broker-dealer, investment 
adviser, or financial advisor as part of an RFP process established by 
the municipal entity or obligated person would not be considered to be 
undertaking a solicitation for purposes of the definition of municipal 
advisor in Rule 15Ba1-1(d)(1), because such person would not be 
soliciting ``on behalf of'' such broker-dealer, investment adviser, or 
financial advisor.\422\ Such person could, however, be engaging in 
other municipal advisory activities with respect to assistance in the 
selection process.\423\
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    \421\ For example, one commenter expressed concern that an 
investment adviser providing advice to a client regarding the 
selection or retention of another investment manager could 
constitute a solicitation of a municipal entity or obligated person 
under Section 15B(e)(9) of the Exchange Act. See infra note 705 and 
accompanying text.
    \422\ See Rule 15Ba1-1(n) (defining solicitation of a municipal 
entity or obligated person).
    \423\ See infra note 556 and accompanying text. See also infra 
Section III.A.1.c.ii. (discussing generally responses to RFPs and 
municipal advisor registration). Moreover, such activity may 
constitute investment advice under the Investment Advisers Act. See, 
e.g., SEC v. Bolla, 401 F.Supp.2d 43 (D.D.C. 2005), aff'd in 
relevant part, SEC v. Washington Investment Network, 475 F.3d 392 
(D.C. Cir. 2007) (person selecting investment advisers for clients 
meets the Investment Advisers Act's definition of ``investment 
adviser'').
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Endorsement of Financial Products and Services by Associations
    The Commission received approximately nine comment letters from 
various associations that endorse third parties offering products and 
services to the associations' members (``endorsement 
arrangements'').\424\ According to commenters, in these endorsement 
arrangements, the third parties, which typically include investment 
advisers, broker-dealers, and mutual fund companies, compensate the 
associations or their for-profit subsidiaries through a royalty 
arrangement or through a marketing or sponsorship fee, depending on the 
association's level of involvement in providing information to its 
members.\425\ The commenters expressed concern that the associations' 
compensated endorsement of investment advisory, municipal advisory, or 
broker-dealer businesses to their members, some of whom are municipal 
entities, could potentially be interpreted as solicitation of a 
municipal entity or obligated person.\426\ Many of these commenters 
believed that the Proposal did not provide sufficient guidance about 
the statutory definition of ``solicitation.'' The statutory definition 
of solicitation includes ``direct or indirect communication with a 
municipal entity or obligated person,'' thus creating uncertainty 
regarding the possible inclusion of such endorsements.\427\ One 
commenter noted that investment advisory, municipal advisory, or 
broker-dealer businesses that are endorsed by associations are not 
directed specifically at municipal entities, but rather are prepared 
and circulated without regard to whether the audience may include 
municipal entities.\428\
---------------------------------------------------------------------------

    \424\ See, e.g., letters from James D. Campbell, CAE, Executive 
Director, Virginia Association of Counties, dated June 22, 2011 
(``Virginia Association of Counties Letter''); Jeff Spartz, 
Executive Director, Association of Minnesota Counties, dated June 
24, 2011 (``Association of Minnesota Counties Letter''); Robert Hay, 
Jr., Manager, Public Policy, ASAE Center for Association Leadership, 
dated July 8, 2011 (``ASAE Center for Association Leadership 
Letter''); Steven R. Michaud, President, Maine Hospital Association, 
dated July 14, 2011 (``Maine Hospital Association Letter''); Anthony 
Burke, President and CEO, AHA Solutions, Inc., dated July 18, 2011 
(``AHA Solutions Letter''); Paul McIntosh, Executive Director, 
California State Association of Counties, dated July 29, 2011 
(``California State Association of Counties Letter'').
    \425\ See, e.g., ASAE Center for Association Leadership Letter.
    \426\ See ASAE Center for Association Leadership Letter and 
Maine Hospital Association Letter.
    \427\ See ASAE Center for Association Leadership Letter; Maine 
Hospital Association Letter; AHA Solutions Letter.
    \428\ See ASAE Center for Association Leadership Letter.
---------------------------------------------------------------------------

    Two commenters recommended that the definition of solicitation 
exempt ``advertisement, endorsement, sponsorship, and similar services 
offered by persons who are not municipal advisors, brokers, dealers, 
municipal securities dealers, or similar persons engaged in the 
financial advisory service industry.'' \429\ One stated that compliance 
with the registration rules would create a significant administrative 
burden and would not create any material public benefits.\430\ The 
other commenter requested that the Commission clarify the meaning of 
``indirect communication'' within the definition of solicitation.\431\ 
Similarly, other commenters stated that the Commission should exempt 
national and state associations representing state and local 
governments from municipal advisor registration.\432\ These commenters 
argued that their staffs do not directly contact public employees or 
offer advice to public agencies or public employees.\433\
---------------------------------------------------------------------------

    \429\ See Maine Hospital Association Letter; AHA Solutions 
Letter.
    \430\ See Maine Hospital Association Letter.
    \431\ See AHA Solutions Letter.
    \432\ See Virginia Association of Counties Letter and California 
State Association of Counties Letter.
    \433\ See Virginia Association of Counties Letter and California 
State Association of Counties Letter.
    These commenters stated that they do not directly or indirectly 
engage in the offer or sale of particular products or services to 
government employees, do not make any product or investment 
recommendations to existing or prospective clients, give any 
investment advice on their own behalf or on behalf of any third 
party supplier, or accept any clients on behalf of any third party 
supplier. These commenters also stated that the cost of registration 
and compliance, along with unknown consequences of state required 
registration due to the rules promulgated by the Commission, would 
unfairly disadvantage associations representing public agencies.
    One of the commenters stated that such associations should 
receive an exemption in order to offer their membership access to 
value-added education and services through publicly solicited 
contracts. The commenter noted that associations representing non-
governmental organizations are not required to register under the 
proposed rule and yet are able to endorse programs for their 
memberships that meet their standards of approval. See Virginia 
Association of Counties Letter.
---------------------------------------------------------------------------

    At this time, the Commission is not providing a general exemption 
for national and state associations that engage in endorsement 
arrangements. An organization that receives compensation for endorsing 
a broker, dealer, municipal securities dealer, municipal advisor, or 
investment adviser is soliciting a municipal entity or obligated person 
within the meaning of the statute. However, the Commission notes that 
its interpretation in Rule 15Ba1-1(n) with respect to excluding 
advertising from ``solicitation of a municipal entity or obligated 
person'' may apply to some of these associations. For example, if an 
association's ``endorsement'' qualifies as ``advertising'' by a broker, 
dealer, municipal securities dealer, municipal advisor, or investment 
adviser, pursuant to Rule 15Ba1-1(n), it would not be required to 
register as a municipal advisor. Such a determination, however, would 
be based on the particular facts and circumstances.
    The Commission does not believe at this time that it is appropriate 
to provide a blanket exemption to associations that are not able to 
take advantage of Rule 15Ba1-1(n), because these associations are being 
directly or indirectly compensated for recommending a broker, dealer, 
municipal advisor, or investment adviser to municipal entities or 
obligated persons. In addition, these associations may, in certain 
cases, be compensated in direct relation to the number of municipal 
entities that engage the endorsed product or service provider.

[[Page 67501]]

Uncompensated Recommendations
    Some commenters stated that the Exchange Act and the Proposal are 
unclear about when uncompensated recommendations might be deemed to be 
solicitations for purposes of the rule.\434\ Several commenters stated 
that uncompensated recommendations should not be considered to be 
solicitations because the statutory text only refers to ``direct or 
indirect compensation.'' \435\ One commenter stated further that, if 
uncompensated recommendations are interpreted to be solicitations, it 
``will chill significantly the provision of information to municipal 
entities. . . .'' \436\ Other commenters suggested that the 
solicitation prong should not apply if the municipal entity or 
obligated person requests an introduction.\437\
---------------------------------------------------------------------------

    \434\ See, e.g., letters from Joy A. Howard, Principal, WM 
Financial Strategies, dated February 21, 2011 (``Joy Howard WM 
Financial Strategies Letter''); John Dotson, Vice President and 
General Counsel, Chevron Energy Solutions, dated February 22, 2011 
(``Chevron Letter''); Amy Natterson Kroll and W. Hardy Calcott, 
Bingham McCutchen LLP, on behalf of the National Association of 
Energy Service Companies, dated February 22, 2011 (``NAESCO 
Letter''); State of Indiana Letter.
    \435\ See Chevron Letter; NAESCO Letter.
    \436\ See NAESCO Letter.
    \437\ See, e.g., letter from Deron S. Kintner, Executive 
Director, Indianapolis Local Public Improvement Bond Bank, dated 
February 22, 2011 (``Indianapolis Local Public Improvement Bond Bank 
Letter'') (stating that a person who solicits advice from 
individuals should be free to solicit advice and recommendations 
without having to either engage those individuals and compensate 
them or subject them to fiduciary duties).
---------------------------------------------------------------------------

    The Commission notes that an introduction is not necessarily a 
solicitation. Moreover, whether an introduction is a solicitation does 
not depend on whether a municipal entity or obligated person requests 
an introduction or the introduction is provided without request. 
Rather, for purposes of Rule 15Ba1-1(n), the solicitation determination 
is based on whether the person providing the introduction receives 
direct or indirect compensation for providing the introduction.\438\ 
For example, a person could respond to a request from a municipal 
entity with a particular recommendation and then subsequently receive 
payment from the recommended entity. In this example, the solicitation 
would trigger the registration requirement.
---------------------------------------------------------------------------

    \438\ See Rule 15Ba1-1(n) and 15 U.S.C. 78o-4(e)(9) (which 
defines ``solicitation of a municipal entity or obligated person'' 
as ``a direct or indirect communication with a municipal entity or 
obligated person made by a person, for direct or indirect 
compensation'' made on behalf of certain specified entities).
---------------------------------------------------------------------------

    The statutory definition of ``solicitation of a municipal entity or 
obligated person'' provides that the solicitation must be performed for 
``direct or indirect compensation.'' \439\ Thus, persons that are not 
compensated for soliciting a municipal entity or obligated person would 
not be required to register as municipal advisors. The Commission 
notes, however, that Commission staff has broadly construed the term 
``direct or indirect compensation'' in other contexts.\440\ In 
addition, as noted in the Proposal, other regulatory agencies have 
interpreted indirect compensation to include non-monetary 
compensation.\441\
---------------------------------------------------------------------------

    \439\ See 15 U.S.C. 78o-4(e)(9).
    \440\ For example, under the Investment Advisers Act, Commission 
staff has taken the position that compensation generally includes 
the receipt of any economic benefit, whether in the form of an 
advisory fee, some other fee relating to services rendered, a 
commission, or some combination of the foregoing. See Applicability 
of the Investment Advisers Act to Financial Planners, Pension 
Consultants, and Other Persons Who Provide Investment Advisory 
Services as a Component of Other Financial Services, Investment 
Advisers Act Release No. 1092 (October 8, 1987).
    \441\ See Proposal, 76 FR 832, note 113.
---------------------------------------------------------------------------

Solicitation of Obligated Persons
    Exchange Act Section 15B(e)(9) provides, in part, that the term 
``solicitation of a municipal entity or obligated person'' is ``for the 
purpose of obtaining or retaining an engagement . . . of a broker, 
dealer, municipal securities dealer, or municipal advisor for or in 
connection with municipal financial products . . . .'' \442\ One 
commenter asked the Commission to clarify that the meaning of 
``municipal financial products'' with respect to the ``solicitation of 
an obligated person'' includes municipal derivatives, guaranteed 
investment contracts, and investment strategies of the municipal entity 
only, and not of the obligated person.\443\ The commenter stated that 
obligated persons may include large entities with numerous and varied 
funds and investments, many of which may have nothing to do with the 
transactions pursuant to which they have become obligated persons.\444\ 
In addition, the commenter stated that if the municipal advisor 
definition includes persons who advise obligated persons or solicit 
obligated persons with respect to the funds, securities, or investment 
strategies of the obligated person, ``the reach of the registration 
requirement would expand in potentially unpredictable ways.'' \445\
---------------------------------------------------------------------------

    \442\ 15 U.S.C. 78o-4(e)(9).
    \443\ See ABA Letter.
    \444\ See id.
    \445\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the comment that solicitation with 
respect to an obligated person applies only when an obligated person is 
acting in its capacity as an obligated person.\446\ The Commission is, 
therefore, adopting Rule 15Ba1-1(n), which clarifies that, in the case 
of solicitation of an obligated person, the definition of 
``solicitation of a municipal entity or obligated person'' does not 
include solicitation of an obligated person ``if such obligated person 
is not acting in the capacity of an obligated person or the 
solicitation of the obligated person is not in connection with the 
issuance of municipal securities or with respect to municipal financial 
products.'' \447\
---------------------------------------------------------------------------

    \446\ The Commission also discusses above when a person is an 
``obligated person.'' See supra Section III.A.1.b.iii.
    \447\ See Rule 15Ba1-1(n). The solicitation could require the 
solicitor to register with the Commission as a broker-dealer. See 
generally Securities Exchange Act Release No. 27017 (July 11, 1989), 
54 FR 30013 (July 18, 1989) (discussing solicitation).
---------------------------------------------------------------------------

    As discussed above, with respect to the definition of obligated 
person, the Commission believes that the municipal advisor registration 
regime should apply in the same manner to advisors of obligated persons 
as to advisors of municipal entities.\448\ The Commission further notes 
that, because they are committed by contract or other arrangement to 
support the payment of all or part of the obligations on municipal 
securities, obligated persons serve the same role as municipal entities 
with regard to municipal securities.\449\ Therefore, pursuant to the 
Commission's clarification in Rule 15Ba1-1(n), a person soliciting an 
obligated person with respect to the issuance of municipal securities 
or municipal financial products will not meet the definition of 
municipal advisor as a result of such activity unless the obligated 
person is acting in its capacity as such.\450\
---------------------------------------------------------------------------

    \448\ See supra note 227 and accompanying text.
    \449\ See supra Section III.A.1.b.iii.
    \450\ See id.
---------------------------------------------------------------------------

    One commenter asked when a person should know whether he or she is 
soliciting an obligated person. Specifically, with respect to the 
application of the proposed rules to persons who undertake a 
solicitation of an obligated person, the commenter stated that a person 
should be considered to have engaged in such activities only when it 
has actual knowledge that it is (a) soliciting an obligated person, 
acting in its capacity as an obligated person, and (b) engaging in 
solicitation with respect to the issuance of municipal securities or 
proceeds of municipal securities.\451\ Further, this commenter stated 
that a person must be rendering services with

[[Page 67502]]

respect to the types of activities or instruments that make a person a 
municipal advisor.\452\ Lastly, the commenter suggested that a person 
need not affirmatively inquire as to the potential obligated person's 
status or the funds' status.\453\
---------------------------------------------------------------------------

    \451\ See SIFMA Letter I.
    \452\ See id.
    \453\ See id.
---------------------------------------------------------------------------

    The Commission believes that the commenter's suggestion, if 
adopted, would allow the municipal advisor registration regime to be 
too easily circumvented. An advisor could always argue that it did not 
have ``actual knowledge'' that it was soliciting an obligated person 
and therefore is not subject to regulation. The Commission instead 
believes that a person that is soliciting an obligated person should 
make a reasonable inquiry to a person in a position to know as to 
whether it is soliciting for services related to the issuance of 
municipal securities or municipal financial products, and whether the 
person being solicited is an obligated person. For example, a person 
may rely on the written representation of the obligated person, unless 
such person has information that would cause a reasonable person to 
question the accuracy of the representation.\454\ In such a case, a 
person could not ignore the information and would need to make further 
reasonable inquiry to verify the accuracy of the representation.\455\
---------------------------------------------------------------------------

    \454\ See Rule 15Ba1-1(m). Also, a person would only be a 
municipal advisor as a result of soliciting an obligated person when 
such obligated person is acting in the capacity of an obligated 
person. See supra note 446 and accompanying text.
    \455\ See also supra Section III.A.1.b.viii. at note 363 and 
accompanying text (discussing the requirement to know when advice 
relates to the proceeds of municipal securities).
---------------------------------------------------------------------------

Other Exclusions and Exemptions From the Definition of ``Solicitation 
of a Municipal Entity or Obligated Person''
    Some commenters stated that the Commission should explicitly 
exclude certain entities from the solicitation definition altogether. 
For example, several commenters stated that placement agents for pooled 
investment vehicles should not be considered solicitors.\456\ Another 
commenter recommended that an investment adviser's employees who 
solicit municipal entities as part of their regular responsibilities 
should not be considered solicitors.\457\ The Commission has carefully 
considered issues raised by commenters and has determined not to 
provide specific exemptions from the definition of ``solicitation of a 
municipal entity or obligated person.'' \458\
---------------------------------------------------------------------------

    \456\ See, e.g., SIFMA Letter I (stating that Section 975 of the 
Dodd-Frank Act does not define ``solicitation'' to include 
solicitation of a municipal entity or obligated person by a 
placement agent for a pooled investment vehicle, such as a private 
equity fund, hedge fund, LGIP, or mutual fund, all of which involve 
the sale of securities by registered broker-dealers); ICI Letter 
(stating that a ``placement agent soliciting a municipal entity to 
invest in a pooled investment vehicle acts on behalf of the pooled 
investment vehicle only, not on behalf of the adviser to the vehicle 
nor on behalf of any of the other four enumerated categories of 
persons contained in the definition'').
    \457\ See letter from Monique S. Botkin, Assistant General 
Counsel, Investment Adviser Association, dated February 22, 2011 
(``IAA Letter'') (stating that ``[i]t would be illogical and 
contravene the statutory intent of the Dodd-Frank Act for such an 
exclusion to apply to an affiliate of an investment adviser and its 
employees soliciting on behalf of its affiliated adviser, but not 
for the same analysis to apply to an investment adviser and its own 
employees soliciting on their employer's behalf'').
    \458\ See infra note 465 and accompanying text.
---------------------------------------------------------------------------

    Section 15B(e)(4)(A) of the Exchange Act states that the definition 
of municipal advisor includes a person that undertakes a solicitation 
of a municipal entity.\459\ Section 15B(e)(4)(B) of the Exchange Act 
states that the definition of municipal advisor includes a number of 
listed types of market participants (specifically financial advisors, 
guaranteed investment contract brokers, third-party marketers, 
placement agents, solicitors, finders, and swap advisors) if such 
persons otherwise meet the definition of a municipal advisor under 
Exchange Act Section 15B(e)(4)(A). In relevant part, Exchange Act 
Section 15B(e)(4)(A)(ii) provides that a municipal advisor includes a 
person that, on behalf of certain types of third-parties, undertakes a 
solicitation of a municipal entity to engage such parties to perform 
certain specified activities.\460\ In the case of placement agents, the 
Commission agrees with commenters that a placement agent for a pooled 
investment vehicle that is not a municipal entity (e.g., a hedge fund 
or mutual fund) and that ``solicits'' a municipal entity to invest in 
the fund does not, with respect to such activity, meet the statutory 
definition of the term ``solicitation of a municipal entity or 
obligated person'' in Exchange Act Section 15B(e)(9). Such a placement 
agent does not meet the statutory definition of the term because it is 
not soliciting on behalf of a third-party broker, dealer, municipal 
securities dealer, municipal advisor, or investment adviser to obtain 
or retain an engagement by a municipal entity or obligated person of 
such third-party broker, dealer, municipal securities dealer, municipal 
advisor, or investment adviser. Whether the placement agent otherwise 
meets the definition of ``municipal advisor'' with respect to any 
activity related to or in connection with its ``solicitation'' activity 
(that does not, as discussed above, meet the statutory definition of 
solicitation in Exchange Act Section 15B(e)(9)) would depend on the 
facts and circumstances.\461\ By contrast, a placement agent that 
undertakes a solicitation of a municipal entity for the purpose of 
obtaining an engagement by the municipal entity of an unaffiliated 
investment adviser to provide investment advisory services to the 
municipal entity is a municipal advisor because it is soliciting on 
behalf of an unaffiliated adviser to provide investment advisory 
services.\462\ The Commission also agrees with commenters that 
employees of a broker, dealer, municipal securities dealer, municipal 
advisor, or investment adviser that solicit municipal entities as part 
of their regular duties on behalf of their employer or an affiliate of 
such employer are not municipal advisors, if they are acting within the 
scope of their employment. Specifically, as provided in Exchange Act 
Section 15B(e)(9), the term ``solicitation of a municipal entity or 
obligated person'' means, in part, ``a direct or indirect communication 
with a municipal entity or obligated person made by a person . . . on 
behalf of a broker, dealer, municipal securities dealer, municipal 
advisor, or investment adviser . . . that does not control, is not 
controlled by, or is not under common control with the person 
undertaking such solicitation . . . .'' \463\ As such, the term applies 
only to third-party solicitors, and not to an entity acting on its own 
behalf or on behalf of its affiliate. Employees acting in their 
capacity as such on behalf of their

[[Page 67503]]

employer are acting as the agent of their employer and, consequently, 
are not third-party solicitors that fall within the definition of 
municipal advisor as a result of their solicitation activity.
---------------------------------------------------------------------------

    \459\ See Exchange Act Section 15B(e)(9). See also Rule 15Ba1-
1(n).
    \460\ See supra note 409 and accompanying text (setting forth 
the definition of ``solicitation of a municipal entity or obligated 
person'').
    \461\ See infra notes 625-629 and accompanying text (discussing 
when a placement agent may be a municipal advisor and when it may, 
or may not, qualify for the exclusion for underwriters).
    \462\ With respect to solicitations on behalf of investment 
advisers, the relevant portion of the definition of a ``solicitation 
of a municipal entity or obligated person'' in Exchange Act Section 
15B(e) limits the scope of covered solicitations to those involving 
solicitations for the purpose of obtaining or retaining an 
engagement by a municipal entity or by an obligated person ``of an 
investment adviser to provide investment advisory services to or on 
behalf of a municipal entity.'' See also S. Rep. No. 111-176 at 148 
(2010) (``Rather than effectively prohibiting such third-party 
solicitation for investment advisory services, this section would 
provide that activities of a municipal advisor, broker, dealer, or 
municipal securities dealer to solicit a municipal entity to engage 
an unrelated investment adviser to provide investment advisory 
services to a municipal entity . . . would be subject to regulation 
by the MSRB.'')
    \463\ 15 U.S.C. 78o-4(e)(9).
---------------------------------------------------------------------------

    Pursuant to Rule 15Ba1-1(d)(3)(viii) and consistent with the 
exemption from the definition of municipal advisor under Rule 15Ba1-
1(d)(3)(vii) for a person that provides advice with respect to 
investment strategies that are not plans or programs for the investment 
of the proceeds of municipal securities or the recommendation of and 
brokerage of municipal escrow investments,\464\ the Commission is 
exempting from the definition of municipal advisor under Rule 15Ba1-
1(d)(1) any person that undertakes a ``solicitation of a municipal 
entity or obligated person'' (as defined in Rule 15Ba1-1(n) (17 CFR 
240.15Ba1-1(n)) for the purpose of obtaining or retaining an engagement 
by a municipal entity or by an obligated person of a broker, dealer, 
municipal securities dealer, or municipal advisor for or in connection 
with municipal financial products that are investment strategies, to 
the extent that such investment strategies are not plans or programs 
for the investment of the proceeds of municipal securities or the 
recommendation of and brokerage of municipal escrow investments.\465\ 
As with respect to the exemption in Rule 15Ba1-1(d)(3)(vii), the 
Commission believes that the exemption in Rule 15Ba1-1(d)(3)(viii) is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 15B of the Exchange Act, because the exemption 
tailors protection of municipal entities to those activities related to 
the investment of the proceeds of municipal securities and related 
escrow investments.\466\
---------------------------------------------------------------------------

    \464\ See supra Section III.A.1.b.viii.
    \465\ See Rule 15Ba1-1(d)(3)(viii).
    \466\ See note 328 and accompanying text.
---------------------------------------------------------------------------

Marketing of Insurance Contracts
    One commenter stated that solicitation should not include the 
marketing of insurance contracts by broker-dealers to retirement plans 
established by municipal entities.\467\ The Commission agrees that the 
marketing of insurance contracts by broker-dealers is not solicitation 
for purposes of the municipal advisor definition if it is not performed 
on behalf of a third-party broker, dealer, investment adviser, 
municipal securities dealer, or municipal advisor. As described above, 
the definition of ``solicitation of a municipal entity or obligated 
person'' only applies to third-party solicitations on behalf of these 
specific kinds of entities.\468\
---------------------------------------------------------------------------

    \467\ See Committee of Annuity Insurers Letter I.
    \468\ See supra note 463 and accompanying text. See also Rule 
15Ba1-1(n).
---------------------------------------------------------------------------

c. Exclusions and Exemptions From the Definition of ``Municipal 
Advisor''
    In addition to the exemption described above for persons providing 
advice or soliciting engagements with respect to certain financial 
products, the Commission discusses below its interpretations of certain 
statutory exclusions, as well as specific activities-based exemptions 
it is granting from the definition of ``municipal advisor.'' \469\ 
Also, the Commission discusses below exemptions of general 
applicability to the extent a person is responding to an RFP or a 
request for qualifications (``RFQ'') or to the extent a municipal 
entity or obligated person is otherwise represented by a registered 
municipal advisor, subject to certain conditions.
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    \469\ For the exclusions and exemptions that were discussed in 
the Proposal and that the Commission is adopting today, the 
Commission has made minor, non-substantive changes to provide 
greater clarity and consistency throughout the rules related to 
exclusions and exemptions.
---------------------------------------------------------------------------

i. Public Officials and Employees of Municipal Entities and Obligated 
Persons
    Exchange Act Section 15B(e)(4)(A) provides that the term 
``municipal advisor'' excludes employees of a municipal entity.\470\ As 
noted in the Proposal, one commenter suggested that the Commission 
clarify that this exclusion would include any person serving as an 
appointed or elected member of the governing body of a municipal 
entity, such as a board member, county commissioner or city 
councilman.\471\ This commenter stated that, because these persons are 
not technically ``employees'' of the municipal entity (but rather 
``unpaid volunteers''), they would not fall within the exclusion from 
the definition of municipal advisor for ``employees of a municipal 
entity.'' \472\
---------------------------------------------------------------------------

    \470\ 15 U.S.C. 78o-4(e)(4)(A).
    \471\ See Proposal, 76 FR 834, n.140 and accompanying text 
(citing letter from John P. Wagner, Kutak Rock LLP, to Elizabeth M. 
Murphy, Secretary, Commission, dated September 28, 2010).
    \472\ See id. See also 15 U.S.C. 78o-4(e)(4)(A).
---------------------------------------------------------------------------

    The Commission stated in the Proposal that the exclusion from the 
definition of municipal advisor for ``employees of a municipal entity'' 
should include any person serving as an elected member of the municipal 
entity's governing body to the extent that the person is acting within 
the scope of his or her role as an elected member. The Commission also 
stated that ``employees of a municipal entity'' should include a 
governing body's appointed members to the extent such appointed members 
are ex officio members by virtue of holding an elective office.\473\ 
The Commission stated its concern that appointed members are not 
directly accountable for their performance to the citizens of the 
municipal entity.\474\
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    \473\ This would include persons appointed to fill the remainder 
of the term for an elective office.
    \474\ See Proposal, 76 FR 834.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on: (1) Whether 
there are any persons who engage in uncompensated municipal advisory 
activities, or municipal advisory activities for indirect compensation, 
that the Commission should exclude from the definition of municipal 
advisor; (2) whether ``employees of a municipal entity'' should include 
elected members of a governing body of a municipal entity, and 
appointed members of a municipal entity's governing body to the extent 
such appointed members are ex officio members of the governing body by 
virtue of holding an elective office, is appropriate; and (3) whether 
there are other persons associated with a municipal entity who might 
not be ``employees'' of a municipal entity but that the Commission 
should exclude from the definition of municipal advisor.\475\
---------------------------------------------------------------------------

    \475\ See Proposal, 76 FR 837.
---------------------------------------------------------------------------

    The Commission received over 600 comment letters on its 
interpretation of ``employee of a municipal entity.'' Commenters 
represented a wide array of individuals and entities, including 
representatives of: city and state governments; \476\ city and state 
retirement systems; \477\ state university

[[Page 67504]]

systems; \478\ state housing, development, and port authorities; \479\ 
city transit authorities; \480\ special districts (such as healthcare, 
water, sanitation, and other districts); \481\ public utility boards 
and associations; \482\ airports, and airport authorities and 
commissions; \483\ and individual volunteer or appointed board 
members.\484\
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    \476\ See, e.g., letter from Stevan Gorcester, Association of 
Washington Cities, dated February 22, 2011; letter from William G. 
Dressel, Jr., Executive Director, New Jersey League of 
Municipalities, dated January 27, 2011; letter from Ken Miller, 
Oklahoma State Treasurer, dated February 7, 2011; letter from Steve 
Ritter, Assistant Finance Director, City of Huntsville, Texas, dated 
January 10, 2011; letter from Jim D. Dunaway, City Manager, City of 
Taylor, Texas, dated January 13, 2011; letter from Jacqueline M. 
Kovilaritch, Assistant City Attorney, City of St. Petersburg, 
Florida, dated January 19, 2011 (``City of St. Petersburg Letter''); 
letter from Judith Hetherly, Mayor, City of Lampasas, Texas, dated 
January 20, 2011; letter from Gary Herbert, Governor, State of Utah, 
Salt Lake City, Utah, dated February 17, 2011; and National 
Association of State Treasurers Letter.
    \477\ See, e.g., Utah Retirement Systems Letter; letter from R. 
Dean Kenderdine, Executive Director and Secretary to the Board, 
Maryland State Retirement and Pension System, dated February 17, 
2011; letter from Ann Fuelberg, Executive Director, Employees 
Retirement System of Texas, dated February 18, 2011; letter from 
Anthony B. Ross, Chairperson and Stephen C. Edmonds, Executive 
Director, City of Austin Employees Retirement System, dated February 
18, 2011; and Alaska Retirement Management Board Letter.
    \478\ See, e.g., letter from Frank T. Brogan, Chancellor, State 
University System of Florida, dated February 21, 2011; letter from 
Calvin J. Anthony, Chairman, Oklahoma State University/Agricultural 
and Mechanical Colleges Board of Regents, dated January 7, 2011 
(``Oklahoma State University/Agricultural and Mechanical Colleges 
Board of Regents Letter''); letter from Francisco G. Cigarroa, M.D., 
Chancellor, The University of Texas System, dated February 7, 2011; 
letter from Michael D. McKinney, Chancellor, The Texas A&M 
University System and Kent Hance, Chancellor, Texas Tech University 
System, dated February 14, 2011; letter from Richard D. Legon, 
President, Association of Governing Boards of Universities and 
Colleges, dated February 15, 2011; letter from Dr. Brian McCall, 
Chancellor of the Texas State University System, dated February 17, 
2011; and letter from Peter J. Taylor, Executive Vice President--
Chief Financial Officer, The Regents of the University of 
California, dated February 18, 2011 (``UCLA Regents Letter'').
    \479\ See, e.g., letter from Rebecca L. Peace, Chief Counsel, 
Pennsylvania Housing Finance Agency, Jayne B. Blake, Chief Counsel, 
Pennsylvania Infrastructure Investment Authority, Stephen M. Drizos, 
Executive Director, Pennsylvania Economic Development Financing 
Authority, Carol A. Longwell, Deputy Chief Counsel, Pennsylvania 
Economic Development Financing Authority, and Doreen A. McCall, 
Chief Counsel, Pennsylvania Turnpike Commission, dated February 15, 
2011 (``Pennsylvania Housing Finance Agency Letter''); and letter 
from Tracy V. Drake, Chairman, Ohio Council of Port Authorities and 
CEO, Columbiana County Port Authority, dated February 4, 2011.
    \480\ See, e.g., letter from Carol B. Keefe, General Counsel, 
Washington Metropolitan Area Transit Authority, Washington, District 
of Columbia, dated February 14, 2011; and letter from David 
Levinger, Chief Financial Officer, Dallas Area Rapid Transit, dated 
February 22, 2011.
    \481\ See, e.g., letter from John ``Chip'' Taylor, Executive 
Director, Colorado Counties Inc., Sam Mamet, Executive Director, 
Colorado Municipal League, and Ann Terry, Executive Director, 
Special District Association of Colorado, dated January 26, 2011; 
letter from Kathleen Durham, Chairman, South Broward Hospital 
District, dated February 8, 2011; letter from James F. Heekin, 
Counsel, Citrus County Hospital Board, Southeast Volusia Hospital 
District, West Orange Healthcare District, February 14, 2011; letter 
from Walt Sears, Jr., General Manager, Northeast Texas Municipal 
Water District, dated January 24, 2011; and letter from Robert M. 
Ball, A. A. E., Executive Director, Lee County Port Authority, dated 
February 18, 2011; and letter from Edward G. Henifin, General 
Manager and Steven G. deMik, Director of Finance, Hampton Roads 
Sanitation District, dated February 22, 2011.
    \482\ See, e.g., letter from David Modisette, California 
Municipal Utilities Association, dated February 22, 2011; letter 
from John S. Bruciak, Brownsville Public Utilities Board, dated 
February 18, 2011; letter from David H. Wright, City of Riverside, 
dated February 23, 2011; and letter from Susan N. Kelly, Senior Vice 
President of Policy Analysis and General Counsel and Diane Moody, 
Director, Statistical Analysis, American Public Power Association, 
dated February 22, 2011 (``American Public Power Association 
Letter'').
    \483\ See, e.g., letter from Jeffery P. Fegan, Chief Executive 
Officer, Dallas/Fort Worth International Airport, dated January14, 
2011, letter from Phillip N. Brown, A.A.E., Executive Director, 
Greater Orlando Aviation Authority, dated February 8, 2011; letter 
from Emily Neuberger, Senior Vice President & General Counsel, Wayne 
County Airport Authority, Michigan, dated February 14, 2011 (``Wayne 
County Airport Authority Letter''); letter from Elaine Roberts, 
President & CEO, Columbus Regional Airport Authority, dated February 
16, 2011; letter from Thomas W. Anderson, General Counsel, 
Metropolitan Airports Commission, dated February 17, 2011; and 
letter from Breton K. Lobner, General Counsel, San Diego County 
Regional Airport Authority, dated February 22, 2011.
    \484\ See, e.g., letter from Richard R. Vosburg, Chartered 
Financial Analyst, Germantown, Tennessee, dated January 24, 2011 
(``Vosburg Letter''); and letter from William Dalton, dated February 
28, 2011 (``Dalton Letter'').
---------------------------------------------------------------------------

    The comments dealt predominantly with the Commission's proposed 
view that ``employees of a municipal entity'' should include elected 
members of a municipal entity's governing body, and appointed members, 
to the extent such appointed members are ex officio members of the 
governing body by virtue of holding an elective office. Many commenters 
asserted that the Commission's proposed interpretation of municipal 
advisor is overly broad or overreaching and should exclude all members 
of a municipal entity's governing board.
    The majority of commenters stated, in particular, that appointed 
board members should not be treated differently from elected board 
members or officials and disagreed with the Commission's statement that 
appointed board members are not directly accountable. Many of the 
commenters asserted that state and local laws applicable to officials 
of a municipal entity do not distinguish between appointed or elected 
members and that all members are subject to the same legal obligations, 
including fiduciary duties, codes of conduct, open meeting laws, and 
conflicts of interest and ethics laws.\485\ For example, commenters 
asserted that appointed officials of municipal non-profit corporations, 
trusts, and pension funds have a duty to act in the interests of the 
corporation, trust, or the fund.\486\ Many commenters also asserted 
that appointed board members are accountable to the elected officials 
that appointed them or for whom they work.\487\ Many also noted that 
appointed board members may be removed for cause \488\ and are subject 
to civil suit.\489\ Others observed that appointed board members are 
more accountable than elected officials.\490\
---------------------------------------------------------------------------

    \485\ See, e.g., Darrell Buchbinder, The Port Authority of New 
York and New Jersey, dated February 18, 2011; National Association 
of State Treasurers Letter; Letter from Martin R. Hopper, General 
Manager, M-S-R Public Power Agency, dated February 18, 2011 (``M-S-
R-Power Agency Letter''); letter from Meredith J. Jones, NYCEDC, 
dated February 18, 2011 (``NYCEDC Letter''); and UCLA Regents 
Letter; letter from Laura King, Minnesota State Colleges and 
Universities, dated February 22, 2011.
    Many of these commenters also explained that certain municipal 
entity governing boards are established or operating pursuant to 
state or local statute. See id. See also letter from JoAnn E. Levin, 
Chief Solicitor, City of Baltimore, dated February 3, 2011; and 
letter from Mark Page, Director of Management and Budget, The City 
of New York, dated February 22, 2011 (``NYC Management and Budget 
Letter'').
    \486\ See, e.g., letter from Acting Governor Earl Ray Tomblin, 
Chairman of the Board; Glen B. Gainer, Auditor of the State of West 
Virginia and Roger Hunter, Chairman of the Investment Committee, and 
Guy Bucci, Chairman of the Legal Committee, West Virginia Investment 
Management Board, dated February 22, 2011; and letter from Joanne 
Handy, President and CEO, Aging Services of California, dated 
February 22, 2011; letter from Charles R. Noll, President, 
Pennsylvania Local Government Investment Trust, dated February 18, 
2011 (``Pennsylvania Local Government Investment Trust Letter''); 
letter from Keith Bozarth, Executive Director, State of Wisconsin 
Investment Board, dated February 22, 2011; and letter from Peter H. 
Mixon, California Public Employees' Retirement System, dated 
February 22, 2011 (``CALPERS Letter'').
    \487\ See, e.g., letter from John Murphy, Executive Director, 
National Association of Local Housing Finance Agencies, dated 
January 27, 2011; NYC Management and Budget Letter; and letter from 
Bob A. Newmark, Housing Finance Authority, dated February 11, 2011.
    \488\ See, e.g., letter from Gottlieb Fisher PLLC, on behalf of 
the Boards of Trustees for King County Rural Library District, Fort 
Vancouver Intercounty Rural Library District, Pierce County Rural 
Library District LaConner Rural Partial-County Library District, 
Sno-Isle Intercounty Rural Library District, Spokane County Rural 
Library District, Walla Walla County Rural Library District, and 
Whitman County Rural Library District, dated February 11, 2011 
(``Gottlieb Fisher Letter''); letter from Linda Beaver, Nebraska 
Educational Finance Authority, dated February 16, 2011 (``Nebraska 
Educational Finance Authority Letter''); Alaska Retirement 
Management Board Letter; Robert W. Barnes, Idaho Falls Redevelopment 
Agency, dated February 18, 2011; and letter from Jeffrey W. Letwin, 
Esq., Partner, Schnader Harrison Segal Lewis LLP, Pittsburgh, 
Pennsylvania, dated February 8, 2011.
    \489\ See, e.g., letter from Jeffrey W. Letwin, Esq., Partner, 
Schnader Harrison Segal Lewis LLP, Pittsburgh, Pennsylvania, dated 
February 8, 2011; letter from Gary Kimball, President, Specialized 
Public Finance, Inc., dated February 22, 2011 (``Specialized Public 
Finance Letter''); letter from Gary Parsons, General Manager, Texas 
Municipal Power Agency, dated February 22, 2011 (``Texas Municipal 
Power Agency Letter''); and letter from John W. Rubottom, General 
Counsel, Lower Colorado River Authority, dated February 15, 2011.
    \490\ See, e.g., letter from Bill Lockyer, Treasurer, State of 
California, dated February 22, 2011 (``California State Treasurer's 
Office Letter''); Texas Municipal Power Agency Letter; letter from 
John D. Clark, III, Executive Director/CEO, Indianapolis Airport 
Authority, dated February 22, 2011; and letter from Victor 
Vandergriff, Chairman, North Texas Tollway Authority, dated February 
11, 2011.
---------------------------------------------------------------------------

    Additionally, many commenters asserted that board members are the 
decision and policy makers who receive advice from third parties who 
are paid for providing services and that board members themselves are 
not

[[Page 67505]]

``advisors.'' \491\ Many commenters asserted that members of governing 
boards are the intended beneficiaries of the proposed regulation.\492\ 
Further, some commenters asserted that the Proposal would usurp state 
laws governing duties and responsibilities of appointed board members 
of municipal entities.\493\ Many commenters also stated that, in its 
current form, the Proposal would deter much needed citizen volunteers 
from serving on governing boards of municipal entities or would chill 
the deliberative process of such boards. These commenters reasoned that 
volunteers would fear that their participation in votes on, or 
discussions of, financial matters will be deemed ``advice'' that would 
subject them to registration.\494\
---------------------------------------------------------------------------

    \491\ See, e.g., letter from Michael D. Nosler, General Counsel 
and Assistant Attorney General, Colorado State University System, 
dated February 21, 2011; letter from Barbara J. Thompson, Executive 
Director, National Council of State Housing Agencies, dated February 
22, 2011; letter from Luther Strange, Attorney General, State of 
Alabama, dated February 22, 2011; CALPERS Letter; letter from Ronnie 
G. Jung, Executive Director, Teacher Retirement System of Texas, 
dated February 22, 2011; Stephanie L. Hamlett, Executive Director, 
Virginia Resources Authority, dated February 22, 2011; and Dalton 
Letter.
    \492\ See, e.g., letter from David R. Fine, City Attorney, 
Denver, dated February 9, 2011 (``Denver Letter''); letter from 
James F. Zay, Chairman, Du Page Water Commission, dated February 11, 
2011; letter from Angela I. Carmon, City Attorney, City of Winston-
Salem, North Carolina, dated February 14, 2011; letter from David J. 
Kincaid, City Manager, City of Safford, Arizona, dated February 14, 
2011 (``City of Safford Letter''); and letter from Donald Dicklich, 
County Auditor-Treasurer, Duluth, Minnesota, dated February 16, 
2011.
    \493\ See, e.g., letter from Steven J. Baumgardt, Finance 
Director, City of Tolleson, Arizona, dated March 3, 2011 (``City of 
Tolleson Letter''); letter from Joe Pizzillo, Vice Mayor, City of 
Goodyear, Arizona, dated February 14, 2011 (``City of Goodyear 
Letter''); letter from Patricia Branya, Director, Miami-Dade County, 
dated February 14, 2011; and letter from Elwood G. ``Woody'' Farber, 
President, New Mexico Educational Assistance Foundation, dated 
February 15, 2011. One commenter questioned whether, if an appointed 
member of a governing body is deemed a municipal advisor, the 
federal fiduciary obligations to the municipal entity override state 
and local law provisions for exculpation, indemnification, and other 
protections of board members. See NABL Letter.
    \494\ See, e.g., City of Tolleson Letter; City of Goodyear 
Letter; letter from Richard D. Legon, President, Association of 
Governing Boards of Universities and Colleges, dated February 15, 
2011; letter from Edward G. Henifin, General Manager and Steven G. 
deMik, Director of Finance, Hampton Roads Sanitation District, dated 
February 22, 2011; letter from Scott Jordan, Executive Office for 
Administration and Finance, dated February 22, 2011; letter from 
Granger Vinall, Chairman of the Board of Directors and Kevin J. 
Burns, Chief Executive Officer, UA Healthcare, Inc., dated February 
22, 2011; and letter from Ronald H. Paydo, President, Medina County 
Port Authority, dated February 18, 2011.
---------------------------------------------------------------------------

    Commenters also stated that the Proposal is unclear with respect to 
whether: (1) Appointed, rather than elected, officials (such as city 
controllers, managers, and commissioners) would be ``employees;'' \495\ 
(2) the employee of one municipal entity (such as an employee of a 
municipal entity that is the sponsor of a pension plan) would be 
covered by the exclusion when serving as an appointed member of the 
board of another municipal entity (such as on the board of the 
sponsored pension plan) or otherwise performing services for other 
related municipal entities; \496\ and (3) board members that were 
``elected,'' but were not elected by the citizens of the municipal 
entity, would be considered ``employees of a municipal entity.'' \497\ 
Some commenters stated that designees of board members should also be 
covered by the exclusion.\498\ One commenter suggested that ``employees 
and board members of a municipal entity should be excluded [from the 
definition of municipal advisor] to the extent they provide advice to 
an obligated person (and acting in the purview of their duties).'' 
\499\
---------------------------------------------------------------------------

    \495\ See, e.g., Cynthia M. Davenport, Attorney at Law, Flynn & 
Davenport, LLC, Troy, Missouri, dated January 18, 2011; City of St. 
Petersburg Letter; Denver Letter; and City of Safford Letter.
    \496\ See, e.g., letter from Michael Hairston, EFRC, dated 
February 22, 2011; NYC Management and Budget Letter; M-S-R-Power 
Agency Letter (explaining that the M-S-R Public Power Agency uses 
the services of employees of its member municipal entities to sit on 
standing committees of the agency and to fulfill the duties of 
offices of the agency; and commenting that employees of its members 
that are seconded to the agency should have the same exemption when 
they perform services for the agency as when the employees are 
acting within the scope of their employment responsibilities 
providing services for the benefit of the member entity); letter 
from Hawkins Delafield & Wood LLP, dated February 16, 2011 
(commenting that ``an employee of municipal entity A who provides 
services to, but is not an employee of, municipal entity B, should 
be exempt under Section 15B(e)(4)(A) if both entities operate for 
the benefit of the same governmental unit, whether at the state, 
county, or municipal level''); letter from Susan Combs, Texas 
Comptroller of Public Accounts, dated February 22, 2011 (describing 
that employees of Texas's Office of the Comptroller may provide 
advice to other municipal entities within the state in connection 
with their duties to the Office of the Comptroller); and letter from 
Amadeo Saenz, Texas Department of Transportation, dated February 22, 
2011 (commenting that employees of the Texas Department of 
Transportation that are appointed to the non-profit entity that 
issues bonds on behalf of the Texas Transportation Commission should 
be excluded because they are employees assuming a decision-making 
responsibility based on the duties of their employment).
    One commenter also stated that the Proposal is unclear, in the 
case of a non-profit entity formed for the benefit of a municipal 
entity, whether employees of the municipal entity that sit on the 
board of such non-profit would be excluded from the definition of 
``municipal advisor'' as ``employees'' of the municipal entity. See, 
e.g., letter from Angela I. Carmon, City Attorney on behalf of North 
Carolina Municipal Leasing Corporation, dated February 22, 2011.
    The term ``municipal entity'' means, in part, ``any State, 
political subdivision of a State, or corporate instrumentality.'' 
See Rule 15Ba1-1(g). The Commission notes that such employees would 
be ``employees of a municipal entity,'' and therefore excluded from 
the definition of municipal advisor, to the extent the non-profit 
entity is itself a municipal entity (e.g., if the non-profit entity 
is a corporate instrumentality of a State).
    \497\ See, e.g., Pennsylvania Local Government Investment Trust 
Letter.
    \498\ See, e.g., NYC Management and Budget Letter; and letter 
from Tim Kenny, Nebraska Investment Finance Authority, dated 
February 22, 2011.
    \499\ Kutak Rock Letter. This commenter was concerned that 
otherwise, the municipal entity and obligated person would not be 
able to coordinate with respect to a financing for the obligated 
person.
---------------------------------------------------------------------------

    Many commenters also stated that boards of municipal entities are 
legally inseparable from the municipal entity.\500\ One commenter 
stated that if the governing body of a municipal entity, as a whole, is 
not a part of the ``municipal entity,'' then any third party soliciting 
or providing advice to the governing body with respect to municipal 
financial products or the issuance of municipal securities would not be 
subject to the registration requirements.\501\
---------------------------------------------------------------------------

    \500\ See, e.g., Utah Retirement Systems Letter; Nebraska 
Educational Finance Authority Letter; State of Indiana Letter; NABL 
Letter; and letter from Gregory W. Smith, General Counsel/Chief 
Operating Officer, Colorado Public Employees' Retirement 
Association, dated February 22, 2011.
    \501\ See Utah Retirement Systems Letter.
---------------------------------------------------------------------------

    Additionally, some commenters asserted that the Proposal would 
restrict municipal entities from soliciting advice from citizens, and 
would subject to the registration requirements members of the general 
public submitting written comments or giving oral statements to the 
board of a municipal entity.\502\ Another commenter stated that the 
Proposal would require registration of a former board member, if the 
Chairman of the current board contacts that former board member with 
questions about a prior issuance.\503\
---------------------------------------------------------------------------

    \502\ See, e.g., letter from Annise D. Parker, Mayor, City of 
Houston, Texas, dated February 22, 2011; Squire Sanders & Dempsey 
Letter.
    \503\ See Indianapolis Local Public Improvement Bond Bank 
Letter.
---------------------------------------------------------------------------

    After considering the comments, the Commission has determined to 
exempt from the definition of municipal advisor, pursuant to its 
authority under Section 15B(a)(4), all members of a municipal entity's 
governing body, its advisory boards and its committees, as well as 
persons serving in a similar official capacity with respect to the 
municipal entity, to the extent they are acting within the scope of 
their official capacity, regardless of whether such members or 
officials are employees of the municipal entity. Specifically, Rule 
15Ba1-1(d)(3)(ii) exempts from the definition of municipal advisor 
``[a]ny

[[Page 67506]]

person serving as a member of a governing body, an advisory board, or a 
committee of, or acting in a similar official capacity with respect to, 
or as an official of, a municipal entity or obligated person \504\ to 
the extent that such person is acting within the scope of such person's 
official capacity'' \505\ and ``any employee of a municipal entity or 
obligated person to the extent that such person is acting within the 
scope of such person's employment.'' \506\
---------------------------------------------------------------------------

    \504\ Comments regarding the treatment of such governing persons 
and employees of obligated persons, and how this exemption addresses 
such comments, are separately discussed further below.
    \505\ Rule 15Ba1-1(d)(3)(ii)(A).
    \506\ Rule 15Ba1-1(d)(3)(ii)(B).
---------------------------------------------------------------------------

    The Commission agrees with commenters that like employees, a 
municipal entity's officials, as well as members of a municipal 
entity's governing body and other officials serving in a similar 
capacity (including members of advisory boards and committees), whether 
or not employed by a municipal entity, typically act on behalf of the 
municipal entity. The Commission also believes that if a local 
government official or appointed board member of a municipal entity, in 
the scope of his or her duties to that municipal entity, provides 
advice to another municipal entity, such advice would not require the 
person to register as a municipal advisor because such person would be 
acting within the scope of his or her duties to the municipal entity. 
Rule 15Ba1-1(d)(3)(ii) also clarifies the Commission's interpretation 
of the statutory exclusion from the definition of ``municipal advisor'' 
for employees of municipal entities by providing that such employees 
are exempt ``to the extent that such person is acting within the scope 
of such person's employment.'' \507\ Consequently, as described above 
with respect to governing board members and officials, an employee of 
one municipal entity that provides advice, within the scope of his or 
her employment as such, to another municipal entity or obligated person 
would be exempt from the definition of ``municipal advisor.''
---------------------------------------------------------------------------

    \507\ See Rule 15Ba1-1(d)(3)(ii).
---------------------------------------------------------------------------

    The exemption in Rule 15Ba1-1(d)(3)(ii) would extend to all 
designees of public officials or members of a municipal entity's 
governing body, to the extent such designation is made pursuant to 
existing rules of the municipal entity for designating or delegating 
authority. The Commission believes that under such scenario, the 
designee would be serving ``in a similar official capacity'' \508\ as 
the person for whom they are acting. Further, the Commission notes that 
the exemption from registration includes members of advisory boards 
\509\ and committees,\510\ acting within the scope of their capacity as 
such \511\ because, as with respect to members of the governing body or 
other government officials, when acting within the scope of their 
official capacity such persons are acting on behalf of the municipal 
entity.
---------------------------------------------------------------------------

    \508\ See id.
    \509\ Commenters provided some examples of advisory board 
composition and activities. See, e.g., Combs Letter (describing that 
the ``Comptroller's Investment Advisory Board,'' which advises the 
state's trust company which in turn manages state funds, is unlike 
an investment adviser in that it doesn't assist with the selection 
of specific investments or investment professionals; that it 
provides general guidance but has no control over what purchases and 
sales are made with state funds; and that although the board members 
have no fiduciary duty, they also have no decisionmaking power); and 
letter from Gregg Abbott, State of Texas, dated February 22, 2011 
(``State of Texas Letter'') (noting that distinguishing between 
governing boards and advisory boards is unworkable as some advisory 
boards are subcommittees of governing boards, some are made up of a 
combination of governing board members and other citizen volunteers, 
and some have no governing board members).
    \510\ Some municipal entity boards also have committees that may 
or may not be comprised of members of the board. See, e.g., letter 
from Jerome Cochrane, University of Pittsburgh, dated February 22, 
2011 (certain committees of the boards of certain Pennsylvania State 
universities include ``non-voting committee members, representing 
members of the public, alumni, faculty, staff and student bodies'').
    \511\ The Commission notes that the exemption for advisory board 
and committee members includes volunteer members of such boards and 
committees.
---------------------------------------------------------------------------

    The Commission does not intend to impede the deliberative process 
that municipal entities engage in with their citizens. Accordingly, the 
registration requirement for municipal advisors does not apply to 
persons who comment on municipal financial products or the issuance of 
municipal securities by making use of public comment forums provided by 
municipal entities or other public forums. Additionally, responding to 
factual questions about a past issuance by a former board member would 
not constitute municipal advisory activities, because providing such 
information in response to questions under such circumstances is 
factual and therefore does not constitute advice with respect to such 
issuance.\512\
---------------------------------------------------------------------------

    \512\ See supra Section III.A.1.b.1. (discussing the advice 
standard in general).
---------------------------------------------------------------------------

    The Commission agrees with commenters that individuals who engage 
in deliberative and decision-making functions with respect to municipal 
financial products or the issuance of municipal securities as part of 
their duties as members of a governing body should not have to register 
as municipal advisors. Such individuals represent the municipal entity 
that is the intended recipient of the protections of the municipal 
advisor registration regime, and the Commission does not consider such 
deliberative and decision-making functions to be advice. Additionally, 
board members and other officials (appointed and elected alike, as well 
as their duly appointed designees) may be subject to state and local 
law, including fiduciary duties and ethics laws, and the statutory 
qualifications for such members' board positions may be significant to 
the mission of the municipal entity. Accordingly, the Commission does 
not believe that imposing an additional layer of regulation, including 
the fiduciary duty imposed upon municipal advisors,\513\ would provide 
a significant additional benefit. The Commission agrees with commenters 
that whether a public official or other member of a governing body of a 
municipal entity is appointed or elected is not the sole factor in 
determining whether such individual is accountable to the municipal 
entity he or she serves. Board members, officials, and employees would 
be required to register, however, if they are engaged by other 
municipal entities or obligated persons to provide services as 
compensated advisors in addition to their normal duties as an employee, 
official, or board member of the municipal entity.\514\
---------------------------------------------------------------------------

    \513\ Section 15B(c)(1) of the Exchange Act (as amended by the 
Dodd-Frank Act) imposes a fiduciary duty on municipal advisors when 
advising municipal entities. See Proposal, 76 FR 827, note 60 and 
accompanying text.
    \514\ Compare with supra note 507 and accompanying text.
---------------------------------------------------------------------------

    For the reasons described above, the Commission finds it consistent 
with the public interest, the protection of investors, and the purposes 
of Section 15B of the Exchange Act, to use its authority pursuant to 
Exchange Act Section 15B(a)(4) to exempt any person serving as a member 
of a governing body, an advisory board, or a committee of, or acting in 
a similar official capacity with respect to, or as an official of, a 
municipal entity to the extent that such person is acting within the 
scope of such person's official capacity.\515\ Accordingly, such 
persons are not required to register as municipal advisors.
---------------------------------------------------------------------------

    \515\ See Rule 15Ba1-1(d)(3)(ii)(A).
---------------------------------------------------------------------------

Employees and Officials of Obligated Persons
    Section 15B(e)(4) of the Exchange Act excludes from the definition 
of municipal advisor persons who are employees of a municipal entity, 
but does not extend such exclusion to employees of obligated persons. 
In the

[[Page 67507]]

Proposal, the Commission asked whether employees of obligated persons 
should be excluded, to the extent they are providing advice to the 
obligated person, acting in its capacity as an obligated person, in 
connection with municipal financial products or the issuance of 
municipal securities.\516\ In addition, the Commission asked whether 
there are types of persons, other than employees of obligated persons, 
who should be excluded from the definition of municipal advisor.\517\ 
In response, the Commission received several comments.
---------------------------------------------------------------------------

    \516\ See Proposal, 76 FR 837.
    \517\ See id.
---------------------------------------------------------------------------

    Some commenters stated that employees, officers, and directors of 
obligated persons should be excluded from the definition of municipal 
advisor when they provide advice to the obligated person with respect 
to municipal financial products or the issuance of municipal 
securities.\518\ More specifically, some commenters stated that board 
members of obligated persons acting within the scope of their duties do 
not give ``advice'' and that it is the obligation of board members to 
communicate with fellow board members and staff.\519\ For example, one 
commenter stated that municipal advisors typically have multiple 
clients, hold themselves out as advisors, and generally do not exercise 
decision making authority for the municipal entity or obligated 
person.\520\ On the other hand, according to this commenter, directors 
and employees of obligated persons act on behalf of and in the interest 
of entities with which they are affiliated and do not hold themselves 
out as advisors.\521\ They act for obligated persons in connection with 
municipal offerings only as part of their responsibilities to the 
obligated person.\522\ Other commenters stated that members of 
governing boards of obligated persons are already subject to state and 
federal laws, such as laws governing non-profit entities, conflict of 
interest laws, ethics laws, and open meeting laws.\523\ Commenters also 
made similar statements with respect to employees of obligated 
persons.\524\ Further, some commenters stated that officers, directors, 
and employees of obligated persons are no different from those of 
municipal entities,\525\ and an obligated person can only act through 
its board and employees.\526\ One commenter suggested, however, that 
individual board members and employees should not be exempt from 
registration if they are engaged to provide services for a nonprofit 
organization as compensated advisors.\527\
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    \518\ See, e.g., NABL Letter; ABA Letter; letter from Duncan 
Gallagher, EVP and Chief Financial Officer, Allina Health System, 
dated February 22, 2011 (``Allina Health System Letter''; letter 
from Jeffrey S. Bromme, Senior Vice President and Chief Legal 
Officer and C. Robert Foltz, Associate Chief Legal Officer--
Treasury, Adventist Health System Sunbelt Healthcare Corporation, 
dated February 11, 2011 (``Adventist Health System Letter'').
    \519\ See, e.g., letter from Charles A. Samuels, Mintz Levin 
Cohn Ferris Glovsky & Popeo, P.C., on behalf of the National 
Association of Health & Educational Facilities Finance Authorities, 
dated February 17, 2011 (``National Association of Health & 
Educational Facilities Finance Authorities Letter''). See also 
Allina Health System Letter; Chapman and Cutler Letter; letter from 
Latham & Watkins, dated February 22, 2011 (``Latham & Watkins 
Letter''); and letter from David W. Lowden, Chair, the Committee on 
Non-Profit Organizations, Association of the Bar of the City of New 
York, dated February 14, 2011 (``New York City Bar Letter'').
    \520\ See Latham & Watkins Letter.
    \521\ See id.
    \522\ See id.
    \523\ See, e.g., Kutak Rock Letter; National Association of 
Health & Educational Facilities Finance Authorities Letter; Latham & 
Watkins Letter; letter from Susan Ellen Wagner, Executive Director, 
Healthcare Trustees of New York State, dated February 16, 2011 
(``Healthcare Trustees of New York State Letter''); William C. 
Daroff, Vice President for Public Policy & Director of the 
Washington Office, Jewish Federations of North America, dated 
February 25, 2011 (``Jewish Federations of North America Letter'').
    \524\ See, e.g., National Association of Health & Educational 
Facilities Finance Authorities Letter; Latham & Watkins Letter; New 
York City Bar Letter; and letter from Corinne Johnson, Executive 
Director, Colorado Health Facilities Authority, Cris White, 
Executive Director, Colorado Housing and Finance Authority, Jo Ann 
Soker, Executive Director, Colorado Educational and Cultural 
Facilities Authority, dated February 18, 2011 (``Colorado Health 
Facilities Letter'').
    \525\ See, e.g., South Lake County Hospital District Letter. See 
also Latham & Watkins Letter.
    \526\ See, e.g., Squire Sanders & Dempsey Letter. See also 
Latham & Watkins Letter; MSRB Letter.
    \527\ See New York City Bar Letter.
---------------------------------------------------------------------------

    Several commenters stated that the MSRB Study,\528\ the legislative 
history of the Dodd-Frank Act, and the Proposal indicate that the term 
``municipal advisor'' is meant to capture professionals that offer 
advisory services in a financial marketplace.\529\ One commenter stated 
that for decades, in regulating the market for financial advice, 
Congress and the Commission have expressly declined to regulate 
internal advice provided by employee to employer.\530\ The commenter 
stated that a departure from this established practice should not be 
inferred, absent a clear indication from Congress, and nothing in the 
language or history of the Dodd-Frank Act signals that Congress 
intended to affect a fundamental shift in policy.\531\
---------------------------------------------------------------------------

    \528\ In April 2009, the MSRB issued a study titled 
``Unregulated Municipal Market Participants: A Case for Reform,'' in 
which the MSRB advocated for the regulation of intermediaries in the 
municipal securities market (such as swap advisors and financial 
advisors). This study was referenced by the Commission in the 
Proposal. See Proposal, 76 FR 825, n.8.
    \529\ See, e.g., letters from Michael B. Koffler and James K. 
Hasson, Jr., Sutherland Asbill & Brennan LLP on behalf of 
Universities, dated February 22, 2011 (``Universities Letter''); 
Richard D. Legon, President, Association of Governing Boards of 
Universities and Colleges, dated February 15, 2011 (``Association of 
Governing Boards of Universities and Colleges Letter'') (stating 
that board members and employees of obligated persons are not 
discussed in the preamble and cost estimates of the Proposal). See 
also letters from Molly Corbett Broad, President, American Council 
on Education, dated February 22, 2011 (``American Council on 
Education Letter''); Daniel G. Kirch, M.D., President and CEO, 
Association of American Medical Colleges, dated February 16, 2011 
(``Association of American Medical Colleges Letter'').
    \530\ See American Council on Education Letter (providing as an 
example in support of their statement that existing registration 
requirements, such as those under the Investment Advisers Act, cover 
firms and persons in the business of providing advice, and that the 
requirements do not regulate employment relationships). See also 
Association of Governing Boards of Universities and Colleges Letter 
(noting that Commission staff has taken the position, in the context 
of a No-Action Letter under the Investment Advisers Act, that 
internal relationships are unlike the commercial relationships 
between an investment adviser and its clients that the Investment 
Advisers Act was intended to regulate).
    \531\ See American Council on Education Letter.
---------------------------------------------------------------------------

    Some commenters stated that the proposed rules would make it 
difficult for obligated persons to recruit and retain board members and 
employees,\532\ discourage officers and board members from engaging in 
matters that are traditionally within their purview,\533\ and disrupt 
the process of borrowing and operations of borrowers and issuers.\534\ 
Other commenters stated that the proposed rules could substantially 
increase the cost of financing \535\ and could cause a potential 
borrower to forego projects using the economic development options 
offered by states and avoid the issuance of municipal bonds.\536\
---------------------------------------------------------------------------

    \532\ See, e.g., letter from Richard L. Clarke, DHA, FHFMA, 
President and CEO, Healthcare Financial Management Association, 
dated February 22, 2011 (``Healthcare Financial Management 
Association Letter''); Latham & Watkins Letter; and New York City 
Bar Letter.
    \533\ See, e.g., Association of American Medical Colleges 
Letter; and New York City Bar Letter.
    \534\ See, e.g., National Association of Health & Educational 
Facilities Finance Authorities Letter.
    \535\ See, e.g., letter from Christopher B. Meister, Executive 
Director, Illinois Finance Authority, dated February 22, 2011 
(``Illinois Finance Authority Letter''). See also SIFMA Letter I.
    \536\ See, e.g., State of Indiana Letter; National Association 
of State Treasurers Letter; and New York City Bar Letter.
---------------------------------------------------------------------------

    As discussed above, one commenter suggested that ``employees and 
board members of a municipal entity should be excluded from regulation 
to the extent they provide advice to an obligated person (and acting in 
the

[[Page 67508]]

purview of their duties).'' \537\ Likewise, employees and board members 
of an obligated person should be excluded from regulation to the extent 
they provide advice to a municipal entity.\538\ On the other hand, 
another commenter stated that employees, officers, and directors of an 
obligated person should be exempt to the extent they provide advice 
solely to the obligated person and not to a municipal entity.\539\ One 
other commenter stated that when an obligated person solicits conduit 
issuers to issue bonds on behalf of the obligated person, such 
solicitation should not require the obligated person or its board 
members or employees to register as municipal advisors.\540\
---------------------------------------------------------------------------

    \537\ See supra note 499 and accompanying text.
    \538\ See Kutak Rock Letter.
    \539\ See ABA Letter.
    \540\ See NABL Letter. See also letter from James E. Potvin, 
Chair and Robert W. Giroux, Executive Director, Vermont Educational 
and Health Buildings Financing Agency, dated February 22, 2011 
(``Vermont Educational and Health Buildings Financing Agency 
Letter''); and National Association of State Treasurers Letter; 
letter from Paul Goldstein, Vice President of Finance, Treasury/
Accounting and Chief Financial Officer, Orlando Health, Inc., dated 
February 18, 2011 (``Orlando Health Letter''). Some commenters 
stated generally that obligated persons should not be required to 
register as municipal advisors. See, e.g., Latham & Watkins Letter.
---------------------------------------------------------------------------

    After considering the comments, the Commission agrees with 
commenters that board members, officers, and employees of obligated 
persons should be treated in the same manner as board members, 
officers, and employees of municipal entities and is using its 
statutory authority to provide an exemption for such persons that is 
parallel to the exemption with respect to municipal entities described 
above.\541\ The Commission believes that this exemption is appropriate, 
because such individuals, when acting in the scope of their duty to the 
obligated person, are accountable to the obligated person. Further, 
board members, officers, and employees of obligated persons serve 
similar functions as board members, officers, and employees of 
municipal entities. Consequently, the Commission is exempting from the 
definition of municipal advisor any employee of an obligated person 
acting within the scope of such person's employment, as well as any 
person serving as a member of a governing body, an advisory board, or a 
committee of, or acting in a similar official capacity with respect to, 
or as an official of, an obligated person to the extent they are acting 
within the scope of their duties.\542\ The Commission believes that, 
like municipal entities, obligated persons and persons who perform 
decision-making functions for, or otherwise act on behalf of, obligated 
persons, when fulfilling their duty to the obligated person, are also 
the intended beneficiaries of the protections afforded by the municipal 
advisor registration requirement. As with respect to municipal 
entities, board members, officials, and employees of obligated persons 
would be required to register, however, if they are engaged by other 
municipal entities or obligated persons to provide services as 
compensated advisors in addition to their normal duties as an employee, 
official, or board member of the obligated person.\543\
---------------------------------------------------------------------------

    \541\ See Rule 15Ba1-1(d)(3)(ii); and supra notes 504-505 and 
accompanying text.
    \542\ See Rule 15Ba1-1(d)(3)(ii). See also notes 504 and 506 and 
accompanying text.
    \543\ As described above, a local government official or 
appointed board member of a municipal entity would not be required 
to register as a municipal advisor if he or she provides advice, in 
the scope of his or her duties to that municipal entity employer, to 
another municipal entity. See supra notes and 496 and 507 
accompanying text. In contrast, if such a person is engaged and 
compensated outside the scope of such duties, he or she would not be 
eligible for the exemption and would be required to register.
---------------------------------------------------------------------------

    For the reasons described above, the Commission finds it consistent 
with the public interest, the protection of investors, and the purposes 
of Section 15B of the Exchange Act, to use its authority pursuant to 
Exchange Act Section 15B(a)(4) to exempt any: (1) Person serving as a 
member of a governing body, an advisory board, or a committee of, or 
acting in a similar official capacity with respect to, or as an 
official of, an obligated person to the extent that such person is 
acting within the scope of such person's official capacity; and (2) 
employee of an obligated person to the extent that such person is 
acting within the scope of such person's employment.\544\ Accordingly, 
such persons are not required to register as municipal advisors.
---------------------------------------------------------------------------

    \544\ See Rule 15Ba1-1(d)(3)(ii).
---------------------------------------------------------------------------

    With regard to the application of the rules to employees or 
governing body members of an obligated person who solicit conduit 
issuers to issue bonds on behalf of the obligated person, the 
Commission notes that these persons are not acting as advisors.\545\ 
Instead, they act as principals seeking an issuance of municipal 
securities by a municipal entity on behalf of the obligated person 
pursuant to an arm's-length loan (or similar) agreement under which the 
obligated person will be required to pay debt service and other costs 
upon bond issuance. The Commission notes that these individuals would 
not be required to register as municipal advisors, because they are not 
advising a municipal entity with respect to the issuance of municipal 
securities or soliciting a municipal entity on behalf of a broker, 
dealer, municipal securities dealer, municipal advisor, or investment 
adviser for the purpose of obtaining or retaining an engagement for 
such person. However, an employee, governing board member or other 
official of an obligated person could still be deemed to be engaged in 
municipal advisory activities (which include solicitation activities) 
if his or her recommendations cannot be properly characterized as 
negotiations of the terms by which the obligated person is agreeing to 
engage in the borrowing through the municipal entity.\546\
---------------------------------------------------------------------------

    \545\ See supra note 540 and accompanying text.
    \546\ See supra Section III.A.b.i. (discussing the advice 
standard in general) and Section III.A.b.x. (discussing solicitation 
of a municipal entity or obligated person).
---------------------------------------------------------------------------

    Regardless of an individual's title as a member of a governing 
body, an employee, or other official (appointed or elected) of a 
municipal entity or obligated person, the Commission notes that the 
exemptions described above do not apply to the extent such individual 
acts outside of the scope of authority of his or her position.\547\
---------------------------------------------------------------------------

    \547\ The exemption only applies ``to the extent such person is 
acting within the scope of such person's official capacity'' or 
``employment,'' as applicable. See Rule 15Ba1-1(d)(3)(ii).
---------------------------------------------------------------------------

ii. Responses to Requests for Proposals or Requests for Qualifications
    In the Proposal, the Commission requested comment about banks that 
respond to municipal entities' RFPs regarding investment products 
offered, such as money market mutual funds or other exempt 
securities.\548\ The Commission received a number of comments regarding 
responses to RFPs or RFQs by banks and other entities.\549\
---------------------------------------------------------------------------

    \548\ See Proposal, 76 FR 837.
    \549\ See also supra notes 421-423 and accompanying text 
(discussing RFPs and RFQs in the context of the solicitation prong, 
including whether a market professional's activities assisting a 
municipal entity or obligated person in their selection of another 
market professional as part of an RFP process constitute municipal 
advisory activities); and infra Section III.A.1.c.vii. (discussing 
the treatment of responses by attorneys to RFPs from municipal 
entities and obligated persons).
---------------------------------------------------------------------------

    Several commenters stated that responses to RFPs and RFQs should 
not require a person to register as a municipal advisor. For example, 
one commenter suggested that, with respect to municipal derivatives, 
responding to RFPs or RFQs from a municipal entity or obligated person 
does not constitute ``advice.'' \550\ Similarly, another commenter 
stated generally that certain

[[Page 67509]]

activities should be expressly excluded from the definition of 
``advice,'' including responding to RFPs or RFQs and providing terms on 
which a financial institution would be prepared to enter into a 
transaction or purchase securities issued by a municipal entity.\551\ 
This commenter also stated that bid documents submitted in response to 
a municipal entity's request for private financing proposals should not 
constitute advice.\552\ Another commenter concurred that responses to 
RFPs should not be treated as advice.\553\
---------------------------------------------------------------------------

    \550\ See BNY Letter.
    \551\ See Letter from Nick Butcher, Senior Managing Director, 
Macquarie Capital Advisors, dated February 22, 2011 (``Macquarie 
Letter'').
    \552\ See Macquarie Letter.
    \553\ See OCC Letter. This commenter stated, among other things, 
that banks respond to RFPs on a competitive basis, and many 
municipalities are required by statute to issue RFPs to banks for 
their operating accounts. See id.
---------------------------------------------------------------------------

    The Commission has carefully considered the issues raised by 
commenters on the Proposal and agrees that responses to RFPs or RFQs 
alone do not constitute municipal advisory activities.\554\ Therefore, 
the Commission is adopting Rule 15Ba1-1(d)(3)(iv), which exempts from 
the definition of municipal advisor ``[a]ny person providing a response 
in writing or orally to a request for proposals or qualifications from 
a municipal entity or obligated person for services in connection with 
a municipal financial product or the issuance of municipal securities; 
provided however, that such person does not receive separate direct or 
indirect compensation for advice provided as part of such response.'' 
\555\
---------------------------------------------------------------------------

    \554\ For a discussion of RFPs and RFQs in the context of the 
solicitation prong, see supra notes 421-423 and accompanying text.
    \555\ The Commission notes that FINRA applies a similar approach 
in connection with the application of its suitability rule to 
broker-dealers. See FINRA Rule 2111. In a recent Regulatory Notice, 
FINRA explained that, where a registered representative makes a 
recommendation to purchase a security to a potential investor, the 
suitability rule would apply to the recommendation if that 
individual executes the transaction through the broker-dealer with 
which the registered representative is associated or the broker-
dealer receives or will receive, directly or indirectly, 
compensation as a result of the recommended transaction. See FINRA 
Regulatory Notice 12-55. For purposes of the municipal advisor 
registration rules, if a person is selected as a result of an RFP or 
RFQ, any applicable law or rule (e.g., fair dealing, suitability, 
fiduciary duty) will apply to that person's activities in the role 
for which the person was selected.
---------------------------------------------------------------------------

    Responses to RFPs or RFQs are provided at the request of, and 
established by, a municipal entity or obligated person as part of a 
competitive process. Therefore, it is reasonable to believe that the 
municipal entity or obligated person would understand that service 
providers respond to RFPs and RFQs in order to obtain business and 
would not rely on such responses as it would on advice from its 
advisor. Further, persons who respond to RFPs or RFQs are likely to be 
already regulated entities, such as registered municipal advisors, 
brokers, dealers, or investment advisers. Accordingly, their responses 
may be subject to fair dealing, suitability, or other standards. 
Moreover, if a person is selected by a municipal entity or obligated 
person as a result of an RFP or RFQ, such person could be required to 
register as a municipal advisor for its subsequent activities.
    For the same reasons discussed above for other RFPs, the exemption 
pursuant to Rule 15Ba1-1(d)(3)(iv) also includes responses to so-called 
``mini-RFPs'' that might only be distributed to service providers that 
have been pre-screened or pre-qualified by the municipal entity or 
obligated person. For the exemption to apply, a person providing advice 
in response to an RFP or RFQ may not be separately compensated for 
advice given as part of the RFP or RFQ process. Further, the 
compensation such person receives, if hired as a result of the RFP or 
RFQ, is not direct or indirect compensation for the advice provided as 
part of the RFP or RFQ. However, assisting with the preparation of an 
RFP or RFQ on behalf of a municipal entity or obligated person, or 
assisting in the selection of a broker-dealer, investment adviser, or 
financial advisor as part of an RFP process, could constitute municipal 
advisory activity. Specifically, in assisting in the preparation of an 
RFP or RFQ, a person could provide advice with respect to the 
parameters of such RFP or RFQ, such as the potential use of municipal 
financial products or the issuance of municipal securities. Further, in 
assisting in the selection of a broker-dealer, investment adviser, or 
municipal advisor as part of an RFP process, a person could provide 
advice with respect to the responses to the RFP, including responses 
related to the use of municipal financial products or the issuance of 
municipal securities.\556\
---------------------------------------------------------------------------

    \556\ A person assisting a municipal entity or obligated person 
in selecting a broker-dealer, investment adviser, or financial 
advisor as part of an RFP process established by the municipal 
entity or obligated person would not, however, be considered to be 
undertaking a solicitation for purposes of the definition of 
municipal advisor in Rule 15Ba1-1(d)(1), because such person would 
not be soliciting ``on behalf of'' such broker-dealer, investment 
adviser, or financial advisor. See supra Section III.A.1.b.x. 
(discussing generally solicitation of a municipal entity or 
obligated person). See also Rule 15Ba1-1(n) (defining solicitation 
of a municipal entity or obligated person).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds it consistent with 
the public interest, the protection of investors, and the purposes of 
Section 15B of the Exchange Act, to use its authority pursuant to 
Exchange Act Section 15B(a)(4) \557\ to exempt persons responding to 
RFPs and RFQs from the definition of municipal advisor, subject to the 
limitations described above.
---------------------------------------------------------------------------

    \557\ Pursuant to Section 15B of the Exchange Act, the 
Commission may exempt any class of municipal advisors from any 
provision of Section 15B or the rules and regulations thereunder, if 
it ``finds that such exemption is consistent with the public 
interest, the protection of investors, and the purpose of [Section 
15B].'' See 15 U.S.C. 78o-4(a)(4).
---------------------------------------------------------------------------

iii. Municipal Entity or Obligated Person Represented by an Independent 
Municipal Advisor
    In the Proposal, the Commission sought comment on whether it should 
provide other exclusions from the definition of municipal advisor.\558\ 
Several commenters suggested that a person providing advice with 
respect to municipal financial products or the issuance of municipal 
securities should not be regulated as a municipal advisor if the 
municipal entity or obligated person is otherwise represented by a 
municipal advisor with respect to the transaction.\559\ One commenter 
argued that the Commission should provide that a person will not be 
regulated as a municipal advisor to a municipal entity or obligated 
person if such municipal entity or obligated person is or will be 
represented by an ``independent advisor'' that is a registered 
municipal advisor (or that is eligible for an exception) and any 
relevant documentation states that: (1) The person is not acting as an 
``advisor;'' and (2) the municipal entity or obligated person is not 
relying on any advisory communications from such person.\560\ According 
to another commenter, ``when a municipality has engaged an independent 
financial advisor in connection with a proposed transaction, 
unaffiliated counterparties or potential counterparties to the 
transaction should not be deemed to be providing advice to the 
municipality as it has already elected an entity to fulfill that 
role.'' \561\ Another commenter stated that, in most cases where a bank 
is ``providing a municipal derivative or other bank products and 
services to a municipal entity or obligated person, a third party

[[Page 67510]]

advisor is providing advice on the transaction to the municipal entity 
or obligated person.'' \562\ This commenter suggested that the 
existence of such a third party relationship should be viewed as 
evidence that the municipal entity or obligated person is not relying 
on the bank for advice.\563\
---------------------------------------------------------------------------

    \558\ See Proposal, 76 FR 838.
    \559\ See, e.g., SIFMA Letter I; letter from Adella M. Heard, 
Senior Vice President and Assistant General Counsel, First Tennessee 
Bank National Association, dated February 18, 2011 (``First 
Tennessee Bank National Association Letter''); BNY Letter.
    \560\ See SIFMA Letter I.
    \561\ See First Tennessee Bank National Association Letter.
    \562\ See BNY Letter.
    \563\ See BNY Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered these comments and is 
adopting Rule 15Ba1-1(d)(3)(vi), which exempts from the municipal 
advisor definition any person engaging in municipal advisory activities 
in a circumstance in which a municipal entity or obligated person is 
otherwise represented by an independent registered municipal advisor 
with respect to the same aspects of a municipal financial product or an 
issuance of municipal securities, provided that the following 
requirements are met.\564\ First, an independent registered municipal 
advisor must be providing advice with respect to the same aspects of 
the municipal financial product or issuance of municipal securities as 
the person seeking to rely on Rule 15Ba1-1(d)(3)(vi).\565\ For purposes 
of Rule 15Ba1-1(d)(3)(vi), the term ``independent registered municipal 
advisor'' means a municipal advisor registered pursuant to Section 15B 
of the Exchange Act and the rules and regulations thereunder and that 
is not, and within at least the past two years was not, associated 
\566\ with the person seeking to rely on Rule 15Ba1-1(d)(3)(vi). The 
Commission believes that a two year cooling-off period represents an 
appropriate period of time to help remove any actual or perceived 
influence over a municipal advisor's ability to exercise independent 
judgment when engaging in municipal advisory activities.\567\ Second, a 
person seeking to rely on this exemption must receive from the 
municipal entity or obligated person a representation in writing that 
it is represented by, and will rely on the advice of, an independent 
registered municipal advisor, and such person has a reasonable basis 
for relying on the representation.\568\ Third, such person must provide 
the required disclosures to the municipal entity or obligated person, 
and provide a copy of such disclosures to the municipal entity's or 
obligated person's independent registered municipal advisor. With 
respect to a municipal entity, such person must disclose in writing to 
the municipal entity that, by obtaining such representation from the 
municipal entity, such person is not a municipal advisor and is not 
subject to the fiduciary duty established in Section 15B(c)(1) of the 
Exchange Act with respect to the municipal financial product or 
issuance of municipal securities.\569\ With respect to an obligated 
person, such person must disclose in writing to the obligated person 
that, by obtaining such representation from the obligated person, such 
person is not a municipal advisor with respect to the municipal 
financial product or issuance of municipal securities.\570\ The rule 
also requires that each such disclosure must be made at a time and in a 
manner reasonably designed to allow the municipal entity or obligated 
person to assess the material incentives and conflicts of interest that 
such person may have in connection with the municipal advisory 
activities.\571\ The level and timing of disclosure required may vary 
according to the issuer's knowledge or experience.\572\
---------------------------------------------------------------------------

    \564\ See Rule 15Ba1-1(d)(3)(vi).
    \565\ See Rule 15Ba1-1(d)(3)(vi)(A).
    \566\ For purposes of the definition of ``independent registered 
municipal advisor'' in Rule 15Ba1-1(d)(3)(vi), the criteria for 
association set forth in Section 15B(e)(7) (15 U.S.C. 78o-4(e)(7)) 
will apply. See Rule 15Ba1-1(d)(3)(vi)(A).
    \567\ A two-year period is also used to determine whether an 
individual is a ``public representative'' for purposes of MSRB Board 
membership. Specifically, for purposes of determining whether an 
individual is a public representative, the MSRB defined the term 
``no material business relationship'' to mean that, at a minimum, 
the individual is not and, within the last two years, was not 
associated with a municipal securities broker, municipal securities 
dealer, or municipal advisor, and that the individual does not have 
a relationship with any municipal securities broker, municipal 
securities dealer, or municipal advisor, whether compensatory or 
otherwise, that reasonably could affect the independent judgment or 
decision making of the individual. See Securities Exchange Act 
Release No. 63025 (September 30, 2010), 75 FR 61806, 61808 (October 
6, 2010) (SR-MSRB-2010-08). Further, Rule 206(4)-5(a)(1) under the 
Investment Advisers Act prohibits investment advisers from receiving 
compensation for providing advice to a ``government entity'' within 
two years after a ``contribution'' to an ``official'' of the 
government entity has been made by the investment adviser or by any 
of its ``covered associates.'' See 17 CFR 275.206(4)-5(a)(1). In 
adopting this rule, the Commission stated that the two-year time out 
is intended to discourage advisers from participating in pay-to-play 
practices by requiring a cooling off period during which the effects 
of a political contribution on the selection process can be expected 
to dissipate. See Political Contributions Final Rule, 75 FR 41026.
    \568\ See Rule 15Ba1-1(d)(3)(vi)(B). The same standards and 
principles apply in determining whether a person has a reasonable 
basis for reliance as discussed previously with respect to reliance 
on representations regarding proceeds determinations. See supra 
notes 364-365 and accompanying text.
    \569\ See Rule 15Ba1-1(d)(3)(vi)(C)(1).
    \570\ See Rule 15Ba1-1(d)(3)(vi)(C)(2).
    \571\ See Rule 15Ba1-1(d)(3)(vi)(C)(3). The CFTC's business 
conduct standards for swap dealers and major swap participants 
contain similar standards for disclosure to counterparties. 
Specifically, CFTC Rule 23.431(a) states that: ``At a reasonably 
sufficient time prior to entering into a swap, a swap dealer or 
major swap participant shall disclose to any counterparty to the 
swap (other than a swap dealer, major swap participant, security-
based swap dealer, or major security-based swap participant) 
material information concerning the swap in a manner reasonably 
designed to allow the counterparty to assess [risks, 
characteristics, and conflicts of interest related to the swap.]'' 
17 CFR 23.431(a).
    \572\ The Commission believes that some municipal advisors are 
already familiar with this disclosure level and timing standard. See 
Interpretive Notice Concerning the Application of MSRB Rule G-17 to 
Underwriters of Municipal Securities (August 2, 2012), available at 
http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-17.aspx?tab=2 (stating that ``[t]he level of disclosure 
required may vary according to the issuer's knowledge or experience 
with the proposed financing structure or similar structures, 
capability of evaluating the risks of the recommended financing, and 
financial ability to bear the risks of the recommended financing, in 
each case based on the reasonable belief of the underwriter''); MSRB 
Notice 2013-08 (March 25, 2013) MSRB Answers Frequently Asked 
Questions (FAQS) Regarding an Underwriter's Disclosure Obligations 
to State and Local Government Issuer Under Rule G-17, available at 
http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2013/2013-08.aspx (referencing the requirement under the 
Interpretive Notice Concerning the Application of MSRB Rule G-17 
that the arm's length nature of the relationship be provided ``At 
the earliest stages of the relationship, generally at or before a 
response to a request for proposals or promotional materials are 
delivered to an issuer.'').
---------------------------------------------------------------------------

    The requirement that a copy of the disclosure be provided to the 
independent registered municipal advisor is not intended to alter the 
nature of the duty owed by the municipal advisor to its municipal 
entity or obligated person client or the nature of such municipal 
advisor's engagement.
    The Commission believes that exempting persons advising a municipal 
entity or obligated person from the definition of municipal advisor 
when the municipal entity or obligated person is represented by an 
independent registered municipal advisor is consistent with the public 
interest, the protection of investors, and the purposes of Section 15B 
of the Exchange Act. The Commission believes that Rule 15Ba1-
1(d)(3)(vi) will allow parties to a municipal securities transaction 
and others who are not registered municipal advisors to share advice 
with municipal entities and obligated persons so long as the municipal 
entity or obligated person is represented by an independent registered 
municipal advisor. A municipal entity represented by an independent 
registered municipal advisor will have the benefits associated with the 
regulation of municipal advisors. Such benefits include, but are not 
limited to, standards of conduct, training, and testing for municipal

[[Page 67511]]

advisors that may be required by the Commission or the MSRB, other 
requirements unique to municipal advisors that may be imposed by the 
MSRB,\573\ and fiduciary duty. While independent registered municipal 
advisors do not owe a fiduciary duty to obligated persons, the 
Commission notes that they have a duty to deal fairly with obligated 
persons under MSRB Rule G-17.\574\ Also, as noted by commenters, the 
engagement by a municipal entity or obligated person of an independent 
registered municipal advisor indicates that the municipal entity or 
obligated person intends to rely on the advice of that advisor. Rule 
15Ba1-1(d)(3)(vi) requires that this intention be further evidenced by 
a written representation that the municipal entity or obligated person 
will rely on the advice of an independent registered municipal advisor. 
Further, Rule 15Ba1-1(d)(3)(vi) requires the person receiving such 
representation to have a reasonable basis for relying on the 
representation.
---------------------------------------------------------------------------

    \573\ See supra note 190.
    \574\ See MSRB Rule G-17.
---------------------------------------------------------------------------

    So long as a municipal entity or obligated person is represented by 
and relies on an independent registered municipal advisor, the 
Commission believes it is appropriate to allow municipal entities and 
obligated persons to receive as much advice and information as possible 
from a variety of sources, even if the providers of such advice are not 
subject to a fiduciary duty. The Commission does not seek to curtail 
the receipt of important advice and information so long as the 
municipal entities and obligated persons are represented by and rely on 
independent registered municipal advisors who are subject to a 
fiduciary or other duties and who can help the municipal entities and 
obligated persons evaluate the advice and identify potential conflicts 
of interest. Further, the requirement that a person seeking to rely on 
this rule provide a copy of the disclosures under Rule 15Ba1-
1(d)(3)(vi)(C) to the independent registered municipal advisor will 
help timely inform the independent registered municipal advisor that 
the municipal entity or obligated person is receiving advice from a 
person seeking to rely on Rule 15Ba1-1(d)(3)(vi).
    In addition, certain persons that may engage in municipal advisory 
activities could also be counterparties to a municipal entity or 
obligated person, such as swap dealers and security-based swap dealers. 
The requirement for such persons to register as municipal advisors 
could be inconsistent with their roles as counterparties to the 
municipal entity or obligated person. While the Commission is 
separately providing certain exemptions for counterparties of municipal 
entities and obligated persons,\575\ such persons may also consider 
whether they can rely on this exemption.
---------------------------------------------------------------------------

    \575\ See, e.g., infra Section III.A.1.c.vi. (discussing an 
exemption for swap dealers).
---------------------------------------------------------------------------

iv. Broker, Dealer, or Municipal Securities Dealer Serving as an 
Underwriter
    Exchange Act Section 15B(e)(4)(C) provides that the term 
``municipal advisor'' does not include a broker, dealer, or municipal 
securities dealer serving as an underwriter (as defined in Section 
2(a)(11) of the Securities Act) (the ``underwriter exclusion'').\576\ 
In the Proposal, the Commission proposed to interpret this statutory 
underwriter exclusion to apply solely to a broker, dealer, or municipal 
securities dealer serving as an underwriter in connection with the 
issuance of municipal securities.\577\ Further, the Commission proposed 
that this exclusion would not apply when such persons are acting in a 
capacity other than as an underwriter, and that, for example, this 
exclusion would not apply to advice with respect to the investment of 
bond proceeds or municipal derivatives.\578\
---------------------------------------------------------------------------

    \576\ See 15 U.S.C. 78o-4(e)(4)(C).
    \577\ See Proposal, 76 FR 832 and proposed Rule 15Ba1-
1(d)(2)(ii). See also Temporary Registration Rule Release, 75 FR 
54467, note 19. In the Proposal, the Commission stated its belief 
that Congress excluded from the definition of municipal advisor a 
broker, dealer, or municipal securities dealer acting as an 
underwriter on behalf of a municipal entity or obligated person in 
connection with the issuance of municipal securities because such 
activity is already subject to MSRB rules. See Proposal, 76 FR 832, 
note 107.
    \578\ See Proposal, 76 FR 832.
---------------------------------------------------------------------------

    In the Proposal, the Commission requested comment on whether its 
interpretation of the statutory exclusion from the definition of 
municipal advisor for a broker, dealer, or municipal securities dealer 
serving as an underwriter was appropriate.\579\ The Commission received 
approximately 20 comment letters addressing the scope of this 
underwriter exclusion. Most commenters suggested that this exclusion 
should cover broker-dealer activities already subject to 
regulation,\580\ and some commenters suggested that it should cover 
broker-dealer activities that are solely incidental to underwriting an 
issuance of municipal securities.\581\ By contrast, other commenters 
supported a more limited scope for the underwriter exclusion, stating, 
for example, that ``[u]nless the Commission recognizes and implements 
in an appropriate manner the narrow character of the underwriter 
definition referenced in the Dodd-Frank Act, the Commission will be 
diminishing otherwise important protections for municipal entities and 
obligated persons provided in that Act.'' \582\ Another commenter 
suggested that the Commission clarify that an underwriter is not 
permitted to provide ``advice'' with respect to the structure, timing, 
or terms of the bond issue it seeks to purchase and distribute.\583\
---------------------------------------------------------------------------

    \579\ See id., at 836.
    \580\ See, e.g., letter from JoAnn Bourne, Senior Executive Vice 
President, Global Treasury Management, Union Bank, N.A., dated 
February 18, 2011 (``Union Bank Letter'') (stating the belief that, 
while the Dodd-Frank Act only provided an exclusion for brokers and 
dealers when they are serving as underwriters, Congress did not 
intend to impose an additional level of regulation on broker-dealers 
when they are providing advice that is already subject to 
regulation); SIFMA Letter I; and letter from Noreen Roche-Carter, 
Chair, Tax & Finance Task Force, Large Public Power Council, dated 
February 22, 2011 (``Large Public Power Council Letter'') (stating 
that ``[b]y limiting that exemption to instances where the broker-
dealer is acting as an underwriter, we are concerned this will limit 
the types of services provided to our members by broker-dealers 
compared to what has traditionally been provided to our members'').
    \581\ See infra note 637 and accompanying text.
    \582\ See, e.g., letter from Robert Doty, AGFS, dated February 
22, 2011 (``Doty Letter I'').
    \583\ See letter from Colette-Irwin Knott, CIPFA, President, 
National Association of Independent Public Finance Advisors, dated 
February 22, 2011 (``NAIPFA Letter'').
---------------------------------------------------------------------------

    The Commission has carefully considered comments submitted about 
the underwriter exclusion in the Proposal, as discussed further below, 
and is adopting its proposed interpretation of the statutory 
underwriter exclusion, with modifications and clarifications designed 
to address commenters' concerns. Specifically, Rule 15Ba1-1(d)(2)(i) 
provides that the term ``municipal advisor'' shall not include a 
``broker, dealer, or municipal securities dealer serving as an 
underwriter of a particular issuance of municipal securities to the 
extent that the broker, dealer, or municipal securities dealer engages 
in activities that are within the scope of an underwriting of such 
issuance of municipal securities.''
    Under the Commission's modified interpretation of the underwriter 
exclusion, if a broker, dealer, or municipal securities dealer is 
serving as an underwriter of a particular issuance of municipal 
securities, the underwriter exclusion would include advice provided by 
that underwriter within the scope of underwriting and would generally 
include advice with respect to the structure, timing, terms, and other 
similar matters concerning that issuance of municipal securities.

[[Page 67512]]

    It is important to note that the following advice would be outside 
the scope of an underwriting for purposes of this exclusion: (1) Advice 
on investment strategies; (2) advice on municipal derivatives; and (3) 
advice otherwise identified by the Commission to be outside the scope 
of an underwriting.\584\ Such advice generally is not within the scope 
of serving as an underwriter on an issuance of municipal securities and 
can raise issues that implicate the policy objectives of municipal 
advisor registration. For example, municipal entities suffered 
significant losses in the financial crisis related to advice on complex 
municipal derivatives,\585\ and advice on investments,\586\ such as 
refunding escrow investments provided by underwriters \587\ and 
investments involving fraud in investment bidding procedures,\588\ has 
been the subject of significant enforcement activity. In other 
circumstances, such advice may create conflicts of interest for an 
underwriter, such as when the advice addresses whether to issue debt or 
whether to conduct a competitive sale instead of a negotiated 
underwriting. In addition, as discussed further below, the underwriter 
exclusion does not include all activities that may be solely incidental 
to an underwriting, such as advice on investment strategies or advice 
on municipal derivatives, because these activities are not within the 
scope of an underwriting and are activities for which municipal 
entities and obligated persons require the protections afforded by 
municipal advisors.
---------------------------------------------------------------------------

    \584\ See infra note 612 and accompanying text.
    \585\ See supra note 3 and accompanying text.
    \586\ See supra note 106 and accompanying text.
    \587\ See supra note 380 and accompanying text.
    \588\ See supra note 287 and accompanying text.
---------------------------------------------------------------------------

    Although, as noted above, ``issuance of municipal securities'' 
should be construed broadly,\589\ the Commission believes that, in 
order for a person to be ``serving as an underwriter'' \590\ with 
respect to an issuance of municipal securities, there must be a 
relationship to a particular transaction.\591\ For example, a 
contractual engagement by a municipal entity of a broker-dealer to 
serve as underwriter on a specific planned transaction for the issuance 
of municipal securities would constitute the requisite engagement on a 
particular issuance of municipal securities. By contrast, an engagement 
by a municipal entity of a broker-dealer to serve as underwriter for 
some period of time or to serve as a member of an underwriting ``pool'' 
without specifying the broker-dealer's assignment expressly to serve as 
underwriter on one or more particular planned transactions would not 
constitute serving as an underwriter on a particular issuance of 
municipal securities. Further, an underwriter providing advice with 
respect to related transactions or tranches on which it is not engaged 
would be acting within the scope of the underwriter exclusion only if 
such advice is also related to the tranche or transaction on which the 
underwriter is engaged. For example, an underwriter may give advice 
about the timing of a sale of a related transaction on which it is not 
engaged by noting that shifting the timing of such sale will have a 
positive impact on market demand for the transaction on which it is 
engaged. Such advice would fall within the underwriter exclusion 
because such advice concerns the timing of the particular issuance of 
municipal securities for which it is acting as underwriter and is not 
regarded by the Commission as being outside the scope of an 
underwriting.
---------------------------------------------------------------------------

    \589\ See supra Section III.A.1.b.vii (discussing the term 
``issuance of municipal securities'').
    \590\ See Rule 15Ba1-1(d)(2)(i).
    \591\ See, e.g., In re Laser Arms Corp. Sec. Litig., 794 F.Supp. 
475, 484 (S.D.N.Y. 1989) (citing L. LOSS, THE FUNDAMENTALS OF 
SECURITIES REGULATION 278 (1983)). As set forth in Section 2(11) of 
the Securities Act, the definition of a statutory underwriter turns 
on the relationship of the party and the offering. Professor Loss 
has observed that ``[t]he term `underwriter' is defined not with 
reference to the particular person's general business but on the 
basis of his relationship to the particular offering.''
---------------------------------------------------------------------------

    The Commission recognizes, however, that a municipal entity issuer 
may wish to request advice on an issuance of municipal securities from 
a broker-dealer serving as a member of its underwriting ``pool'' that 
does not yet have a specific assignment or from a broker-dealer engaged 
on related transactions or tranches. In such circumstances, the broker-
dealer could respond within the requirements of one of the other 
exemptions of general applicability discussed above. For example, if 
the municipal entity issuer was seeking the advice in response to a 
``mini-RFP'' sent to members of the underwriting pool, the broker-
dealer could respond and provide advice within the limitations of the 
exemption for responses to RFPs and RFQs.\592\ In addition, if the 
municipal entity is represented by an independent registered municipal 
advisor with respect to such issuance of municipal securities, the 
broker-dealer could respond and provide advice if the requirements of 
the exemption available when a municipal entity is otherwise 
represented by an independent registered municipal advisor with respect 
to the same aspects of the issuance of municipal securities were 
satisfied.\593\ Finally, depending on the nature of the requested 
information and the response, it might be considered a communication or 
effort to win business that is not municipal advisory activity.\594\
---------------------------------------------------------------------------

    \592\ See supra Section III.A.1.c.ii.
    \593\ See supra Section III.A.1.c.iii.
    \594\ See infra notes 615-618 and accompanying text.
---------------------------------------------------------------------------

    In response to commenters that suggested that underwriters should 
not be permitted to provide ``advice'' with respect to the structure, 
timing and terms of the bond issue it seeks to purchase and 
distribute,\595\ the Commission points out that, subsequent to the 
Proposal, the MSRB provided additional interpretive guidance under MSRB 
Rule G-17, which requires that brokers, dealers, and municipal 
securities dealers acting as underwriters make certain disclosures to 
municipal issuers about the roles of underwriters in negotiated sales 
of municipal securities, including disclosures about their duty of fair 
dealing with a municipal issuer (but not a fiduciary duty to a 
municipal issuer) and their actual or potential, material conflicts of 
interest. The Commission continues to believe that allowing 
underwriters to give advice within the scope of an underwriting with 
respect to the structure, timing, terms, and other similar matters 
concerning an issuance is consistent with the aim of improving the 
quality of advice that municipal entities and obligated persons 
receive, because these Rule G-17 disclosure requirements should assist 
them in clarifying the duties of underwriters to municipal issuers, 
identifying conflicts of interest, and appropriately evaluating the 
advice they receive from underwriters with that informed 
perspective.\596\
---------------------------------------------------------------------------

    \595\ See, e.g., NAIPFA Letter.
    \596\ See MSRB Notice 2012-25 (May 7, 2012) (Securities and 
Exchange Commission Approves Interpretive Notice on the Duties of 
Underwriters to State and Local Government Issuers). In response to 
comments on this Rule G-17 interpretive guidance, the MSRB also 
indicated that it would continue to study whether to impose a 
suitability standard on the types of financial products (including 
types of bond structures) that may be sold to municipal entities. 
See letter from Margaret Henry, General Counsel, Market Regulation, 
MSRB, dated February 13, 2012, available at http://www.sec.gov/comments/sr-msrb-2011-09/msrb201109-24.pdf.
---------------------------------------------------------------------------

    The Commission continues to believe that a broker, dealer, or 
municipal securities dealer engaging in municipal advisory activities 
outside the scope of underwriting a particular issuance of municipal 
securities should be subject to municipal advisor registration, absent 
the availability of another exemption or exclusion. With respect to the 
treatment of advice on municipal derivatives as

[[Page 67513]]

outside the underwriter exclusion, the Commission notes that one 
purpose of the municipal advisor provision in the Dodd-Frank Act was to 
address concerns about advice to municipalities on complex municipal 
derivatives in which municipalities suffered significant losses in the 
financial crisis.\597\
---------------------------------------------------------------------------

    \597\ See S. Rep. No. 111-176, at 38 (2010).
---------------------------------------------------------------------------

    Several commenters requested additional guidance from the 
Commission regarding the types of activities that would fall within the 
Commission's interpretation of the statutory underwriter exclusion for 
activity within the scope of an underwriting of an issuance of 
municipal securities. For example, one commenter stated that the 
exclusion should clearly extend to a full range of activities ``closely 
related'' to the underwriting.\598\ Another commenter asserted that 
certain municipal advisory activities and, in particular, certain 
``transaction-related services'' provided by underwriters are integral 
to fulfilling the function of an underwriter in a professional manner 
but did not specify which activities were integral.\599\ A few 
commenters stated that the Proposal did not provide sufficient guidance 
regarding the scope of the underwriter exclusion and requested further 
clarification.\600\
---------------------------------------------------------------------------

    \598\ See SIFMA Letter I. This commenter recommended that 
covered activities for the underwriter exclusion should include: (1) 
Advice regarding the issuance of municipal securities, municipal 
financial products, or any other securities in the context of an 
underwriting; (2) advice on the advisability of a municipal 
derivative (including entering into a new derivative or amending or 
terminating an existing derivative) in connection with an 
underwriting; (3) advice in the capacity of a member of the 
municipal entity or obligated person's underwriting pool, even if 
not in the context of a particular deal, or other services after the 
closing of an issuance of municipal securities but which relate to 
the issuance for which the underwriter acted as an underwriter; (4) 
communications and analyses that are part of an effort or 
presentation to obtain business from the municipal entity or 
obligated person, or otherwise part of seeking to serve as an 
underwriter on future transactions; (5) assistance on related 
transactions and related tranches of the offering; and (6) service 
as a dealer-manager on a related tender or exchange offer for 
outstanding securities.
    \599\ See letter from Alan Polsky, Chair, MSRB, dated November 
9, 2011 (``MSRB Letter II'') (including a listing of transaction-
related services of which, according to the commenter, some may be 
appropriately performed by a broker-dealer as part of an 
underwriting). See also letter from Robert K. Dalton, Vice Chairman, 
George K. Baum & Company, dated December 20, 2011 (the ``Baum 
Letter'') (noting that in the text of their November 9, 2011 letter 
the MSRB noted that not only transaction-related services are 
integral to an underwriting). But see NAIPFA Letter and letter from 
Colette Irwin-Knott, President, NAIPFA, dated November 30, 2011 
(``NAIPFA Letter II'') (stating its belief that certain of such 
transaction-related services listed in the MSRB's letter are not so 
``integrally related'' to an underwriter's duties to warrant 
exclusion from regulation as a municipal advisor).
    \600\ See, e.g., letter from Robert J. Stracks, Counsel, BMO 
Capital Markets GKST Inc., dated February 22, 2011 (``BMO Capital 
Markets Letter'') (stating that the Commission has made no attempt 
to clarify the myriad of confusing issues it has raised with respect 
to the exclusion for underwriters); Joy Howard WM Financial 
Strategies Letter (stating that ``it is unclear what trigger event 
would create an underwriting relationship as opposed to a municipal 
advisory relationship''); Bond Dealers of America Letter (noting 
that the underwriter exclusion is not clearly defined).
---------------------------------------------------------------------------

    Set forth below are non-exclusive examples of activities that the 
Commission considers to be within or outside the scope of the 
underwriter exclusion to the municipal advisor definition, 
respectively.
Examples of Activities Within the Scope of Serving as an Underwriter of 
a Particular Issuance Municipal Securities for Purposes of the 
Underwriter Exclusion
    The Commission agrees with those commenters \601\ that stated that 
it is not possible to provide an exhaustive list of all activities that 
would be considered to be within the scope of an underwriting. As a 
general matter, the Commission considers activities that are integral 
to the purchase and distribution of a particular issuance of municipal 
securities on which a broker, dealer, or municipal securities dealer is 
engaged to serve in the capacity as underwriter to be within the scope 
of the underwriter exclusion. The Commission also considers activities 
that are integral to fulfilling the role of an underwriter, such as the 
obligations of underwriters under the antifraud provisions of the 
federal securities laws and obligations of underwriters under MSRB 
rules, to be within the scope of an underwriting.\602\
---------------------------------------------------------------------------

    \601\ See, e.g., MSRB Letter II.
    \602\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799, 2811-28812 (July 10, 1989); Securities Exchange 
Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33123-33125 
(June 10, 2010); See also MSRB Rules G-17 and G-19.
---------------------------------------------------------------------------

    The Commission considers the following activities, identified by 
commenters,\603\ to be within the scope of the underwriting exclusion: 
\604\ (1) advice regarding the structure, timing, terms, and other 
similar matters concerning a particular issuance of municipal 
securities (except as otherwise provided herein with respect to advice 
on investment strategies, municipal derivatives, or other activities 
identified by the Commission as outside the scope of an underwriting); 
(2) preparation of rating strategies and presentations related to the 
issuance being underwritten; (3) preparations for and assistance with 
investor ``road shows'' and investor discussions related to the 
issuance being underwritten; (4) advice regarding retail order periods 
and institutional marketing if the municipal entity has determined to 
engage in a negotiated sale; (5) assistance in the preparation of the 
preliminary and final official statements for the municipal securities; 
(6) assistance with the closing of the issuance of municipal 
securities, including negotiation and discussion with respect to all 
documents, certificates, and opinions needed for such closing; (7) 
coordination with respect to obtaining CUSIP numbers and the 
registration of the issue of municipal securities with the book-entry 
only system of the Depository Trust Company; (8) preparation of post-
sale reports for such municipal securities; and (9) structuring of 
refunding escrow cash flow requirements necessary to provide for the 
refunding and defeasance of an issue of municipal securities (provided, 
however, that the recommendation of and brokerage of particular 
municipal escrow investments is outside the scope of the underwriting 
exclusion).
---------------------------------------------------------------------------

    \603\ See, e.g., MSRB Letter II; NAIPFA Letter; NAIPFA Letter 
II; SIFMA Letter I; and Baum Letter.
    \604\ This list of activities includes examples of activities 
that the Commission considers to be within the scope of an 
underwriting; the list does not purport to cover all possible 
activities qualifying for the underwriter exclusion.
---------------------------------------------------------------------------

Examples of Activities Outside the Scope of Serving as an Underwriter 
of a Particular Issuance of Municipal Securities for Purposes of the 
Underwriter Exclusion
    Several commenters \605\ also requested clarification as to whether 
certain strategic, transaction-related, and post-issuance activities 
would be considered acting within the scope of the underwriter 
exclusion. The Commission notes that an underwriter providing certain 
advice outside the scope of the underwriter exclusion would not be 
required to be registered as a municipal advisor in order to provide 
that advice if: (a) the advice does not relate to a municipal financial 
product \606\ or the issuance of municipal securities,\607\ (b) the 
advice is given in response to a request for proposal \608\ or is 
otherwise permitted when seeking to obtain

[[Page 67514]]

business,\609\ or (c) the advice is given when the municipal entity has 
engaged an independent registered municipal advisor.\610\
---------------------------------------------------------------------------

    \605\ See, e.g., NAIPFA Letter.
    \606\ See supra Section III.A.1.b.iv. (discussing the definition 
of ``municipal financial products'').
    \607\ See supra Section III.A.1.b.vii. (discussing the term 
``issuance of municipal securities'').
    \608\ See supra Section III.A.1.c.ii. (discussing the exemption 
for responses to RFPs and RFQs).
    \609\ See infra notes 615 and 616 and accompanying text 
(discussing communications or efforts to win business).
    \610\ See supra Section III.A.1.c.iii. (discussing the exemption 
when the municipal entity or obligated person is represented by an 
independent municipal advisor).
---------------------------------------------------------------------------

    The Commission considers the following activities, identified by 
commenters,\611\ to be outside the scope of the underwriter exclusion: 
\612\ (1) advice on investment strategies; (2) advice on municipal 
derivatives (including derivative valuation services); (3) advice on 
what method of sale (competitive sale \613\ or negotiated sale \614\) a 
municipal entity should use for an issuance of municipal securities; 
(4) advice on whether a governing body of a municipal entity or 
obligated person should approve or authorize an issuance of municipal 
securities; (5) advice on a bond election campaign; (6) advice that is 
not specific to a particular issuance of municipal securities on which 
a person is serving as underwriter and that involves analysis or 
strategic services with respect to overall financing options, debt 
capacity constraints, debt portfolio impacts, analysis of effects of 
debt or expenditures under various economic assumptions, or other 
impacts of funding or financing capital projects or working capital; 
(7) assisting issuers with competitive sales, including bid 
verification, true interest cost (TIC) calculations and 
reconciliations, verifications of bidding platform calculations, and 
preparation of notices of sale; (8) preparation of financial 
feasibility analyses with respect to new projects; (9) budget planning 
and analyses and budget implementation issues with respect to debt 
issuance and collateral budgetary impacts; (10) advice on an overall 
rating strategy that is not related to a particular issuance of 
municipal securities on which a person is serving as an underwriter, 
including advice and actions taken on behalf of a municipal entity or 
obligated person between financing transactions; (11) advice on overall 
financial controls that are not related to a particular issuance of 
municipal securities on which a person is serving as an underwriter; or 
(12) advice regarding the terms of requests for proposals or requests 
for qualification for the selection of underwriters or other 
professionals for a project financing and advice regarding review of 
responses to such requests, including matters regarding compensation of 
such underwriters or other professionals.
---------------------------------------------------------------------------

    \611\ See, e.g., MSRB Letter II; NAIPFA Letter; NAIPFA Letter 
II; SIFMA Letter I; and Baum Letter.
    \612\ For broker-dealers serving as underwriters for a 
particular issuance of municipal securities, these activities would 
not be excluded from the definition of municipal advisor because 
they are not within the scope of an underwriting of such issuance of 
municipal securities. This list of activities includes examples of 
activities that the Commission considers to be outside the scope of 
the underwriter exclusion; the list does not purport to cover all 
possible activities not qualifying for the underwriter exclusion.
    \613\ Competitive sale is a method of sale chosen by an issuer, 
requesting underwriters to submit a firm offer to purchase a new 
issue of municipal securities. The issuer awards the municipal 
securities to the ``winning'' underwriter or syndicate presenting a 
bid complying with the terms of a Notice of Sale that provides the 
lowest interest rate cost according to stipulated criteria set forth 
in the Notice of Sale. See definition of ``Competitive Sale'' in 
MSRB Glossary.
    \614\ Negotiated sale is the sale of a new issue of municipal 
securities by an issuer directly to an underwriter or underwriting 
syndicate selected by the issuer. See definition of ``Negotiated 
Sale'' in MSRB Glossary.
---------------------------------------------------------------------------

    The Commission believes the above-listed activities are not within 
the scope of the underwriter exclusion because the activities are 
either not specific to a particular issuance of municipal securities 
for which a broker, dealer or municipal securities dealer could be 
serving as an underwriter or the activities are not integral to 
fulfilling the role of an underwriter.
Communications or Efforts to Win Business
    A few commenters asked whether communications and analyses that are 
part of an effort to win business would be considered municipal 
advisory activity.\615\ The Commission notes that not all 
communications with a municipal entity or obligated person constitute 
municipal advisory activities. If the person has identified himself or 
herself as seeking to obtain business, such as serving as an 
underwriter on future transactions, whether such communications and 
analyses constitute municipal advisory activities or the provision of 
general information (as discussed further above \616\) will depend on 
the specific facts and circumstances. For example, pursuant to the 
Commission's interpretation of the treatment of the provision of 
general information, the Commission believes that a broker-dealer who 
provides information to a municipal entity regarding its underwriting 
capabilities and experience or general market or financial information 
that might indicate favorable conditions to issue or refinance debt 
likely would not be treated as engaging in municipal advisory activity.
---------------------------------------------------------------------------

    \615\ See SIFMA Letter I. See also letter from Nathan R. Howard, 
Esq., Municipal Advisor, WM Financial Strategies, dated February 22, 
2011 (``Nathan R. Howard WM Financial Strategies Letter'') (stating 
that when the services provided by a broker-dealer are merely 
informational non-municipal advisory services, the broker-dealer 
should be excluded from the definition of municipal advisor).
    \616\ See supra Section III.A.1.b.i. (discussing, among other 
things, the provision of general information).
---------------------------------------------------------------------------

    On the other hand, for purposes of this rule and in response to 
comments,\617\ the Commission does not consider advice rendered by a 
broker-dealer in its capacity as a member of an ``underwriting pool'' 
for a municipal entity or obligated person (and in the absence of a 
designation of that broker-dealer to serve as underwriter on the 
particular issuance of municipal securities on which the advice is 
given) to be advice within the scope of the underwriting exclusion. An 
underwriting pool generally includes a group of underwriters selected 
by a municipal entity pursuant to an RFP or other process \618\ from 
which the municipal entity may select one or more firms to underwrite a 
specific transaction. As noted above, a broker-dealer that is merely a 
part of an underwriting pool is not engaged to underwrite any 
particular issuance, and therefore, is not acting as an underwriter. As 
described above, however, depending on the particular facts and 
circumstances, the broker-dealer's activities as part of an 
underwriting pool may be within the requirements of one of the 
exemptions of general applicability,\619\ may be considered to be an 
effort to obtain underwriting business on its own behalf, or may be 
otherwise exempt, which would not require municipal advisor 
registration.
---------------------------------------------------------------------------

    \617\ See SIFMA Letter I.
    \618\ See infra Section III.A.1.c.ii.
    \619\ See supra notes 592 and 593 and accompanying text.
---------------------------------------------------------------------------

Post-Offering Services
    Commenters asked whether post-offering work performed by an 
underwriter would qualify for the underwriter exclusion or whether it 
would constitute municipal advisory activity requiring 
registration.\620\ For purposes of this rule, the Commission considers 
post-offering work performed by an underwriter to be municipal advisory 
activity unless it is a request for information or services that would 
have been provided as part of the underwriting (such as resending cash 
flow and other similar information related to the offering) or is 
required for an underwriter to fulfill its regulatory

[[Page 67515]]

obligations as underwriter.\621\ If an issuance has closed and the 
underwriting period \622\ has terminated, the broker-dealer cannot be 
considered to be acting as an underwriter with respect to the issuance 
of municipal securities. Therefore, any advice or recommendation with 
respect to the issuance of municipal securities or a municipal 
financial product given after the termination of the underwriting 
period generally would be municipal advisory activities. Accordingly, 
broker-dealers should consider whether particular post-offering work 
they provide would constitute advice with respect to the issuance of 
municipal securities or a municipal financial product.
---------------------------------------------------------------------------

    \620\ See, e.g., SIFMA Letter I.
    \621\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799, 28805, 2811-28812 (July 10, 1989); Securities 
Exchange Act Release No. 62184A (May 27, 2010), 75 FR 33100, 33123-
33125 (June 10, 2010); See also MSRB Rules G-17; G-19 and G-32.
    \622\ For purposes of MSRB rules and Exchange Act Rule 15c2-12, 
the underwriting period is the period in connection with a primary 
offering of municipal securities ending on the later of the closing 
of the underwriting or the sale of the last of the securities by the 
syndicate. See definition of ``Underwriting Period'' in MSRB 
Glossary.
---------------------------------------------------------------------------

    The Commission notes that assisting a municipal entity or obligated 
person with filing annual financial information, audited financial 
statements, or material event notices, as required by Rule 15c2-
12,\623\ after an issuance has closed and after the underwriting period 
has terminated, would generally be outside the scope of the 
underwriting exclusion. A determination as to whether or not these 
activities would constitute advice would be based on all the facts and 
circumstances.\624\
---------------------------------------------------------------------------

    \623\ 17 CFR 240.15c2-12.
    \624\ See supra Section III.A.1.b.i (discussing the advice 
standard in general).
---------------------------------------------------------------------------

Broker-Dealers Acting as Placement Agents, Dealer-Managers, and 
Remarketing Agents
    A few commenters emphasized the similarity between private 
placement agents and underwriters, and suggested that private placement 
agents should be included in the underwriter exclusion.\625\ One 
commenter stated that a private placement agent offering securities of 
a municipal entity or obligated person in a private placement under the 
Securities Act, even if the agent is not serving as an underwriter 
within the strict meaning of Section 2(a)(11) of the Securities Act, 
serves almost exactly the same role underwriters play in assisting 
issuers.\626\ This commenter also noted that ``[a]ny uncertainty with 
respect to a private placement agent's role can be adequately clarified 
to municipal issuers or obligors through mandatory disclosures.'' \627\
---------------------------------------------------------------------------

    \625\ See SIFMA Letter I; Chapman & Cutler Letter (concurring 
with SIFMA that the duties of placement agents with respect to the 
sale and pricing of municipal securities are similar to the duties 
of underwriters); Piper Jaffray Letter.
    \626\ See Piper Jaffray Letter.
    \627\ See id.
---------------------------------------------------------------------------

    The Commission believes that any registered broker-dealer who 
participates in a particular issuance of municipal securities, whether 
the broker-dealer is acting as agent (such as in a best-efforts 
offering) or is acting as principal (such as in a firm commitment 
offering) would not have to register as a municipal advisor if facts 
and circumstances indicate that the registered broker-dealer is 
performing municipal advisory activities that otherwise would be 
considered within the scope of the underwriting of a particular 
issuance of municipal securities as discussed above.\628\ Registered 
broker-dealers are subject to regulation under the Exchange Act, 
regardless of whether they act as principal or agent in a municipal 
securities offering. The Commission does not believe that the 
underwriter exclusion should be limited to a particular type of 
underwriting or particular type of offering.\629\ Therefore, if a 
registered broker-dealer, acting as a placement agent, performs 
municipal advisory activities that otherwise would be considered within 
the scope of the underwriting of a particular issuance of municipal 
securities as discussed above, the broker-dealer would not have to 
register as a municipal advisor.
---------------------------------------------------------------------------

    \628\ A registered broker-dealer acting as a placement agent in 
the issuance of non-municipal securities, however, would not be able 
to rely on the underwriter exclusion and, based on the facts and 
circumstances, might be engaged in solicitation activity. See supra 
note 462 and accompanying text (discussing when a placement agent 
for an investment adviser to a pooled-investment vehicle would be 
considered a third-party solicitor that falls within the definition 
of municipal advisor). In addition, a placement agent may have other 
duties, including a fiduciary duty to its client, that arise as a 
matter of common law or another statutory or regulatory regime.
    \629\ Whether or not a particular offering would be a 
distribution for purposes of Section 2(a)(11) of the Securities Act 
is a facts and circumstances determination. Whether there is a 
``distribution'' does not affect the role of a registered broker-
dealer in a municipal securities offering for purposes of this 
underwriter exclusion.
---------------------------------------------------------------------------

    In addition, the Commission has determined that a broker-dealer 
acting as a dealer-manager for a tender offer, without more,\630\ would 
not be municipal advisory activity because tender offers typically 
involve only the purchase of municipal securities and the purchase is 
not itself an advisory activity. Similarly, a broker-dealer acting as a 
dealer-manager for an exchange offer would generally involve only two 
transactions--the purchase of one security in the tender offer and the 
underwriting of a particular issuance of municipal securities in 
exchange for such tendered securities. Since the purchase itself is not 
advisory activity and the underwriting of the new issue of municipal 
securities would be excluded under the underwriter exclusion, neither 
component of the exchange offer would be considered municipal advisory 
activity.\631\
---------------------------------------------------------------------------

    \630\ However, if, for example, the registered broker-dealer 
provides advice as to the benefits of a tender offer in comparison 
to the alternative of issuing refunding bonds, then, depending on 
the facts and circumstances, they might be engaged in municipal 
advisory activity outside the scope of an underwriting.
    \631\ Any advice or recommendations to undertake such a tender 
or exchange offer, or regarding the timing or terms of such tender 
or exchange offer, would have to be evaluated in the context of that 
issuance or the issuance of other securities to determine if the 
advice was advice with respect to the structure, timing, terms, or 
other similar matters concerning an issuance being underwritten, and 
thus within the underwriter exclusion.
---------------------------------------------------------------------------

    A few commenters also suggested that remarketing agents should be 
included in the underwriter exclusion.\632\ Generally, the Commission 
also would not consider a remarketing agent \633\ acting only in its 
capacity as a remarketing agent to be a municipal advisor because the 
mere remarketing of bonds likely would not constitute an issuance of 
municipal securities. If, however, the remarketing constitutes a 
primary offering,\634\ then the

[[Page 67516]]

remarketing agent would need to evaluate its activities to determine if 
an exemption or exclusion from registration (such as the underwriter 
exclusion) applies. A primary offering is an issuance of municipal 
securities for purposes of the municipal advisor registration 
regime.\635\ Similarly, if the activities of a remarketing agent 
include providing advice (such as advice with respect to the investment 
of proceeds) beyond merely determining a remarketing price for bonds 
that have already been issued and that are not being reoffered, the 
remarketing agent would need to evaluate its activities to determine if 
an exception to registration (such as the investment adviser exclusion) 
applies.
---------------------------------------------------------------------------

    \632\ See SIFMA Letter I (stating that activities in which a 
remarketing agent engages when it resells an issuance in the 
secondary market are similar to those of an underwriter of a primary 
issuance by a municipal entity or obligated person); Chapman & 
Cutler Letter (concurring with SIFMA that the duties of remarketing 
agents with respect to the sale and pricing of municipal securities 
are similar to the duties of underwriters).
    \633\ A remarketing agent is a municipal securities dealer 
responsible for reselling to investors securities (such as variable 
rate demand obligations and other tender option bonds) that have 
been tendered for purchase by their owner. The remarketing agent 
also typically is responsible for resetting the interest rate for a 
variable rate issue and may act as tender agent. See definition of 
``Remarketing Agent'' in MSRB Glossary.
    \634\ Whether a remarketing is a ``primary offering'' of the 
municipal securities and whether the remarketing agent is an 
underwriter for purposes of the Securities Act of 1933 will depend 
on, among other matters, the level of issuer involvement in the 
remarketing. Whether a particular remarketing is a primary offering 
by the issuer of the securities requires an evaluation of relevant 
provisions of the governing documents, the relationship of the 
issuer to the other parties involved in the remarketing transaction, 
and other facts and circumstances pertaining to such remarketing, 
particularly with respect to the extent of issuer involvement. See, 
e.g., Securities Exchange Act Release No. 62184A (May 27, 2010), 75 
FR 33100, 33103 (June 10, 2010). Although not applicable in 
determining whether an offering is a primary offering for purposes 
of the Securities Act of 1933, the Commission also notes that for 
purposes of Rule 15c2-12, a ``primary offering'' is defined to mean 
``an offering of municipal securities directly or indirectly by or 
on behalf of an issuer of such securities, including any remarketing 
of municipal securities'' that meets certain specified conditions. 
See 17 CFR 240.15c2-12(f)(7). See also Securities Exchange Act 
Release No. 34961 (November 10, 1994), 59 FR 59590 (November 17, 
1994).
    \635\ See supra Section III.A.1.b.vii. (discussing the term 
``issuance of municipal securities''). The Commission notes that, 
although it is likely in such a circumstance for the underwriter 
exemption to apply, if the agent is engaging in municipal advisory 
activity that is outside of the scope of underwriting activity and 
no other exemption or exclusion applies, such agent would be 
required to register as a municipal advisor.
---------------------------------------------------------------------------

Solely Incidental Services
    Many commenters recommended that the municipal advisor registration 
rules include an exclusion for broker-dealers that is similar in scope 
to the broker-dealer exclusion under Section 202(a)(11)(C) of the 
Investment Advisers Act.\636\ Specifically, these commenters stated 
that the Commission should exclude from registration broker-dealers 
that provide advice that is solely incidental to a transaction.\637\ 
These commenters generally noted that broker-dealers are already 
regulated by the Commission and should not be subject to additional or 
duplicative regulation.\638\
---------------------------------------------------------------------------

    \636\ Section 202(a)(11)(C) of the Investment Advisers Act 
excludes from the definition of ``investment adviser'' a broker or 
dealer ``whose performance of [advisory] services is solely 
incidental to the conduct of his business as a broker or dealer who 
receives no special compensation therefor.'' 15 U.S.C. 80b-
2(a)(11)(C).
    \637\ See, e.g., Union Bank Letter (stating that advice supplied 
that is ``solely incidental to the conduct of his business as a 
broker or dealer and who receives no special compensation therefor'' 
(Section 202(a)(11) of the Investment Advisers Act) should be 
excluded from the definition of ``advice''); SIFMA Letter I (stating 
that ``broker-dealers providing advice that is solely incidental to 
a transaction should be excluded from the definition of municipal 
advisor for the same reason that registered investment advisers are 
excluded (in some instances): they are already regulated''); 
Financial Services Institute Letter (stating that broker-dealers 
should be treated as in the Investment Advisers Act, i.e., where a 
municipal entity enters into an ordinary brokerage transaction, any 
incidental advice provided in the scope of that relationship should 
not require the broker-dealer to register as a municipal advisor).
    \638\ See, e.g., Union Bank Letter (stating that Congress did 
not intend for broker-dealers and registered investment advisers 
that already engage in regulated activities for their municipal 
clients to be subject to the additional layer of regulation that 
would accompany municipal advisor registration); ICI Letter (noting 
that broker-dealers that are underwriters are already subject to 
MSRB Rule G-37 and are also regulated by the Commission as broker-
dealers); SIFMA Letter I.
---------------------------------------------------------------------------

    The Commission is not adopting an exemption from the definition of 
municipal advisor for a broker-dealer that engages in municipal 
advisory activities that are solely incidental to the conduct of its 
business as a broker-dealer because the Commission believes that it has 
otherwise addressed commenters' concerns regarding duplicative 
regulation. As discussed above, the Commission is exempting from the 
definition of municipal advisor persons that provide advice with 
respect to investment strategies that are not plans or programs for the 
investment of the proceeds of municipal securities and the 
recommendation of and brokerage of municipal escrow investments.\639\ 
As discussed below, based on the application of the adopted rules, 
broker-dealers that sell securities to municipal entities and obligated 
persons would generally not be engaging in municipal advisory 
activity.\640\ The application of the adopted rules limits the range of 
municipal financial products to which duplicative regulation could 
apply. As noted above, the Commission believes that registered broker-
dealers that engage in municipal advisory activities by advising on the 
investment of proceeds of municipal securities or municipal escrow 
investments should not be exempt from municipal advisor 
registration.\641\
---------------------------------------------------------------------------

    \639\ See supra note 327 and accompanying text and Rule 15Ba1-
1(d)(3)(vii).
    \640\ See infra note 644 and accompanying text.
    \641\ See supra Section III.A.1.b.viii. (discussing the 
Commission's views on why advice with respect to the investment of 
proceeds of municipal securities should be subject to municipal 
advisor registration notwithstanding the existence of other 
regulatory regimes). See also infra Section III.A.1.c.v. 
(discussing, among other things, the Commission's position that 
registered investment advisers engaging in municipal advisory 
activities are only excluded from registration to the extent their 
activities are investment advice). Likewise, the Commission believes 
that broker-dealers that engage in municipal advisory activities 
that are outside of the scope of the underwriting of a particular 
issuance of municipal securities should be regulated and registered 
as municipal advisors.
---------------------------------------------------------------------------

Broker-Dealers Selling Securities to Municipal Entities and Obligated 
Persons
    Several commenters suggested that, based on the Proposal, the 
Commission appears to conclude that ``a broker-dealer that sells a 
security to a municipal entity where it is not serving as an 
underwriter'' is engaged in municipal advisory activity, because advice 
is integral to the sale of securities.\642\ That is not the conclusion 
of the Commission. The municipal advisor registration requirement does 
not apply in the absence of advice (or solicitation). As noted above, 
for purposes of the municipal advisor definition, ``advice'' includes, 
without limitation, a recommendation that is particularized to the 
needs and circumstances of a municipal entity or obligated person with 
respect to municipal financial products or the issuance of municipal 
securities, based on all the facts and circumstances.\643\ Thus, a 
broker-dealer that effects a transaction that it has not recommended 
will not be a ``municipal advisor'' with respect to such activity.\644\ 
However, the sale of a security to a municipal entity or obligated 
person constitutes a municipal advisory activity if: (1) the monies 
used to purchase such security are proceeds of municipal securities; 
\645\ and (2) in executing such transaction, the broker-dealer also 
recommends the investment or otherwise offers advice to the municipal 
entity or obligated person about which securities to purchase or sell.
---------------------------------------------------------------------------

    \642\ See Insurance Companies Letter (stating that the 
Commission appears to conclude that every time a broker-dealer sells 
a security to a municipal entity where it is not serving as an 
underwriter, it must register as a municipal advisor, and that such 
an approach seems inconsistent with Congressional intent due to pre-
existing broker-dealer regulation). See also ICI Letter (stating 
that the Commission proposed that the broker-dealer exclusion means 
that a broker, dealer or municipal securities dealer would be 
eligible for the exclusion only when acting in its capacity as an 
underwriter; and suggesting that the broker-dealer exclusion should 
include brokers, dealers, and municipal securities dealers who 
engage in additional activities while serving as underwriters to 
municipal entities or obligated persons); and Large Public Power 
Council Letter (expressing concern that the Commission is limiting 
the broker-dealer exemption to situations in which the broker-dealer 
is acting as an underwriter).
    \643\ See supra Section III.A.1.b.i. (discussing the advice 
standard in general).
    \644\ See supra note 162 (discussing the term ``advice'' in 
contexts outside of the municipal advisor definition).
    \645\ See supra notes 330-343 and accompanying text (discussing 
the definition of ``proceeds of municipal securities'').
---------------------------------------------------------------------------

    Another commenter urged the Commission to exclude broker-dealers 
affiliated with life insurance companies from municipal advisor 
registration,

[[Page 67517]]

because such ``limited service'' broker-dealers are substantively 
different from ``full service'' broker-dealers.\646\ The Commission 
notes that broker-dealers affiliated with insurance companies are only 
required to register as municipal advisors to the extent their 
activities constitute advice to (or solicitation of) a municipal entity 
or obligated person with respect to municipal financial products or the 
issuance of municipal securities. The mere fact that a broker-dealer is 
affiliated with a life insurance company and may not sell as wide a 
range of securities as other broker-dealers is not determinative as to 
whether such broker-dealer must register as a municipal advisor. As 
noted in the paragraph above, such broker-dealers may sell securities 
to a municipal entity without triggering municipal advisor 
registration.
---------------------------------------------------------------------------

    \646\ See ACLI Letter (stating that the range of products 
offered by these limited purpose broker-dealers is typically narrow 
and focuses upon the distribution of variable insurance contracts 
and mutual funds; and that such broker-dealers primarily elicit 
orders from variable contract and mutual fund purchasers).
---------------------------------------------------------------------------

Broker-Dealers Providing Advice to Individual Plan Participants in a 
Public Employee Benefit Plan
    One commenter expressed concern that broker-dealers that provide 
investment advice (such as asset allocation) to individual plan 
participants in the context of a 403(b) retirement plan or a similar 
defined contribution plan might trigger municipal advisor registration. 
This commenter recommended that such broker-dealers be specifically 
excluded from registration.\647\
---------------------------------------------------------------------------

    \647\ See letter from Adym W. Rygmyr, Associate General Counsel, 
TIAA-CREF Individual & Institutional Services, LLC, dated February 
22, 2011 (``TIAA-CREF Letter'').
---------------------------------------------------------------------------

    The definition of municipal advisor states that a municipal advisor 
is a person that provides advice ``to or on behalf of a municipal 
entity or obligated person.'' As described above, advice related to 
investment strategies that would require registration is limited to 
advice with respect to ``the investment of proceeds of municipal 
securities . . . and the recommendation of and brokerage of municipal 
escrow investments.'' \648\ Thus, the provision of investment advice to 
individual plan participants in a public employee benefit plan is not a 
municipal advisory activity, as long as the individual plan participant 
is not a municipal entity.\649\
---------------------------------------------------------------------------

    \648\ Rule 15Ba1-1(b) and Rule 15Ba1-1(d)(3)(vii).
    \649\ See supra Section III.A.1.b.viii. (distinguishing 
individual contributions from municipal entity contributions to 529 
Savings Plans and public retirement plans, among other plans).
---------------------------------------------------------------------------

v. Registered Investment Advisers
    Exchange Act Section 15B(e)(4)(C) excludes from the definition of 
municipal advisor ``any investment adviser registered under the 
Investment Advisers Act of 1940, or persons associated with such 
investment advisers who are providing investment advice.'' \650\ The 
Commission proposed in Rule 15Ba1-1(d)(2)(ii) to interpret the 
statutory exclusion for registered investment advisers from the 
definition of municipal advisor.\651\ Specifically, the Commission 
proposed that the term ``municipal advisor'' shall not include ``[a]n 
investment adviser registered under the Investment Advisers Act of 1940 
. . . or a person associated with such registered investment adviser, 
unless the registered investment adviser or person associated with the 
investment adviser engages in municipal advisory activities other than 
providing investment advice that would subject such adviser or person 
associated with such adviser to the Investment Advisers Act of 1940.'' 
\652\
---------------------------------------------------------------------------

    \650\ 15 U.S.C. 78o-4(e)(4)(C).
    \651\ See proposed Rule 15Ba1-1(d)(2)(ii).
    \652\ See id. See also Temporary Registration Rule Release, 75 
FR 54467.
---------------------------------------------------------------------------

    In the Proposal, the Commission stated that a registered investment 
adviser or an associated person of a registered investment adviser 
would fall within the definition of municipal advisor and be required 
to register with the Commission as a municipal advisor if the adviser 
or associated person engages in any municipal advisory activities 
(including solicitation) that would not be investment advice subject to 
the Investment Advisers Act.\653\ In the Proposal, the Commission 
stated its belief that this interpretation is in furtherance of the 
goals of the Dodd-Frank Act to regulate persons that engage in 
municipal advisory activities.\654\
---------------------------------------------------------------------------

    \653\ See Proposal, 76 FR 833.
    \654\ See id.
---------------------------------------------------------------------------

    As discussed further below, the Commission received several 
comments in response to its proposed interpretation of the statutory 
exclusion relating to investment advisers. After careful consideration, 
to address commenters' concerns, the Commission is modifying proposed 
Rule 15Ba1-1(d)(2)(ii) to provide certain clarifications. Specifically, 
Rule 15Ba1-1(d)(2)(ii), as adopted, provides that the definition of 
municipal advisor excludes ``[a]ny investment adviser registered under 
the Investment Advisers Act of 1940 . . . or any person associated with 
such registered investment adviser to the extent that such registered 
investment adviser or such person is providing investment advice in 
such capacity.'' Moreover, the Commission clarifies in Rule 15Ba1-
1(d)(2)(ii) that ``investment advice,'' solely for purposes of this 
rule, ``does not include advice concerning whether and how to issue 
municipal securities, advice concerning the structure, timing, and 
terms of an issuance of municipal securities and other similar matters, 
advice concerning municipal derivatives, or a solicitation of a 
municipal entity or obligated person.'' \655\
---------------------------------------------------------------------------

    \655\ See Rule 15Ba1-1(d)(2)(ii).
---------------------------------------------------------------------------

Interpretation of the Statutory Language
    Several commenters stated that the Commission's proposed 
interpretation is contrary to the plain meaning of the statute and 
exceeds its intended scope.\656\ One commenter stated that the statute 
excludes ``any'' registered investment adviser--without 
limitation.\657\ Similarly, another commenter stated that the phrase 
``who are providing investment advice'' refers only to the immediately 
previous phrase, ``persons associated with such investment advisers''--
not to ``such registered advisers'' themselves.\658\ As such, this 
commenter also encouraged the Commission to interpret the exclusion for 
investment advisers to apply to all registered investment advisers, not 
just those who are providing investment advice.\659\ Yet another 
commenter stated that the statute's exclusion of investment advisers 
``who are providing investment advice'' cannot be interpreted to only 
exclude advisers providing ``investment advice'' subject to the 
Investment Advisers Act, because not all ``investment advice'' requires 
registration under the Investment Advisers Act (e.g., advice with 
respect to instruments that are not securities).\660\ This commenter 
stated that the Commission's interpretation would mean that ``[a 
Commission]-registered investment adviser would be excepted from 
municipal advisor registration for only some, but not all, of its 
investment activities.'' \661\ The commenter described the Commission's

[[Page 67518]]

interpretation as ``without an apparent reason or policy 
justification.'' \662\
---------------------------------------------------------------------------

    \656\ See, e.g., IAA Letter; ICI Letter; SIFMA Letter I; and 
letter from Heidi Stam, Managing Director and General Counsel, The 
Vanguard Group, Inc., dated February 22, 2011 (``Vanguard Letter'').
    \657\ See Vanguard Letter. See also ICI Letter.
    \658\ See ICI Letter. See also IAA Letter.
    \659\ See ICI Letter.
    \660\ See SIFMA Letter I. See also text accompanying infra notes 
682 and 683.
    \661\ SIFMA Letter I.
    \662\ Id.
---------------------------------------------------------------------------

    In commenting that registered investment advisers should be 
excluded broadly from municipal advisor registration, one commenter 
stated that the municipal advisor registration requirement established 
by the Dodd-Frank Act was ``primarily aimed at registering unregulated 
persons.'' \663\ Registered investment advisers, in the view of some 
commenters, are ``already subject to the fiduciary duties and 
comprehensive registration and disclosure requirements mandated by the 
Investment Advisers Act.'' \664\ The proposal would therefore subject 
them to ``duplicative and overlapping regulation.''\665\
---------------------------------------------------------------------------

    \663\ See Vanguard Letter.
    \664\ Id. See also MFA Letter.
    \665\ See Vanguard Letter.
---------------------------------------------------------------------------

    Some commenters stated that the Commission's proposed 
interpretation of the exclusion ``interjects ambiguity'' on how to 
determine whether registered investment advisers must also register as 
municipal advisors.\666\ These commenters stated that the Commission's 
interpretation would create ``widespread uncertainty'' \667\ among 
investment advisers regarding whether certain of their activities are 
subject to regulation as municipal advisory activities. One commenter 
stated that the uncertainty would be compounded by the lack of a 
definition concerning the kind of investment advice that would exempt a 
registered investment adviser from the municipal advisor registration 
requirement.\668\
---------------------------------------------------------------------------

    \666\ See, e.g., Vanguard Letter.
    \667\ MFA Letter.
    \668\ See Vanguard Letter.
---------------------------------------------------------------------------

    One commenter requested that the Commission include a non-exclusive 
interpretation that ``any advice provided by a registered investment 
adviser pursuant to a written agreement with a municipal entity to whom 
the adviser owes a fiduciary duty as an investment adviser constitutes 
the rendering of investment advice.'' \669\ The requested 
interpretation would thereby exempt the investment adviser from 
registration as a municipal advisor.\670\
---------------------------------------------------------------------------

    \669\ Id.
    \670\ See id.
---------------------------------------------------------------------------

    As stated above, the Commission is adopting a revised Rule 15Ba1-
1(d)(2)(ii). Under the rule the Commission is adopting today, a 
registered investment adviser could provide advice concerning the 
investment of proceeds in securities without registering as a municipal 
advisor because it would be ``providing investment advice'' in its 
capacity as a registered investment adviser. Further, if the advice is 
provided pursuant to an advisory agreement that extends to investments 
in both securities and non-security financial instruments, such advice 
would still be excluded, because investment advice provided pursuant to 
the advisory agreement would be investment advice for purposes of Rule 
15Ba1-1(d)(2)(ii).\671\
---------------------------------------------------------------------------

    \671\ As discussed below, solely for purposes of the municipal 
advisor registration rules, ``investment advice'' does not include 
advice concerning whether and how to issue municipal securities, 
advice concerning the structure, timing, and terms of an issuance of 
municipal securities and other similar matters, advice concerning 
municipal derivatives, or a solicitation of a municipal entity or 
obligated person, even if such activities are under an advisory 
agreement. Also, investment advice provided pursuant to the advisory 
agreement would be subject to the anti-fraud provisions of the 
Investment Advisers Act. See 15 U.S.C. 80b-6(1) and 80b-6(2). The 
Supreme Court has construed Investment Advisers Act Sections 206(1) 
and (2) as establishing a fiduciary standard for investment advisers 
that imposes the ``affirmative duty of `utmost good faith, and full 
and fair disclosure of all material facts,' as well as an 
affirmative obligation to `employ reasonable care to avoid 
misleading'' ' their clients. SEC v. Capital Gains Research Bureau, 
Inc., 375 U.S. 180, 194 (1963).
---------------------------------------------------------------------------

    However, the Commission notes that, solely for purposes of the 
municipal advisor registration rules, pursuant to Rule 15Ba1-
1(d)(2)(ii), ``investment advice'' does not include advice concerning 
whether and how to issue municipal securities, advice concerning the 
structure, timing, and terms of an issuance of municipal securities and 
other similar matters, advice concerning municipal derivatives, or a 
solicitation of a municipal entity or obligated person. Notwithstanding 
that these activities may constitute advice under the Investment 
Advisers Act, the Commission believes that this approach is appropriate 
given that Section 15B(e) of the Exchange Act expressly designates 
these activities as requiring municipal advisor registration.\672\ 
Accordingly, a registered investment adviser that provides these types 
of advice to municipal entities or obligated persons would need to 
register as a municipal advisor.
---------------------------------------------------------------------------

    \672\ See 15 U.S.C. 78o-4(e)(4). The Commission notes that this 
interpretation of the term investment advice relates solely to 
whether a registered investment adviser, or an associated person of 
such adviser, would need to register as a municipal advisor.
---------------------------------------------------------------------------

    The Commission interprets the statutory language, which provides an 
exclusion for registered investment advisers and associated persons 
``who are providing investment advice,'' as evidence that Congress did 
not intend to grant a blanket exemption from municipal advisor 
registration for all registered investment advisers and their 
associated persons regardless of the activities in which they are 
engaged. The Commission believes the phrase ``who are providing 
investment advice'' limits the exclusion. Under this interpretation, if 
an associated person or a registered investment adviser engages in 
municipal advisory activities that do not constitute ``investment 
advice'' for purposes of Rule 15Ba1-1(d)(2)(ii), both the registered 
investment adviser and the associated person of such adviser engaging 
in the municipal advisory activities would be ``municipal advisors'' 
unless eligible for another exclusion or exemption.\673\
---------------------------------------------------------------------------

    \673\ Consequently, both the registered investment adviser and 
the associated person would be required to register, unless the 
associated person meets the requirements of the exemption from 
registration in Rule 15Bc4-1 discussed below. See infra Section 
III.A.7.
---------------------------------------------------------------------------

    The Commission further notes that the municipal advisor 
registration and regulatory regime relates to issues that are unique to 
municipal advisory activities--particularly the advice concerning 
utilization of municipal derivatives, whether and how to issue 
municipal securities, and the structure, timing, and terms of issuances 
of municipal securities and other similar matters. The registration of 
registered investment advisers as municipal advisors, to the extent 
they engage in these activities, whether or not already subject to the 
Investment Advisers Act, is necessary to provide the benefits 
associated with the regulation of persons who engage in municipal 
advisory activities. Such benefits include, but are not limited to, 
standards of conduct, training, and testing for municipal advisors that 
may be required by the Commission or the MSRB, and other requirements 
unique to municipal advisors that may be imposed by the MSRB.\674\
---------------------------------------------------------------------------

    \674\ See supra note 190.
---------------------------------------------------------------------------

    The Commission believes that the clarifications described above 
address the comments that the Commission's interpretation introduces 
``ambiguity'' and will lead to ``widespread uncertainty'' among 
registered investment advisers. In particular, permitting a Commission-
registered investment adviser to rely on the exclusion when providing 
any advice under an investment advisory agreement that is subject to 
the Investment Advisers Act, as long as such advice is not specifically 
excluded from the definition of ``investment advice'' under Rule 15Ba1-
1(d)(2)(ii), will allow registered investment advisers to achieve 
greater certainty about the scope of the exclusion at the time they 
enter into an advisory

[[Page 67519]]

agreement.\675\ If an investment adviser firm engages in a municipal 
advisory activity that is not within the registered investment adviser 
exclusion, such as advice concerning the issuance of municipal 
securities or the utilization of swaps by municipalities, the mere fact 
that the firm is registered under the Investment Advisers Act would not 
exempt that firm from registration as a municipal advisor.\676\
---------------------------------------------------------------------------

    \675\ See also Ancillary or Additional Advisory Services 
Provided by Investment Advisers section below.
    \676\ The Commission acknowledges commenters' concerns that 
there will be overlapping requirements for registered investment 
advisers that engage in municipal advisory activities, just as there 
are for investment advisers that engage in broker-dealer activities. 
The Commission notes that it is permitting investment advisers that 
have already filed a Form ADV with the Commission to incorporate by 
reference in their Form MA certain information that they have 
already supplied in Form ADV. See infra Sections II.A.2.
---------------------------------------------------------------------------

    As discussed above in Section III.A.1.b.viii., the Commission is 
narrowing the application of the term ``investment strategies'' from 
all plans, programs, or pools of assets that invest funds held by or on 
behalf of a municipal entity to plans or programs for the investment of 
the proceeds of municipal securities and the recommendation of and 
brokerage of municipal escrow investments. Accordingly, the municipal 
advisor registration regime, as adopted, will provide appropriate 
protection for advice with respect to proceeds of municipal securities 
while mitigating many of the commenters' concerns with respect to funds 
of municipal entities other than proceeds of municipal securities. 
Moreover, because advice provided to fewer types of plans, programs, or 
pools of assets would require municipal advisor registration, the 
Commission's exemption for persons providing advice with respect to 
certain investment strategies will result in fewer registered 
investment advisers having to register as municipal advisors compared 
to Rule 15Ba1-1(b) as originally proposed.\677\ For example, under the 
narrow scope of investment strategies, investment advisers who provide 
advice to public employee benefit plans, participant-directed 
investment plans such as 529, 403(b) or 457 plans that do not include 
proceeds of municipal securities would not be required to register as 
municipal advisors.
---------------------------------------------------------------------------

    \677\ See supra Section III.A.1.b.viii. (discussing the term 
``investment strategies'' and the exemption pursuant to Rule 15Ba1-
1(d)(3)(vii)).
---------------------------------------------------------------------------

    As noted above, one commenter suggested that any advice pursuant to 
a written agreement between an investment adviser and a municipal 
entity to whom the adviser owes a fiduciary duty should be considered 
investment advice and thus exclude the adviser from registration as a 
municipal advisor.\678\ In the Commission's view, this approach fails 
to recognize that the regulatory regime for municipal advisors set 
forth in the Dodd-Frank Act includes more than a fiduciary duty.\679\ 
Accordingly, unless an exclusion or exemption applies, a municipal 
advisor must register with the Commission and comply with the 
applicable MSRB rules.\680\
---------------------------------------------------------------------------

    \678\ See supra notes 669-670 and accompanying text (discussing 
the Vanguard Letter).
    \679\ See 15 U.S.C. 78o-4(c)(1). As noted above, benefits 
associated with the regulation of municipal advisors also include, 
but are not limited to, the application of standards of conduct, 
training, and testing for municipal advisors that may be required by 
the Commission or the MSRB, and other requirements unique to 
municipal advisors that may be imposed by the MSRB. See supra note 
190.
    \680\ See, e.g., MSRB Rule G-17 (Conduct of Municipal Securities 
and Municipal Advisory Activities).
---------------------------------------------------------------------------

Ancillary or Additional Advisory Services Provided by Investment 
Advisers
    Several commenters urged the Commission to carve out from the 
definition of municipal advisor certain investment advisers that 
provide various specific kinds of advice to municipal entities. For 
example, some commenters noted that a registered investment adviser may 
provide clients with services ancillary to its investment advice in 
``the normal course of its advisory services.'' \681\ Such ancillary 
service includes advice regarding investments other than securities 
(e.g., bank deposits, currencies, real estate, futures, and forward 
contracts),\682\ research, and reports.\683\ One commenter stated that 
such services may not subject the adviser providing such services to 
the Investment Advisers Act but would require the provider to register 
as a municipal advisor. According to the commenter, an adviser would 
have to ``segregate its activities into those that are exempt and those 
which require registration as a municipal advisor and follow 
potentially conflicting rules.'' \684\
---------------------------------------------------------------------------

    \681\ See, e.g., MFA Letter.
    \682\ See, e.g., MFA Letter and ICI Letter. See also SIFMA 
Letter I and American Bankers Association Letter I.
    \683\ See, e.g., MFA Letter.
    \684\ American Bankers Association Letter I.
---------------------------------------------------------------------------

    Another commenter stated that managers at investment adviser firms 
``would need to regularly monitor each service they provide to 
municipal entities,'' which would be ``burdensome for a private fund 
manager or other investment manager'' and ``would divert resources from 
the performance of [their] core advisory services.'' \685\ The 
commenter stated that the proposed rules could also cause some managers 
to ``choose to reduce the types of services they provide,'' which could 
``harm fund managers and their municipal entity clients.'' \686\
---------------------------------------------------------------------------

    \685\ See MFA Letter.
    \686\ Id.
---------------------------------------------------------------------------

    Another commenter suggested an exemption for a ``particularized 
recommendation regarding the structuring or issuance of municipal 
securities'' when such advice is provided in the context of the 
investment adviser providing investment advisory services.\687\ For 
example, according to this commenter, an investment adviser would be 
exempt if it recommends changes to the terms of a municipal entity's 
proposed bond offering so that the municipal entity can pay a lower 
interest rate on the securities and invest the proceeds in less risky 
investment vehicles.\688\
---------------------------------------------------------------------------

    \687\ SIFMA Letter I.
    \688\ See id.
---------------------------------------------------------------------------

    The Commission carefully considered the comments received, 
including comments regarding the burden for firm managers to monitor 
each service provided by the firm to determine whether it would require 
municipal advisor registration. The Commission, however, is not 
exempting from the definition of municipal advisor a registered 
investment adviser that engages in municipal advisory activities that 
are ``in the ordinary course of'' investment advice or ``ancillary'' to 
such investment advice. The determination of whether a particular 
activity is ``in the ordinary course of'' or ``ancillary'' is very much 
based on facts and circumstances. Thus, the Commission is concerned 
that such a standard could be easily circumvented and could create a 
pretext for abuse.\689\
---------------------------------------------------------------------------

    \689\ See supra Section III.A.1.c.iv. (discussing broker-dealers 
selling securities and solely incidental services).
---------------------------------------------------------------------------

    The Commission interprets the registered investment adviser 
exclusion to include any advice provided pursuant to an advisory 
agreement. However, Rule 15Ba1-1(d)(2)(ii) excludes from ``investment 
advice'' advice concerning: (1) Whether and how to issue municipal 
securities; (2) the structure, timing, and terms of issuances of 
municipal securities and other similar matters; and (3) municipal 
derivatives. Additionally, the registered investment adviser exclusion 
does not cover solicitation of a municipal entity or obligated person, 
as defined in Rule 15Ba1-1(n). The Commission does not believe that it 
is necessary to adopt most

[[Page 67520]]

of the interpretations or carve-outs from the municipal advisor 
definition that commenters suggested because it anticipates that most 
of these additional services would be covered by advisory agreements. 
For example, as discussed above, a registered investment adviser that 
advises a municipal entity to invest the proceeds of an issuance of 
municipal securities in an asset class other than securities will not 
be required to register as a municipal advisor, if that advice is 
provided pursuant to an advisory agreement between the registered 
investment adviser and the municipal entity. Similarly, if ancillary 
services are provided pursuant to an advisory agreement and these 
services are not of the type specifically excluded from ``investment 
advice'' under Rule 15Ba1-1(d)(2)(ii), the investment adviser exclusion 
would apply. The Commission believes that its interpretation of the 
investment adviser exclusion should mitigate commenters' concerns 
regarding segregating activities into those that are exempt and those 
that are not and following potentially conflicting rules.\690\ The 
Commission also believes that its interpretation should mitigate 
commenters' concerns regarding the burden for a firm to monitor its 
activities \691\ because a firm would only need to monitor for the 
specific types of activities that are excluded from ``investment 
advice'' under Rule 15Ba1-1(d)(2)(ii) and the activities that are not 
covered by advisory agreements.
---------------------------------------------------------------------------

    \690\ See supra note 684 and accompanying text.
    \691\ See supra notes 685-686 and accompanying text.
---------------------------------------------------------------------------

    The Commission is also not adopting a commenter's suggestion to 
create a specific exemption for ``a particularized recommendation 
regarding the structuring or issuance of municipal securities.'' \692\ 
The Commission believes that an adviser offering advice regarding the 
issuance of municipal securities, including advice with respect to the 
structuring, timing, terms, and other similar matters, clearly is a 
municipal advisor because the statutory definition of municipal advisor 
expressly includes such activities.
---------------------------------------------------------------------------

    \692\ See supra notes 687-688 and accompanying text.
---------------------------------------------------------------------------

Affiliates of Investment Advisers Providing Municipal Advisory Services
    As discussed above, Exchange Act Section 15B(e)(4)(A)(ii) includes 
in the definition of municipal advisor a person that ``undertakes a 
solicitation of a municipal entity.'' \693\ Section 15B(e)(9), however, 
excludes a person that controls, is controlled by, or is under common 
control with a registered investment adviser \694\ from the requirement 
to register as a municipal advisor when it solicits municipal entities 
or obligated persons on behalf of the affiliated investment 
adviser.\695\ Thus, an affiliate of a registered investment adviser may 
engage in such solicitation without registering as a municipal advisor. 
Neither the statute nor the rules, as proposed, otherwise exclude an 
affiliate of a registered investment adviser from the definition of 
municipal advisor.
---------------------------------------------------------------------------

    \693\ 15 U.S.C. 78o-4(e)(4)(A)(ii).
    \694\ For purposes of this discussion, the term ``affiliate of a 
registered investment adviser'' means such a person.
    \695\ See 15 U.S.C. 78o-4(e)(9).
---------------------------------------------------------------------------

    One commenter stated that registered investment advisers ``often 
assign or delegate management of a portion of their client's assets to 
an affiliated entity . . . when they seek specialized expertise for 
particular regions, strategies, or products.'' \696\ The commenter 
stated that such affiliated entities ``are typically part of the same 
organization as the registered adviser and are subject to the same or 
similar compliance and management structures.'' \697\ Further, they are 
usually ``organized as separate legal entities rather than branch 
offices'' for ``tax or other purposes.'' \698\ The commenter stated 
that, because the registered investment advisers themselves are exempt 
from registration as municipal advisors when they provide investment 
advice, it would be incongruous to require their affiliates to register 
as municipal advisors.\699\ The commenter further stated that 
registration would ``simply add costs to the industry and regulators 
without additional public policy benefits.'' \700\
---------------------------------------------------------------------------

    \696\ See MFA Letter.
    \697\ Id.
    \698\ Id.
    \699\ Id.
    \700\ Id.
---------------------------------------------------------------------------

    The Commission disagrees that there should be a general exemption 
for affiliates of registered investment advisers that engage in 
municipal advisory activities. The Commission notes that Congress 
explicitly exempted affiliates from the solicitation prong of the 
municipal advisor definition, but not from the prong relating to 
advisory and other activities. Accordingly, the Commission believes 
that the statute does not contemplate exempting affiliates from 
municipal advisor registration, except when an affiliate specifically 
solicits business for its affiliated entity.
    Further, as discussed below, the Commission does not believe that 
any additional exemption is necessary or appropriate. In the case of 
solicitations, the Commission notes that, although the statute excludes 
solicitation by an affiliate from the definition of municipal 
advisor,\701\ the Commission would still have regulatory authority over 
the entity on whose behalf the affiliate is soliciting, as a municipal 
advisor, if it engages in municipal advisory activities. If the entity 
is also a registered investment adviser and falls under the investment 
adviser exclusion in Rule 15Ba1-1(d)(2)(ii), the Commission would 
continue to have regulatory authority over that entity as a registered 
investment adviser. In a case where an affiliate of a registered 
investment adviser is engaged in municipal advisory activities as a 
municipal advisor, however, the Commission would not necessarily have 
regulatory authority outside of the municipal advisor registration 
regime. Also, as discussed more fully above, the Commission's exemption 
for persons that provide advice with respect to investment strategies 
that are not plans or programs for the investment of the proceeds of 
municipal securities or the recommendation of and brokerage of escrow 
investments \702\ should reduce the likelihood that specialized 
expertise from affiliates, such as foreign affiliates, will require 
registration.
---------------------------------------------------------------------------

    \701\ See 15 U.S.C. 78o-4(e)(9) (defining ``solicitation of a 
municipal entity or obligated person'').
    \702\ See supra Section III.A.1.b.viii. (discussing the 
Commission's application of the term ``investment strategies'').
---------------------------------------------------------------------------

Investment Adviser Solicitations and Referrals
    Some commenters requested clarification on the exclusion for 
investment advisers from the solicitation prong of the municipal 
advisor definition. One commenter requested that the Commission confirm 
that the exclusion for investment advisers applies to the investment 
adviser and its employees ``who may solicit municipal entities as part 
of their regular responsibilities to market the adviser's investment 
advisory services or who may incidentally discuss the adviser's 
advisory services with municipal entities.'' \703\
---------------------------------------------------------------------------

    \703\ See IAA Letter.
---------------------------------------------------------------------------

    The Commission agrees with this comment and notes that a registered 
investment adviser that solicits on its own behalf does not fall within 
the ``solicitation'' prong of the municipal advisor definition. 
Exchange Act Section 15B(e)(9) provides that the term ``solicitation of 
a municipal entity or obligated person'' means a

[[Page 67521]]

communication ``on behalf of a broker, dealer, municipal securities 
dealer, municipal advisor, or investment adviser . . . that does not 
control, is not controlled by, or is not under common control with the 
person undertaking such solicitation.'' \704\ Thus, Section 15B(e)(9) 
permits a registered investment adviser and its employees, who market 
the adviser's investment advisory services, to solicit municipal 
entities or obligated persons, including discussing the adviser's 
advisory services, without triggering regulatory obligations, to the 
extent such solicitation is on behalf of the registered investment 
adviser. As discussed above, the same is true for affiliates of 
registered investment advisers.
---------------------------------------------------------------------------

    \704\ 15 U.S.C. 78o-4(e)(9).
---------------------------------------------------------------------------

    One commenter expressed concern that an investment adviser 
providing advice to a client regarding the selection or retention of 
another investment manager could constitute a solicitation of a 
municipal entity or obligated person under Section 15B(e)(9) of the 
Exchange Act.\705\ The Commission confirms that a registered investment 
adviser will not be required to register as a municipal advisor in this 
scenario, unless it receives direct or indirect compensation and acts 
on behalf of the recommended investment adviser. Absent such facts, the 
registered investment adviser is not soliciting on behalf of another 
broker, dealer, municipal securities dealer, municipal advisor, or 
investment adviser, and thus would not be engaging in solicitation 
requiring municipal advisor registration.\706\
---------------------------------------------------------------------------

    \705\ See Insurance Companies Letter.
    \706\ However, such advice may be considered investment advice 
under the Investment Advisers Act. See supra note 423.
---------------------------------------------------------------------------

State-Registered Investment Advisers
    As a result of changes in the threshold for registration as an 
investment adviser with the Commission,\707\ certain entities are not 
required to register as investment advisers under the Investment 
Advisers Act and instead are subject to state registration 
requirements.\708\ In the Proposal, the Commission sought comment on 
whether state-registered investment advisers should be exempt from the 
municipal advisor definition to the extent they are providing advice 
that otherwise would be subject to the Investment Advisers Act, but for 
the operation of a prohibition on, or exemption from, Commission 
registration.\709\
---------------------------------------------------------------------------

    \707\ See 15 U.S.C. 80b-3a(a).
    \708\ See Investment Advisers Act Release No. 3221 (June 22, 
2011), 76 FR 42950 (July 19, 2011) (implementing the statutory shift 
to the states the responsibility for oversight of investment 
advisers that have between $25 million and $100 million of assets 
under management). Approximately 2,400 Commission-registered 
investment advisers withdrew their registrations and registered with 
state securities authorities in 2012 and 2013.
    \709\ See Proposal, 76 FR 836.
---------------------------------------------------------------------------

    Several commenters supported an exemption for state-registered 
investment advisers.\710\ One commenter, for example, stated that 
``Congress has recognized the efficacy of state regulation of 
investment advisers.'' \711\ Therefore, ``the Commission should 
similarly recognize the efficacy of state regulation of investment 
advisers, particularly since the provision of advice to municipal 
entities is a matter of special interest to state authorities.'' \712\ 
Another commenter stated that state-registered investment advisers are 
already subject to significant regulation by state regulators, 
including fiduciary obligations with respect to investment management 
activities. Consequently, the commenter stated that ``imposing an 
additional layer of regulation on these persons would not provide an 
appreciable regulatory benefit or increase the protection of municipal 
entities or obligated persons.'' \713\
---------------------------------------------------------------------------

    \710\ See, e.g., ABA Letter; MFA Letter; SIFMA Letter I; letter 
from Rex A. Staples, General Counsel, North American Securities 
Administrators Association, Inc., dated March 15, 2011 (``NASAA 
Letter'').
    \711\ ABA Letter.
    \712\ Id.
    \713\ SIFMA Letter I.
---------------------------------------------------------------------------

    After considering the commenters' views, the Commission is not 
adopting an exemption for state-registered investment advisers at this 
time. The Commission notes that the statutory definition of municipal 
advisor excludes only federally-registered investment advisers. The 
Commission also notes that state regulation of investment advisers is 
not always similar to regulation under the Investment Advisers Act. For 
example, state-registered investment advisers are not subject to the 
Commission's pay-to-play rule.\714\ Furthermore, because the Commission 
is limiting the kinds of advice with respect to ``investment 
strategies'' that would require a person to register as a municipal 
advisor,\715\ the Commission believes that fewer state-registered 
investment advisers will be required to register as municipal advisors 
than as originally proposed.\716\
---------------------------------------------------------------------------

    \714\ See Investment Advisers Act Release No. 3043 (July 1, 
2010), 75 FR 41018, 41019 (July 14, 2010) (``Political Contributions 
Final Rule'').
    \715\ See supra Section III.A.1.b.viii.
    \716\ For example, under the exemption pursuant to Rule 15Ba1-
1(d)(3)(vii), state-registered investment advisers who provide 
advice to public employee benefit plans (including participant 
directed plans or plans such as 529 Savings Plans, 403(b) plans, and 
457 plans) that do not include proceeds of municipal securities 
would not be required to register as municipal advisors.
---------------------------------------------------------------------------

Exempt Reporting Advisers
    Finally, the Commission is not adopting the suggestion of one 
commenter to exempt the category of ``Exempt Reporting Advisers'' from 
registration as municipal advisors.\717\ The commenter stated that the 
Exempt Reporting Advisers exemption from registration under the 
Investment Advisers Act indicates that policy makers have determined 
that ``such investment advisers are not of the type that must register 
with the [Commission] and be subject to Commission oversight as a 
registered investment adviser.'' \718\ The commenter stated that it 
would be ``consistent with these policy determinations to similarly 
exempt these advisers from the definition of municipal advisor in 
connection with providing investment advice to a municipal entity.'' 
\719\
---------------------------------------------------------------------------

    \717\ See MFA Letter (citing Investment Advisers Act Release No. 
3111 (November 19, 2010), 75 FR 77190 (December 10, 2010) (Proposed 
Exemptions for Advisers to Venture Capital Funds, Private Fund 
Advisers with Less Than $150 Million in Assets Under Management, and 
Foreign Private Advisers)). The Commission subsequently adopted the 
exemption from registration under the Investment Advisers Act for 
Exempt Reporting Advisers. See Investment Advisers Act Release No. 
3222 (June 22, 2011), 76 FR 39646 (July 6, 2011) (Exemptions for 
Advisers to Venture Capital Funds, Private Fund Advisers With Less 
Than $150 Million in Assets Under Management, and Foreign Private 
Advisers).
    \718\ MFA Letter.
    \719\ Id.
---------------------------------------------------------------------------

    The Commission does not agree. The Commission believes that, if 
Exempt Reporting Advisers engage in municipal advisory activities, 
consistent with the protection of municipal entities and obligated 
persons, and consistent with the policy objectives of Congress and this 
rulemaking, they should not be exempt from the municipal advisor 
registration requirement based on status. Specifically, while Congress 
determined that Exempt Reporting Advisers do not need to be registered 
in connection with their investment advisory activities, that does not 
suggest that Exempt Reporting Advisers should similarly be exempt from 
regulation as municipal advisors. Therefore, Exempt Reporting Advisers 
who are exempt from registration as investment advisers must register 
as municipal advisors if they engage in municipal advisory activities, 
unless they qualify for an exclusion or exemption. However, as 
discussed above, the Commission is exempting from the definition of 
municipal advisor persons that provide advice with respect to 
investment strategies that are not

[[Page 67522]]

plans or programs for the investment of the proceeds of municipal 
securities or the recommendation of and brokerage of municipal escrow 
investments.\720\ Accordingly, the Commission believes that fewer 
Exempt Reporting Advisers will be required to register as municipal 
advisors than as originally proposed. For example, under the narrow 
scope of investment strategies, Exempt Reporting Advisers who provide 
advice to private funds that do not include proceeds of municipal 
securities would not be required to register as municipal advisors.
---------------------------------------------------------------------------

    \720\ See supra Section III.A.1.b.viii.
---------------------------------------------------------------------------

vi. Registered Commodity Trading Advisors; Swap Dealers
    Exchange Act Section 15B(e)(4)(C) excludes from the definition of 
municipal advisor any commodity trading advisor registered under the 
Commodity Exchange Act or persons associated with a commodity trading 
advisor who are providing advice related to swaps. In the Proposal, the 
Commission interpreted the statutory exclusion for registered commodity 
trading advisors and their associated persons to apply only to such 
persons when they are providing advice related to swaps, as that term 
is defined in Section 1a(47) of the Commodity Exchange Act and Section 
3(a)(69) of the Exchange Act,\721\ and any rules and regulations 
promulgated thereunder.\722\ As proposed in Rule 15Ba1-1(d)(2)(iii), a 
commodity trading advisor, or an associated person of a commodity 
trading advisor, would be required to register with the Commission as a 
municipal advisor if the commodity trading advisor, or an associated 
person of the commodity trading advisor, engages in any municipal 
advisory activities that are not advice related to swaps.\723\ Further, 
a commodity trading advisor would be required to register with the 
Commission if the advisor provides advice with respect to swaps on 
behalf of a municipal entity or obligated person, but is not registered 
as a commodity trading advisor under the Commodity Exchange Act or is 
not a person associated with a registered commodity trading advisor 
providing advice related to swaps.\724\
---------------------------------------------------------------------------

    \721\ 7 U.S.C. 1a(47) and 15 U.S.C. 78c(a)(69). Consistent with 
the statutory exclusion, the Commission's proposed interpretation of 
the statutory exclusion would not apply when such persons are 
providing advice with respect to security-based swaps.
    \722\ See Proposal, 76 FR 833. See also Temporary Registration 
Rule Release, 75 FR 54467.
    \723\ See Proposal, 76 FR 833. As an example, the Commission 
noted that if an advisor is providing advice to a municipal entity 
with respect to engaging in a swap transaction and provides advice 
to the municipal entity with respect to the structure of a municipal 
securities offering, the advisor would have to register with the 
Commission as a municipal advisor and would be subject to regulation 
by the MSRB as a municipal advisor. See id.
    \724\ See id.
---------------------------------------------------------------------------

    The Commission requested comment on, and received several comments 
regarding, its interpretation of the exclusion for commodity trading 
advisors.\725\ One commenter agreed that the exclusion should only be 
available when the registered commodity trading advisor is providing 
advice related to swaps.\726\ This commenter believed that Congress 
intended a single comprehensive municipal advisor regulatory structure 
to govern advice to municipal entities, particularly in, but not 
necessarily limited to, the context of a municipal securities 
offering.\727\
---------------------------------------------------------------------------

    \725\ See id., at 837.
    \726\ See MSRB Letter.
    \727\ See id.
---------------------------------------------------------------------------

    Another commenter expressed concern that the Commission's proposed 
interpretation of the exclusion could have the unintended consequence 
of requiring commodity trading advisors to register as municipal 
advisors if, ``in connection with providing advice about swaps, [a 
commodity trading advisor] provide[s] clients or prospective clients 
with research or advice about instruments other than swaps.'' \728\ The 
commenter expressed concern that a registered commodity trading advisor 
would need to register as a municipal advisor if these ancillary 
services fall within the scope of municipal advisory activities and are 
not deemed to be the type of advice described in the exclusion. 
According to the commenter, the types of ancillary services that a 
commodity trading advisor may provide to a municipal entity would be 
subject to ``regular oversight by the [Commission] and CFTC.'' \729\ In 
addition, the commenter stated that the rules would create widespread 
uncertainty among registered commodity trading advisors regarding 
whether the services they perform would require registration as 
municipal advisors.\730\ According to the commenter, in order to comply 
with the proposed rules, managers would need to regularly monitor each 
service they provide to municipal entities, determine which of the 
services are municipal advisory activities, and further determine which 
of the services, if any, may not be deemed to be advice related to 
swaps.\731\
---------------------------------------------------------------------------

    \728\ MFA Letter.
    \729\ Id. According to the commenter, such ancillary services 
include providing clients or prospective clients with research or 
advice about instruments other than swaps in connection with 
providing advice about swaps.
     The Commission notes that providing certain general information 
to clients or prospective clients, such as research and general 
information about products, would not be municipal advisory 
activity. See supra Section III.A.1.b.i.
    \730\ See MFA Letter.
    \731\ See id.
---------------------------------------------------------------------------

    Another commenter urged the Commission to ``honor a waiver, no-
action letters or other remedy from the CFTC regarding the requirement 
to register as a commodity trading advisor.'' \732\ The same commenter 
stated that ``the CFTC has established a `private advisor' limited 
exemption from commodity trading advisor registration.'' \733\ Under 
this exemption, a person does not have to register as a commodity 
trading advisor if it has not provided commodity trading advice to more 
than fifteen persons during the preceding twelve months and does not 
hold itself out to the public as a commodity trading advisor.\734\ The 
commenter suggested that the Commission should implement a similar 
exemption for purposes of determining when a person must register as a 
municipal advisor.\735\ In addition, the commenter stated that creating 
an exemption for providing advice to a de minimis number of entities 
would help distinguish between entities whose principal business is to 
be a municipal advisor and others.\736\
---------------------------------------------------------------------------

    \732\ ACES Power Marketing Letter.
    \733\ See id. (citing Section 4m(1) of the Commodity Exchange 
Act).
    \734\ See id.
    \735\ See id.
    \736\ See id.
---------------------------------------------------------------------------

    This commenter also expressed concern that a person must register, 
regardless of the type of swap advice that may be contemplated and 
irrespective of the relationship between the municipal entity and the 
person seeking to offer advice.\737\ The commenter urged the Commission 
to consider exclusions based on both: (1) The types of swaps 
(specifically, limiting municipal derivatives to securities-based 
swaps); and (2) the types of relationships between the municipal entity 
and the person who is providing the advice (specifically, providing an 
exclusion where the advisor acts as an agent and fiduciary of the 
municipal entity).
---------------------------------------------------------------------------

    \737\ See id.
---------------------------------------------------------------------------

Exclusion for Commodity Trading Advisors
    The Commission is adopting the interpretation of the statutory 
exclusion for commodity trading advisors substantially as proposed, 
with some modifications to provide additional clarity on the scope of 
advice that

[[Page 67523]]

would be excluded, in response to commenters' concerns. As adopted, 
Rule 15Ba1-1(d)(2)(iii) provides that the term ``municipal advisor'' 
shall not include any commodity trading advisor registered under the 
Commodity Exchange Act or person associated with a registered commodity 
trading advisor,\738\ to the extent that such registered commodity 
trading advisor or such person is providing advice that is related to 
swaps (as defined in Section 1a(47) of the Commodity Exchange Act (7 
U.S.C. 1a(47)) and Section 3(a)(69) of the Exchange Act (15 U.S.C. 
78c(a)(69)), and any rules and regulations thereunder).\739\ The final 
rule reflects minor, non-substantive modifications to provide greater 
clarity and consistency with other organizational changes the 
Commission is making to the exclusions and exemptions. Accordingly, the 
exclusion from the municipal advisor definition will not be available 
to a registered commodity trading advisor, or an associated person of a 
registered commodity trading advisor, to the extent it engages in 
municipal advisory activities that are not providing advice related to 
swaps.\740\ As noted in the Proposal, while a registered commodity 
trading advisor generally could provide advice related to swaps without 
registering as a municipal advisor, a commodity trading advisor that is 
not a registered commodity trading advisor would be required to 
register as a municipal advisor if it provides advice related to swaps 
to a municipal entity.\741\ Similarly, as noted in the Proposal, if a 
registered commodity trading advisor provides advice with respect to an 
issuance of municipal securities or any municipal financial product 
other than the swap, the advisor must register as a municipal 
advisor.\742\
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    \738\ The Commission notes that Section 15B(e)(4)(C) excludes 
from the definition of municipal advisor ``any commodity trading 
advisor registered under the Commodity Exchange Act or persons 
associated with a commodity trading advisor who are providing advice 
related to swaps.'' The Commission believes it is reasonable to 
interpret this exclusion to apply to registered commodity trading 
advisors and persons associated with a registered commodity trading 
advisor, as opposed to persons associated with any registered or 
unregistered commodity trading advisor. The Commission notes that a 
commenter also suggested this change. See MSRB Letter.
    \739\ See Rule 15Ba1-1(d)(2)(iii).
    \740\ The Commission notes, however, that to the extent a 
registered commodity trading advisor registers as a municipal 
advisor, its associated persons that are natural person municipal 
advisors would be exempt from registration if he or she is an 
associated person of an advisor that is registered with the 
Commission pursuant to Section 15B(a)(2) of the Act and the rules 
and regulations thereunder and engages in municipal advisory 
activities solely on behalf of a registered municipal advisor. See 
supra Section III.A.7. (discussing Rule 15Bc4-1).
    \741\ See Proposal, 76 FR 833.
    \742\ See id. The commodity trading advisor must also consider 
whether its activities constitute ``solicitation of a municipal 
entity or obligated person.'' See supra Section III.A.1.b.x. 
(discussing solicitation of a municipal entity or obligated person).
---------------------------------------------------------------------------

    The Commission is not exempting from municipal advisor registration 
persons that have received no-action letters from the CFTC or are 
otherwise exempt from registration as commodity trading advisors.\743\ 
For example, a person may be exempted from registration as a commodity 
trading advisor precisely because it engages in the types of activities 
that are more akin to activities in which municipal advisors engage. 
Thus, the Commission does not believe that a blanket exemption is 
appropriate at this time. The Commission notes, however, that such 
entities could apply for no-action or exemptive relief.\744\
---------------------------------------------------------------------------

    \743\ See supra notes 732-735 and accompanying text (discussing 
comments related to CFTC no action letters and exemptions related to 
commodity trading advisor registration).
    \744\ Exchange Act Section 15B(a)(4) provides that the 
Commission, by rule or order, upon its own motion or upon 
application, may conditionally or unconditionally exempt any 
municipal advisor or class of municipal advisors from any provision 
of Section 15B or the rules or regulations thereunder, if the 
Commission finds that such exemption is consistent with the public 
interest, the protection of investors, and the purposes of Section 
15B. See 15 U.S.C. 78o-4(a)(4). When requesting exemptive relief 
pursuant to Section 15B(a)(4), a person may follow the procedures 
for requesting exemptive relief pursuant to Section 36 of the 
Exchange Act, as set forth in Rule 0-12 under the Exchange Act. See 
17 CFR 240.0-12.
---------------------------------------------------------------------------

    The Commission is also not adopting an exemption for services 
provided by a commodity trading advisor that are solely incidental or 
ancillary to the commodity trading advisor's advice related to 
swaps.\745\ To the extent the commodity trading advisor is providing 
general information, however, such activities would not be municipal 
advisory activities that would subject the advisor to registration as a 
municipal advisor.\746\
---------------------------------------------------------------------------

    \745\ See supra notes 728-729 and accompanying text.
    \746\ See supra Section III.A.1.b.i. (providing guidance on 
``advice'' and discussing the provision of general information).
---------------------------------------------------------------------------

Swap Dealers
    Section 15B(e)(4)(C) of the Exchange Act does not include an 
exclusion from the definition of municipal advisor for swap dealers or 
security-based swap dealers. In its Proposal, the Commission requested 
comment generally as to whether there are exclusions from the 
definition of ``municipal advisor,'' other than those proposed, that 
the Commission should consider.\747\
---------------------------------------------------------------------------

    \747\ See Proposal, 76 FR 838.
---------------------------------------------------------------------------

    Some commenters suggested that the exclusion should be extended to 
swap dealers and security-based swap dealers because, otherwise, 
registration as a municipal advisor would be duplicative.\748\ One such 
commenter noted that Sections 731 and 764 of the Dodd-Frank Act have 
provisions requiring registration by swap dealers and security-based 
swap dealers with the CFTC and the Commission, respectively, and 
provisions specifically covering such dealers' activities when acting 
as advisors to ``special entities,'' which include state and local 
governments.\749\ Another commenter stated that persons that will be 
considered municipal advisors will often be engaged in business 
activities other than providing advice to or on behalf of a municipal 
entity or obligated person.\750\ The commenter expressed concern that 
regulated persons, such as swap dealers, that may also provide advice 
to a municipal entity or obligated person in connection with their 
business as swap dealers, may be required to register as municipal 
advisors.\751\ The commenter stated that it would be best to avoid dual 
or multiple regulations by exempting any advice that is related to, or 
given in connection with, another regulated activity. The commenter 
also provided that, in the alternative, the Commission should 
coordinate the definition of ``advice'' with that of other regulatory 
regimes.\752\
---------------------------------------------------------------------------

    \748\ See, e.g., Kutak Rock Letter; SIFMA Letter I.
    \749\ See Kutak Rock Letter. This commenter suggested that the 
Proposal should be harmonized with other provisions of the Dodd-
Frank Act specifically addressing swap practices.
    \750\ See SIFMA Letter I. The commenter stated that a swap 
dealer that provides advice in connection with its other business 
activity may be subject to CFTC regulation and, absent an exemption, 
would become subject to additional regulation as a municipal 
advisor. See id.
    \751\ See id.
    \752\ See id. In this context, this commenter cited as an 
example the proposed CFTC business conduct standards for swaps.
---------------------------------------------------------------------------

    In its Business Conduct Standards for Swaps, the CFTC adopted 
certain standards for swap dealers in their dealings with 
counterparties to swap transactions, as well as for any swap dealer 
that acts an advisor to a special entity.\753\ The CFTC's adopted 
standards also include a safe harbor from the heightened protections 
that would otherwise apply when a swap dealer acts as an advisor to a 
special entity, if:

[[Page 67524]]

such swap dealer does not express an opinion as to whether the special 
entity should enter into a recommended swap or trading strategy 
involving a swap that is tailored to the particular needs or 
characteristics of the special entity; the special entity represents in 
writing that it will not rely on recommendations provided by the swap 
dealer, and will rely on advice from an independent representative; and 
the swap dealer discloses to the special entity that it is not 
undertaking to act in the best interests of the special entity as 
otherwise required under the CFTC's standards.\754\ Consistent with 
this approach and for the reasons described below, the Commission 
believes that it is appropriate to provide an exemption for certain 
swap dealers.
---------------------------------------------------------------------------

    \753\ CFTC Rule 23.440(c)(1) provides that a swap dealer that 
acts as an advisor to a special entity has ``a duty to make a 
reasonable determination that any swap or trading strategy involving 
a swap recommended by the swap dealer is in the best interests of 
the Special Entity [as defined in CFTC Rule 23.401(c)].''
    \754\ See Business Conduct Standards for Swaps, supra note 275. 
See also CFTC Rule 23.440 (17 CFR 23.440).
---------------------------------------------------------------------------

    Specifically, to address commenters' concerns, the Commission is 
exempting any swap dealer registered under the Commodity Exchange Act 
or associated person of the swap dealer recommending a municipal 
derivative or a trading strategy that involves a municipal derivative, 
so long as the registered swap dealer or associated person is not 
``acting as an advisor'' to the municipal entity or obligated person 
with respect to the municipal derivative or trading strategy pursuant 
to Section 4s(h)(4) of the Commodity Exchange Act and the rules and 
regulations thereunder.\755\ For purposes of determining whether a swap 
dealer is ``acting as an advisor'' under Rule 15Ba1-1(d)(3)(v), the 
municipal entity or obligated person involved in the transaction will 
be treated as a ``special entity'' \756\ under Section 4s(h)(2) of the 
Commodity Exchange Act and the rules and regulations thereunder 
(regardless of whether such municipal entity or obligated person is 
otherwise a ``special entity'').\757\
---------------------------------------------------------------------------

    \755\ See Rule 15Ba1-1(d)(3)(v)(A).
    \756\ Special entity is defined in Section 4s(h)(2)(C) of the 
Commodity Exchange Act and the rules and regulations thereunder. See 
17 CFR 23.401(c) (defining ``special entity,'' for purposes of 
business conduct requirements for swap dealers and major swap 
participants) and supra note 275 (discussing the protections 
provided by the Dodd-Frank Act for special entities with respect to 
derivative transactions).
    \757\ See Rule 15Ba1-1(d)(3)(v).
---------------------------------------------------------------------------

    The Commission believes an exemption for swap dealers is 
appropriate because, as discussed below, the exemption will apply the 
standards that are applicable under the CFTC's existing regulatory 
regime. As under such regime, the exemption will also preserve 
consistent and comparable protections for municipal entities and 
obligated persons. For example, for the exemption for registered swap 
dealers to apply, a municipal entity or obligated person must have an 
independent representative who is subject to a duty to act in the best 
interests of its client.\758\ The Commission notes that independent 
representatives would likely be commodity trading advisors, municipal 
advisors, investment advisers, or ERISA fiduciaries \759\ that are also 
subject to, or may become subject to,\760\ a fiduciary duty to their 
clients.\761\ Moreover, regardless of whether a municipal entity or 
obligated person is a special entity, the swap dealer will need to 
comply with any applicable suitability standards and disclosure 
requirements, which should offer another measure of protection for 
municipal entities and obligated persons in addition to those noted 
above. Further, in the context of interactions between swap dealers and 
municipal entities and obligated persons, the exemptions will 
incorporate the standards provided by the CFTC's Business Conduct 
Standards for Swaps, which include a requirement that the swap dealer 
disclose that it is not undertaking to act in the best interest of the 
special entity.\762\ Therefore, municipal entities and certain 
obligated persons may already be familiar with the notion that exempt 
swap dealers are not undertaking to act in their best interest when 
recommending a swap or a trading strategy involving a swap and could 
more appropriately evaluate such recommendation. In addition, the 
Commission believes the standards provided by the CFTC's Business 
Conduct Standards for Swaps are appropriate for the swap dealer 
exemption from the definition of municipal advisor, because they will 
help provide clarity about: (1) when a swap dealer must register as a 
municipal advisor; and (2) its relationship with municipal entities and 
obligated persons.
---------------------------------------------------------------------------

    \758\ This is consistent with the blanket exemption where a 
municipal entity or obligated person is represented by an 
independent registered municipal advisor. See Rule 15Ba1-
1(d)(3)(vi).
    \759\ See Business Conduct Standards for Swaps, 77 FR 9738.
    \760\ The Commission notes that the CFTC has indicated that it 
is ``considering developing rules for [commodity trading advisors] 
that are comparable to rules adopted by the [Commission] or the MSRB 
for municipal advisors.'' See Business Conduct Standards for Swaps, 
77 FR 9739. Additionally, the CFTC has stated that it believes it 
has harmonized its rules with the regulatory regime for municipal 
advisors and will continue to work with the Commission as the 
Commission's proposed rules for the registration of municipal 
advisors are finalized. Id.
    \761\ Municipal advisors, investment advisers, and ERISA 
fiduciaries all owe fiduciary duties to their clients.
    \762\ See supra note 754 (setting forth the disclosure 
requirements for swap dealers under CFTC Rule 23.440).
---------------------------------------------------------------------------

    For these reasons, the Commission finds it consistent with the 
public interest, the protection of investors, and the purposes of 
Section 15B of the Exchange Act, to use its authority pursuant to 
Exchange Act Section 15B(a)(4) to exempt swap dealers from the 
definition of municipal advisor, subject to the limitations described 
above, and therefore not require such dealers to register as municipal 
advisors.
    The Commission is not adopting, at this time, an exemption for 
security-based swap dealers. As a general matter, the Commission 
understands that municipal entities currently do not typically enter 
into security-based swap transactions.\763\ The Commission also notes 
security-based swap dealers may, to the extent they would otherwise 
meet the definition of ``municipal advisor,'' qualify for a different 
exemption, such as the exemption in Rule 15Ba1-1(d)(3)(vi) when the 
municipal entity or obligated person is otherwise represented by an 
independent registered municipal advisor. Further, the Commission notes 
that such entities could apply for no-action or exemptive relief.\764\ 
When the Commission considers adopting external business conduct rules 
for security-based swap dealers, the Commission may also consider 
amending the municipal advisor definition to include an exemption for 
security-based swap dealers that is similar to the exemption for swap 
dealers.\765\
---------------------------------------------------------------------------

    \763\ See, e.g., Transcript of the U.S. Securities and Exchange 
Commission Birmingham Field Hearing on the State of the Municipal 
Securities Market at 241 and 244.
    \764\ See, e.g., supra note 744.
    \765\ The Commission has proposed standards for security-based 
swap dealers that are similar to those that the CFTC has adopted. 
See Business Conduct Standards for Security-Based Swaps. Comments 
received by the Commission on this proposal are available at http://www.sec.gov/comments/s7-25-11/s72511.shtml.
---------------------------------------------------------------------------

vii. Accountants, Attorneys, Engineers and Other Professionals
    The definition of municipal advisor in Exchange Act Section 
15B(e)(4) excludes attorneys offering legal advice or providing 
services of a traditional legal nature and engineers providing 
engineering advice.\766\ As discussed more fully below, the Commission 
proposed interpretations of the attorney and engineer exclusions and 
also

[[Page 67525]]

proposed a limited exemption for accountants.\767\
---------------------------------------------------------------------------

    \766\ See 15 U.S.C. 78o-4(e)(4)(C).
    \767\ See proposed Rule 15Ba1-1(d)(2)(iv)-(vi) and Proposal, 76 
FR 833-834.
---------------------------------------------------------------------------

Accountants Providing Attest Services
    Exchange Act Section 15B(e)(4) does not explicitly exclude 
accountants from the definition of municipal advisor. In the Proposal, 
however, the Commission proposed to interpret the statutory definition 
of municipal advisor to exempt any accountant, unless the accountant 
engages in municipal advisory activities other than preparing or 
auditing financial statements or issuing letters for underwriters. In 
other words, the Commission proposed to exempt from the municipal 
advisor definition accountants preparing financial statements, auditing 
financial statements, or issuing letters for underwriters for, or on 
behalf of, a municipal entity or obligated person.\768\ In the 
Proposal, the Commission noted that it was not appropriate to exempt 
accountants entirely, because accountants may provide advice to 
municipal entities that includes advice about the structure, timing, 
terms, and other similar matters concerning the issuance of municipal 
securities.\769\
---------------------------------------------------------------------------

    \768\ See proposed Rule 15Ba1-1(d)(2)(vi).
    \769\ See Proposal, 76 FR 833. The Commission noted that 
accountants may also be engaged by municipal entities to provide 
other services, such as conducting feasibility studies or preparing 
financial projections and that, in defining municipal advisor in 
Exchange Act Section 15B(e)(4), Congress only excluded attorneys 
offering legal advice or services of a traditional legal nature or 
engineers providing engineering advice. See id., at 833, notes 127-
128 and accompanying text.
---------------------------------------------------------------------------

    The Commission requested comment on its proposed exemption for 
accountants. In particular, the Commission requested comment on whether 
the Commission should provide this exemption and whether there are 
additional types of accounting services that should fall under the 
exemption.\770\
---------------------------------------------------------------------------

    \770\ See id., at 837.
---------------------------------------------------------------------------

    The Commission received approximately 11 comment letters that 
addressed the proposed accountant exemption. Two commenters expressed 
support for the accountant exemption as proposed and did not suggest 
any changes.\771\ Several commenters, however, believed that the 
proposed accountant exemption was too narrow and recommended including 
additional services under the exemption.\772\
---------------------------------------------------------------------------

    \771\ See MSRB Letter (agreeing that the exemption should apply 
solely when an accountant is preparing financial statements, 
auditing financial statements, or issuing bring down, comfort or 
``agreed upon procedures'' letters for underwriters); letter from 
Kim M. Whelan, Co-President, Acacia Financial Group, Inc., dated 
February 22, 2011 (``Acacia Financial Group Letter'') (stating that 
``[t]o the extent accountants or engineers provide advice regarding 
municipal financial products or issuance of municipal securities, 
accountants and engineers should be considered Municipal 
Advisors'').
    \772\ See, e.g., State of Indiana Letter; letters from Deloitte 
LLP, dated February 22, 2011 (``Deloitte Letter''); Gerald G. 
Malone, H.J. Umbaugh & Associates, dated February 22, 2011 
(``Umbaugh Letter''); letter from Susan S. Coffey, Senior Vice 
President, Member Quality and International Affairs, American 
Institute of Certified Public Accountants (``AICPA''), dated 
February 25, 2011 (``AICPA Letter''); and Gary Higgins, President, 
Registered Municipal Accountants Association of New Jersey, dated 
February 22, 2011 (``RMAA Letter'').
---------------------------------------------------------------------------

    Several commenters recommended that attest, not just audit, 
services should be part of the accountant exemption.\773\ The 
performance of attest services is generally limited to certified public 
accountants by state regulation and professional standards.\774\ One 
commenter noted that audit services are a subset of the broader 
category of attest services and both are subject to similar 
professional standards, including an ``independence'' requirement.\775\ 
Another commenter also provided examples of services in this broader 
category of attest services, all of which it believed would be subject 
to professional standards: (1) Examinations, compilations, or agreed-
upon procedures engagements on projections or forecasts using AICPA 
Statements on Standards for Attestation Engagements (``SSAEs''); (2) 
performance of other types of agreed-upon procedures engagements; (3) 
compliance audits (e.g., opinions on compliance with federal, state, or 
local compliance requirements); and (4) review of debt coverage 
requirements on outstanding bonds and verification of calculations of 
escrow account requirements for advance refunding of bonds.\776\
---------------------------------------------------------------------------

    \773\ See, e.g., Deloitte Letter (stating that ``[a]udit 
services are a subset of the broader category of attest services. . 
. and we see no reason for the final rule to distinguish between the 
two''); Umbaugh Letter (stating that attest services and tax 
services (e.g., arbitrage rebate calculations on behalf of issuers) 
do not appear to fit the ``municipal advisor'' definition); letter 
from KPMG LLP, dated February 22, 2011 (``KPMG Letter'') 
(recommending that the Commission include, at a minimum, specific 
exemptions for attest services in the accountant exemption).
     Commenters referred to the definition of the term ``attest 
engagements'' by the AICPA as ``engagements . . . in which a 
certified public accountant in the practice of public accounting . . 
. is engaged to issue or does issue an examination, a review, or an 
agreed-upon procedures report on subject matter, or an assertion 
about the subject matter . . . that is the responsibility of another 
party.'' See Deloitte Letter (citing AICPA Attestation Standards AT 
Sec.  101.01). The Uniform Accountancy Act, which has been used as a 
basis for state regulation of certified public accountants, 
incorporates similar concepts. (See, e.g., Section 14(a) of The 
Uniform Accountancy Act (5th ed. 2007), available at http://www.aicpa.org/Advocacy/State/StateContactInfo/uaa/DownloadableDocuments/UAA_Fifth_Edition_January_2008.pdf).
    \774\ See, e.g., AICPA Code of Professional Conduct ET 201.01, 
202.01; see also AICPA Attestation Standards AT Sec.  101.06 
(providing that ``[a]ny professional service resulting in the 
expression of assurance must be performed under AICPA professional 
standards that provide for the expression of such assurance''); see 
also, e.g., The Uniform Accountancy Act (5th ed. 2007), available at 
http://www.aicpa.org/Advocacy/State/StateContactInfo/uaa/DownloadableDocuments/UAA_Fifth_Edition_January_2008.pdf.
    \775\ See Deloitte Letter.
    \776\ See AICPA Letter.
---------------------------------------------------------------------------

    Further, one commenter asked if the following services would be 
included or excluded from the accountant exemption: (1) The preparation 
of unaudited annual financial statements; (2) the provision of annual 
independent audits of a municipal entity; (3) the review and 
preparation of pro forma maturity schedules of principal and interest 
on proposed bond issues; (4) the provision of budget, audit, and other 
information to credit rating agencies; and (5) the preparation of the 
``front end'' of offering statements and financial and demographic 
information.\777\
---------------------------------------------------------------------------

    \777\ See RMAA Letter.
---------------------------------------------------------------------------

    Several commenters also recommended extending the exemption to 
services that non-certified public accountants can provide but are 
subject to regulation and professional standards. For example, two 
commenters stated that advice related to Generally Accepted Accounting 
Principles (``GAAP'') and tax advice related to municipal securities 
and derivatives should also fall under the accountant exemption.\778\
---------------------------------------------------------------------------

    \778\ See KPMG Letter; AICPA Letter.
---------------------------------------------------------------------------

    In addition to these services, another commenter recommended, more 
generally, that the Commission extend the accountant exemption to the 
provision of non-attest services, such as certain tax and actuarial 
services.\779\ Two other commenters stated that accountants and other 
consultants who provide feasibility studies should not be considered 
municipal advisors.\780\
---------------------------------------------------------------------------

    \779\ See Deloitte Letter.
    \780\ See Gilmore & Bell Letter; State of Indiana Letter.
---------------------------------------------------------------------------

    One commenter suggested that accountants of conduit borrowers 
should be exempt as municipal advisors.\781\
---------------------------------------------------------------------------

    \781\ See South Lake County Hospital Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered issues raised by commenters 
on the Proposal and is expanding the accountant exemption to include 
accountants providing audit or other attest services. Specifically, 
Rule 15Ba1-1(d)(3)(i), as adopted, provides that the term ``municipal 
advisor'' shall

[[Page 67526]]

not include any accountant to the extent that the accountant is 
providing audit or other attest services, preparing financial 
statements, or issuing letters for underwriters for, or on behalf of, a 
municipal entity or obligated person.\782\ To the extent commenters 
requested clarification regarding whether specific activities would be 
exempted, such activities would be exempted if they constitute audit or 
other attest services,\783\ the preparation of financial statements, or 
the issuance of letters for underwriters for, or on behalf of, a 
municipal entity or obligated person.
---------------------------------------------------------------------------

    \782\ See Rule 15Ba1-1(d)(3)(i). In addition to adopting an 
expanded accountant exemption, as compared to the Proposal, the 
Commission is also making minor, non-substantive modifications to 
provide greater clarity and consistency with other organizational 
changes the Commission is making to the exclusions and exemptions.
    \783\ See supra notes 776-777.
---------------------------------------------------------------------------

    The Commission believes that it is appropriate to include attest 
services in general, and not just audit services in particular, among 
the services that fall under the exemption. Both audit and other attest 
services are generally subject to regulation and professional 
standards,\784\ including independence requirements. Such independence 
requirements could potentially conflict with municipal advisors' 
fiduciary duty to the municipal entities they advise.\785\ Accountants 
providing attest services are also required to meet general standards 
related to adequate technical training and proficiency, adequate 
knowledge of subject matter, suitability and availability of criteria, 
and the exercise of due professional care.\786\ Accordingly, the 
Commission believes that attest services, and not just audit services, 
exemplify the types of services typically performed by accountants that 
should not constitute the provision of advice within the meaning of 
Exchange Act Section 15B(e)(4)(A)(i).\787\
---------------------------------------------------------------------------

    \784\ See, e.g., AICPA Code of Professional Conduct ET 201.01, 
202.01; see also AICPA Attestation Standards AT Sec.  101.06 
(providing that ``[a]ny professional service resulting in the 
expression of assurance must be performed under AICPA professional 
standards that provide for the expression of such assurance'').
    \785\ See AICPA Attestation Standards AT Sec.  101.35 (``The 
practitioner must maintain independence in mental attitude in all 
matters relating to the engagement.''), 101.36 (``The practitioner 
should maintain the intellectual honesty and impartiality necessary 
to reach an unbiased conclusion about the subject matter or the 
assertion. This is a cornerstone of the attest function.'').
    \786\ See AICPA Attestation Standards AT Sec.  101.19 to 101.41.
    \787\ See 15 U.S.C. 78o-4(e)(4)(A)(i).
---------------------------------------------------------------------------

    The Commission has considered whether various non-attest services 
should also be included in the accountant exemption, such as tax 
services (including arbitrage rebate services \788\) and advice 
relating to GAAP. While the Commission acknowledges that such non-
attest services may represent activities provided by accountants, such 
services are neither necessarily provided by certified public 
accountants, nor necessarily subject to similar regulation and 
professional standards as attest services. The Commission does not 
believe it is appropriate to expand the exemption to cover activities 
or services that non-accountants could perform. Accordingly, the 
Commission is not including non-attest services in the accountant 
exemption. Nevertheless, a person providing non-attest services would 
only be required to register as a municipal advisor if such services 
are within the scope of the municipal advisory activities definition.
---------------------------------------------------------------------------

    \788\ See, e.g., supra note 773.
---------------------------------------------------------------------------

    Several commenters noted that non-attest services should be 
included because accountants are already subject to other regulatory 
regimes, including those of state boards of accountancy, the 
Commission, and the Public Company Accounting Oversight Board.\789\ The 
Commission does not believe those regimes, which are principally 
focused on the certified public accountant's provision of attest 
services,\790\ are sufficient to warrant further expansion of the 
accountant exemption.
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    \789\ See, e.g., KPMG Letter.
    \790\ See Sarbanes-Oxley Act of 2002, as amended by Section 982 
of the Dodd-Frank Act. 15 U.S.C. 7201 et seq. See, specifically, 
Section 102 of the Sarbanes-Oxley Act of 2002. 15 U.S.C. 7212.
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    As stated above and in the Proposal, accountants may provide advice 
to municipal entities, including advice about the structure, timing, 
terms, and other similar matters, and such advice may be the basis for 
an issuance of municipal securities. Therefore, the Commission does not 
believe that it is appropriate to exempt accountants from the 
definition of municipal advisor entirely. In addition, although attest 
services are often included as part of larger engagements, such as the 
examination of prospective financial information that is included as 
part of a feasibility study or acquisition study,\791\ the accountant 
exemption includes only the attest portion of these engagements and 
does not cover all services that comprise such engagements.\792\
---------------------------------------------------------------------------

    \791\ See AICPA Attestation Standards AT Sec.  101.05.
    \792\ For example, the exemption would not apply to accountants 
that provide consulting services to municipal entities, including 
advice with respect to the structure, timing, terms, or other 
similar matters concerning an issuance of municipal securities or a 
municipal financial product, modeling future debt service coverage, 
suggesting future rate schedules, tax advice related to municipal 
securities and derivatives, and other non-attest services that 
constitute municipal advisory activities. The scope of the 
accountant exemption is different from the scope of the investment 
adviser exclusion because, unlike accountant engagements that 
include attest as well as other services, investment advice provided 
pursuant to an advisory agreement would be subject to the anti-fraud 
provisions of the Investment Advisers Act and a fiduciary duty. See 
supra note 671.
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    The Commission also notes that, according to the exemption provided 
by Rule 15Ba1-1(d)(3)(i), feasibility studies concerning the issuance 
of municipal securities or municipal financial products for which an 
accountant provides only audit or attest services would not require the 
accountant to register as a municipal advisor.\793\
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    \793\ This is consistent with the approach for engineers that 
provide feasibility studies discussed below in this section.
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    Lastly, with respect to accountants of obligated persons, the 
Commission notes that such accountants will be treated consistently 
with accountants of municipal entities.\794\
---------------------------------------------------------------------------

    \794\ See Rule 15Ba1-1(d)(3)(i). See also South Lake County 
Hospital Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission finds it consistent with the 
public interest, the protection of investors, and the purposes of 
Section 15B of the Exchange Act, to use its authority pursuant to 
Exchange Act Section 15B(a)(4) to exempt accountants from the 
definition of municipal advisor, subject to the limitations described 
above.
Attorneys Offering Legal Advice or Providing Services of a Traditional 
Legal Nature
    Section 15B(e)(4)(C) of the Exchange Act excludes from the 
municipal advisor definition attorneys offering legal advice or 
providing services that are of a traditional legal nature. In the 
Proposal, the Commission proposed to interpret the exclusion to mean 
that the term ``municipal advisor'' shall not include any attorney, 
unless the attorney engages in municipal advisory activities other than 
offering legal advice or providing services that are of a traditional 
legal nature to a client of the attorney that is a municipal entity or 
obligated person.\795\ In addition, the Commission proposed to 
interpret advice from an attorney to his or her client with respect to 
the structure, timing, terms, and other similar matters concerning the 
issuance of municipal securities or municipal financial products to be 
services of a traditional legal nature, if such advice is provided 
within an attorney-client relationship specifically related to the 
issuance of municipal securities or such municipal

[[Page 67527]]

financial products in conjunction with related legal advice.\796\ 
Further, in the Proposal, the Commission indicated that, for example, 
the following advice would be considered to be services of a 
traditional legal nature: (1) Advice comparing the structures, terms, 
or associated costs of issuance of different types of securities or 
financial instruments (such as fixed rate bonds or variable rate demand 
obligations) given by an attorney hired to advise a municipal entity 
client embarking on a bond offering; (2) advice concerning the tax 
consequences of alternative financing structures; or (3) advice 
recommending a particular financing structure due to legal 
considerations, such as the limitations included in existing contracts 
and indentures to which the issuer is a party.\797\ The Commission, 
however, also stated in the Proposal that the following advice would 
not be services of a traditional legal nature: (1) advice concerning 
the financial feasibility of a project or a financing; (2) advice 
estimating or comparing the relative cost to maturity of an issuance, 
depending on various interest rate assumptions, or (3) advice 
recommending a particular structure as being financially advantageous 
under prevailing market conditions.\798\
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    \795\ See Proposal, 76 FR 833-834. See also proposed Rule 15Ba1-
1(d)(2)(iv).
    \796\ As an example, the Commission stated that advice comparing 
the structures, terms, or associated costs of the issuance of 
different types of securities or financial instruments (such as 
fixed rate bonds or variable rate demand obligations) given by an 
attorney hired to advise a municipal entity client embarking on a 
bond offering, would be considered to be services of a traditional 
legal nature, as would advice concerning the tax consequences of 
alternative financing structures or advice recommending a particular 
financing structure due to legal considerations such as the 
limitations included in existing contracts and indentures to which 
the issuer is a party. See Proposal, 76 FR 834.
    \797\ See id.
    \798\ See id.
---------------------------------------------------------------------------

    The Commission requested comment on numerous aspects of the 
attorney exclusion, including whether the exclusion should only apply 
to legal services to an attorney's municipal or obligated person 
client; whether the Commission should provide an exclusion for all an 
attorney's activities as long as that attorney has an attorney-client 
relationship with the municipal entity or obligated person; and whether 
the meaning of the term ``services of a traditional legal nature'' is 
sufficiently clear.\799\
---------------------------------------------------------------------------

    \799\ See id., at 837.
---------------------------------------------------------------------------

    The Commission received approximately 20 comment letters regarding 
the attorney exclusion. Two commenters generally supported the proposed 
interpretation of the exclusion,\800\ although one of these commenters 
recommended that the Commission continue to refine the attorney 
exemption. The commenter suggested that exempted activity ``consists of 
advice on legal matters such as the legal ramifications of such 
structure, timing, terms and other matters, the appropriate 
documentation thereof, and matters of a similar legal nature.'' \801\ 
Meanwhile, two other commenters stated that they did not support the 
exclusion because advice provided by attorneys to financing teams is 
generally financial in nature and represents municipal advisory 
activity.\802\
---------------------------------------------------------------------------

    \800\ See MSRB Letter I (supporting the language of the attorney 
exclusion, ``including in particular that such exclusion applies 
solely when an attorney is providing legal advice or services that 
are of a traditional legal nature to a client that is a municipal 
entity or obligated person''); letter from Robert Doty, AGFS, dated 
March 1, 2011 (``Doty Letter II'') (stating that: ``[i]n the 
municipal securities market . . . it has long been recognized that 
attorneys providing other services are stepping beyond their 
recognized roles'').
    \801\ See MSRB Letter I.
    \802\ See letter from John J. Haas, President, Ranson Financial 
Consultants, LLC, dated February 17, 2011 (``Ranson Financial 
Consultants Letter'') (``How an attorney can give advice on whether 
an entity should be rated or not, and/or to walk and [sic] entity 
through the rating process without being a registered Municipal 
Advisor is not understandable . . . . The Commission, in principal 
[sic], is allowing bond attorney and local attorneys to continue to 
act as Municipal Advisors without the requirement to be registered 
as one.''); Acacia Financial Group Letter (stating that attorney 
advice comparing the structures, terms or associated costs of 
issuance of different types of securities or financial instruments 
(such as fixed rate bonds or variable rate demand obligations) is 
not service that should be included in the definition of traditional 
legal services as it is at the heart of the advice that a municipal 
advisor provides and is directly financial in nature).
---------------------------------------------------------------------------

    The majority of commenters did not support the proposed 
interpretation of the statutory exclusion, stating that the 
interpretation is too limited in scope.\803\ One commenter sought 
clarification that the statutory exclusion for attorneys covers all 
``legal advice'' and that the ``traditional legal nature'' limitation 
applies only to ``services'' provided by attorneys.\804\ Some 
commenters noted the difficulty of separating ``services of a 
traditional legal nature'' from advice that could be considered 
``financial'' in nature.\805\ These commenters also noted that roles of 
outside counsel are not neatly compartmentalized, and that municipal 
clients benefit from attorneys' ``financial'' advice.\806\ Other 
commenters indicated that attorneys should feel free to provide advice 
to municipal entities and obligated persons without fear of falling 
subject to municipal advisor registration.\807\ Some commenters 
questioned whether registration of attorneys was necessary, even if 
they provided financial advice. These commenters reasoned that 
attorneys already have a fiduciary duty to their clients, in addition 
to state ethics laws and well-established disciplinary processes for 
those who breach their fiduciary duties.\808\
---------------------------------------------------------------------------

    \803\ See, e.g., NABL Letter (``[A]ttorneys have an obligation 
to give frank advice to their clients and . . . not to limit their 
advice to strictly legal issues if their clients otherwise would be 
prejudiced . . . . The attorney should be free to discuss the 
possible pros and cons of different transaction structures if more 
than one is legally authorized, including practical consequences 
that are financial in nature . . . . [T]he exclusion for attorneys 
should not be afforded only for advice given to clients, but should 
apply to all advice that one must be licensed as an attorney to give 
or that is given as part of a traditional legal nature, or that is 
incidental to such services.''); letter from Wm. Raymond Manning, 
President & CEO, Manning Architects, dated February 21, 2011 
(``Manning Architects Letter'') (``[B]y requiring attorneys for the 
government entity to register if they stray beyond pure legal advice 
. . . the SEC will be chilling some of the most effective advice 
that a lawyer can provide. Attorneys often challenge the analysis of 
experts and other advisors to their clients and if that challenge 
strays beyond the purely legal, then those lawyers may be fearful to 
fully and ably represent their clients. The Commission should 
consider carefully if chilling a lawyer's advice to a client serves 
the interests it seeks to protect.''); Sherman & Howard Letter (``We 
believe that in so limiting the exemption for attorneys, the 
Commission is going beyond what Congress intended, as shown by the 
language of the Act, and beyond what Congress has authorized.'').
    \804\ See NABL Letter.
    \805\ See, e.g., letter from Joe B. Allen, Allen Boone Humphries 
Robinson LLP, dated February 21, 2011 (``Allen Boone Humphries 
Robinson Letter'') (```[S]ervices that are of a traditional legal 
nature' is vague, especially for bond counsel. Bond counsel's 
consultation with a client necessarily includes `structure, timing, 
terms and other similar matters.''').
    \806\ See, e.g., American Municipal Power Letter; Squire Sanders 
& Dempsey Letter (``[C]ertain advice and services the Commission may 
identify as financial in nature are in fact an integral part of and 
inseparable from legal advice and services that attorneys have 
traditionally been expected to provide to their clients in 
connection with municipal finance transactions'' and attorneys 
should be excluded from the application of the proposed rules ``when 
the attorney is providing legal advice or services, including 
ancillary financial or related advice or services relating to a 
municipal finance transaction or municipal financial product, or 
providing information concerning developments in the municipal 
marketplace.''); letter from Edward G. Henifin, General Manager and 
Steven G. de Mik, Director of Finance, Hampton Roads Sanitation 
District, dated February 22, 2011 (``Hampton Roads Sanitation 
District Letter'').
    \807\ See, e.g., NABL Letter; American Municipal Power Letter; 
Hampton Roads Sanitation District Letter; Rose Letter; letter from 
Susan Combs, Texas Comptroller of Public Accounts, dated February 
22, 2011 (``Texas Comptroller of Public Accounts Letter'').
    \808\ See, e.g., NABL Letter; State of Indiana Letter; Squire 
Sanders & Dempsey Letter.
---------------------------------------------------------------------------

    Several commenters stated that the attorney exclusion should not 
depend on a pre-existing attorney-client

[[Page 67528]]

relationship.\809\ Some commenters generally noted that attorneys are 
often expected to provide counsel to all financing team members, and 
not only to the attorney's clients that are municipal entities and 
obligated persons.\810\ One commenter stated that ``others in the bond 
issue clearly rely upon the legal advice of bond counsel, including the 
. . . obligated person in a conduit financing. The very role of bond 
counsel is to provide advice to the entire group relative to the state 
law authority for the issuance of the bonds (the approving legal 
opinion) and the federal and state tax status of the interest on the 
bonds.'' \811\ Similarly, another commenter noted that bond counsel has 
at times been described as representing ``the transaction'' rather than 
any particular party to an offering.\812\ Accordingly, the commenter 
asked the Commission to clarify if in such instance the bond counsel 
would be viewed as having a municipal entity or obligated person as a 
client. Finally, commenters also stated that attorneys representing 
parties other than municipal entities and obligated persons, such as 
underwriter's counsel, are called upon to provide their views or advice 
to the entire team, yet the attorney exclusion, as proposed, would not 
pertain to these attorneys.\813\
---------------------------------------------------------------------------

    \809\ See, e.g., State of Indiana Letter (``Not all attorneys 
who are integrally involved in a typical municipal finance 
transaction have an attorney/client relationship with the municipal 
entity issuing the bonds . . . . The responsibilities of these 
counsel are relatively standard at the core, but can be varied in 
accordance with the agreements of the various parties to the 
transaction to produce the most efficient and effective final 
product for the municipal entity . . . . All these attorneys need 
absolute comfort that their contributions will not be considered 
municipal advisory services which are outside the scope of the 
exemption simply because they are not engaged by the municipal 
entity.''); Squire Sanders & Dempsey Letter (stating that imposing a 
federal fiduciary duty upon an attorney with respect to a non-client 
municipal entity or obligated person will create potential ethical 
dilemmas regarding conflicts of interest rules under state 
professional conduct rules that already impose a prior competing 
fiduciary duty in favor of the attorney's client); Chapman and 
Cutler Letter; Gilmore & Bell Letter; Sherman & Howard Letter; and 
Texas Comptroller of Public Accounts Letter.
    \810\ See, e.g., Gilmore & Bell Letter; NABL Letter.
    \811\ See Gilmore & Bell Letter.
    \812\ See MSRB Letter.
    \813\ See, e.g., State of Indiana Letter; Squire Sanders & 
Dempsey Letter; Sherman & Howard Letter; NABL Letter.
---------------------------------------------------------------------------

    Some commenters noted that, if an attorney is required to register 
as a municipal advisor in order to provide advice to non-clients on the 
financing team, the resulting municipal advisory relationship would 
create a fiduciary duty for the attorney to the non-client. According 
to these commenters, such a fiduciary duty would directly conflict with 
the attorney's pre-existing fiduciary duties to its clients, and thus 
potentially infringe upon state rules of professional 
responsibility.\814\
---------------------------------------------------------------------------

    \814\ See, e.g., NABL Letter (recommending that the Commission 
clarify the attorney exclusion to prevent the imposition of 
fiduciary duties to issuers that are inconsistent with the duties of 
lawyers under their state professional conduct rules); Sherman & 
Howard Letter; Squire Sanders & Dempsey Letter.
---------------------------------------------------------------------------

    Other commenters indicated that many law firms provide to both 
clients and non-clients educational material about municipal bond 
financings through newsletters and emails and expressed concern that 
such activity would not be covered under the proposed interpretation of 
the attorney exclusion.\815\ Moreover, some commenters indicated that 
attorneys typically provide legal advice to a client, both before a 
formal attorney-client relationship is formed and after the attorney-
client relationship has ended (e.g., upon the closing of a bond 
transaction).\816\ One commenter noted that it is often asked to 
provide its view or advice on matters relating to prior transactions 
for which it served as bond counsel or in another legal capacity.\817\
---------------------------------------------------------------------------

    \815\ See, e.g., NABL Letter; Squire Sanders & Dempsey Letter; 
Sherman & Howard Letter.
    \816\ See, e.g., State of Indiana Letter; Squire Sanders & 
Dempsey Letter; NABL Letter.
    \817\ See Squire Sanders & Dempsey Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered issues raised by commenters 
on the Proposal and is modifying its interpretation of the statutory 
attorney exclusion to provide that attorneys are excluded from the 
definition of municipal advisor to the extent that the attorney is 
offering legal advice or providing services that are of a traditional 
legal nature with respect to the issuance of municipal securities or 
municipal financial products to a client of such attorney that is a 
municipal entity, obligated person, or other participant in the 
transaction. The Commission recognizes that legal advice and services 
of a traditional legal nature in the area of municipal finance 
inherently involves a financial advice component. By contrast, to the 
extent an attorney represents himself or herself as a financial advisor 
or financial expert regarding the issuance of municipal securities or 
municipal financial products, the attorney is not excluded with respect 
to such financial activities under Rule 15Ba1-1(d)(2)(iv) as this type 
of advice and services would be outside the statutory exclusion.\818\
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    \818\ Rule 15Ba1-1(d)(2)(iv). In addition to the modifications 
discussed above, the Commission is adopting the attorney exclusion 
with minor, non-substantive modifications to provide greater clarity 
and consistency with other organizational changes the Commission is 
making to the exclusions and exemptions.
---------------------------------------------------------------------------

    By revising its interpretation of the exclusion in this way and 
providing guidance, the Commission intends to clarify that all legal 
advice or services of a traditional legal nature involving the issuance 
of municipal securities or a municipal financial product are covered 
under the attorney exclusion. This approach addresses many comments 
received by the Commission noting the negative impacts of requiring 
attorneys in municipal finance transactions to limit their advice and 
services to those related strictly to legal issues and describing the 
difficulty involved in complying with such limitations given the nature 
of the legal advice and services attorneys traditionally have provided, 
and are expected to provide, in municipal finance transactions.\819\ In 
addition, if another participant in the issuance or transaction, who is 
not a client of the attorney, receives and acts upon the legal advice 
the attorney provides to its client, the attorney will not have to 
register as a municipal advisor. In this situation, the attorney is 
still only advising its client, even if the advice affects the actions 
of other participants in the transaction. This approach addresses 
commenters' concerns that bond counsel and other attorneys routinely 
share their views with non-client parties in a municipal finance 
transaction in the context of working group discussions.\820\ Because 
such attorney would not be required to register as a municipal advisor, 
he or she would not be subject to an additional fiduciary duty that 
could potentially conflict with the attorney's existing fiduciary duty 
to his or her client.\821\ By revising its interpretation of the 
exclusion to include a client of such attorney that is a municipal 
entity, obligated person, or other participant in the transaction, the 
Commission intends to be responsive to the comments received that 
attorneys representing participants other than a municipal entity or 
obligated person should be included in the exemption.\822\
---------------------------------------------------------------------------

    \819\ See supra notes 803-807 and accompanying text.
    \820\ See supra notes 809-813 and accompanying text (discussing 
comments on the role of bond counsel in a municipal securities 
transaction and the expectation that attorneys share their advice 
with the financing team).
    \821\ See supra notes 809 and 814 and accompanying text 
(discussing comments on potentially conflicting duties if an 
attorney is not counsel to the municipal entity or obligated person, 
but would be required to register as a municipal advisor to the 
extent they provide advice on the transaction).
    \822\ See supra note 813 and accompanying text (discussing role 
of underwriter's counsel in a municipal securities transaction).

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[[Page 67529]]

    If, however, in connection with the issuance of municipal 
securities or municipal financial products, an attorney represents 
himself or herself as a ``financial advisor'' or ``financial expert,'' 
the attorney will be required to register as a municipal advisor if the 
attorney engages in municipal advisory activities. As provided in the 
Proposal, the Commission would consider an attorney to be representing 
himself or herself as a ``financial advisor'' or ``financial expert'' 
if the attorney provides advice that is primarily financial in nature, 
such as: (1) The financial feasibility of a project or financing; (2) 
advice estimating or comparing the relative cost to maturity of an 
issuance of municipal securities depending on various interest rate 
assumptions; (3) advice recommending a particular structure as being 
financially advantageous under prevailing market conditions; (4) advice 
regarding the financial aspects of pursuing a competitive sale versus a 
negotiated sale; and (5) other types of financial advice that are not 
related to the attorney's provision of legal advice and services of a 
traditional legal nature.\823\ In these examples, attorneys would be 
providing services that are primarily financial in nature and that are 
beyond their traditional legal roles and outside of the statutory 
exclusion. The Commission believes that if an attorney represents 
himself or herself as a financial advisor or expert and engages in 
municipal advisory activities, the attorney is acting outside the scope 
of the statutory exclusion (i.e., the attorney is not offering legal 
advice or providing services that are of a traditional legal 
nature).\824\
---------------------------------------------------------------------------

    \823\ See Proposal, 76 FR 834.
    \824\ See 15 U.S.C. 78o-4(e)(4)(C).
---------------------------------------------------------------------------

    The Commission recognizes that analysis, discussion, negotiation, 
and advice regarding the legal ramifications of the structure, timing, 
terms, and other provisions of a financial transaction by an attorney 
to a client are essential to the development of a plan of finance. In 
turn, these services become, among other things, the basis for a 
transaction's basic legal documents, the preparation and delivery of 
the official statement or other disclosure document that describes the 
material terms and provisions of the transaction, the preparation of 
the various closing certificates that embody the terms and provisions 
of the transaction, the preparation and delivery of the attorney's 
legal opinion with respect to the transaction that is relied upon by 
the client and investors in the municipal securities marketplace, and 
advice and documentation with respect to post-closing policies and 
procedures that are necessary for compliance with federal and state law 
during the term of the municipal securities or municipal financial 
product. Similarly, attorneys often provide legal advice and related 
legal services regarding Federal tax requirements for issues of 
municipal securities, such as, for example, legal advice and services 
in determining ongoing compliance of an issue of municipal securities 
with the Federal tax law requirement to ``rebate'' excess arbitrage 
earnings on investments of tax-exempt bond proceeds to the Federal 
Government at periodic intervals during the term of the bond issue. The 
legal advice and legal services described in this paragraph would be 
within the attorney exclusion to the municipal advisor definition. 
Thus, attorneys providing this advice or these services would not be 
required to register as municipal advisors.
    In addition, the Commission recognizes that attorneys seeking to 
represent municipal entities and obligated persons are often required 
to respond to RFPs and RFQs, and to participate in interviews during 
which they are requested to, and do, offer advice regarding the 
structure, timing, terms, and other provisions of a proposed offering 
of municipal securities or municipal financial products before being 
retained as counsel and that these requests may not be limited to legal 
questions. As discussed above in Section III.A.1.c.ii, the Commission 
does not believe that a response to an RFP or RFQ is advice with 
respect to the issuance of municipal securities or municipal financial 
products, and the Commission is adopting an exemption from the 
definition of municipal advisor for any person providing a response to 
an RFP or RFQ, provided such person does not receive separate direct or 
indirect compensation for advice provided as part of such RFP or RFQ. 
The Commission notes that responses to RFPs and RFQs are provided at 
the request of the municipal entity or obligated person. Thus, anyone 
responding to an RFP or RFQ in accordance with the exemption, including 
an attorney, will not have to register as a municipal advisor.
    The Commission also recognizes that attorneys who represent 
municipal entities or obligated persons with respect to the issuance of 
municipal securities or municipal financial products are often asked to 
provide interpretation of the provisions of the legal documents 
throughout the term of the municipal securities or municipal financial 
products, including before and after the formal attorney-client 
relationship with respect to the issuance or municipal financial 
product exists.\825\ Although the attorney-client relationship may not 
be in existence, if the advice is with respect to an issuance or 
transaction in connection with which the municipal entity was or will 
be a client of the attorney, the Commission considers such advice to be 
``to a client.'' Accordingly, such advice will not require the attorney 
to register as a municipal advisor.
---------------------------------------------------------------------------

    \825\ See supra notes 816-817 and accompanying text.
---------------------------------------------------------------------------

    Finally, as discussed above, the Commission is clarifying that 
provision of general information, including the provision of 
educational materials to an attorney's clients and non-clients does not 
constitute advice, and therefore, will not require the attorney to 
register as a municipal advisor.\826\
---------------------------------------------------------------------------

    \826\ See supra Section III.A.1.b.i. (discussing the provision 
of general information) and note 815 and accompanying text.
---------------------------------------------------------------------------

Engineers Providing Engineering Advice
    Section 15B(e)(4)(C) of the Exchange Act excludes engineers 
providing engineering advice from the municipal advisor definition. In 
the Proposal, the Commission proposed to interpret this exclusion to 
mean that the term ``municipal advisor'' shall not include ``[a]ny 
engineer, unless the engineer engages in municipal advisory activities 
other than providing engineering advice.'' \827\ In the Proposal, the 
Commission stated that costing out engineering alternatives would not 
subject an engineer to registration because such activity would be 
considered ``engineering advice.'' \828\ The Commission, however, 
further proposed that this exclusion would not include circumstances in 
which the engineer is engaging in municipal advisory activities, 
including cash flow modeling or the provision of information and 
educational materials relating to municipal financial products or the 
issuance of municipal securities, even if those activities are 
incidental to the provision of engineering advice.\829\ The Commission 
also proposed that the exclusion would not include preparing 
feasibility studies concerning municipal financial products or the 
issuance of municipal securities that provide analysis beyond the 
engineering aspects of the project. Therefore, under the Proposal, 
engineers engaging in the types of activities described above

[[Page 67530]]

would have been required to register as a municipal advisor.\830\
---------------------------------------------------------------------------

    \827\ See proposed Rule 15Ba1-1(d)(2)(v).
    \828\ See Proposal, 76 FR 834.
    \829\ See id.
    \830\ See id.
---------------------------------------------------------------------------

    The Commission requested comment on whether it should expand its 
proposed interpretation of the statutory exclusion beyond engineers 
providing engineering advice.\831\ The Commission also asked how the 
term ``engineering advice'' should be interpreted and whether the 
engineering exclusion should include circumstances in which the 
engineer is preparing feasibility studies concerning municipal 
financial products or the issuance of municipal securities that include 
analysis beyond the engineering aspects of the project.\832\
---------------------------------------------------------------------------

    \831\ See id., at 837.
    \832\ See id.
---------------------------------------------------------------------------

    The Commission received approximately 32 comment letters regarding 
the proposed interpretation of the statutory engineering exclusion. 
Some commenters supported the proposed interpretation of the 
exclusion.\833\ One commenter stated that the Commission ignored the 
statutory exclusion altogether.\834\ Most commenters, however, 
suggested that the Commission's proposed interpretation of the 
engineering exclusion was too narrow and that activities such as cash 
flow analyses and feasibility studies represent an integral part of an 
engineer's services.\835\ Some commenters suggested that the terms 
``cash flow analysis'' and ``feasibility studies'' have very specific 
meanings within the engineering industry.\836\ One commenter 
specifically recommended that engineering firms reporting on the 
condition of water and sewer systems should be excluded from the 
definition of municipal advisor.\837\ Another commenter noted that the 
Brooks Act,\838\ which was enacted in 1972, delineates what constitutes 
``engineering services.'' \839\
---------------------------------------------------------------------------

    \833\ See MSRB Letter (``The MSRB supports the language of 
proposed Rule 15Ba1-1(d)(2)(v) regarding the exclusion for 
engineers, including in particular that such exclusion applies 
solely when an engineer is providing engineering advice. Thus, to 
the extent that an engineer provides advice with respect to 
municipal financial products, the issuance of municipal securities 
or other financing structure that is not considered engineering 
advice (such as advice on how to structure an issue to cover the 
costs of a project), the engineer would be considered a municipal 
advisor.'') and Acacia Financial Group Letter.
    \834\ See letter from Spencer Bachus, Chairman, United States 
House of Representatives, Committee on Financial Services, dated 
February 23, 2011 (``Bachus Letter'').
    \835\ See, e.g., letters from David King, President, Virginia/
DC/Maryland Chapter, American Public Works Association, dated 
February 16, 2011 (``APWA Letter'') (stating that engineering 
professional services for infrastructure evaluations, studies, and 
design contracts by their very nature involve and require cost 
analyses); David A. Raymond, President & CEO, American Council of 
Engineering Companies, dated February 18, 2011 (``ACEC Letter'') 
(stating that in many cases, analysis of cash flow requirements is 
inextricable from the design of an engineering project, and that 
engineers often provide guidance regarding alternative phasing of 
projects to match available revenues or to maximize the 
infrastructure given limited resources); Parsons Brinckerhoff Inc., 
dated February 18, 2011 (``Parsons Brinckerhoff Letter'') (noting 
that in the engineering context, cash-flow modeling often involves 
(1) a cost-loaded design and construction schedule, or (2) a record-
keeping cash flow analysis that facilitates periodic reporting); 
Kutak Rock Letter (stating that the Commission should treat an 
engineer's preparation of a project feasibility study as a part of 
routine engineering advice); Honeywell Letter (stating that ``the 
provision of such [feasibility studies and other activities that 
currently do not fall under the engineer exemption] is simply 
necessary for the municipality to initially understand the costs 
associated with a proposed engineering project and the range of 
potential options for financing such project, not to assist it in 
specifically evaluating or recommending financing options''); NAESCO 
Letter (stating that ``engineering includes a continuum of services 
. . . including the provision of general and specific information 
about financing options for energy projects, preparation of studies 
including information about cash-flows and other financial 
projections, and identification of, and introduction to brokers, 
dealers, municipal advisors (including financial advisors) and 
municipal securities dealers with expertise in financing energy 
service projects''); letter from David A. Raymond, President & CEO, 
HNTB Holdings Ltd, dated February 22, 2011 (``HNTB Holdings 
Letter'') (stating that ``[t]he conception of engineering advice 
expressed in the proposing release does not reflect engineering as 
it is practiced today, particularly in the context of infrastructure 
projects, and excludes many activities that are intrinsic to the 
profession of engineering'').
    \836\ See, e.g., Parsons Brinkerhoff Letter.
    \837\ See letter from Mark Page, Director of Management and 
Budget, The City of New York, dated February 22, 2011 (``NYC 
Management and Budget Letter''). This commenter also stated that 
sewer rate consultants issuing reports relating to the sufficiency 
of water and sewer rates to satisfy obligations of a city's water 
authority are not providing advice relating to municipal securities 
or municipal financial products; and that rate consultants providing 
advice regarding rates and revenues should, like engineers providing 
engineering advice, be excluded from the definition of ``municipal 
advisor.''
    \838\ 40 U.S.C. 1102. The Brooks Act is a federal law that sets 
forth policies and certain procedures for selection by the federal 
government of engineering and architecture firms and related 
services.
    \839\ See letter from Mark A. Casso, President, Construction 
Industry Round Table, dated February 22, 2011 (``Construction 
Industry Round Table Letter'').
---------------------------------------------------------------------------

    A number of commenters highlighted energy services and solar energy 
companies, in particular, as a sector of the engineering industry that 
would be especially affected by the Commission's proposed 
interpretation.\840\ Three commenters suggested that energy service 
companies should be able to provide disclosure statements to 
municipalities without being considered municipal advisors,\841\ and 
one commenter suggested that solar energy companies acting in an 
engineering role and providing just information and education related 
to cost savings integral to solar engineering should be included in the 
exemption.\842\
---------------------------------------------------------------------------

    \840\ See, e.g., letters from Senator Daniel Coats, Congressmen 
Dan Burton, Larry Bucshon, Todd Rokita, and Todd Young, dated May 
27, 2011 (``Senator Coats et al. Letter'') (highlighting the 
``unnecessarily dire impacts'' that the proposed rule would have on 
energy services companies); Senator Landrieu, Senator Coons, and 
Chairman Bingaman, United States Senate Committee on Energy and 
Natural Resources, dated June 22, 2011 (``Senator Landrieu et al. 
Letter'') (stating that ``the Commission's proposal undermines [the 
engineering] exemption by suggesting that any [energy services 
company] that so much as provides a cash flow analysis or 
feasibility study to a municipality would not be providing 
`engineering advice' and would therefore be subject to registration 
as a `municipal advisor'''); Honeywell Letter; letter from Katherine 
Gensler, Director, Regulatory Affairs, and Emily J. Duncan, Policy 
Specialist, Solar Energy Industries Association, dated November 9, 
2011 (``Solar Energy Industries Association Letter'').
    \841\ See NAESCO Letter; Honeywell Letter; Chevron Letter.
    \842\ See Solar Energy Industries Association Letter. For 
purposes of the engineering exclusion discussion, the Commission 
treats energy services and solar energy companies as engineering 
companies.
---------------------------------------------------------------------------

    The Commission has carefully considered the issues raised by 
commenters on the Proposal and is adopting its interpretation of the 
statutory engineering exclusion, substantially as proposed, to provide 
that engineers are excluded from the definition of municipal advisor 
``to the extent that the engineer is providing engineering advice,'' 
\843\ with modifications and clarifications regarding the scope of its 
interpretation of the statutory exclusion in response to public 
comment.\844\ In general, the Commission believes activities within the 
scope of the engineering exclusion may include feasibility studies, 
cash flow analyses, and similar activities; provided, however, that the 
engineering exclusion does not cover activities in which an engineer 
provides advice to a municipal entity or obligated person regarding 
municipal financial products or the issuance of municipal securities, 
as discussed further herein.
---------------------------------------------------------------------------

    \843\ See Rule 15Ba1-1(d)(2)(v). The Commission is adopting the 
engineering exclusion with minor, non-substantive modifications from 
the version proposed to provide greater clarity and consistency with 
other organizational changes the Commission is making to the 
exclusions and exemptions.
    \844\ See supra notes 835-836 and accompanying text (discussing 
comments related to cash flow analyses and feasibility studies).
---------------------------------------------------------------------------

    Activities within the scope of the engineering exclusion include, 
among other things, certain activities discussed below. The Commission 
believes that this exclusion covers an engineer's provision of certain 
information to its client regarding a project schedule and anticipated 
funding requirements of the project. The Commission further

[[Page 67531]]

believes that the provision of engineering feasibility studies that 
include certain types of projections, such as projections of output 
capacity, utility project rates, project market demand, or project 
revenues that are based on considerations involving engineering aspects 
of a project are within the scope of the engineering exception.
    For example,\845\ an engineer who provides funding schedules and 
cash flow models that anticipate the need for funding at certain 
junctures in a project or engineering feasibility studies based on 
analysis of engineering aspects of the project will fall within the 
Commission's interpretation of the statutory engineering exclusion from 
the municipal advisor definition. An engineering feasibility study, for 
example, might include a discussion of how much power might be 
generated by the installation of solar panels, and such a discussion 
would not constitute a municipal advisory activity. Similarly, 
recommendations about how to increase power output based on factors 
such as the placement of the panels or the number of panels would also 
not constitute a municipal advisory activity. Moreover, an engineer 
might provide estimates of water delivery capacity or a road's traffic 
capacity without engaging in municipal advisory activity. Engineers who 
report on the physical condition of infrastructure, such as roads, 
bridges or water and sewer systems, would also not be engaged in 
municipal advisor activity.\846\ Absent other facts and circumstances 
which indicate that an engineer is providing advice to a municipal 
entity or obligated person regarding the issuance of municipal 
securities, an engineer's use of assumptions provided by a municipal 
entity or obligated person regarding interest rates or debt levels in 
preparing an engineering feasibility study or cash flow analysis alone 
will not result in municipal advisory activity.
---------------------------------------------------------------------------

    \845\ See, e.g., supra note 835 and accompanying text.
    \846\ See supra note 837. Whether a rate consultant providing 
advice regarding rates and revenues would be a ``municipal advisor'' 
will depend upon the facts and circumstances. For example, if such 
consultant provides advice on whether certain rates and revenues 
would support debt service on an issue of municipal securities, such 
activity would be municipal advisory activity that would subject the 
consultant to the registration requirement. Although the Commission 
is not adopting an exemption for persons performing such activities, 
the Commission notes that like all persons, such entities could 
apply for no-action or exemptive relief. As noted above, when 
requesting exemptive relief pursuant to Section 15B(a)(4), a person 
may follow the procedures for requesting exemptive relief pursuant 
to Section 36 of the Exchange Act, as set forth in Rule 0-12 under 
the Exchange Act. See 17 CFR 240.0-12.
---------------------------------------------------------------------------

    With respect to services related to cash flow analysis, a municipal 
entity might seek input from an engineering company about whether a 
project could be accomplished with estimated available funding, 
including the timing of such funding. As noted above, engineers that 
provide input about the anticipated funding requirements of a project 
would not be engaging in a municipal advisory activity.\847\ Thus, an 
engineer could advise a municipal entity about whether a project could 
be safely or reliably completed with the available funds and provide 
engineering advice about other alternative projects, cost estimates, or 
funding schedules without engaging in municipal advisory activity. 
Further, the Commission would consider an engineering company that 
informs a municipal entity or obligated person of potential tax 
savings, discounts, or rebates on supplies to be acting within the 
scope of the engineering exclusion.
---------------------------------------------------------------------------

    \847\ In the Proposal, the Commission gave as an example of 
activity that would be engineering advice the costing out of 
engineering alternatives. See Proposal, 76 FR 834.
---------------------------------------------------------------------------

    By contrast, however, activities of engineers are outside the scope 
of the engineering exclusion if they include advice to a municipal 
entity or obligated person regarding municipal financial products or 
the issuance of municipal securities, including advice with respect to 
the structure, timing, terms, or other similar matters concerning such 
products or issuances. For example, an engineer that is engaged by a 
municipal entity or obligated person to prepare revenue projections to 
support the structure of an issuance of municipal securities would be 
providing advice outside the scope of the engineering exclusion and 
would be engaging in municipal advisory activity. Further, while the 
inclusion of an engineering feasibility study in an official statement 
or other offering document for an issuance of municipal securities 
alone does not cause an engineer's activities with respect to the 
feasibility study to be treated as municipal advisory activity, other 
facts and circumstances, such as the inclusion of revenue projections 
and debt service coverage calculations in the feasibility study, may 
suggest municipal advisory activity.
    Engineering companies may also provide advice to their clients 
regarding financing of products and services delivered to such clients. 
As noted previously, the Commission is clarifying that provision of 
general information that does not involve a recommendation regarding 
municipal financial products or the issuance of municipal securities 
(including general information with respect to financing options) would 
not be municipal advisory activity.\848\ Depending on all the facts and 
circumstances, however, the provision of information describing 
financing alternatives that may meet the needs of a municipal entity or 
obligated person may be considered a recommendation with respect to 
municipal financial products or the issuance of municipal securities 
that would be municipal advisory activity.\849\
---------------------------------------------------------------------------

    \848\ See supra note 168 and accompanying text. See also supra 
Section III.A.1.b.i. (providing guidance on the term ``advice'' and 
discussing the provision of general information).
    \849\ See supra Section III.A.1.b.i. (providing guidance on the 
term ``advice'' and discussing the provision of general 
information).
---------------------------------------------------------------------------

    One commenter stated that another standard service offered by 
engineers involves the provision of introductions of municipal entities 
to brokers, dealers, municipal advisors, and municipal securities 
dealers and that such introductions should be within the engineering 
exclusion.\850\ One commenter recommended that the Commission ``refine 
its approach'' to register only those solicitors that receive 
compensation for introductions to funding sources.\851\
---------------------------------------------------------------------------

    \850\ See NAESCO Letter.
    \851\ See letter from Jennifer Schafer, Coordinator, Federal 
Performance Contracting Coalition, dated February 22, 2011 
(``Federal Performance Contracting Coalition Letter'').
---------------------------------------------------------------------------

    The Commission does not believe it is necessary or appropriate to 
provide a separate exemption for engineers engaging in introductions. 
The Commission notes that introductions provided by engineers would be 
subject to the same analysis as any other ``solicitation of a municipal 
entity or obligated person.'' \852\ Thus, if an introduction does not 
result in direct or indirect compensation to the engineer, the 
introduction will not constitute such a solicitation and the engineer 
will not be required to register as a municipal advisor.
---------------------------------------------------------------------------

    \852\ See supra Section III.A.1.b.x. (discussing ``solicitation 
of a municipal entity or obligated person'').
---------------------------------------------------------------------------

    Finally, as discussed previously, the Commission is providing an 
exemption for advice given to municipal entities and obligated persons 
in circumstances in which the municipal entity or obligated person 
separately is represented by an independent registered municipal 
advisor.\853\

[[Page 67532]]

Engineers may provide advice beyond engineering advice when such an 
independent registered municipal advisor is present without triggering 
the requirement to register as a municipal advisor.
---------------------------------------------------------------------------

    \853\ See supra Section III.A.1.c.iii. (discussing the exemption 
when a ``municipal entity or obligated person represented by an 
independent municipal advisor'').
---------------------------------------------------------------------------

Vendors Generally
    Some commenters who commented on other aspects of the Proposal also 
provided information with respect to purchases from vendors made by 
municipal entities that could potentially involve the issuance of 
municipal securities. One commenter stated that most municipalities, 
for example, do not purchase a solar installation upfront, but rather 
enter into a purchase or lease agreement with the solar company.\854\ 
Another commenter referenced lease-leaseback arrangements and preferred 
provider or performance contract arrangements.\855\
---------------------------------------------------------------------------

    \854\ See Solar Energy Industries Association Letter.
    \855\ See NAESCO Letter.
---------------------------------------------------------------------------

    The Commission notes that municipal entities and obligated persons 
purchase a wide range of products from vendors, including, for example, 
computers, office furnishings and supplies, car, truck and school bus 
fleets, telephone systems, and a multitude of other products. The 
Commission believes that the activities of vendors in advertising, 
promoting, and selling their products to municipal entities are 
generally outside the scope of municipal advisory activities because 
these activities generally do not involve advice with respect to the 
issuance of municipal securities or municipal financial products.\856\
---------------------------------------------------------------------------

    \856\ See supra note 143 and accompanying text (discussing the 
term ``municipal advisory activities'').
---------------------------------------------------------------------------

    The Commission understands, however, that sometimes municipal 
entities and obligated persons may finance the purchase of products 
from vendors through the use of instruments such as installment 
purchase contracts, installment sale contracts, lease-purchase 
agreements, or loans. The Commission notes that the provision of advice 
and recommendations by vendors (or any other person including, for 
example, lease financing companies affiliated with vendors) to 
municipal entity or obligated person clients regarding specific 
financing options for the purchase of products could, depending on the 
facts and circumstances, be a municipal advisory activity. For example, 
certain financings, depending on how they are structured, could 
constitute the issuance of a security \857\ by a municipal entity and, 
therefore, could constitute the issuance of a municipal security.\858\ 
The provision of advice and recommendations regarding such an issuance 
would constitute municipal advisory activity unless an exclusion or 
exemption applies.
---------------------------------------------------------------------------

    \857\ See Reves v. Ernst & Young, Inc., 494 U.S. 56 (1990), 
where the U.S. Supreme Court established a multi-factor test to 
distinguish securities from instruments that are not securities.
    \858\ See 15 U.S.C. 78c(a)(29) (defining ``municipal 
securities'').
---------------------------------------------------------------------------

Actuaries
    Section 15B(e)(4)(C) of the Exchange Act does not include an 
exclusion for actuaries from the municipal advisor definition. The 
Commission received approximately five comment letters concerning a 
possible exemption for actuaries.\859\
---------------------------------------------------------------------------

    \859\ See, e.g., Fraser Stryker Letter; State of Indiana Letter; 
letter from Maria Sarli, Resource Actuary, and Lynn Cook, Towers 
Watson, dated February 22, 2011 (``Towers Watson Letter''); American 
Society of Pension Professionals Letter; and American Academy of 
Actuaries Letter.
---------------------------------------------------------------------------

    One commenter stated that if the term ``investment strategies'' 
extends beyond proceeds of municipal securities to include funds held 
in pension plans, actuarial services for pension plans would 
potentially require municipal advisor registration.\860\ The same 
commenter recommended that the Commission exempt from the municipal 
advisor definition enrolled actuaries and members of the five U.S.-
based actuarial organizations that have adopted the actuarial Code of 
Professional Conduct (including the American Academy of Actuaries, the 
American Society of Pension Professionals and Actuaries, the Casualty 
Actuarial Society, the Conference of Consulting Actuaries, and the 
Society of Actuaries).\861\ This commenter suggested that such 
exemption should apply to actuaries providing actuarial services that 
are governed by the Actuarial Standards of Practice and the Code of 
Professional Conduct.\862\ Further, another commenter recommended that 
actuaries providing actuarial services to public pension plans, 403(b) 
plans, and 457(b) plans generally should also be exempt.\863\ 
Additionally, one commenter recommended that the Commission clarify 
whether actuaries who perform actuarial and/or consulting services for 
certain other governmental benefit plans and trusts, such as retiree 
medical plans, voluntary employee benefit associations and related 
trusts (``VEBAs''), and other post-employment benefits (``OPEB'') plans 
and trusts would be municipal advisors.\864\ Finally, another commenter 
stated that actuarial studies should not be considered to be 
``municipal advisory activities.'' \865\
---------------------------------------------------------------------------

    \860\ See American Academy of Actuaries Letter.
    \861\ See id.
    \862\ See id.
    \863\ See Towers Watson Letter.
    \864\ See Fraser Stryker Letter.
    \865\ See State of Indiana Letter.
---------------------------------------------------------------------------

    For the reasons discussed below, the Commission does not believe 
that it is necessary or appropriate to exempt actuaries from the 
municipal advisor registration regime as suggested by commenters. 
However, as discussed in other sections of the release, the Commission 
is making several changes to the final rule text and its 
interpretations that would also address some of the concerns raised by 
commenters. As discussed above in Section III.A.1.b.viii, the 
Commission is exempting from the definition of municipal advisor 
persons that provide advice with respect to investment strategies that 
are not plans or programs for the investment of the proceeds of 
municipal securities or the recommendation of and brokerage of 
municipal escrow investments. Thus, persons who provide advice with 
respect to a plan, such as a public employee benefit plan (including 
403(b) plans and 457(b) plans, to the extent the plans do not contain 
proceeds of municipal securities) will not be required to register as 
municipal advisors. To the extent that a plan contains proceeds of 
municipal securities, the Commission understands that an actuary's 
service does not generally involve advice with respect to the 
investment of such proceeds. As such, an actuary's services with 
respect to such plan generally would not constitute municipal advisory 
activities and would not require the actuary to register as a municipal 
advisor.
    In addition, the provision of actuarial studies that are used as 
the basis for a municipal entity to engage in a financing will not be 
considered a municipal advisory activity if the actuarial study only 
uses client-provided investment return assumptions and does not make 
any recommendations about how such municipal entity might address an 
unfunded liability, including a discussion of the advisability of an 
issuance of municipal securities or a municipal financial product. 
Further, in order for the provision of actuarial studies that form the 
basis for disclosure with respect to an issuance of municipal 
securities to not constitute a municipal advisory activity, it must not 
include a discussion of the advisability of an issuance of municipal 
securities or a municipal financial product. Such

[[Page 67533]]

actuarial studies only provide calculations using data from the client 
and do not involve the provision of any advice. An actuary may be 
deemed to be engaged in a municipal advisory activity if the facts and 
circumstances indicate that the actuary tailored its actuarial study to 
support an issuance of municipal securities or to support entering into 
a municipal financial product.
viii. Banks
    In the Proposal, the Commission discussed a commenter's suggestion 
that the Commission exempt from the definition of ``municipal advisor'' 
banks providing ``traditional banking services'' and banks and trust 
companies that provide ``investment advisory services.''\866\ The 
Commission noted that Congress included in the statutory definition of 
municipal advisor a limited number of exclusions, and such exclusions 
did not include banks in any capacity.\867\ In addition, as discussed 
more fully above,\868\ the Commission proposed to interpret the term 
``investment strategies'' to include ``plans, programs, or pools of 
assets that invest in funds held by or on behalf of a municipal 
entity.'' \869\ In connection with its proposed interpretation of 
``investment strategies,'' the Commission stated that, because every 
bank account of a municipal entity is comprised of funds ``held by or 
on behalf of a municipal entity,'' money managers that provide advice 
to municipal entities regarding their bank accounts could be municipal 
advisors.\870\
---------------------------------------------------------------------------

    \866\ See letter from Carolyn Walsh, Vice President and Senior 
Counsel, Center for Securities, Trust and Investments, American 
Bankers Association, and Deputy General Counsel, ABA Securities 
Association, dated October 13, 2010. See also Proposal, 76 FR 834, 
notes 143-144 and accompanying text. As support, this commenter 
stated that banks are currently well-regulated and banks that offer 
trustee services are subject to rigorous and frequent examination, 
as well as extensive regulation by the various federal or state 
banking regulators.
    The commenter also listed the following activities as examples 
of the types of activities in which bank and trust companies engage: 
providing direct loans, checking accounts, and CDs; responding to 
RFPs regarding investment products offered by the bank, such as 
interest bearing deposits, money market mutual funds, or other 
exempt securities; investing in securities issued by municipalities 
and providing credit, or through their affiliates, underwriting 
services to municipalities (such as when the municipality wants to 
buy a fire truck or build a school); providing fiduciary services to 
municipal entities (such as by managing investment accounts for 
local towns or acting as trustee with respect to bond proceeds, 
escrow accounts, governmental pension plans and other similar 
capacities). See Proposal, 76 FR 834, n.143.
    \867\ See id., at 835.
    \868\ See supra Section III.A.1.b.viii.
    \869\ See Proposal, 76 FR 830.
    \870\ See id.
---------------------------------------------------------------------------

    The Commission requested comment on whether it should exempt banks 
providing advice to a municipal entity or obligated person concerning 
transactions that involve a ``deposit'' (as defined in Section 3(l) of 
the Federal Deposit Insurance Act \871\) at an ``insured depository 
institution'' (as defined in Section 3(c)(2) of the Federal Deposit 
Insurance Act \872\). The Commission stated that, if adopted, banks 
would be exempted from the definition of municipal advisor to the 
extent they provide advice to a municipal entity or obligated person 
with respect to such banking products as insured checking and savings 
accounts and certificates of deposit. However, banks would not be 
exempted if they engage in other municipal advisory activities.\873\
---------------------------------------------------------------------------

    \871\ 12 U.S.C. 1813(l).
    \872\ 12 U.S.C. 1813(c)(2). See Proposal, 76 FR 835.
     The Commission also requested on comment on whether to exclude 
banks performing certain other specific activities, including, for 
example: banks responding to RFPs from municipal entities regarding 
other investment products offered by the banking entity, such as 
money market mutual funds or other exempt securities; banks that 
provide to a municipal entity a listing of the options available 
from the bank for the short-term investment of excess cash (for 
example, interest-bearing bank accounts and overnight or other 
periodic investment sweeps) and negotiate the terms of an investment 
with the municipal entity; banks that provide to a municipal entity 
the terms upon which the bank would purchase for the bank's own 
account (to be held to maturity) securities issued by the municipal 
entity, such as bond anticipation notes, tax anticipation notes, or 
revenue anticipation notes; banks that direct or execute purchases 
and sales of securities or other instruments with respect to funds 
in a trust account or other fiduciary account in accordance with 
predetermined investment criteria or guidelines, including on a 
discretionary basis; banks and trust companies that provide other 
fiduciary services to municipal entities, such as acting as trustees 
with respect to governmental pension plans and other similar 
capacities; and banks and trust companies to the extent they are 
providing advice that otherwise would subject them to registration 
under the Investment Advisers Act, but for the operation of a 
prohibition to or exemption from registration. See Proposal, 76 FR 
837.
    \873\ See id., at 835.
---------------------------------------------------------------------------

    In response to request for comment, the Commission received over 
300 letters from commenters, many of them commercial banks and banking 
associations. The commenters stated that, because the Commission was 
proposing to interpret the term ``investment strategies'' to encompass 
any funds ``held'' by a municipal entity, regardless of whether such 
funds are related to the issuance of municipal securities or investment 
of bond proceeds, the definition would potentially cover what 
commenters termed ``traditional banking products and services.'' \874\ 
According to the commenters, such services include deposit accounts, 
cash management products, and loans to municipalities, all of which are 
already subject to supervision by federal bank regulators.\875\ As a 
result, these commenters stated that banks providing such products and 
services would have to register as municipal advisors, adding ``a new 
layer of regulation on bank products for no meaningful public 
purpose.'' \876\ One commenter noted that ``the OCC and the other 
federal banking agencies have an existing regulatory framework and 
oversight over traditional banking products and services, which include 
bank deposit transactions * * * The OCC also already evaluates the 
ability of bank management to monitor and control traditional banking 
products and services, including the administration of deposit 
accounts, through regular and extensive on-site examinations.'' \877\ 
Other commenters recommended that municipal advisor registration should

[[Page 67534]]

instead only apply to currently unregulated entities.\878\
---------------------------------------------------------------------------

    \874\ See, e.g., American Bankers Association Letter I (the 
SEC's proposed interpretation would regulate ``already-regulated 
traditional banking products, such as deposit, cash management and 
lending activities, and trust or custody products with or on behalf 
of municipalities''); Union Bank Letter; Form Letter A (of the 
approximately 300 comment letters that addressed the topic of 
commercial bank regulation, 170 were submitted in Form Letter A 
format) (the SEC's proposed interpretation would cover ``traditional 
bank products and services, such as deposit accounts, cash 
management products, and loans to municipalities''). See also Form 
Letter D (36 comment letters were submitted in this form) (the SEC's 
proposed interpretation ``would label as ``municipal advisors'' 
banks and many bank employees providing essential and traditional 
bank services to their local municipalities, including day-to-day 
deposit, cash management, custody, trustee, and lending services--a 
result we do not believe furthers any legitimate policy goal . . 
.'').
    \875\ See, e.g., American Bankers Association Letter I; Union 
Bank Letter; Form Letter A.
    \876\ See, e.g., Form Letter A. See also Form Letter D (36 
comment letters were submitted in this format) (stating that ``the 
rule would result in . . . additional, redundant layers of multiple 
rules by the SEC and Municipal Securities Rulemaking Board (MSRB) 
for the very same products and services for which we are already 
comprehensively supervised by the prudential banking regulators''); 
BOK Financial Corp. Letter (stating that ``[e]xpanding the . . . 
registration requirement to providers of traditional banking 
services is unnecessary because it provides no additional protection 
to municipalities or investors in municipal securities beyond 
existing regulation and oversight''); American Bankers Association 
Letter I (stating that ``[d]eposit accounts, cash management 
products, loans, and trust and custody products are but four broad 
types of [municipal financial products]'' and that ``[a]ll are 
extensively regulated, and the institutions providing them are 
supervised and regularly examined by the federal bank regulators'').
    \877\ See OCC Letter.
    \878\ See, e.g., SIFMA Letter I; American Bankers Association 
Letter I (stating that ``as drafted, the proposal goes far beyond 
legislative intent or public policy need by purporting to regulate 
already-regulated traditional banking products, such as deposit, 
cash management and lending activities, and trust and custody 
products with or on behalf of municipalities''); Union Bank Letter 
(stating that Congress intended to regulate a heretofore unregulated 
group that advises municipal entities, and not banks that are 
already regulated).
---------------------------------------------------------------------------

    Many commenters focused, in particular, on the potential effects of 
the proposed rules on ``community banks.'' \879\ Many other commenters 
claimed that the additional regulatory burden of registering as a 
municipal advisor would raise costs, which would either discourage 
community banks from offering their full array of products and services 
to municipalities \880\ or lead community banks to pass on added costs 
and expenses to their municipal entity customers.\881\
---------------------------------------------------------------------------

    \879\ Entities referring to themselves as ``community banks'' 
include, for example First Bank of Owasso; ACB Bank, Cherokee; First 
National Bank of Bastrop, Texas; and The First National Bank of 
Suffield. See letter from Dominic Sokolosky, President, First Bank 
of Owasso, dated February 14, 2011; letter from Kari Roberts, 
President/CCO, ACB Bank, Cherokee, dated February 15, 2011; letter 
from Reid Sharp, President/CEO, First National Bank of Bastrop, 
Texas, Bastrop, Texas, dated February 16, 2011; letter from George 
W. Hermann, President/CEO, The First National Bank of Suffield, 
dated February 17, 2011.
    The OCC defines ``community banks'' generally as ``banks with 
less than $1 billion in total assets and may include limited-purpose 
chartered institutions, such as trust banks and community 
development banks.'' See Comptroller's Handbook, Community Bank 
Supervision (2010) available at http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/cbs.pdf at 1.
    \880\ See, e.g., Form Letter A.
    \881\ See, e.g., Hancock Holding Co. Letter. However, none of 
the commenters provided any data on the dollar cost that would be 
imposed by the proposed rules.
---------------------------------------------------------------------------

    Commenters stated that ``traditional banking products and 
services'' are not the intended focus of the municipal advisor 
registration provision of the Dodd-Frank Act and that banks that 
provide these services should not be subject to this provision.\882\ 
For example, one commenter noted that products such as deposit accounts 
and cash management products do not warrant municipal advisor 
registration, because ``[t]hese types of products merely are extension 
[sic] of more traditional deposit products, such as savings accounts, 
checking accounts and CDs, and do not constitute `advice' under any 
reasonably accepted definition of the term.'' \883\
---------------------------------------------------------------------------

    \882\ See, e.g., Form Letter A, Form Letter D, American Bankers 
Association Letter I, Independent Community Bankers of America 
Letter, and OCC Letter.
    \883\ See Independent Community Bankers of America Letter. As 
examples of short-term investment of cash, this commenter listed 
``interest-bearing bank accounts and overnight or other periodic 
investment sweeps.'' See id.
    See also letter from Charles V. Motil, Capital One Financial 
Corporation, dated February 22, 2011 (stating that ``a bank teller 
would be caught under the [municipal advisor] definition when 
helping an employee of the municipal entity deposit money into the 
entity's checking account if the teller, seeing that the account 
carries a high balance, recommends a savings account or certificate 
of deposit that would give the entity a higher rate of return'').
---------------------------------------------------------------------------

    Other commenters listed specific banking products and services 
that, in their view, should not be encompassed within municipal advisor 
registration. For example, one commenter stated that, ``[a]t a minimum, 
the Commission should clarify that banks providing municipal entity 
customers advice regarding traditional banking products including 
deposit accounts, savings accounts, certificates of deposit, bankers 
acceptances, bank loans and letters of credit, and certain loan 
participations do not need to register as municipal advisors.'' \884\ 
This commenter also stated that the Commission should clarify that 
``banks providing the terms for the purchase of municipal securities 
for the bank's own account shall be excluded from registration as 
`municipal advisors''' and explained that ``banks are authorized to 
purchase municipal securities for their own account subject to 
extensive regulation and oversight.'' \885\ Another commenter also 
argued that banks extending credit, ``whether through loans, letters of 
credit or otherwise,'' should be excluded from the definition of 
municipal advisor.\886\
---------------------------------------------------------------------------

    \884\ See OCC Letter.
    \885\ See id. See also Independent Community Bankers of America 
Letter (stating that the Commission should exclude from the 
definition of ``municipal advisor'' banks that provide ``to a 
municipal entity the terms upon which the bank would purchase for 
[its] own account securities . . . issued by the municipal entity,'' 
and arguing that ``[s]uch activities do not involve the safeguarding 
of public funds'').
    \886\ See Independent Community Bankers of America Letter.
---------------------------------------------------------------------------

    Meanwhile, another commenter recommended that the Commission adopt 
an exclusion for providing advice concerning (or soliciting) 
transactions that involve a ``deposit'' at an ``insured depository 
institution,'' as defined in Section 3(c)(2) of the Federal Deposit 
Insurance Act, including advice with respect to: (1) Insured checking 
and savings accounts and certificates of deposit; (2) directing or 
executing purchases and sales of securities or other instruments in a 
trust, fiduciary, or investment management account in accordance with 
predetermined investment criteria or guidelines, including on a 
discretionary basis; (3) providing other services to municipal 
entities, such as acting as trustees with respect to governmental 
pension plans and other similar capacities; (4) providing advice 
concerning (or soliciting) transactions that are subject to an 
exemption under Regulation R under the Exchange Act, or transactions 
otherwise excluded from the definition of broker-dealer activities 
under the Exchange Act, including bank broker-dealer exceptions 
relating to third-party networking arrangements, trust and fiduciary 
activities, deposit ``sweep'' activities, custody and safekeeping 
activities and certain securities lending transactions; (5) and serving 
as trustee to a pooled investment vehicle.\887\ Another commenter 
recommended that the municipal advisor definition only cover the 
services of advisors with respect to the investment of proceeds of 
municipal securities and exclude the deposit and cash management 
services traditionally provided by ``community banks.'' \888\ Another 
commenter suggested that ``investment strategies'' not include products 
and services in the categories of deposit accounts insured by the FDIC 
(up to $250,000) or bank activities that the Commission has exempted 
from the definitions of ``broker'' under Section 3(a)(4)(B) of the 
Exchange Act.\889\
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    \887\ See SIFMA Letter I.
    \888\ See First Bank of Owasso Letter.
    \889\ See First Tennessee Bank National Association Letter.
---------------------------------------------------------------------------

    The Commission is exempting from the definition of municipal 
advisor persons that provide advice with respect to ``investment 
strategies that are not plans or programs for the investment of the 
proceeds of municipal securities or the recommendation of and brokerage 
of municipal escrow investments.'' \890\ Accordingly, the performance 
of many of the bank activities and services about which commenters were 
concerned would not require banks to register as municipal advisors. In 
addition, as discussed further below, the Commission is exempting from 
registration banks that perform certain activities.
---------------------------------------------------------------------------

    \890\ See Rule 15Ba1-1(d)(3)(vii). See also supra Section 
III.A.1.b.viii.
---------------------------------------------------------------------------

    Specifically, the Commission is exempting from the definition of 
municipal advisor ``[a]ny bank, as defined in section 3(a)(6) of the 
Act (15 U.S.C. 78c(a)(6)), to the extent the bank provides advice with 
respect to the following: (A) [a]ny investments that are held in a 
deposit account, savings account, certificate of deposit, or other

[[Page 67535]]

deposit instrument issued by a bank; (B) [a]ny extension of credit by a 
bank to a municipal entity or obligated person, including the issuance 
of a letter of credit, the making of a direct loan, or the purchase of 
a municipal security by the bank for its own account; (C) [a]ny funds 
held in a sweep account that meets the requirements of Section 
3(a)(4)(B)(v) of the Act (15 U.S.C. 78c(a)(4)(B)(v)); or (D) [a]ny 
investment made by a bank acting in the capacity of an indenture 
trustee \891\ or similar capacity.'' \892\ The Commission believes that 
advice by banks to municipal entities and obligated persons with 
respect to these products and services would not subject municipal 
entities and obligated persons to the kinds of risks that the municipal 
advisor registration regime is intended to mitigate.
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    \891\ For purposes of this rule, an indenture trustee acts as an 
order-taker at the direction of the municipal entity that issued the 
municipal securities, within the investment parameters set forth in 
the indenture, ordinance, resolution, or similar instrument, and, 
therefore, acts in a constrained capacity, because the indenture 
trustee is responsible for making sure that any investments it 
undertakes fall within the investment parameters of the indenture.
    \892\ Rule 15Ba1-1(d)(3)(iii).
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    The Commission notes that the products and services included in the 
exemption, such as deposit accounts and certain other short-term cash 
investments like sweep accounts, and extensions of credit by a bank 
(whether by direct loan or otherwise),\893\ are transactions in which 
there should be no confusion as to the role of the bank or its 
employees. Similarly, the Commission notes that banks that purchase 
securities from municipal entities or obligated persons for their own 
account (without providing advice to the municipal entities or 
obligated persons with respect to other issues or municipal products) 
are not engaging in municipal advisory activities. Instead, they are 
acting as principals in purchase transactions.\894\ In the case of 
investments made by an indenture trustee, the bank acts at the 
direction of the municipal entity or obligated person.
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    \893\ The Commission notes that the examples of extensions of 
credit set forth in Rule 15Ba1-1(d)(3)(iii) are not intended to be 
exhaustive, and that the exemption would also apply to banks 
providing advice to a municipal entity or obligated person with 
respect to other extensions of credit by a bank such as a banker's 
acceptance or a participation in a loan which the bank or an 
affiliate of the bank (other than a broker or dealer) funds, 
participates in, or owns.
    \894\ Specifically, banks providing municipal entities or 
obligated persons with the terms under which they would purchase 
securities for their own account are not engaging in municipal 
advisory activities.
    The Commission notes that, in this context, such banks may, 
however, depending on the facts and circumstances, be subject to 
regulation as ``municipal securities dealers.'' See Sections 
3(a)(30) and 15B of the Exchange Act and the rules and regulations 
thereunder.
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    Accordingly, Rule 15Ba1-1(d)(3)(iii) provides an exemption from the 
definition of municipal advisor for banks that provide advice with 
respect to certain enumerated products and services that the Commission 
believes do not pose the types of risks that the Dodd-Frank Act was 
designed to address. Moreover, the Commission notes that the narrower 
focus of the ``investment strategies'' definition on investments of 
proceeds of municipal securities and municipal escrow investments 
discussed above is intended to be responsive to comments about the 
impact of the municipal advisor registration requirement on the 
provision of products and services offered by banks. The Commission 
believes that, together, these exemptions to the definition of 
``municipal advisor'' generally will cover banks with respect to advice 
that they provide regarding the types of products and services that 
commenters referred to as ``traditional banking products and 
services.'' \895\ For example, commenters identified deposit accounts, 
which municipal entities typically use for short-term investments of 
revenues, as one type of traditional banking product. Under the final 
rules, banks that provide advice regarding deposit accounts generally 
will be explicitly exempt from the definition of municipal advisor for 
this type of account. Similarly, banks will be explicitly exempt with 
respect to other identified products and services such as letters of 
credit and sweep accounts. Additionally, although the final rules would 
not explicitly exempt certain products and services such as custody 
accounts and trust services (unless the bank is serving in the capacity 
of an indenture trustee or a similar capacity), a bank providing advice 
with respect to such products or services would not be required to 
register as a municipal advisor, as a result of the narrower approach 
with respect to investment strategies, unless such accounts contain 
proceeds of municipal securities or municipal escrow investments.
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    \895\ See, e.g., supra notes 874 and 875, and accompanying text. 
See also supra note 884 and accompanying text (discussing the OCC 
Letter).
---------------------------------------------------------------------------

    By contrast, however, the Commission is not exempting from 
registration banks that engage in municipal advisory activities, 
including without limitation banks that provide advice to municipal 
entities or obligated persons with respect to the issuance of municipal 
securities, or banks that provide advice with respect to municipal 
derivatives, unless the bank qualifies for another exclusion or 
exemption, such as under the limited circumstances described above with 
respect to the exemption for certain swap dealers.\896\ As discussed 
above in the context of the definition of municipal derivatives and the 
exemption for certain swap dealers, with the Dodd-Frank Act, Congress 
established heightened protection with respect to swaps and security-
based swaps,\897\ and the Commission therefore does not believe that a 
blanket exemption for banks with respect to such activities would be 
appropriate. The Commission believes it is important to emphasize that 
the bank exemption does not apply to advice on municipal derivatives, 
which is a significant problem area identified in the financial crisis 
in which municipal entities suffered significant losses,\898\ and 
further, the bank exemption does not apply to advice on the issuance of 
municipal securities, which is a core focus of the protections to 
municipal entities in the municipal advisor registration provision and 
is an area in which a blanket exemption to banks would result in a 
potential inappropriate competitive advantage to banks over other 
financial advisors.\899\
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    \896\ See supra Section III.A.1.b.v. (discussing the definition 
of municipal derivatives) and Section III.A.1.c.vi. (discussing an 
exemption for certain swap dealers). See also supra note 275 
(discussing generally the protections afforded to special entities 
under the Dodd-Frank Act with respect to swap and security-based 
swap transactions).
    \897\ See id.
    \898\ See supra note 3 and accompanying text.
    \899\ See infra Section VIII.D.6.b. (discussing alternatives to 
the exemptions from the definition of municipal advisor).
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    The Commission believes that the exemption it is providing for 
banks will help ensure that parties engaging in key municipal advisory 
activities are registered, while permitting banks to continue to 
provide products and services to municipal entities and obligated 
persons that do not pose the types of risks that the Dodd-Frank Act was 
designed to address. Therefore, for these reasons and the reasons 
described above, the Commission finds that it is consistent with the 
public interest, the protection of investors, and the purposes of 
Section 15B of the Exchange Act, to use its authority pursuant to 
Exchange Act Section 15B(a)(4) to exempt banks engaging in certain 
municipal advisory activities from the definition of municipal advisor 
pursuant to the limitations described above. Accordingly, such banks 
are not required to register as municipal advisors.

[[Page 67536]]

Separately Identifiable Departments or Divisions
    Sections 3(a)(30) and 15B(b)(2)(H) of the Exchange Act provide for 
the MSRB to define a separately identifiable department or division of 
a bank (``SID'') for purposes of whether a bank is a municipal 
securities dealer and must register as such.\900\ In the Proposal, the 
Commission specifically requested comment on whether the Commission 
should permit SIDs (providing a bank's municipal advisory activities) 
to register as a municipal advisor, rather than the bank itself.\901\ 
The Commission requested comment on suggested rule text relating to 
SIDs, based on MSRB Rule G-1 relating to SIDs engaged in municipal 
securities dealer activities,\902\ and asked: whether such a rule would 
provide appropriate conditions for determining whether and when a SID 
engaged in municipal advisory activities may register as a municipal 
advisor; whether there were reasons the language based on MSRB Rule G-1 
should not be used for SIDs engaging in municipal advisory activities; 
and whether the language should be modified or clarified in any way, or 
if there was alternative language the Commission should consider.\903\ 
The Commission notes that the concept of separate treatment for SIDs 
exists in the current regulatory regimes for both municipal securities 
dealers and investment advisers, which both permit the SID to be the 
regulated entity.\904\
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    \900\ Exchange Act Section 3(a)(30)(B) provides that the term 
``municipal securities dealer'' does not include banks, unless the 
bank is engaged in the business of buying and selling municipal 
securities for its own account other than in a fiduciary capacity, 
provided, however that if the bank is engaged in such activities 
through a separately identifiable department or division, the 
department or division, and not the bank itself, shall be deemed to 
be the municipal securities dealer. Exchange Act Section 
15B(b)(2)(H) provides for the MSRB to ``define the term `separately 
identifiable department or division', as that term is used in 
[Exchange Act Section 3(a)(30)], in accordance with specified and 
appropriate standards to assure that a bank is not deemed to be 
engaged in the business of buying and selling municipal securities 
through a separately identifiable department or division unless such 
department or division is organized and administered so as to permit 
independent examination and enforcement of applicable provisions of 
[the Exchange Act], the rules and regulations thereunder and the 
rules of the [MSRB].''
    \901\ See Proposal, 76 FR 838.
    \902\ See id.
    \903\ See Proposal, 76 FR 838.
    \904\ See supra note 900 and infra note 909, respectively.
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    Although as discussed above many commenters recommended that the 
Commission create a blanket exemption for banks,\905\ some commenters 
specifically recommended that, to the extent a bank provides products 
or services that would not be excluded, the Commission should allow a 
bank to register a SID if its municipal advisory services or actions 
are performed through such a SID.\906\ A few commenters \907\ 
additionally stated that permitting registration of SIDs would be 
consistent with the registration scheme for municipal securities 
dealers \908\ and investment advisers.\909\
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    \905\ See supra notes 874-878 and accompanying text.
    \906\ See, e.g., Kutak Rock Letter (stating in response to the 
Commission's request for comment with respect to SIDs that ``a bank 
creating a SID should be exempted in all its other activities from 
registration as an advisor); SIFMA Letter 1 (encouraging the 
Commission to permit SIDs to register instead of the entire banking 
entity); Union Bank Letter (recommending that the Commission permit 
registration of SIDs on a voluntary basis, because given the 
dispersion of public finance activities throughout a bank, a bank 
may not be able to consolidate the activities in a single department 
or division as is contemplated in the analogous language for 
municipal dealer SIDs); ABA Letter (supporting the concept of 
permitting banks to register, when required to register at all, 
SIDs).
    \907\ See Financial Services Roundtable Letter (requesting that, 
if banks are required to register as municipal advisors, they should 
only be required to register those department actually providing 
municipal advisory services, consistent with the exclusion from the 
definition of ``municipal securities dealer'' for banks under 
Section 3(a)(30)(B) of the Exchange Act); First Tennessee Bank 
National Association Letter (stating that registration as a SID 
would be consistent with the registration scheme for bank municipal 
securities dealers and bank investment advisers to investment 
companies); and letter from Kurt R. Bauer, President/CEO, Wisconsin 
Bankers Association, dated February 21, 2011 (noting the discrepancy 
between the municipal advisor registration regime for municipal 
securities dealers that are banks, in that the Dodd-Frank Act did 
not provide for registration of SIDs).
    \908\ See supra note 900.
    \909\ See Section 202(a)(11)(A).
     The Commission notes that the Investment Advisers Act excepts 
from the definition of ``investment adviser'' ``a bank, or any bank 
holding company as defined in the Bank Holding Company Act of 1956, 
which is not an investment company,'' but provides that the 
exception does not apply to ``any bank or bank holding company to 
the extent that such bank or bank holding company serves or acts as 
an investment adviser to a registered investment company.'' The 
Investment Advisers Act also provides that ``if in the case of a 
bank, such services or actions are performed through a separately 
identifiable department or division, the department or division, and 
not the bank itself, shall be deemed to be the investment adviser'' 
See Section 202(a)(11) of the Investment Advisers Act.
---------------------------------------------------------------------------

    The Commission has carefully considered issues raised by commenters 
on its proposal and is adopting Rule 15Ba1-1(d)(4) to permit a SID that 
meets the requirements of the rule to register as a municipal advisor 
instead of the bank. The Commission agrees with commenters that it is 
appropriate to treat banks performing municipal advisory activities 
through a SID in a manner consistent with their treatment under the 
investment adviser and municipal securities dealer registration 
regimes.\910\ Thus, to the extent a bank provides advice with respect 
to a municipal derivative or engages in any other non-exempted 
municipal advisory activity, if such advice is provided through a SID 
that meets the requirements of Rule 15Ba1-1(d)(4), the SID, rather than 
the bank itself, shall be deemed to be the municipal advisor.\911\ The 
Commission believes that permitting SIDs to register is in the public 
interest, because it will ensure that municipal entities and obligated 
persons receive the regulatory protection intended by the statute, 
while addressing commenters' general concerns about duplicative 
regulation for banks and the impact of imposing the municipal advisor 
registration regime on banks in general.\912\
---------------------------------------------------------------------------

    \910\ One commenter stated that, ``given the dispersion of 
municipal advisory activities throughout the bank, banks may not be 
able to consolidate the activities in a single department or 
division as is contemplated in the analogous language for municipal 
dealer SIDs'' and, as a result, does ``not think the referenced 
language is workable.'' This commenter also stated that the 
Commission should not dictate the structure of a bank's municipal 
business. See American Bankers Association Letter I.
     The Commission notes that it is not requiring banks to 
consolidate their municipal advisory activities into a SID. Rather, 
to the extent that a bank does not otherwise qualify for an 
exclusion or exemption (such as the exemption for banks with respect 
to certain activities described above), the bank may choose to 
consolidate its municipal advisory activities into a SID. In such 
case, only the SID, and not the bank itself, would be required to 
register as a municipal advisor. Also, as discussed further below, 
Rule 15Ba1-1(d)(4) would not preclude a finding that a bank has a 
SID if the bank's municipal advisory activities are conducted in 
more than one geographic organizational or operational unit, so long 
as all such units are identifiable and otherwise meet the 
requirements of the rule with respect to each such unit.
    \911\ See Rule 15Ba1-1(d)(4).
    \912\ See, e.g., notes 874-889 and accompanying text.
---------------------------------------------------------------------------

    Specifically, as adopted, Rule 15Ba1-1(d)(4) provides that ``[i]f a 
bank engages in municipal advisory activities through a separately 
identifiable department or division that meets the requirements of 
[Rule 15Ba1-1(d)(4)], the determination of whether those municipal 
advisory activities cause any person to be a municipal advisor may be 
made separately for such department or division. In such event, that 
department or division, rather than the bank itself, shall be deemed to 
be the municipal advisor.'' For purposes of Rule 15Ba1-1(d)(4), a SID 
of a bank is defined as ``that unit of the bank which conducts all of 
the municipal advisory activities of the bank'' provided that certain 
specific requirements are met. In the Proposal, the Commission 
suggested defining SID as such term is defined in Section 3(a)(30) of 
the Exchange Act. To

[[Page 67537]]

provide additional clarity, however, the Commission is eliminating the 
specific reference to Section 3(a)(30) of the Exchange Act in the 
definition of SID that it is adopting because, while based on that 
definition, Section 3(a)(30) relates specifically to activities of 
municipal securities dealers, as opposed to municipal advisory 
activities. The Commission is also clarifying, consistent with the 
definition for SIDs suggested in the Proposal, that the fact that 
directors and senior officers of the bank may from time to time set 
broad policy guidelines affecting the bank as a whole and which are not 
directly related to the day-to-day conduct of the bank's municipal 
advisory activities, shall not disqualify such unit or require that 
such directors or officers be considered as part of such unit. Further, 
the fact that the bank's municipal advisory activities are conducted in 
more than one geographic organizational or operational unit of the bank 
shall not preclude a finding that the bank has a separately 
identifiable department or division for purposes of Rule 15Ba1-1(d)(4), 
provided, however, that all such units are identifiable and that the 
requirements of Rule 15Ba1-1(d)(4) are met with respect to each such 
unit. All such geographic, organizational or operational units of the 
bank shall be considered in the aggregate as the separately 
identifiable department or division of the bank for purposes of this 
paragraph Rule 15Ba1-1(d)(4).\913\ With the exception of the reference 
to Section 3(a)(30) and the removal from the rule text of the 
Commission's guidance with respect to the activities of directors and 
senior officers and multiple geographic locations, the other applicable 
requirements are substantively identical to those suggested in the 
proposal and based on the rules applicable to municipal securities 
dealer SIDs.\914\
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    \913\ The Commission notes that it is not including this 
clarification in Rule 15Ba1-1(d)(4) itself as suggested in the 
Proposal. See supra note 902.
    \914\ See Rule 15Ba1-1(d)(4)(i)(A)-(B). See also supra note 902 
and accompanying text. The other differences between the definition 
suggested in the Proposal and the adopted definition are technical 
and organizational in nature.
---------------------------------------------------------------------------

2. Rule 15Ba1-2
a. Application for Municipal Advisor Registration
    Section 15B(a)(1)(B) of the Exchange Act provides that it shall be 
unlawful for a municipal advisor to provide advice to or on behalf of a 
municipal entity or obligated person with respect to municipal 
financial products or the issuance of municipal securities, or to 
undertake a solicitation of a municipal entity or obligated person, 
unless the municipal advisor is registered in accordance with the 
relevant provisions of the statute. A ``municipal advisor'' is defined 
in Section 15B(e)(4) of the Exchange Act to mean, with certain 
exceptions, ``a person'' that ``provides advice to or on behalf of a 
municipal entity or obligated person . . . . or undertakes a 
solicitation of a municipal entity.'' \915\ In the Proposal, the 
Commission indicated that the type of information it should gather from 
firms versus individuals for registration purposes may be 
different.\916\ As such, the Commission proposed two different 
registration forms: Form MA for ``municipal advisory firms'' and Form 
MA-I for ``natural person municipal advisors.'' \917\
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    \915\ See supra Section III.A.1.a. (discussing the definition of 
the term ``municipal advisor'').
    \916\ Id.
    \917\ Id. A ``municipal advisory firm,'' as defined in the 
Glossary of Terms for the forms and used hereinafter, is ``any 
organized entity that is a municipal advisor, including sole 
proprietors.'' A ``natural person municipal advisor,'' as was 
defined in the Glossary, as proposed, and used hereinafter, is ``any 
natural person that is a municipal advisor, including sole 
proprietors,'' with the further clarification that ``[a] sole 
proprietor that is a municipal advisor is also a municipal advisory 
firm.'' See also infra notes 918 and 919.
---------------------------------------------------------------------------

    In connection with these forms, the Commission also proposed Rule 
15Ba1-2(a) and 15Ba1-2(b) for the registration of municipal advisory 
firms and natural person municipal advisors, respectively. Rule 15Ba1-
2(a), as proposed, required a ``person, other than a natural person, 
including a sole proprietor'' \918\ applying for registration with the 
Commission as a municipal advisor to complete Form MA in accordance 
with the instructions to the form and to file the form electronically 
with the Commission. Rule 15Ba1-2(b), as proposed, required a ``natural 
person (including a sole proprietor)'' \919\ applying for registration 
with the Commission as a municipal advisor to complete Form MA-I in 
accordance with the instructions to the form and to file the form 
electronically with the Commission. This proposed requirement applied 
to, among others, each individual employee of a firm who meets the 
definition of municipal advisor. The two proposed provisions read 
together required a sole proprietor to complete both Form MA and Form 
MA-I.
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    \918\ This language in proposed paragraph 15Ba1-2(a) is 
equivalent to the simpler term, ``municipal advisory firm'' used in 
the forms and herein, see supra note 917. The formulation of the 
rule language was intended to preclude any misinterpretation of the 
word ``firm'' as excluding sole proprietors.
    \919\ The category to which proposed paragraph 15Ba1-2(b) 
applied is identical to the ``natural person municipal advisor'' 
defined above. See supra note 917. The formulation of the rule 
language was intended to preclude any misinterpretation that would 
exclude sole proprietors.
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    The Commission requested comments on proposed Rule 15Ba1-2(a) and 
Form MA. The Commission received no comments directly on proposed Rule 
15Ba1-2(a) and is adopting this provision substantively \920\ as 
proposed.\921\
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    \920\ The adopted rule, however, is phrased differently. Rule 
15Ba1-2(a), as adopted, provides: ``A person applying for 
registration with the Commission as a municipal advisor pursuant to 
section 15B of the Act (15 U.S.C. 78o-4) must complete Form MA (17 
CFR 249.1300) in accordance with the instructions in the Form and 
file the Form electronically with the Commission.''
    The adopted rule no longer includes the phrase ``person, other 
than a natural person, including a sole proprietor'' to describe the 
person subject to registration on Form MA. As discussed below, under 
the adopted rules, natural persons that engage in municipal advisory 
activities solely on behalf of a firm with which they are associated 
(generally, as employees) are exempted from registration. Thus, such 
persons do not need to be excluded from Rule 15Ba1-2(a), which 
applies to municipal advisors ``applying for registration.'' In 
addition, sole proprietors do not need to be identified specifically 
among the persons who are required to complete Form MA.
    \921\ As discussed in the Proposal at 76 FR 838, Rule 15Ba1-2(a) 
requires firms that are currently registered on Form MA-T to 
register anew on Form MA.
---------------------------------------------------------------------------

    The Commission also requested comments on proposed Rule 15Ba1-2(b) 
and Form MA-I. Specifically, the Commission solicited comments on the 
effects of a separate registration requirement for natural persons and 
firms and the relative advantages and disadvantages for firms, 
municipal advisor employees, municipal entities, obligated persons, 
investors, and regulators, of requiring separate registration for 
natural person municipal advisors.\922\ The Commission also asked, if 
the Commission were to only require registration of municipal advisory 
firms, would inclusion of information regarding the firm's employees on 
the firm's Form MA cause confusion for municipal entities, obligated 
persons, and investors.\923\ Finally, the Commission also asked what, 
if any, legal ramifications may result for firms, and/or for natural 
persons, based on a registration regime that allows natural person 
municipal advisors that are employees of a municipal advisory firm to 
be registered by their firms as opposed to separate registration.\924\
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    \922\ See Proposal, 76 FR 851.
    \923\ Id.
    \924\ Id.
---------------------------------------------------------------------------

    The Commission received several comment letters regarding the 
proposed requirement for individual registration of natural person 
municipal advisors on

[[Page 67538]]

Form MA-I.\925\ One commenter asserted that the Commission should not 
require individuals to register separately on Form MA-I.\926\ This 
commenter stated such requirement would not only impose significant 
burden and costs on municipal advisory firms and their individual 
associated persons but also would ``force the SEC to devote substantial 
resources to processing many individual applications for registration'' 
in addition to processing municipal advisory firms' registrations on 
Form MA.\927\ This commenter noted that the Commission expected 
approximately 21,800--if not more--individuals to register as municipal 
advisors on Form MA-I \928\ and that ``[t]he sheer number of 
registrations would place significant strain on the SEC's budget and 
personnel, especially if it plans to review all applications for 
municipal advisors that are filed under the permanent registration 
program.'' \929\ The commenter questioned ``whether the incremental 
regulatory benefit (which [the commenter] does not believe would be 
significant) stemming from the public availability of the information 
that would be produced by a system of individual registration would 
justify this massive resource commitment by both applicants and the 
SEC.'' \930\ Another commenter also suggested that the Commission 
eliminate individual registration of registrants' employees.\931\
---------------------------------------------------------------------------

    \925\ See, e.g., Deloitte Letter; JPMorgan Chase & Co. Letter; 
MSRB Letter I; and SIFMA Letter I.
    \926\ SIFMA Letter I. The commenter also argued that the 
separate registration requirement would be ``excessively burdensome 
and costly.'' Although this description was made primarily in the 
context of the commenter's belief that the information requested by 
Form MA-I regarding individuals ``largely duplicates Form MA's 
disclosures regarding a municipal advisor's associated persons,'' 
the Commission believes that the commenter also intended it as a 
reason to eliminate individual registration regardless of the extent 
of the information required on the form. Regarding the commenter's 
concern about duplication, see infra notes 1171-1173 and 
accompanying discussion.
    \927\ See SIFMA Letter I.
    \928\ Id. The commenter added that ``[t]his would be in addition 
to the 800 municipal advisory firms that have already registered 
with the SEC on Form MA-T and would be required to re-register on 
Form MA, and at least 200 additional firms that are also expected to 
register.'' For the basis of the referenced Commission's estimate, 
see Proposal, 76 FR 865.
    \929\ See SIFMA Letter I.
    \930\ Id.
    \931\ See JPMorgan Chase & Co. Letter. This commenter also 
advocated the ``simplification of Form MA'' and more broadly 
criticized the scope of the proposed rules.
---------------------------------------------------------------------------

    Two commenters argued that the statute does not require individual 
registration of natural person municipal advisors.\932\ One of these 
commenters asserted that the statute appears to intend that 
registration of municipal advisors be limited to entities (including 
partnerships, unincorporated organizations, and sole proprietors).\933\ 
This commenter also stated that such entities would provide the 
critical information about individuals (including associated persons of 
the municipal advisor entity) during the registration process.\934\
---------------------------------------------------------------------------

    \932\ See SIFMA Letter I (asserting that ``the registration of 
individuals in the manner proposed by the SEC is not called for in 
any respect by Section 975'') and MSRB Letter I.
    \933\ See MSRB Letter I.
    \934\ Id. The commenter further maintained that forms relating 
to individuals at municipal advisor firms should be viewed as 
officially submitted by the municipal advisor entity. (To clarify, 
however, the commenter was questioning why individuals within a firm 
that is itself acting as a registered municipal advisor should be 
viewed as municipal advisors rather than as associated persons of a 
municipal advisor.)
---------------------------------------------------------------------------

    Another commenter believed that ``dual reporting'' on Forms MA and 
MA-I ``could lead to confusion'' and that ``there could be inadvertent 
inconsistencies in the information.'' \935\ In particular, the 
commenter noted that, under the Proposal, natural persons would be 
required to maintain and comply with recordkeeping and inspection 
requirements, which, in the commenter's view, would be ``a significant 
burden'' without ``any meaningful benefit.'' The commenter suggested 
that the Commission eliminate registration for natural persons 
altogether, or at least require natural persons to register as 
``registered representatives,'' without recordkeeping and inspection 
requirements.\936\ Similarly, another commenter believed that, rather 
than introducing a new Form MA-I to provide for registration of natural 
persons, FINRA's Form U4 should be adapted to allow for registration of 
individuals.\937\
---------------------------------------------------------------------------

    \935\ Deloitte Letter. This letter, like SIFMA Letter I, see 
supra note 926, tied the argument against separate registration for 
individuals to its belief that ``separate registration for natural 
persons is largely redundant.''
    \936\ See id.
    \937\ See Financial Services Roundtable Letter. See also infra 
note 992 and accompanying text for information concerning Form U4 
and further discussion.
---------------------------------------------------------------------------

    The Commission has carefully considered the issues raised by 
commenters on the Proposal. In response to these comments, the 
Commission is modifying its approach in the final rules and is not 
adopting Rule 15Ba1-2(b) and Form MA-I as proposed. Specifically, the 
Commission is exempting certain natural persons from the requirement to 
register as municipal advisors \938\ and is modifying Rule 15Ba1-2(b) 
and Form MA-I accordingly. Rule 15Ba1-3, as adopted, exempts from 
municipal advisor registration natural persons who are associated 
persons of a registered municipal advisor and who engage in municipal 
advisory activities solely on behalf of a registered municipal 
advisor.\939\ In practical terms, this exemption means that employees 
of municipal advisory firms who do not engage in municipal advisory 
activities independently of their firms (e.g., by engaging in municipal 
advisory activities on the side as a sole proprietor) will not be 
required to register as municipal advisors.
---------------------------------------------------------------------------

    \938\ See Rule 15Ba1-3, as adopted, which provides: ``A natural 
person municipal advisor shall be exempt from section 15B(a)(1)(B) 
of the Act (15 U.S.C. 78o-4(a)(1)(B)) if he or she: (a) [I]s an 
associated person of an advisor that is registered with the 
Commission pursuant to section 15B(a)(2) of the Act (15 U.S.C. 78o-
4(a)(2)) and the rules and regulations thereunder; and (b) [e]ngages 
in municipal advisory activities solely on behalf of a registered 
municipal advisor.''
    \939\ This exemption does not include sole proprietors, who must 
register as a municipal advisor on Form MA and also file a Form MA-
I.
---------------------------------------------------------------------------

    While the Commission is not requiring municipal advisor 
registration for these natural persons, the Commission is requiring 
municipal advisory firms to provide the Commission with information 
relating to these exempted natural persons. In this regard, Rule 15Ba1-
2(b), as adopted, requires the municipal advisor to complete and file 
with the Commission Form MA-I for each of its natural persons who are 
associated with the municipal advisor and engaged in municipal advisory 
activities on its behalf.\940\ While Form MA-I, as adopted, is not a 
form for individual registration of natural persons, adopted Form MA-I 
requires municipal advisory firms to provide similar information 
regarding its associated natural persons as proposed Form MA-I required 
(with some modifications, as discussed below).
---------------------------------------------------------------------------

    \940\ See Rule 15Ba1-2(b), as adopted, which provides: ``(1) A 
person applying for registration or registered with the Commission 
as a municipal advisor pursuant to section 15B of the Act (15 U.S.C. 
78o-4) must complete Form MA-I (17 CFR 249.1310) with respect to 
each natural person who is a person associated with the municipal 
advisor (as defined in section 15B(e)(7) of the Act (15 U.S.C. 78o-
4(e)(7))) and engaged in municipal advisory activities on its behalf 
in accordance with the instructions in the Form and file the Form 
electronically with the Commission. (2) A natural person applying 
for registration with the Commission as a municipal advisor pursuant 
to section 15B of the Act (15 U.S.C. 78o-4), in addition to 
completing and filing Form MA pursuant to paragraph (a), must 
complete Form MA-I (17 CFR 249.1310) in accordance with the 
instructions in the Form and file the Form electronically with the 
Commission.''
---------------------------------------------------------------------------

    The Commission believes that the information obtained from Form MA-
I is necessary and appropriate to assist

[[Page 67539]]

the Commission in assuring compliance with Section 15B of the Exchange 
Act and the rules thereunder. The Commission believes that exempting 
certain natural persons from registration and requiring municipal 
advisors to complete and file a Form MA-I for certain exempted natural 
persons retains the benefits of individual registration discussed in 
the Proposal while also addressing the concerns raised by commenters. 
Specifically, the final rules and forms mitigate commenters' concerns 
about imposing registration obligations upon the large number of 
individuals without negating the important disclosures and other 
benefits that the Commission believes would be obtained through Form 
MA-I.\941\ For example, as discussed in the Proposal, the information 
provided by Form MA-I would help the Commission (i) manage its 
regulatory and examination programs by assisting the Commission in 
identifying municipal advisors and understanding their business 
structures; (ii) prepare for its inspection and examination of 
municipal advisors; and (iii) oversee the municipal securities market 
and investigate possible wrongdoing.\942\ This approach would also 
provide municipal entities, obligated persons, investors, and other 
regulators with information that would inform them as to the relevant 
municipal advisory experience and history of each natural person for 
whom the municipal advisor completed and filed a Form MA-I.\943\
---------------------------------------------------------------------------

    \941\ See, e.g., SIFMA Letter I.
    \942\ See Proposal, 76 FR 850.
    \943\ See id., at 851.
---------------------------------------------------------------------------

    This approach also would help to streamline the manner of gathering 
pertinent information, reduce confusion in the disclosure process, and 
reduce inconsistencies in the information reported because the 
municipal advisory firm will be required to complete and file Form MA 
and Form MA-I for each of the associated natural persons engaged in 
municipal advisory activities on its behalf.\944\ Indeed, commenters 
observed that a registered municipal advisory firm should provide 
critical information about its employees who engage in municipal 
advisory activities, rather than require the individual's separate 
registration.\945\ Accordingly, as adopted, Rule 15Ba1-2(b), Rule 
15Ba1-3, and Form MA-I will serve this purpose. Finally, the Commission 
also believes that eliminating the requirement for individual municipal 
advisors to separately register addresses commenters' concerns 
regarding regulatory efficiency, as it will allow the Commission to 
direct resources that would have otherwise been required to review many 
thousands of these individuals' applications to other regulatory 
matters.
---------------------------------------------------------------------------

    \944\ This approach does not address the argument of commenters 
that Form MA-I is redundant of Form MA. That issue is addressed in 
the discussion below regarding the information requested in Form MA-
I. See infra notes 1171-1173 and accompanying text.
    \945\ See, e.g., MSRB Letter I.
---------------------------------------------------------------------------

    As stated above, one commenter argued against individual 
registration, claiming that, under the Proposal, natural persons would 
be required to maintain and comply with recordkeeping and inspection 
requirements, which, in the commenter's view, would be ``a significant 
burden'' without ``any meaningful benefit.'' \946\ The Commission 
notes, however, that the recordkeeping obligations imposed by the 
Proposal always applied only to municipal advisory firms.\947\
---------------------------------------------------------------------------

    \946\ See id.
    \947\ As proposed, the text of Rule 240.15Ba1-7(a) provided: 
``Every person, other than a natural person, including sole 
proprietors, registered or required to be registered under Section 
15B of the Securities Exchange Act . . . shall make and keep true, 
accurate, and current the following books and records relating to 
its municipal advisory activities . . . . '' (emphasis added). See 
Proposal, 76 FR 883. The highlighted language is retained in the 
recordkeeping rule, as adopted, which has been renumbered as Rule 
240.15Ba1-8. See infra Section III.C.
---------------------------------------------------------------------------

    The Commission recognizes that the rule, as adopted, places on 
municipal advisory firms an obligation to file a Form MA-I for each 
individual employee that acts as a municipal advisor on its behalf. The 
Commission notes that, in the context of broker-dealer regulation, Form 
U4, which is required of individual employees and asks for much the 
same information as Form MA-I, is generally filed by the employees' 
firms.\948\ Indeed, commenters appeared to favor a regime in which 
firms submit information regarding their employees rather than one in 
which each employee submits information separately.\949\
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    \948\ The Commission notes, moreover, that Form U4 is used for 
registration. Under the rules as adopted Form MA-I is not a 
registration form. It is a form to obtain information about persons 
who engage in municipal advisory activities on behalf of the firm.
    \949\ See, e.g., MSRB Letter I and citation at supra note 934. 
See also Deloitte Letter, stating: ``Alternatively, if the SEC does 
not eliminate separate registration for natural persons, the 
Commission should require such persons to register as registered 
representatives of municipal advisors, as is done in the broker-
dealer context, rather than as municipal advisors.'' Although the 
commenter is suggesting an alternative kind of registration for 
natural persons, and does not specifically state that the 
applications for registration of such persons would be filed by 
their firms, the analogy to the broker-dealer context suggests that 
the proposed alternative would operate in a similar manner, where 
firms file an individual's Form U4.
---------------------------------------------------------------------------

    The Commission notes further that, as described below,\950\ the 
information that firms will need to obtain to complete Form MA-I is 
primarily the individual's full legal and other names, social security 
number, and employment and residential history, other business 
activities in which the employee is engaged, and his or her 
disciplinary history. The Commission notes that, in any case, a firm 
generally must obtain information regarding any relevant criminal, 
regulatory, or civil judicial history concerning any of its associated 
persons \951\ in order to accurately complete Form MA for purposes of 
its own registration.\952\ In addition, to help ensure adequate 
regulatory oversight, aid the prosecution of wrongdoing, and benefit 
municipal entities and investors, the final Form MA-I collects 
substantially the same information as required under the proposed 
form.\953\ Moreover, although under the adopted rules employees of 
municipal advisory firms are not required to register independently, 
they are otherwise not exempt from any other provision relating to 
municipal advisors.
---------------------------------------------------------------------------

    \950\ See infra Section III.A.2.c., ``Information Requested in 
Form MA-I.''
    \951\ See infra note 1054 for the meaning of ``associated 
persons'' in this context.
    \952\ See infra Section III.A.2.b., under ``Item 9: Disclosure 
Information and Related DRPs.'' Thus, for purposes of completing an 
employee's Form MA-I, a firm will additionally need to obtain the 
information required by the form concerning investigations of the 
employee; customer complaints, arbitration, and civil litigation 
relating to municipal advisor-related or investment-related matters 
involving the employee; terminations of the employee; and 
outstanding judgments or liens against the employee. This 
information is substantially the same as required by Form MA-I under 
the Proposal, with the modifications discussed below. See infra 
Section III.A.2.c., ``Information Requested in Form MA-I.''
    \953\ See id.
---------------------------------------------------------------------------

    The Commission received no comments on the requirement, under the 
Proposal, for a sole proprietor to file both Form MA and Form MA-I. 
Accordingly, the Commission is retaining this requirement in the rules, 
although, in view of the other changes described above, a provision has 
been added to set forth explicitly that a natural person applying for 
registration must file Form MA-I in addition to Form MA.\954\
---------------------------------------------------------------------------

    \954\ See Rule 15Ba1-2(b)(2) of the adopted rules, 17 CFR 
240.15Ba1-2(b)(2), which provides: ``A natural person applying for 
registration with the Commission as a municipal advisor pursuant to 
section 15B of the Act (15 U.S.C. 78o-4), in addition to completing 
and filing Form MA pursuant to paragraph (a), must complete Form MA-
I (17 CFR 249.1310) in accordance with the instructions in the Form 
and file the Form electronically with the Commission.'' The addition 
of Rule 15Ba1-2(b)(2), which relates to sole proprietors, was 
necessary because Rule 15Ba1-2(b)(1), as adopted, is worded 
specifically to require municipal advisors that are firms to file 
Form MA-I with respect to associated persons who engage in municipal 
advisory activities on their behalves, and would not by definition 
apply to sole proprietors.

---------------------------------------------------------------------------

[[Page 67540]]

    The Commission stated in the Proposal that it was considering 
whether Form MA and Form MA-I should be submitted through the 
Commission's Electronic Data Gathering, Analysis, and Retrieval System 
(``EDGAR'') or otherwise.\955\ The Commission requested comment on 
whether the electronic registration system to be established should 
have the ability to cross-check other electronic systems, such as IARD 
and CRD, and whether requiring the filing of forms on EDGAR would be an 
appropriate means to make the requested information available.\956\
---------------------------------------------------------------------------

    \955\ See Proposal, 76 FR 839.
    \956\ See id.
---------------------------------------------------------------------------

    Two commenters favored the use of FINRA's electronic registration 
system for CRD and IARD or some similar system for the registration of 
municipal advisors.\957\ One commenter stated that this system would 
``allow regulators to easily find filings for firms and individuals, as 
well as cross reference between the CRD and IARD systems.'' \958\ The 
commenters believed that use of FINRA's system would allay concerns 
that EDGAR would subject registration information to ``unnecessary 
public scrutiny'' \959\ and ``compromise the confidentiality of 
operating performance data for privately held Municipal Advisors.'' 
\960\
---------------------------------------------------------------------------

    \957\ See NASAA Letter and letter from Gary Kimball, President, 
Specialized Public Finance, Inc., dated February 22, 2011 
(``Specialized Public Finance Letter'').
    \958\ See NASAA Letter.
    \959\ See Specialized Public Finance Letter. In this regard, the 
commenter mentioned specifically social security numbers.
    \960\ Id.
---------------------------------------------------------------------------

    After carefully considering the comments, the Commission has 
determined to require the forms to be submitted through EDGAR.\961\ 
Although EDGAR is known primarily as the vehicle through which public 
companies file their annual and quarterly reports and other 
disclosures, the Commission has adapted EDGAR for other information 
gathering purposes.\962\ Further, collecting information regarding 
municipal advisors through EDGAR should enable the Commission to 
efficiently retrieve and analyze data in a cost-effective manner to 
carry out its oversight of municipal advisors and their municipal 
advisory activities. The Commission notes that, while IARD, which is an 
electronic filing system that facilitates investment adviser 
registration, is funded through user fees,\963\ there is no comparable 
provision in Section 975 of the Dodd-Frank Act authorizing the 
Commission to charge municipal advisors (or to authorize another entity 
to collect) registration fees. Accordingly, the Commission has 
determined to leverage its existing technology to serve as a mechanism 
by which municipal advisors can register with the Commission. The 
Commission further notes that EDGAR is a widely utilized resource that 
is already familiar to investors and other interested parties seeking 
information about public companies, and believes that municipal 
entities, investors, other regulators, and members of the public 
seeking information about municipal advisors should not have difficulty 
learning how to use the system.
---------------------------------------------------------------------------

    \961\ As discussed in the Proposal, because the registration 
forms will be required to be submitted through EDGAR, the electronic 
filing requirements of Regulation S-T will apply. See generally 17 
CFR 232 (governing the electronic submission of documents filed with 
the Commission). The Commission will provide, in the municipal 
securities area of its Web site, full instructions on how applicants 
for municipal advisor registration that are not currently EDGAR 
filers can acquire authorized codes to access the system. These 
instructions have now also been added to the General Instructions 
for the Form MA series. General information about EDGAR is available 
at http://www.sec.gov/info/edgar.shtml, where the EDGAR Filer Manual 
can also be accessed. The Commission recommends that applicants read 
this filer manual before they begin using the system.
    \962\ Most recently, for example, the Commission determined to 
adapt EDGAR to accept Form 13H filings required under the ``Large 
Trader Reporting'' regime established by new Rule 13h-1 under 
Section 13(h) of the Exchange Act. See Securities Exchange Act 
Release No. 64976 (July 27, 2011), 76 FR 46960 (August 3, 2011).
    \963\ See Section 204(c) of the Advisers Act, which permits the 
Commission to charge fees associated with filings and the 
maintenance of a filing system.
---------------------------------------------------------------------------

    Regarding the comment that the use of FINRA's CRD and IARD systems 
would be preferable because it would allow regulators to cross 
reference the information in Forms MA and MA-I with information in 
those other systems, the Commission notes that, as discussed further 
below, Form MA requires a municipal advisor that has been assigned a 
number either under the CRD system or the IARD system (a ``CRD 
Number'') to provide that number in completing the form.\964\ In 
addition, Form MA asks an applicant specifically whether it is 
registered with the Commission in various other capacities (e.g., 
municipal securities dealer, government securities broker-dealer, or 
other category that the applicant must specify) and, if so, to provide 
the relevant file numbers.\965\ In a similar fashion, an applicant is 
required to supply file numbers for any registrations it has with 
another federal agency or state or other U.S. jurisdiction.\966\ Form 
MA-I requires the municipal advisory firm filing the form to provide 
the relevant individual's CRD Number, if registered on the CRD or IARD 
system; list any other names by which the individual is known or has 
been known; and provide the name, registration number, and the firm's 
EDGAR CIK (Central Index Key) number.\967\ These identifying numbers 
should assist municipal entities, regulators, and the public to access 
any other publicly available information about the municipal advisor. 
Although EDGAR will not automatically provide an electronic link to the 
information on the CRD and IARD systems, these systems are nevertheless 
readily accessible to regulators, municipal entities, and to the 
public.
---------------------------------------------------------------------------

    \964\ See infra Section III.A.2.b., ``Information Requested in 
Form MA,'' discussion of Item 1, ``Identifying Information.'' See 
also infra note 1007.
    \965\ See infra Section III.A.2.b.
    \966\ Id.
    \967\ See infra Section III.A.2.c., ``Information Requested in 
Form MA-I,'' discussion of Items 1 and 2, ``Identifying Information 
and Other Names.''
---------------------------------------------------------------------------

    With respect to commenters' concerns regarding privacy, the 
Commission notes that, while information required in Form MA and Form 
MA-I generally will not be confidential, some information, such as 
social security numbers, will be kept confidential (subject to the 
provisions of applicable law).\968\ The EDGAR system will block

[[Page 67541]]

the relevant information in these forms in the versions that will be 
made public.
---------------------------------------------------------------------------

    \968\ The Proposal specified that social security numbers would 
not be made public. See Proposal, 76 FR 867, 868, and 869. The 
forms, as adopted, specify additional instances in which responses 
will be kept confidential subject to the provisions of applicable 
law. See, e.g., Item 8 of Schedule A of Form MA (advising applicants 
that social security numbers, foreign identity numbers, and dates of 
birth will not be publicly disseminated) and Item 3 of Form MA-I, as 
adopted (advising that private residential addresses disclosed in 
completing the residential history section of the form will not be 
included in publicly available versions). The Commission has 
determined that it is appropriate to block this information from 
public view, as well. To make this clear, in the forms, as adopted, 
in each place where an applicant is asked for a social security 
number, foreign identity number, private residential address, or a 
date of birth, guidance has been added stating that the information 
will not be included in publicly available versions of the form. In 
addition, at various other places in the forms that ask for an 
address, the filer is asked to indicate whether the address provided 
in response is a private residence and is advised that, if so, the 
address will not be included in publicly available versions of the 
form. One of the DRPs in Form MA-I, which asked whether the docket 
or case number of a particular case is the municipal advisor's 
social security number, bank card number, or personal identification 
number, has been deleted as unnecessary.
---------------------------------------------------------------------------

    One commenter argued that information relating to operating 
performance of privately held municipal advisors should be kept 
confidential.\969\ The commenter did not specify which particular 
questions in the forms it considered problematic. The Commission 
believes, however, that the public interest in making the information 
available--to allow municipal entities to better evaluate candidates 
for service in municipal advisory roles and to provide investors in 
municipal securities with clearer knowledge of who may be influencing 
the use and outcome of their investments--outweighs this type of 
confidentiality concern.\970\
---------------------------------------------------------------------------

    \969\ See supra note 960.
    \970\ Form ADV, upon which Form MA was substantially modeled 
(see text accompanying infra note 975), requires a similar level of 
disclosure. The Commission would make this information publicly 
available regardless of the electronic registration system that is 
used. See also infra notes 1046 and 1048 and accompanying text.
---------------------------------------------------------------------------

    The Commission received no comments on the requirement in proposed 
Rules 15Ba1-2(a) and (b) that Forms MA and MA-I, respectively, must be 
filed electronically, and is adopting this requirement as proposed. The 
Commission also received no comments on paragraph (c) of proposed Rule 
15Ba1-2, which provided that the forms would be considered filed with 
the Commission ``upon acceptance by the [applicable electronic 
system].'' However, the Commission is adopting the rule with 
modifications.
    As proposed, Rule 15Ba1-2 provides that Forms MA and MA-I ``shall 
be considered filed with the Commission upon acceptance by the 
[applicable electronic system].'' As adopted, the rule instead provides 
that the forms are considered filed upon ``submission of a completed 
Form MA, together with all additional required documents, including all 
required filings of Form MA-I (17 CFR 249.1310) . . .'' The Commission 
is modifying the rule to state that the form is considered filed upon 
``submission'' to EDGAR rather than upon ``acceptance'' to align the 
rule with the terminology used by the EDGAR system. Further, the 
Commission is modifying the rule to provide that Form MA will be 
considered filed upon submission of a ``completed Form MA, together 
with all additional required documents,'' to clarify that, if a Form MA 
is not considered complete, the Commission's statutory forty-five day 
review period will not commence.\971\ Moreover, because a municipal 
advisor applying for registration under the final rules is responsible 
for submitting Form MA-I for each associated person engaging in 
municipal advisory activities on its behalf, the Commission believes it 
appropriate to stipulate that the firm's application for registration 
will be considered filed only if the firm has submitted all requisite 
Form MA-Is.
---------------------------------------------------------------------------

    \971\ If a Form MA is complete and all additional required 
documents are attached, the form is considered filed and the forty-
five day period for the Commission to act upon the application 
(i.e., either approve or institute proceedings to determine whether 
it should be denied) begins.
---------------------------------------------------------------------------

    When an applicant attempts to transmit its Form MA electronically, 
EDGAR performs the initial automated checks to determine whether 
questions that require responses have been answered and to detect, in 
certain instances, defective responses. For example, if an applicant 
indicates that it has three Web sites but provides, contrary to 
instructions, only two corresponding Web site addresses, EDGAR will 
detect the deficiency.\972\ In such instance, EDGAR will not permit the 
applicant's submission. However, if a form passes EDGAR's automated 
checks, EDGAR will display a message indicating that the submission was 
successfully transmitted and will provide an ``accession number,'' 
which permits the applicant to enter the system to check the status of 
its application. At this point, the applicant is also advised that its 
application is not ``accepted,'' which is an EDGAR term for not 
``approved,'' and EDGAR will display the status of the application as 
``In Progress.''
---------------------------------------------------------------------------

    \972\ See infra note 1003 for more examples.
---------------------------------------------------------------------------

    Once an application passes EDGAR's initial automated check and is 
successfully transmitted, the Commission staff will check the 
application for the types of deficiencies that may not be detected 
through automation, and if the Form MA is considered incomplete, the 
applicant will receive by email an EDGAR-generated notice of 
suspension. The notice will inform the applicant that the transmission 
has been suspended and the reason for the suspension. The notice will 
also instruct the applicant to make corrections and re-transmit the 
application to the Commission in its entirety.
    The Commission notes that, within forty-five days of the date a 
complete Form MA is considered filed, the Commission shall by order 
grant registration or institute proceedings to determine whether 
registration should be denied. The Commission also notes that the 
statutory review period for a filed Form MA may be longer if the 
applicant consents to a longer time period. If the Commission 
determines to grant registration, an EDGAR-generated email will be sent 
to inform the applicant that the filing has been ``accepted'' and the 
Commission will issue a formal order of approval separately.
    The Proposed paragraph (d) of Rule 15Ba1-2 provided that Forms MA 
and MA-I constitute ``reports'' within the meaning of Sections 15B(c), 
17(a), 18(a), 32(a) (15 U.S.C. 78o-4(c), 78q(a), 78r(a), 78ff(a)) and 
other applicable provisions of the Exchange Act.\973\ The Commission 
received no comments on paragraph (d) and is adopting this provision as 
proposed. As a consequence, it is unlawful for a municipal advisor to 
willfully make or cause to be made, a false or misleading statement of 
a material fact or omit to state a material fact in Form MA or Form MA-
I.
---------------------------------------------------------------------------

    \973\ See Rule 15Ba1-2(d).
---------------------------------------------------------------------------

b. Information Requested in Form MA
    Municipal advisors that are municipal advisory firms (including 
sole proprietors) must submit Form MA to register with the Commission. 
The Commission received several comments, as discussed further below, 
on the information it proposed to require from applicants in completing 
Form MA.\974\ After carefully considering the comments, the Commission 
is adopting Form MA substantially as proposed, with some modifications, 
as discussed below.
---------------------------------------------------------------------------

    \974\ See infra notes 979-987.
---------------------------------------------------------------------------

    Form MA is modeled primarily on Form ADV (Part 1),\975\ which is 
used for the registration of investment advisers with the Commission, 
with appropriate changes made to reflect the differences in the 
activities of municipal advisors and the markets that they serve. The 
information that applicants are required to provide on the form is 
described in detail below. As discussed in the Proposal, the items in 
Form MA were drafted broadly to apply to the different types of 
municipal advisors that may register with the Commission.\976\
---------------------------------------------------------------------------

    \975\ See 17 CFR 279.1. See also Proposal, 76 FR 840.
    \976\ See Proposal, 76 FR 840.
---------------------------------------------------------------------------

    Form MA asks for information about the municipal advisor and 
persons associated with the advisor. The Commission believes it 
necessary to obtain the requested information to manage the 
Commission's regulatory and examination programs and to make such 
information available to the MSRB

[[Page 67542]]

to better inform its regulation of municipal advisors. The information 
will assist the Commission in identifying municipal advisors, their 
owners, and their business models, and in determining whether a 
municipal advisor might present sufficient concerns as to warrant the 
Commission's further attention in order to protect the municipal 
advisor's clients. In addition, the information will assist the 
Commission in understanding the kinds of activities in which the 
applicant participates. The information will also be useful to the 
Commission in tailoring any requests for additional information that 
the Commission may send to a municipal advisor. Furthermore, the 
required information will assist the Commission in the preparation of 
the Commission's inspection and examination of municipal advisors and 
the MSRB in determining what regulations for municipal advisors may be 
necessary or appropriate and how such regulations might be best 
implemented.\977\
---------------------------------------------------------------------------

    \977\ See id., at 841.
---------------------------------------------------------------------------

    Moreover, the Commission believes that the information sought will 
enable municipal entities and potential obligated persons to better 
assess the experience and background of municipal advisors in deciding 
whether to engage the services of, or do business with, any particular 
municipal advisor. Similarly, information about the persons serving as 
municipal advisors can be important to investors in deciding whether to 
purchase specific municipal securities. In determining what information 
should be disclosed, the Commission also considered the broader public 
interest in the availability of information about municipal advisors to 
the public.\978\
---------------------------------------------------------------------------

    \978\ See id.
---------------------------------------------------------------------------

    The Commission received several comments regarding the extent and 
kind of information sought on Form MA, as a general matter, and the 
impact that the requirement to provide this information will have on 
municipal advisors.\979\ While one commenter generally approved of the 
content of the questions, most of the commenters on this subject 
believed that the scope of information sought was too broad, that the 
form should ask different questions for different kinds of municipal 
advisors, or that providing the answers would be too burdensome.
---------------------------------------------------------------------------

    \979\ See, e.g., Acacia Financial Group Letter; Financial 
Services Roundtable Letter; JP Morgan Chase Letter; Managed Funds 
Association Letter; MSRB Letter I; NAESCO Letter; SIFMA Letter I; 
Specialized Public Finance Letter.
---------------------------------------------------------------------------

    Specifically, one commenter stated its belief that the information 
requested was ``generally appropriate'' and that it would assist the 
Commission in its examination and enforcement activities as well as 
assist its rulemaking activities.\980\ Another commenter stated that it 
does not object in principle to requiring municipal advisors to make 
disclosures similar to the disclosures required of registered 
investment advisers, but urged that the Commission ``tailor carefully'' 
any disclosure document to ``ensure that the information to be 
disclosed relates only to the municipal advisor activities of the 
provider, rather than broadly requiring companies to disclose 
information unrelated to municipal advisory activities.'' \981\ Another 
commenter suggested that the forms be tailored for various categories 
of advisors, instead of a ``one-size-fits-all'' approach.\982\ 
According to another commenter, ``the disclosures required for 
investment advisers on Form ADV, on which proposed Form MA is based, 
are, in many cases, not relevant to municipal advisors.'' \983\ The 
commenter maintained that many of the other questions drawn from Form 
ADV are ``not likely to obtain useful responses from municipal 
advisors'' and that the Commission ``has not articulated a convincing 
purpose for much of the information.'' \984\
---------------------------------------------------------------------------

    \980\ See MSRB Letter I. The MSRB also expressed the hope that 
the Commission would receive ``significant meaningful feedback from 
small municipal advisors regarding the potential burdens the Rule 
Proposal would impose, and give due weight to such feedback in light 
of the Congressional intent regarding regulatory burden on small 
municipal advisors.'' At the same time, the MSRB believed that the 
information gleaned from the forms will ``help the MSRB to better 
gauge the parameters of what should be considered a small municipal 
advisor and to structure its rules to effectuate the intent of 
Section 15B(b)(2)(L)(iv) [of the Exchange Act],'' which requires 
that the MSRB ``not impose a regulatory burden on small municipal 
advisors that is not necessary or appropriate in the public interest 
and for the protection of investors, municipal entities, and 
obligated persons, provided that there is robust protection of 
investors against fraud.''
    \981\ See NAESCO Letter.
    \982\ See Acacia Financial Group Letter.
    \983\ See SIFMA Letter I.
    \984\ See id. The commenter cited in particular in this regard 
the proposed disclosure requirements in Form MA relating to a 
municipal advisor's clients; compensation arrangements; other 
business activities; financial industry affiliations; proprietary 
and sales interests in its municipal advisory clients' transactions; 
and investment or brokerage discretion. The Commission believes that 
information in each of these areas can shed light on the possible 
conflicts of interest that a municipal advisor may have when 
providing advice. See also infra notes 1065, 1087, and 1119 and 
accompanying text, regarding this commenter's comments relating 
specifically to disclosures about affiliates and other associated 
persons.
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    Some commenters additionally believed that supplying the 
information requested on the proposed forms would be too burdensome on 
certain firms and individuals, but varied on the specifics.\985\ On the 
one hand, some commenters believed, as one commenter expressed, that 
``the scope of the proposed information to be collected'' in Form MA 
``is exhaustive and could place a burden on small municipal advisors.'' 
\986\ On the other hand, one commenter believed that large 
organizations would incur ``significant time, burden, and expense in 
identifying personnel involved in activities that would subject them to 
registration.'' \987\
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    \985\ See, e.g., Acacia Financial Group Letter, SIFMA Letter I.
    \986\ See Acacia Financial Group Letter.
    \987\ See SIFMA Letter I.
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    In considering these comments, the Commission carefully analyzed 
each aspect of Form MA as set forth in the Proposal, consulting with 
and drawing on the experience and expertise of Commission's enforcement 
and examination staffs. As already stated, the Commission had paid 
conscious and due attention in developing Form MA to the differences 
between the activities of investment advisers and those of municipal 
advisors. The Commission has analyzed proposed Form MA in the light of 
the comments received, specifically with an eye to making any possible 
further adjustments to reflect the field of municipal advisory 
activities and to remove any proposed elements of Form MA that are not 
appropriate to the regulation of municipal advisors or valuable for 
such regulation in consideration of the burdens of completing the form.
    The Commission continues to believe that the information requested 
will be valuable in establishing and maintaining effective oversight of 
municipal advisors. The various purposes to which the Commission 
intends to put the information to use, as well as its value for 
municipal entities and investors, have been broadly described above. 
The decision to model Form MA on Form ADV was based, in part, on the 
Commission's belief that the level of information sought in Form ADV is 
important, appropriate, and not unduly burdensome for participants 
engaged in providing investment advice, bearing in mind the goal of 
protection of investors and the public interest. The Commission 
believes that the regulation of municipal advisors warrants obtaining a 
similar level of information as pertinent to municipal advisors.\988\

[[Page 67543]]

The Commission notes that the MSRB, the statutorily mandated rulemaking 
body for the municipal securities market, believes that the information 
obtained generally will contribute to the Commission's and its own 
regulatory activities.\989\
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    \988\ For example, knowledge of the kind of clients that a 
municipal advisor serves may be useful to a municipal entity in 
determining whether that advisor has the background and expertise 
necessary to provide advice regarding the issuance that the entity 
is contemplating. Similarly, information regarding the advisor's 
compensation arrangements generally may help a municipal entity 
evaluate the advisor's proposed compensation arrangements for the 
issuance under consideration. Such information can also be valuable 
to regulators in uncovering irregularities when questions are raised 
regarding a municipal advisor's motives and/or business conduct with 
respect to a particular transaction. The information that a 
municipal advisor provides regarding its other business activities, 
its financial industry affiliations, the proprietary and sales 
interests it may have in its municipal advisory clients' 
transactions, and the investment or brokerage discretion that it is 
granted in carrying out its services may help municipal entities, 
investors in municipal securities, and regulators assess whether 
conflicts of interest may affect the advice that the firm provides 
or may have influenced its advice in a transaction under 
investigation. The Commission believes that obtaining such 
information is consistent with the intent of the Dodd-Frank Act in 
establishing a regulatory framework for municipal advisory 
activities.
    \989\ See MSRB Letter I. The MSRB also commented that the 
Commission ``should give due weight to feedback from small municipal 
advisors regarding the potential burdens in light of the 
Congressional intent regarding regulatory burden on small municipal 
advisors.'' See id. The Commission addresses the burden for smaller 
municipal advisory firms in the Final Regulatory Flexibility 
Analysis below. See infra Section IX.
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    Some commenters believed that the information sought by Form MA 
with respect to many municipal advisors is information already 
available to the Commission through other registrations and that the 
proposed disclosures would therefore be redundant.\990\ One commenter 
argued that ``adding new layers of regulation in this area will not 
serve to enhance the protection of municipal entities or investors.'' 
\991\ Another commenter contended that it would be ``more efficient for 
the SEC to leverage existing registration forms, which have years of 
interpretive guidance behind them, than to create a new form seeking 
much of the same information as required by Forms BD and U4.'' \992\ To 
address this issue, some suggested that the Commission allow persons 
that are already registered with the Commission--such as broker-
dealers, investment advisers, and municipal securities dealers--to 
check an additional box on their primary registration forms already 
filed with the Commission or to provide them with a short-form 
registration process.\993\ Short of this, commenters urged that, if 
such persons must complete Form MA, they should be allowed to 
incorporate by reference on Form MA any information that is included on 
another registration form and be required to provide on Form MA only 
such additional information as deemed essential regarding municipal 
advisory activities.\994\
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    \990\ See, e.g., JP Morgan Chase Letter; SIFMA Letter I; and 
Specialized Public Finance Letter. See also Financial Services 
Roundtable Letter (maintaining that, for registered broker-dealers, 
``Form MA is largely duplicative of Form BD''); and Managed Funds 
Association Letter (maintaining that proposed Form MA, ``but for 
items specifically relating to municipal advisory activities,'' is 
``substantially similar to Form ADV'').
    \991\ See JP Morgan Chase Letter. This view was expressed 
particularly with respect to traditional banking products and 
services. See also supra Section III.A.1.c.viii., regarding banks.
    \992\ See Financial Services Roundtable Letter. Form U4 is the 
Uniform Application for Securities Industry Registration or 
Transfer, available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p015112.pdf.
    \993\ See SIFMA Letter I. See also Managed Funds Association 
Letter, Financial Services Roundtable Letter.
     Also, one commenter suggested that, instead of registering a 
second time as a municipal advisor, an investment adviser should be 
permitted to amend its Form ADV to reflect the fact that it engages 
in municipal advisory activities. This commenter also suggested 
permitting state-registered investment advisers to register as 
municipal advisors by amending their Forms ADV. See ABA Letter.
    \994\ See SIFMA Letter I, ABA Letter.
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    The Commission notes that Form MA, both as proposed and adopted, 
allow for incorporation by reference of certain information that 
already has been submitted on certain other forms by the applicant, any 
of its associated persons, or another entity pursuant to the 
requirements of other regulatory regimes. Specifically, each of the 
Disclosure Reporting Pages (``DRPs'') of Form MA permits incorporation 
by reference to DRPs that are already on file with regulators.\995\ The 
DRPs are generally where the most significant amount of information is 
requested on Form MA and on which applicants will likely need to expend 
the most time and effort.
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    \995\ As explained below, Item 9 of Form MA requires an 
applicant to provide certain information concerning any criminal, 
regulatory, and civil judicial actions relating to the applicant or 
any of its associated persons. For each action reported in Item 9, 
the applicant is required to complete a DRP by providing for further 
details, such as the court where the charges were filed and when, a 
description of the charge and the circumstances relating to it (in 
the case of criminal actions); the authority that initiated the 
action and a description of the allegations and the product-type (in 
the case of regulatory actions); or the initiator of the court 
action, the relief sought, and the product type (in the case of 
civil judicial actions). The information sought in the DRPs of Form 
MA is similar to information sought in DRPs that must be filed, as 
applicable, with Forms BD, ADV, and U4.
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    Form MA, as adopted, more prominently highlights the option to 
incorporate information by reference. Part A of each DRP asks for basic 
information regarding the person(s) or entity(ies) concerning whom the 
DRP must be filed. Immediately thereafter, in Part B, the form asks if 
there is another DRP or other disclosure already on file in the IARD, 
CRD, or EDGAR system containing the information required by the DRP. If 
the answer is ``Yes,'' the form asks the applicant to identify where 
the disclosures may be found. In addition, for the benefit of 
regulators, municipal entities, and other interested parties, the DRPs 
ask for information that will enable such parties to locate the 
referenced document easily, by requiring the applicant to provide the 
name of the registrant on the referenced document, the relevant 
registration number, and other identifying information. Thus, for all 
persons for whom disclosures of criminal, regulatory, and civil 
judicial actions must be made, Form MA already allows for incorporation 
by reference. The Commission believes that the accommodation of 
incorporation by reference for these disclosures will eliminate a 
significant amount of redundancy to which the commenters refer.
    The Commission believes that commenters' suggestion to allow 
applicants already registered with the Commission under other 
regulatory regimes to check an additional box on their primary 
registration forms \996\ would not achieve the aim of the municipal 
advisor registration regime. Specifically, the Commission believes that 
persons seeking to compile, compare, and analyze data pertaining to 
registered municipal advisors, as well as regulators overseeing 
compliance with rules and regulations applicable to registered 
municipal advisors, should generally be able to easily access within 
one system relevant information about municipal advisors.
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    \996\ See supra note 993.
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    The Commission notes that the vast majority of applicants 
registering under the permanent registration regime would be new 
Commission registrants.\997\ As such, the majority of all information 
pertaining to municipal advisors will be centralized in EDGAR. On the 
other hand, the Commission acknowledges that, because disclosures 
required by Form MA DRPs and Form MA-I DRPs may be incorporated by 
reference from other forms, some

[[Page 67544]]

information will reside outside EDGAR. However, the Commission notes 
that, under the temporary registration regime, only about 15% of 
applicants on Form MA-T indicated a history of criminal, regulatory, or 
civil judicial action that would require the submission of DRPs under 
the permanent registration regime. Moreover, not all 15% of municipal 
advisors indicating such a history would have DRPs on file elsewhere, 
as many may not be broker-dealers or investment advisers and thus would 
not be required to file Form BD or Form ADV. Accordingly, the 
Commission believes that fewer than 15% of municipal advisors should 
have DRP information stored outside EDGAR, with the majority of 
information collected under the permanent municipal advisor regime 
centralized in EDGAR. The Commission also notes that, if applicants 
that are already registered with the Commission under other regulatory 
regimes can register as municipal advisors by only checking an 
additional box on their primary registration form, a municipal entity 
or investor seeking information about a municipal advisor may not 
realize that the information they seek is available on a Form BD or 
ADV, rather than a Form MA or MA-I.
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    \997\ According to MA-T data as of December 31, 2012, there were 
approximately 1,110 Form MA-T registrants. Of these Form MA-T 
registrants, 226 were also registered with the Commission as broker-
dealers; 39 were also registered with the Commission as investment 
advisers; and 65 were registered with the Commission as both broker-
dealers and investment advisers. Therefore, the vast majority of 
Form MA-T registrants were new Commission registrants.
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Description of the Form: Introduction
    As previously noted, in addition to considering the comments, the 
Commission analyzed the entire proposed Form MA and its appended 
schedules and disclosure pages to make any necessary adjustments. The 
discussion below describes Form MA, as adopted, and notes the 
substantive changes to the proposed form. At the outset, the Commission 
notes that it is making some revisions to clarify questions asked in 
Form MA. Other revisions are intended to elicit additional information. 
The Commission believes that the additional required data should make 
the information provided by registrants more useful to examiners, 
investigators, and other regulatory authorities and/or to municipal 
entities and investors.\998\
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    \998\ Although some commenters believed, generally, that the 
forms, as proposed, required too much information, the Commission 
believes that the modifications it has made to the forms that ask 
for additional information will elicit information that can be of 
significant use to regulators and municipal entities. The discussion 
below includes the reasons why, in each significant case, the 
Commission has made the revision. See, e.g., infra notes 1028-1030.
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    As noted below, the Commission made some revisions to the form to 
eliminate unnecessary disclosure requirements. Other changes involve a 
reorganization of the requested information. In general, the Commission 
intends to improve the picture that municipal entities, investors, and 
regulators will be able to obtain from Form MAs, whether regarding 
municipal advisors, in particular, or regarding municipal advisory 
activities, as a whole. For example, while the proposed DRPs required 
information generally regarding the disposition of criminal charges or 
resolution of regulatory or civil proceedings, in the DRPs, as adopted, 
the questions are more specific and require certain additional 
details.\999\
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    \999\ See further the discussion below regarding Item 9 of Form 
MA.
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Format of Form MA
    Form MA, as proposed, required the applicant to provide information 
describing itself and its business through a series of fill-in-the-
blank, multiple choice, and the check-the-box questions.\1000\ In the 
form, as adopted, these questions have been adapted to an electronic, 
web-based format,\1001\ with minor revisions to the text as necessary 
or appropriate for online completion.\1002\ As stated above, EDGAR is 
designed to detect certain failures to respond to mandatory questions 
and, to detect, in certain instances, defective responses.\1003\
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    \1000\ No comments were received on the format of the form.
    \1001\ For example, where the paper form asked a Yes or No 
question and, if the answer is Yes, other questions must be 
answered, in the electronic form those additional questions will 
appear only if the applicant selected Yes. In the paper form, in 
some instances when the applicant answers Yes, the form instructs 
the applicant to supply additional information in Schedule D of the 
form. In the electronic form, a pop-up screen appears that 
immediately enables the applicant to complete the additional 
information. Filers will be able to obtain a paper version of the 
form at any time through the electronic system, which should help 
them anticipate in advance the information they will need to gather 
to complete on the online form. In addition, filers will be able to 
print out a hard copy version of the form with their responses 
included in their appropriate places on the form.
    \1002\ Certain documents, such as a signed and notarized Form 
MA-NR (required of certain non-residents as discussed below) or 
copies of court orders required as part of a DRP will need to be 
converted into a portable document file (PDF) meeting the 
specifications set forth in the EDGAR Filer Manual, supra note 961, 
and attached to the electronic submission.
    \1003\ Some examples: If an applicant provides an EDGAR CIK 
number, the name of the company will be pre-populated in the 
electronic form with the name assigned to that CIK number and the 
applicant will not be permitted to list a different name. When an 
applicant indicates that it is registered under another Commission 
regulatory regime but supplies a registration number for that 
regulatory regime that cannot be valid because it is not in the 
correct numbering format, the system will prevent the applicant from 
filing the form. If an applicant answers affirmatively to a question 
that asks whether it only engages in solicitation and does not 
advise clients, it will not be possible to indicate in response to 
another question that it advises clients and does not solicit. If an 
applicant indicates that it has three Web sites but provides the 
addresses of only two, the system will not permit submission of the 
form. If an applicant discloses that it or an associated person has 
been involved in a criminal, regulatory, or civil judicial action, 
the system will prevent the applicant from filing the form if the 
appropriate DRP is not completed. If the principal address of a firm 
in Form MA or the residence of an individual reported in Form MA-I 
is in a foreign country (which the system can detect because states 
and countries are indicated by selecting the appropriate name in a 
drop-down box), the system will not permit submission of the form 
unless, at the appropriate step in the form, a Form MA-NR is 
attached.
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    Form MA also contains several supplemental schedules that must be 
completed, where applicable, each of which is discussed further below: 
Schedule A asks for information about the municipal advisor's direct 
owners and executive officers; Schedule B asks for information about 
the municipal advisor's indirect owners; Schedule C is used to amend 
information on either Schedule A or Schedule B; and Schedule D asks for 
additional information when an applicant answers in the affirmative 
regarding certain questions in the form and also provides space for any 
explanations that a filer may wish to add to its application. Form MA 
also contains DRPs, which require further details about events and 
proceedings involving the municipal advisor and/or the municipal 
advisor's associated persons that the applicant was required to report 
in Item 9 of the main body of the form, and are discussed in the 
context of Item 9 below.
    Form MA, as proposed, first required a municipal advisor to 
indicate whether it is submitting the form for initial registration as 
a municipal advisor or submitting an annual update or an amendment 
(other than an annual update) to a registration as a municipal 
advisor.\1004\ In the electronic form, as adopted, Form MA asks the 
applicant to indicate, upon entry, whether it is filing an initial 
form, an annual update, or amendment. Once an initial form is 
submitted, when a filer subsequently enters the system and selects the 
choice of annual update or amendment, the most recently submitted 
version of the form will appear, pre-populated with the responses as 
completed at that time. Thus, the filer will need only to amend the 
outdated information.
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    \1004\ Amendments to Form MA are discussed further below. See 
infra Section III.A.5.
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Item 1: Identifying Information
    The Commission proposed Item 1 of Form MA to require essential 
identifying information regarding the applicant. For the reasons 
discussed

[[Page 67545]]

below and in the Proposal,\1005\ the Commission is adopting Item 1 
substantially as proposed but with the minor modifications discussed 
below.
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    \1005\ See Proposal, 76 FR 841.
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    As proposed and adopted, Items 1-A and B of Form MA require a 
municipal advisor to indicate the full legal name of the municipal 
advisor and, if different, the name under which it primarily conducts 
its municipal advisor-related business.\1006\ As adopted, Item 1-A also 
asks for the municipal advisor's CRD Number, if it has one.\1007\ Item 
1-C of Form MA as proposed and adopted requires a municipal advisor 
also to provide its Employer Identification Number (or ``EIN,'' a 
number used with respect to Internal Revenue Service matters) or, if 
the applicant (such as a sole proprietor) does not have an EIN, a 
social security number.\1008\
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    \1006\ As proposed and adopted, Item 1-B requires any additional 
names under which the applicant conducts municipal advisor-related 
business and the jurisdictions in which they are used to be listed 
in Schedule D.
    \1007\ Obtaining a municipal advisor's CRD Number, if it has 
one, enables regulators, municipal entities, and investors in a most 
basic way to research the background of a registrant. See, e.g., 
supra text accompanying note 964.
    \1008\ As discussed in the Proposal, the Commission is asking 
for the social security number of sole proprietors to permit the 
electronic filing system to distinguish between persons who share 
the same name. This information is necessary in connection with the 
Commission's enforcement and examination functions pursuant to 
Section 15B(c) of the Exchange Act (15 U.S.C. 78o-4(c)). See 
Proposal, 76 FR 840, note 176. See also supra note 968.
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    In Item 1-D, as proposed and adopted, if the municipal advisor is 
also registered with the Commission as an investment adviser, broker, 
dealer, or municipal securities dealer, or if it has previously 
registered with the Commission as a municipal advisor on Form MA-T, 
such municipal advisor is required to provide its related SEC file 
number or numbers. Further, if the municipal advisor is a broker-dealer 
or an investment adviser and has a CRD Number assigned to it either 
under the CRD system or the IARD system, it is required to provide its 
CRD Number.
    As proposed and adopted, Item 1-D also requires an applicant to 
indicate whether it is a state-registered investment adviser. In such 
case, as adopted, Item 1-D additionally requires the applicant to 
identify the state (or states) with which it is registered,\1009\ and 
adds to this category other U.S. jurisdictions where the applicant is 
registered.\1010\
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    \1009\ Requiring the place(s) of registration directly on Form 
MA can be helpful to regulators, municipal entities, and investors 
while imposing little burden upon the applicant. The omission of 
this disclosure requirement in the proposed version of the form was 
unintentional.
    \1010\ The revision to include other U.S. jurisdictions in 
addition to states has been made throughout the forms.
---------------------------------------------------------------------------

    Item 1-D, as adopted, additionally requires a municipal advisor to 
indicate if it is an ``exempt reporting adviser'' with respect to 
investment adviser registration and, if so, to provide the SEC file 
number and CRD Number. The category of exempt reporting advisers, 
discussed in Section III.A.1.c.v. herein, was created by Commission 
rule after Form MA was proposed. Because exempt reporting advisers are 
not exempt from municipal advisor registration, if applicable, the 
Commission believes that the information that such advisers must report 
to the Commission, and the identifying numbers necessary to ease access 
to such information, is no less important to regulators of the 
municipal market, municipal entities, and investors than the equivalent 
information available regarding municipal advisors who are registered 
investment advisers.\1011\
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    \1011\ As proposed and adopted, an applicant is further asked in 
Item 1-D whether it is a government securities broker-dealer, and, 
if so, to provide the SEC file number and bank identifier; whether 
it has any other SEC registration, and, if so, to specify which 
registration and the file number; and whether it is registered with 
another federal or state regulator, and, if so, to specify the 
regulator's name and the applicant's registration number. As 
adopted, Item 1-D asks whether the applicant has any additional 
registrations that were not already reported, and, if so, to list 
the regulator and the applicant's registration number in Schedule D. 
The addition of this last question clarifies that if there are 
additional registrations, the applicant must list all of them.
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    The information provided in response to Item 1-D will allow the 
Commission to more effectively cross-reference those entities applying 
for registration as municipal advisors to those who are registered as 
brokers, dealers, municipal securities dealers, investment advisers, or 
otherwise registered \1012\ with the Commission. As discussed in the 
Proposal, the ability to cross-reference will allow the Commission to 
assemble more complete information concerning a municipal advisor to 
inform the Commission's decision to approve or institute proceedings to 
deny an application for registration as a municipal advisor. The 
ability to cross-reference will also permit the Commission or any 
designee \1013\ to plan for, and carry out, efficient and effective 
examinations of registered municipal advisors. By obtaining all of an 
applicant's regulatory file numbers, the Commission will be able to 
cross-reference disciplinary information in the CRD or IARD systems 
with the information on Form MA. This ability would provide the 
Commission with a more complete understanding of a municipal advisor's 
structure and business.
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    \1012\ For example, as the Commission noted in the Proposal, 
pursuant to Section 764 of the Dodd-Frank Act, security-based swap 
dealers will be required to register with the Commission. See 
Section 764(a) of the Dodd-Frank Act and 15 U.S.C. 78o-8(a). See 
Proposal, 76 FR 841, note 178.
    \1013\ See 15 U.S.C. 78o-4(c)(7)(A)(iii) (providing that 
examinations of municipal advisors shall be conducted by the 
Commission or its designee).
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    Item 1-E asks for the address of applicant's principal office and 
place of business \1014\ and the telephone and fax numbers at that 
location. As proposed, Item 1-E of Form MA required an applicant to 
list on Schedule D any additional names under which it conducts 
municipal advisor-related business and the offices at which such 
business is conducted. In consideration of comments, generally, that 
the form is too burdensome,\1015\ in Item 1-E, as adopted, the 
Commission has determined to require information pertaining only to the 
five largest offices.
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    \1014\ Rule 15Ba1-1(l) defines principal office and place of 
business to mean: ``the executive office of the municipal advisor 
from which the officers, partners, or managers of the municipal 
advisor direct, control, and coordinate the activities of the 
municipal advisor.'' See also Glossary. In addition, the municipal 
advisor must supply its mailing address, if it is different from its 
principal office and place of business.
    \1015\ See, e.g., supra note 979 and accompanying text and text 
following note 987.
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    Item 1-F of Form MA, as proposed, asked whether the applicant has 
one or more Web sites, and, if so, to list them in Schedule D of the 
form. As adopted, Item-F continues to require an applicant to list all 
its Web sites, but also requires the address of its principal Web site 
on the main part of the form and any additional Web site addresses on 
Schedule D.\1016\
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    \1016\ The Commission believes that identification of the 
applicant's principal Web site out of possibly many will increase 
the benefit of the information to regulators, municipal entities, 
and investors without adding any unreasonable burden on the 
applicant.
---------------------------------------------------------------------------

    Item 1-G of Form MA, as proposed, required applicants to supply the 
name, address, email address, and telephone and fax numbers of its 
Chief Compliance Officer, if it has such an officer, and to list any 
other title(s) the officer holds. Item 1-H, as proposed, asked for the 
title of, and similar contact information for, any other person whom 
the municipal advisor has authorized to receive information and respond 
to questions about the registration (the ``contact person''). Items 1-G 
and 1-H are being adopted, as proposed, with a clarification to advise 
applicants that they must provide the name and contact

[[Page 67546]]

information for only one person (i.e., either a Chief Compliance 
Officer or another contact person). The intent of the Proposal was for 
the applicant to provide one or the other, and the form, as adopted, 
makes this clearer. The added note also advises, however, that 
information for both may be provided if the applicant so chooses. As 
discussed in the Proposal, the Commission is requesting the identifying 
and contact information in Item 1-G and/or 1-H to assist the Commission 
and the staff in evaluating applications for registration and 
overseeing registered municipal advisors.\1017\
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    \1017\ See also Proposal, 76 FR 841.
---------------------------------------------------------------------------

    As proposed and adopted, Item 1-I of Form MA requires the applicant 
further to state whether it maintains, or intends to maintain, some or 
all of its books and records required to be kept under MSRB or 
Commission rules somewhere other than at its principal office and place 
of business and, if so, to provide (on Schedule D) information about 
the other location(s).
    Item 1-J of Form MA, as proposed and adopted, requires an applicant 
to answer whether it is registered with any foreign financial 
regulatory authority,\1018\ and, if so, to provide the name (on 
Schedule D) of each such authority and the country. Item 1-J is being 
adopted as proposed, with the additional requirement to provide the 
applicant's registration number under the foreign authority.\1019\
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    \1018\ An added instruction in Item 1-J, as adopted, makes clear 
that an applicant should answer ``No'' to this question even if it 
is affiliated with a business that is registered with a foreign 
financial regulatory authority.
    \1019\ Schedule D relating to Item 1-J, as adopted, clarifies 
that both the name of the country and the name of the authority must 
be provided in English, which may not have been evident in the 
proposed version. In general, throughout the forms, as adopted, when 
the name of a foreign country and/or authority is required, the 
filer is instructed that answers must be provided in English.
---------------------------------------------------------------------------

    Item 1-K, as proposed and adopted, requires an applicant to 
disclose whether it is affiliated with any other business entity, and, 
if so, to disclose on Schedule D the name and registration number of 
each such affiliate.\1020\ As discussed in the Proposal, this 
information will help inform the Commission as to the structure of the 
municipal advisor's business, which will help staff prepare for 
examinations of the municipal advisor.\1021\
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    \1020\ The text of Item 1-K has been revised to make explicit 
that ``business entity'' refers to any domestic or foreign entity. 
Similarly, the related questions in Schedule D, which, as proposed, 
asked only for ``any federal or state registration'' has been 
revised to include foreign registrations, as well. These revisions 
have been made in accordance with the description of this disclosure 
item in the Proposal, which included foreign affiliates among the 
required disclosures. See Proposal, 76 FR 842.
    \1021\ See id.
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Item 2: Form of Organization
    The Commission proposed Item 2 of Form MA to require information 
about a municipal advisor's form of organization. The Commission 
received no comments regarding Item 2 and is adopting this item 
substantially as proposed. Item 2 requires a municipal advisor to 
specify whether it is organized as a corporation, partnership, sole 
proprietorship, limited liability company, limited liability 
partnership, limited partnership, or other form of organization that 
the municipal advisor must specify; the month of its annual fiscal year 
end; the date on which it was organized; and the state or other U.S. 
jurisdiction \1022\ or foreign jurisdiction where it was organized. As 
discussed in the Proposal, this information will assist the Commission 
in evaluating the applications for registration and overseeing 
registered municipal advisors.\1023\
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    \1022\ Proposed Item 2 did not specifically mention U.S. 
jurisdictions other than states. The Item, as adopted, makes clear 
that such jurisdictions are included. See supra note 1010 and 
accompanying text.
    \1023\ See Proposal, 76 FR 842.
---------------------------------------------------------------------------

    Item 2 also requires an applicant to specify whether it is a public 
reporting company under Section 12 or 15(d) of the Exchange Act and, if 
so, to provide its Commission-assigned EDGAR CIK number. As discussed 
in the Proposal, the information that an applicant is a public 
reporting company will provide a signal that additional public 
information is available about the municipal advisor and/or its control 
persons.\1024\
---------------------------------------------------------------------------

    \1024\ See id.
---------------------------------------------------------------------------

Item 3: Successions
    The Commission proposed Item 3 of Form MA to require applicants to 
disclose whether they are succeeding to the business of a registered 
municipal advisor and, if so, the date of succession. Further, Item 3 
requires, on Schedule D, the name of, and registration information for, 
the firm the applicants are succeeding.\1025\ The Commission received 
no comments regarding Item 3 and is adopting this item as proposed. As 
discussed in the Proposal, this information will assist the Commission, 
among other things, in overseeing registered municipal advisors and in 
determining whether there has been a change in control of a municipal 
advisor.\1026\
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    \1025\ As discussed elsewhere in this release, depending on 
whether the succession is a result of a merger or acquisition, or a 
reorganization, the succeeding firm will be able to register by 
either submitting a new Form MA or amending the Form MA of its 
predecessor. See infra note 1318 and accompanying text and infra 
Section III.A.7. (discussing Rule 15Ba1-7 regarding registration of 
a successor to a municipal advisor).
    \1026\ See id. See also Proposal, 76 FR 842.
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Item 4: Information About Applicant's Business
    The Commission proposed Item 4 to require certain information about 
the applicant's business. The Commission received several comments 
relating to Item 4, which are discussed below.\1027\ The Commission is 
adopting Item 4 substantially as proposed, with certain modifications 
as discussed in the description of the item below.
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    \1027\ See infra notes 1040-1046 and accompanying text.
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    As proposed and adopted, subparts A to C of Item 4 require an 
applicant to provide information regarding the approximate number of 
employees it has, approximately how many of those employees engage in 
municipal advisory activities, and approximately how many are 
registered representatives of a broker-dealer or investment adviser 
representatives.
    Item 4-D, as proposed and adopted, requires an applicant to state 
approximately how many firms, or other persons (that are not employees 
or otherwise associated persons of the applicant) solicit municipal 
advisory clients on the applicant's behalf. As proposed, an applicant 
is required to disclose on Schedule D the names, addresses, and phone 
numbers of firms that solicit on its behalf. As adopted, Item 4-D 
additionally requires the applicant to disclose on Schedule D the same 
information for other persons who are not employed by, or otherwise 
associated persons of, the applicant but who solicit on its 
behalf.\1028\ In addition, to make the information more useful, the 
Commission has determined to require an applicant also to provide the 
EDGAR CIK and/or individual CRD Number, if any, of the soliciting firm 
or other person.
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    \1028\ Upon review of the form as proposed, the Commission 
determined that requiring a firm to list the names of all persons 
who solicit on its behalf will provide potentially valuable and more 
fulsome information, as it may yield the names of persons who are 
providing such services without themselves registering.
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    Further, Item 4-E, as proposed, required an applicant to state 
whether it has any employees that also do business independently on the 
applicant's behalf as affiliates of the applicant and, if so, to 
disclose in related Section 4-E of Schedule D the names of such 
employees.\1029\ In the form, as adopted,

[[Page 67547]]

Section 4-E of Schedule D requires the applicant, in addition, to 
provide the address, telephone and fax number, EDGAR CIK (if any) and 
individual CRD Number (if any) of each such employee.\1030\
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    \1029\ This category of employee includes persons who do not 
necessarily engage in municipal advisory activities on behalf of the 
firm, and for whom a Form MA-I would thus not be required. Regarding 
employees who do also engage in municipal advisory activities on 
behalf of the firm, the applicant must in any case obtain the 
information requested in Section 4-E, as adopted, to complete a Form 
MA-I for each such employee. See also infra note 1030.
    \1030\ The Commission believes that these additional details in 
Schedule D will further serve the purposes for which Item 4 is 
designed and that an applicant firm should be able to provide such 
information about employees that do business on its behalf. Item 4-
E, as adopted, asks the applicant to state the number of employees 
of this kind. This does not require an applicant to search for any 
additional information, because each such employee must be named in 
Schedule D. However, it can serve as a helpful cross-check to the 
filer as well as to regulators, and is also a useful number for 
interested parties who do not need the additional details.
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    Item 4-F, as proposed and adopted, requires the applicant also to 
approximate the number of clients it served in the context of its 
municipal advisory activities in the past fiscal year and to specify by 
checking the appropriate box(es) whether its clients include: municipal 
entities, non-profit organizations (e.g., 501(c)(3) organizations) who 
are obligated persons, corporations or other businesses not listed 
previously who are obligated persons, or other types of entities (and 
specify which other types of entities); or whether the applicant 
engages only in solicitation and does not serve clients in the context 
of its municipal advisory activities.
    As proposed and adopted, applicants also are required, in Item 4-
G,\1031\ to specify approximately the number of municipal entities or 
obligated persons that were solicited by the applicant on behalf of a 
third-party during its most recently completed fiscal year, including 
any clients that it solicits in addition to serving them in the context 
of its municipal advisory activities. However, Item 4-G, as adopted, 
requires the applicant to provide the numbers separately for municipal 
entities and obligated persons.\1032\
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    \1031\ The section of Item 4 that relates to solicitations of 
municipal entities and obligated persons has been restructured in 
Form MA, as adopted, into two parts. Item 4-G is the first part of 
Item 4-G as proposed, which requires the applicant to state the 
number of municipal entities and obligated persons that the 
applicant solicited on behalf of a third party, as described above. 
New Item 4-H is comprised of the questions regarding the types of 
persons solicited by the applicant that constituted the rest of Item 
4-G as proposed. Hereinafter, subparts 4-H, I, J, and K of the 
Proposal will be referred to by their numbers in the adopted form, 
i.e., 4-I, J, K, and L, respectively.
    \1032\ The Commission believes that the information requested 
will be more useful for regulatory purposes, and for gaining an 
understanding of municipal advisory activities in general, when 
broken down in this manner. Municipal entities and other interested 
parties can also benefit from this breakdown in assessing the 
specific experience of a municipal advisor.
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    Further, as proposed and adopted, applicants must indicate, in Item 
4-H,\1033\ whether they solicit public pension funds, 529 Savings 
Plans, local or state government investment pools, hospitals, colleges, 
or other types of municipal entities or obligated persons (and to 
specify which other types). Alternatively, an applicant is able to 
indicate that the question is inapplicable, because it serves only 
clients and does not engage in solicitation in the context of its 
municipal advisory activities.
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    \1033\ Item 4-H was a part of Item 4-G as proposed. See supra 
note 1031.
---------------------------------------------------------------------------

    As proposed and adopted, applicants are also required to disclose, 
in Item 4-I,\1034\ whether they are compensated for their advice to or 
on behalf of municipal entities or obligated persons by hourly charges, 
fixed fees (not contingent on the success of solicitations), contingent 
fees, subscription fees (for a newsletter or other publications), or 
otherwise.\1035\ If the applicant checks ``other,'' the other kind of 
arrangement must be described. Item 4-J,\1036\ as proposed and adopted, 
asks for similar information about compensation for solicitation 
activities. Item 4-K,\1037\ as proposed and adopted, asks whether the 
applicant receives compensation, in the context of its municipal 
advisory activities, from anyone other than clients, and, if so, to 
provide an explanation.
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    \1034\ Item 4-I was Item 4-H as proposed. See supra note 1031.
    \1035\ An applicant may alternatively state that the question is 
inapplicable because the applicant engages only in solicitation.
    \1036\ Item 4-J was Item 4-I as proposed. See supra note 1031.
    \1037\ Item 4-K was Item 4-J as proposed. See supra note 1031.
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    As discussed in the Proposal, disclosure of information relating to 
the number of a municipal advisor's employees and compensation 
arrangements will provide the Commission with a clearer understanding 
of the business structure of registered municipal advisors, including 
the size of each advisor, the number of its employees that engage in 
municipal advisory activities, and in what capacity these employees 
engage in such activities. Information about compensation arrangements 
also will identify possible conflicts of interest that the municipal 
advisor may have with its clients.\1038\
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    \1038\ See Proposal, 76 FR 843.
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    The Commission received several comments regarding the five 
categories of compensation arrangements.\1039\ One commenter believed 
that the Commission should ``refrain from utilizing this limited 
information in making a determination as to the existence of conflicts 
of interest with respect to compensation'' and that ``a more 
comprehensive analysis of compensation arrangements and the rationale 
for such fees should be considered prior to making any determination as 
to the appropriateness of a particular fee arrangement.'' \1040\ 
Another commenter believed that, because investment advisers generally 
have ``a completely different business model, approach to business and 
compensation model,'' as well as ``scale of business,'' than municipal 
advisors, Form ADV is ``not a good model in this element of 
registration.'' \1041\
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    \1039\ See Joy Howard WM Financial Strategies Letter; Public FA 
Letter; and Fiscal Advisors and Marketing Letter, Inc., dated 
February 21, 2011 (``Fiscal Advisors and Marketing Letter'').
    \1040\ See Joy Howard WM Financial Strategies Letter.
    \1041\ See Public FA Letter. Another commenter stated that most 
municipal advisors ``charge on a project or transaction specific 
basis and not on an annual all encompassing service basis'' and thus 
believed that Form ADV is not a relevant document that would help in 
understanding ``the nature of an `Independent Municipal Advisor,' 
its corporate makeup, nor the fee relationship'' and ``does not 
afford any basis for analyzing potential conflict of interest.'' See 
Fiscal Advisors and Marketing Letter.
---------------------------------------------------------------------------

    The five choices from among which applicants are asked to select 
are not intended to give an exhaustive picture of a municipal advisor's 
business model, but the Commission does believe that receiving 
responses regarding compensation, at least on the level of specificity 
requested in this item, will enable Commission staff to ask more 
targeted questions on routine examinations and may highlight 
relationships that should be more closely examined. Furthermore, the 
Commission notes that in addition to the five choices, an applicant may 
also check ``Other'' to describe its compensation arrangements. If 
selected, the applicant is required to specify the nature of such 
arrangements.
    Item 4-L,\1042\ as proposed and adopted, also requires the 
municipal advisor to indicate the general types of municipal advisory 
activities in which it engages.\1043\ The Commission

[[Page 67548]]

understands that the listed activities are those in which the municipal 
advisors engage and are derived from the definition of municipal 
advisor in Exchange Act Section 15B(e)(4) \1044\ or closely related to 
the activities included within that definition. As discussed in the 
Proposal, this information will help the Commission understand the 
scope of activities in which a municipal advisor engages and identify 
possible conflicts of interest and in preparing for examinations, and 
will also provide the Commission with data useful to making regulatory 
policy.\1045\
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    \1042\ Item 4-L was Item 4-K as proposed. See supra note 1031.
    \1043\ The following eleven activities are listed: (1) Advice 
concerning the issuance of municipal securities (including, without 
limitation, advice concerning the structure, timing, terms and other 
similar matters, such as the preparation of feasibility studies, tax 
rate studies, appraisals and similar documents, related to an 
offering of municipal securities), (2) advice concerning the 
investment of the proceeds of municipal securities (including, 
without limitation, advice concerning the structure, timing, terms 
and other similar matters concerning such investments), (3) advice 
concerning municipal escrow investments (including, without 
limitation, advice concerning their structure, timing, terms and 
other similar matters), (4) advice concerning the investment of 
other funds of a municipal entity or obligated person (including, 
without limitation, advice concerning the structure, timing, terms 
and other similar matters concerning such investments), (5) advice 
concerning guaranteed investment contracts (including, without 
limitation, advice concerning their structure, timing, terms and 
other similar matters), (6) advice concerning the use of municipal 
derivatives (including, without limitation, advice concerning their 
structure, timing, terms and other similar matters), (7) 
solicitation of investment advisory business from a municipal entity 
or obligated person (including, without limitation, municipal 
pension plans) on behalf of an unaffiliated person or firm (e.g., 
third party marketers, placement agents, solicitors and finders), 
(8) solicitation of business other than investment advisory business 
from a municipal entity or obligated person on behalf of an 
unaffiliated broker, dealer, municipal securities dealer, municipal 
advisor or investment adviser (e.g., third party marketers, 
placement agents, solicitors and finders), (9) advice or 
recommendations concerning the selection of other municipal advisors 
or underwriters with respect to municipal financial products or the 
issuance of municipal securities, (10) brokerage of municipal escrow 
investments, or (11) other. Applicants who check ``other'' 
activities will be required to provide a narrative description of 
such activities.
    \1044\ See 15 U.S.C. 78o-4(e)(4).
    \1045\ See Proposal, 76 FR 843.
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    One commenter believed that, due to competitive concerns, a 
municipal advisor should not be required to disclose the names and 
contact information of persons that solicit municipal clients on its 
behalf.\1046\ The Commission notes that the definition of municipal 
advisor under the Exchange Act includes, specifically, persons who 
undertake solicitation of municipal entities and obligated persons. The 
Commission thus believes that requiring an applicant to provide 
information about persons who solicit clients on its behalf will help 
it carry out its oversight responsibilities with respect to the full 
range of persons who are municipal advisors. For example, as already 
stated,\1047\ such information may yield the names of persons who are 
engaged in such activities without themselves registering. Moreover, as 
stated in the Proposal, the Commission believes that information 
requested in Item 4-L is important for discerning possible conflicts of 
interest.\1048\ The Commission further notes that the requirement that 
a municipal advisor disclose all persons who solicit clients on its 
behalf applies equally to all applicants for registration. The 
Commission believes that such universal disclosure serves to mitigate 
the competitive concerns raised by the commenter.
---------------------------------------------------------------------------

    \1046\ See SIFMA Letter I.
    \1047\ See supra note 1028.
    \1048\ See supra note 1038 and accompanying text.
---------------------------------------------------------------------------

Item 5: Other Business Activities
    The Commission proposed Item 5 to require information about the 
applicant's other business activities. The Commission received no 
comments regarding Item 5 and is adopting Item 5 substantially as 
proposed, with minor modifications as discussed below.
    As proposed and adopted, Item 5 requires applicants to indicate 
whether they are actively engaged any one of an enumerated list of 
businesses.\1049\ In Item 5, as adopted, the applicant is required 
additionally to indicate, for each other business in which it is 
engaged, whether this is its primary business.\1050\ As proposed and 
adopted, Item 5 requires an applicant also to state whether it is 
actively engaged in any other business that is not one of those 
enumerated above and whether that other business is its primary 
business. It also is required to describe the other business on 
Schedule D to Form MA. As discussed in the Proposal, this information 
will assist the Commission, among other things, in identifying 
conflicts of interest for municipal advisors and preparing for 
inspections and examinations of municipal advisors. The information 
also will assist the Commission and the MSRB in understanding municipal 
advisors in the context of their activities for regulatory 
purposes.\1051\
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    \1049\ Specifically, in Item 5, as adopted, an applicant is 
asked whether it is actively engaged in business in, or as, a (1) 
broker-dealer, municipal securities dealer or government securities 
broker or dealer, (2) registered representative of a broker-dealer, 
(3) commodity pool operator (whether registered or exempt from 
registration), (4) commodity trading advisor (whether registered or 
exempt from registration), (5) futures commission merchant, (6) 
major swap participant, (7) major security-based swap participant, 
(8) swap dealer, (9) security-based swap dealer, (10) trust company, 
(11) real estate broker, dealer, or agent, (12) insurance company, 
broker, or agent, (13) banking or thrift institution (including a 
separately identifiable department or division of a bank), (14) 
investment adviser (including financial planners), (15) attorney or 
law firm, (16) accountant or accounting firm, (17) engineer or 
engineering firm, or (18) other financial product advisor (and, if 
so, to specify the type). Minor differences in this multiple choice 
list from the list, as proposed, are that engineer is now included, 
in addition to engineering firm (as in Item 6 as proposed and 
adopted), and swap dealer and security-based swap dealer are now two 
distinct categories.
    \1050\ Although this specific question was not included in the 
proposed form, the Commission notes that in the next subpart of Item 
5, as proposed, if the applicant identifies any other businesses in 
which it is engaged that are not included in the list of choices 
described above, it is further asked whether this is its primary 
business. See infra note 1051.
    \1051\ See Proposal, 76 FR 844.
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Item 6: Financial Industry and Other Activities of Associated Persons 
\1052\
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    \1052\ The title of Item 6, which, as proposed, was ``Financial 
Industry Affiliations of Associated Persons,'' has been changed in 
Form MA as adopted to better reflect the range of activities that 
the item concerns--all of which may be a source of conflict of 
interest for the municipal advisor--and to avoid any possible 
confusion that could be caused by the use of the term 
``affiliations'' in the title.
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    The Commission proposed Item 6 to require an applicant to disclose 
financial industry affiliations of its associated persons. The 
Commission received several comments on Item 6, as discussed 
below.\1053\ The Commission has carefully considered these comments and 
is adopting Item 6 and the related information it requires on Schedule 
D of Form MA largely as proposed. Some modifications have been made, 
however, and these are discussed below.
---------------------------------------------------------------------------

    \1053\ See infra notes 1064-1070.
---------------------------------------------------------------------------

    Item 6, as proposed and adopted, requires an applicant to provide 
information about its associated persons \1054\ that are engaged in

[[Page 67549]]

activities other than those that relate to their association with the 
applicant. As discussed in the Proposal, Item 6 lists twenty activities 
that an associated person may engage in, some of which are not listed 
in Item 5 as other activities in which the applicant itself may be 
engaged.\1055\ The collection of this information is designed to gather 
more complete information about the associated persons of a municipal 
advisor who are actually providing advice or are controlling the firm 
and help better inform the Commission's regulatory and examination 
programs.\1056\
---------------------------------------------------------------------------

    \1054\ Section 15B(e)(7) provides that the term ``person 
associated with a municipal advisor'' or ``associated person of an 
advisor'' means ``(A) any partner, officer, director, or branch 
manager of such municipal advisor (or any person occupying a similar 
status or performing similar functions); (B) any other employee of 
such municipal advisor who is engaged in the management, direction, 
supervision, or performance of any activities relating to the 
provision of advice to or on behalf of a municipal entity or 
obligated person with respect to municipal financial products or the 
issuance of municipal securities; and (C) any person directly or 
indirectly controlling, controlled by, or under common control with 
such municipal advisor.'' 15 U.S.C. 78o-4(e)(7). For purposes of 
Form MA, the Glossary defines ``associated person or associated 
person of a municipal advisor'' to have the same meaning as in 
Exchange Act Section 15B(e)(7) (15 U.S.C. 78o-4(e)(7)), but to 
exclude employees that are solely clerical or administrative. 
Specifically, the Glossary defines these terms to mean: ``Any 
partner, officer, director, or branch manager of a municipal advisor 
(or any person occupying a similar status or performing similar 
functions); any other employee of such municipal advisor who is 
engaged in the management, direction, supervision, or performance of 
any municipal advisory activities relating to the provision of 
advice to or on behalf of a municipal entity or obligated person 
with respect to municipal financial products or the issuance of 
municipal securities (other than employees who are performing solely 
clerical, administrative, support or other similar functions); and 
any person directly or indirectly controlling, controlled by, or 
under common control with such municipal advisor.''
    \1055\ Specifically, under Item 6, a municipal advisor is 
required to disclose whether any of its associated persons is: (1) A 
broker-dealer, municipal securities dealer, or government securities 
broker or dealer; (2) an investment company (including a mutual 
fund), (3) an investment adviser (including a financial planner), 
(4) a swap dealer, (5) a security-based swap dealer, (6) a major 
swap participant, (7) a major security-based swap participant, (8) a 
commodity pool operator (whether registered or exempt from 
registration), (9) a commodity trading advisor (whether registered 
or exempt from registration), (10) a futures commission merchant, 
(11) a banking or thrift institution, (12) a trust company, (13) an 
accountant or accounting firm, (14) an attorney or law firm, (15) an 
insurance company or agency, (16) a pension consultant, (17) a real 
estate broker or dealer, (18) a sponsor or syndicator of limited 
partnerships, (19) an engineer or engineering firm, or (20) another 
municipal advisor. See supra note 1049. As adopted, Item 6 includes 
an instruction that if an associated person is involved in more than 
one of these activities, each such activity must be reported.
    \1056\ See Proposal, 76 FR 844.
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    As proposed, Item 6 of Form MA required an applicant to list, on 
related Section 6 of Schedule D of the form, all associated persons, 
including foreign affiliates, that are broker-dealers, municipal 
securities dealers, or government securities brokers or dealers, or 
investment advisers, municipal advisors, registered swap dealers, 
banking or thrift institutions, or trust companies. As adopted, the 
form requires the applicant also to list in Section 6 of Schedule D all 
associated persons that are investment companies (including mutual 
funds), major swap participants and major security-based swap 
participants, commodity pool operators, commodity trading advisors, 
futures commission merchants, accountants or accounting firms, 
attorneys or law firms, insurance companies or agencies, pension 
consultants, real estate brokers or dealers, sponsors or syndicators of 
limited partnerships, or engineers or engineering firms.\1057\
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    \1057\ In other words, the form, as adopted, requires the 
applicant to list in Section 6 of Schedule D the names of all 
associated persons in any of the categories in Item 6. See supra 
note 1055 and accompanying text.
---------------------------------------------------------------------------

    Section 6 of Schedule D, as proposed and adopted, also requires the 
applicant to provide the legal and primary business names of each 
associated person listed, as well as to indicate the category or 
categories listed in Item 6 of the main form of which the associated 
person is a member. Finally, Section 6 of Schedule D, as proposed and 
adopted, requires the applicant to indicate whether it controls, or is 
controlled by, the associated person; whether the two are under common 
control; \1058\ and/or whether the associated person is registered with 
a foreign financial regulatory authority and, if so, the country and 
name in English of that authority.\1059\
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    \1058\ See infra note 1080 for the definition of ``control'' as 
used in the municipal advisor registration forms.
    \1059\ To the extent that Item 6, as adopted, requires 
associated persons in additional categories to be listed in Schedule 
D, as discussed supra note 1057, the requirements to provide in 
Schedule D the legal and primary business names of each associated 
person, indicate the category or categories to which the person 
belongs, and respond to the questions relating to control now apply 
to persons in those additional categories. Similarly, the questions 
relating to registration with foreign financial regulatory 
authorities, as discussed further below, apply to associated persons 
in all the categories listed in Item 6, as adopted.
---------------------------------------------------------------------------

    As discussed above, the purpose of Item 6 is to elicit more 
complete information about who is providing advice or controlling the 
applicant. Moreover, as new Rule 15Bc4-1 underscores, all associated 
persons of municipal advisors are subject to censure.\1060\ Thus, after 
further consideration, the Commission believes that requiring the 
applicant municipal advisory firm to identify associated persons that 
are involved in any of the above categories--each of which involves 
activities that can impact or be impacted by the advice the firm 
provides--will better assist the Commission in gaining an understanding 
of possible conflicts of interest or wrongful influence in the 
municipal advisor's activities. The Commission notes that Form MA 
elsewhere already reflects a concern that involvement in a wider range 
of areas can lead to conflict of interest, as Item 5 of the form 
requires disclosure of whether the applicant firm itself is involved in 
any of 17 enumerated categories of that Item and must further indicate 
whether it acts as any other type of financial product advisor and 
specify the type.\1061\
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    \1060\ See infra Section III.A.9.
    \1061\ Item 6, as adopted, also asks the applicant to state the 
total number of its associated persons that belong to any of the 
twenty categories (listed above in note 1055). Because, in Item 6, 
as adopted, all such persons must be identified in Schedule D, 
tallying the number involves no additional disclosure and will act 
as a cross-check to ensure that the information provided is 
complete.
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    As already noted,\1062\ in conformance with the additions to the 
categories of associated persons that must be identified in Item 6, 
Section 6 of Schedule D, as adopted, will require disclosure of foreign 
registration information with respect to associated persons in twenty 
categories. As discussed above, the Commission believes that an 
associated person's involvement in any of these categories can impact 
or be impacted by the advice the firm provides, and foreign financial 
regulatory authorities can be of significant help in tracking such 
activity and uncovering possible wrongdoing. An additional change in 
Section 6 of Schedule D, as adopted, requires the applicant to provide, 
in the case of an associated person registered with a foreign financial 
regulatory authority, the relevant registration number. The Commission 
believes that, for associated persons that are active in foreign 
countries, having the registration number, if any, under foreign 
financial regulatory authorities can be particularly helpful in 
obtaining information for regulatory and investigative purposes.
---------------------------------------------------------------------------

    \1062\ See supra note 1059.
---------------------------------------------------------------------------

    The Commission received several comment letters opposing the extent 
of the disclosures required by Item 6 and, on a more general level, all 
the disclosures that Form MA requires regarding an applicant's 
associated persons.\1063\ One commenter believed that the form requires 
``overly extensive disclosure'' regarding affiliates of a municipal 
advisor, particularly for a municipal advisor that is a member of a 
large affiliated group of institutions.\1064\ These requirements, the 
commenter said, would impose ``a vast information-gathering burden on 
applicants.'' \1065\ The commenter raised specifically the case of 
affiliates that are under common control with a municipal advisor 
(``sister affiliates''), whose activities ``may have no connection to 
municipal advisory activities, let alone, in the case of financial 
institutions with global operations, a nexus or connection to any

[[Page 67550]]

activities in the United States.'' \1066\ The commenter suggested that 
disclosures regarding affiliates be limited to affiliates that control 
or are controlled by the municipal advisor or ``at a minimum'' to 
sister affiliates providing municipal advisory services in the 
U.S.\1067\ This commenter also believed that a municipal advisory firm 
should not be required to provide information regarding its individual 
associated persons (citing the example of employees) on Form MA unless 
those persons ``devote a significant amount of time or resources'' to, 
or are ``primarily engaged'' in, municipal advisory activities, 
particularly if those persons are already registered with a broker-
dealer, investment adviser, municipal securities dealer, commodity 
trading advisor or swap dealer.\1068\
---------------------------------------------------------------------------

    \1063\ See, e.g., Acacia Financial Group Letter; Deloitte 
Letter; SIFMA Letter I.
    \1064\ SIFMA Letter I.
    \1065\ Id.
    \1066\ Id.
    \1067\ Id. See also infra notes 1119-1120 (related SIFMA 
comments regarding disclosure requirements with respect to the 
disciplinary history of affiliates and associated persons).
    \1068\ See SIFMA Letter I.
---------------------------------------------------------------------------

    Another commenter believed that requiring disclosures regarding 
associated persons performing ``any activities'' relating to advice 
could ``impose significant costs'' and ``create a significant burden.'' 
\1069\ This commenter stated that the Commission should ``establish a 
threshold for reporting and updating associated person information in 
Form MA''--a certain minimum of hours spent on municipal advisory 
activities over a specified time period. The commenter also suggested 
that, when personnel from an entity are subcontracted, the entity 
itself should not be required to register.\1070\
---------------------------------------------------------------------------

    \1069\ See Deloitte Letter.
    \1070\ See id.
---------------------------------------------------------------------------

    The Commission notes that, for certain information pertaining to 
affiliates, it has determined to limit the required disclosures in Form 
MA to information regarding persons that control, or are controlled by, 
the municipal advisor (and not persons under common control).\1071\ 
However, with respect to financial industry and other activities 
represented on the list in Item 6, the Commission believes it is 
appropriate to extend its information base regarding such activities to 
all of a municipal advisor's associated persons (which, by definition, 
includes persons under common control with the municipal 
advisor).\1072\ For example, the Commission believes that ascertaining 
such information may assist the Commission in identifying potential 
conflicts of interest.
---------------------------------------------------------------------------

    \1071\ See also the discussion below regarding Item 8, infra 
notes 1079-1088 and accompanying text.
    \1072\ See Section 15B(e)(7)(C) of the Exchange Act, which 
defines the term ``person associated with a municipal advisor'' or 
``associated person of an advisor'' as including ``any person 
directly or indirectly controlling, controlled by, or under common 
control with such municipal advisor.''
---------------------------------------------------------------------------

    The ability to discern connections within a large network of 
affiliations and other associations that otherwise would not be evident 
is particularly important to the Commission for purposes of 
enforcement, to enable regulators to detect possible trails of 
influence and to widen their potential sources of factual information 
relevant to investigations of wrongdoing. The Commission believes that 
establishing such an information base is consistent with the Dodd-Frank 
Act's amendments to Section 15B of the Act, which explicitly extend the 
Commission's regulatory authority (directly and through its oversight 
of the MSRB) to associated persons of municipal advisors.\1073\
---------------------------------------------------------------------------

    \1073\ See, e.g., Section 15B(c)(4) of the Exchange Act 
(authority of Commission to censure or place limitations on the 
activities or functions of associated persons of municipal 
advisors); and Section 15B(b)(2)(A) (authority of MSRB to establish 
standards of training, experience, competence, and other 
qualifications for associated persons of municipal advisors). See 
also Section 15B(a)(2) (application for registration as a municipal 
advisor to contain such information and documents concerning 
associated persons of municipal advisors as the Commission may 
prescribe as necessary or appropriate in the public interest or for 
the protection of investors).
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    The Commission notes that Item 6 and Section 6 of Schedule D ask 
for little more than the names (legal and business) of any associated 
persons of the municipal advisor that do business in the specified 
fields and, if the associated person is registered with a foreign 
financial regulatory authority, the registration number. Otherwise, 
Section 6 asks only whether the municipal advisor controls or is 
controlled by the associated person or whether the two are under common 
control. Such control relationships are directly relevant to 
investigations of the municipal advisor.
    The Commission believes that, in today's world of organizational 
and managerial sophistication and advanced information technology, 
including as is pertinent to cross-border affiliations, it should not 
be unreasonably difficult for a municipal advisor that finds itself 
within a larger family of affiliates, particularly of the size 
discussed by commenters, to obtain knowledge of its own place and the 
place of others within that family. Given the potential relevance and 
importance of such information, as discussed above, to assuring 
lawfulness and fairness in the field of municipal advisory services, as 
well as in maintaining confidence in the municipal securities markets, 
the Commission believes it is appropriate to require municipal advisors 
to obtain and provide such information.
    With respect to the suggestions that a municipal advisory firm 
should not be required to provide information regarding its individual 
associated persons unless those persons devote a certain threshold of 
time or resources to municipal advisory activities, the Commission 
disagrees. In particular, the kind of activity that disclosure relating 
to associated persons is intended to bring to light may involve the 
kind of significant influence that often is wielded in very short 
timeframes of activity, e.g., a short phone call from a partner in the 
firm to a key person in a municipal entity ``urging'' the issuance of a 
particular offering, or soliciting the municipal entity's investment.

Item 7: Participation or Interest in Municipal Advisory Client or 
Solicitee Transactions \1074\
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    \1074\ The title of Item 7 has been revised in Form MA, as 
adopted, to include ``solicitee'' transactions to better reflect the 
information sought in this item. The term ``solicitee'' is defined 
in the discussion below and is included in the Glossary of Terms for 
the Form MA series as adopted.
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    The Commission proposed Item 7 to require information about an 
applicant's participation and interest in the transactions of its 
municipal advisory clients. The Commission received no comments 
referencing Item 7 that are not discussed elsewhere \1075\ and is 
adopting Item 7 as proposed.\1076\
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    \1075\ As discussed above, the Commission received a general 
comment questioning whether useful information could be elicited 
from applicants with regard to some required disclosures. See supra 
note 984 and accompanying discussion.
    \1076\ The Commission notes that, as published in the Proposal, 
several of the questions in this item referred explicitly only to 
clients of the municipal advisor. It is clear from the context, 
however, that these questions were also intended to apply to persons 
that the municipal advisor solicits or intends to solicit in the 
context of its municipal advisory activities. Item 7, as adopted, 
has been modified to explicitly reference such solicitees in 
addition to clients in each of these instances.
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    As discussed in the Proposal, the purpose of Item 7 is to identify 
possible conflicts of interest that the municipal advisor and its 
associated persons may have with the municipal advisor's clients and/or 
the persons the municipal advisor solicits.\1077\ For example, a 
municipal advisor that receives commissions or other payments for sales 
of securities to clients may have a conflict of interest with its 
clients. This type of practice gives the municipal advisor and its 
personnel an incentive to base investment recommendations on the amount 
of compensation they will

[[Page 67551]]

receive rather than on the client's best interests.
---------------------------------------------------------------------------

    \1077\ See Proposal, 76 FR 844.
---------------------------------------------------------------------------

    Specifically, Item 7 requires an applicant to disclose whether it, 
or any of its associated persons, has a proprietary interest in the 
securities or other investment or derivative product transactions of 
its clients or of persons whom it solicited or intends to solicit 
(``solicitees''). These disclosures include whether the applicant buys 
securities or other investment or derivative products from, or sells 
them to, its clients or solicitees; whether it buys or sells for itself 
securities (other than shares of mutual funds) or other investment or 
derivative products that it also recommends to such clients or 
solicitees; whether it enters into derivative contracts with such 
clients or solicitees; or whether it recommends to its clients or 
solicitees securities or other investment or derivative products in 
which it or any associated person has any proprietary interest (other 
than as already disclosed in response to the previous questions).
    An applicant is also asked to disclose whether it or its associated 
persons recommend purchases of securities or derivative products to 
clients or solicitees for which the municipal advisor or its associated 
persons serve as underwriter, general or managing partner, or purchaser 
representative; recommend purchases or sales of securities or 
derivatives to clients or solicitees in which applicant or its 
associated person has any other sales interest (other than the receipt 
of sales commissions as a broker or registered representative of a 
broker-dealer); have certain discretionary authority over transactions 
in securities or other investment or derivative products for its 
clients or solicitees; and recommend brokers, dealers, or investment 
advisers to its clients or solicitees, and, if so, whether those 
brokers, dealers, or investment advisers are associated persons of the 
municipal advisor. Item 7 also requires the municipal advisor to 
disclose whether it or its associated persons give or receive 
compensation for municipal advisory client referrals.\1078\
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    \1078\ In Item 7, as adopted, the phrase ``in the context of its 
municipal activities'' has been deleted in instances where the 
intention may not have been clear. For example, Item 7.C, as 
proposed, asked: ``Does applicant or any associated person have 
discretionary authority to determine the: (1) Securities or other 
investment or derivative products to be bought or sold for the 
account of a client that it serves or person that it has solicited 
or intends to solicit in the context of its municipal advisory 
activities.'' The phrase ``in the context of its municipal advisory 
activities'' was not intended to limit the question to products 
bought or sold in such context, but to limit the kind of 
solicitation being referenced. To avoid confusion, it has been 
deleted.
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Item 8: Owners, Officers, and Other Control Persons \1079\
---------------------------------------------------------------------------

    \1079\ The title of this item as proposed was ``Control 
Persons.'' It has been changed in Form MA, as adopted, because the 
item, among other things, is seeking information about owners to 
determine whether such persons are control persons.
---------------------------------------------------------------------------

    The Commission proposed Item 8 of Form MA to require information 
about an applicant's control persons. As discussed below, the 
Commission received one comment specifically relating to Item 8. The 
Commission carefully considered issues raised by the commenter and is 
adopting Item 8 substantially as proposed, with minor modifications 
discussed below.
    Item 8, as proposed and adopted, asks applicants to identify on 
Schedules A and B every person that owns a certain percentage of the 
applicant, that directly or indirectly controls the applicant, or that 
the applicant directly or indirectly controls.\1080\ An initial 
applicant is required to complete Schedules A and B. Schedule C is used 
to amend information previously reported on Schedules A and B.
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    \1080\ The term ``control'' is defined in the Glossary to mean, 
for purposes of the municipal advisor registration forms, ``the 
power, directly or indirectly, to direct the management or policies 
of a person, whether through ownership of securities, by contract, 
or otherwise.'' Further, the Glossary provides that: (a) Each of the 
municipal advisor's officers, partners, or directors exercising 
executive responsibility (or persons having similar status or 
functions) is presumed to control the municipal advisor; (b) a 
person is presumed to control a corporation if the person: (i) 
Directly or indirectly has the right to vote 25 percent or more of a 
class of the corporation's voting securities; or (ii) has the power 
to sell or direct the sale of 25 percent or more of a class of the 
corporation's voting securities; (c) a person is presumed to control 
a partnership if the person has the right to receive upon 
dissolution, or has contributed, 25 percent or more of the capital 
of the partnership; (d) a person is presumed to control a limited 
liability company (``LLC'') if the person: (i) directly or 
indirectly has the right to vote 25 percent or more of a class of 
the interests of the LLC; (ii) has the right to receive upon 
dissolution, or has contributed, 25 percent or more of the capital 
of the LLC; or (iii) is an elected manager of the LLC; and (e) a 
person is presumed to control a trust if the person is a trustee or 
managing agent of the trust. See Glossary.
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    Schedule A requires information about the applicant's executive 
officers and, for firms, persons that directly own 5% or more of the 
applicant.\1081\ Schedule B requests information about persons that 
indirectly own 25% or more of the applicant. A clarifying instruction 
has been added to Schedule B, as adopted, explaining that, for these 
purposes, an ``indirect owner'' includes any owner of 25% or more of 
any direct owner listed in Schedule A and any owner of 25% or more of 
each such indirect owner going up the chain of ownership. Applicants 
are also asked to identify, on Schedule D, any person that controls the 
applicant's management or policies if not otherwise identified as an 
owner or officer in Schedule A or B. Further information is requested 
with respect to control persons that are public reporting companies 
under Sections 12 or 15(d) of the Exchange Act.\1082\
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    \1081\ As detailed in the form, the 5% criterion varies in its 
applicability and does not always mean ownership in the ordinary 
sense of the word--depending on whether the applicant is a 
corporation, partnership, trust, or limited liability company.
    \1082\ Section 8-B of Schedule D to Form MA requires the name 
and CIK number of each control person listed on Schedule A, B, C or 
Section 8-A of Schedule D.
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    For ease of use and clarity, Form MA, as adopted, asks for 
information separately on Schedules A-1 and B-1 for owners and control 
persons that are business entities and on Schedules A-2 and B-2 for 
owners and control persons who are natural persons, as well as (in 
Schedule A-2) for executive officers.\1083\ The information sought in 
these schedules, however, is the same as in the Proposal, with minor 
modifications.\1084\
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    \1083\ The guidance provided in the form has been 
correspondingly revised to reflect this restructuring. Although 
these Schedules, as published in print, display the information 
requested in table form, the electronic version of Form MA--which is 
the only format in which the form can be completed and submitted--
asks the questions in a series of pop-up boxes and instructions. See 
also supra note 1001.
    \1084\ In the form, as adopted, in addition to providing 
information about other registrations that the control person that 
is a firm or organization may have with the Commission, information 
about any registration on Form MA-T must also be provided. In 
addition, the nature of the control must also be described. If the 
control person is a natural person, his or her CIK number, if any, 
must be supplied in addition to the other basic information 
requested.
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    For each business entity listed, the applicant is required to 
provide its organization CRD Number, if it has one, or its IRS tax 
number, EIN, or, if not a domestic entity, any foreign business number. 
For each natural person listed, the applicant is required to provide 
the person's individual CRD Number, if any, or the person's social 
security number or foreign identity number, as well as date of 
birth.\1085\
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    \1085\ As noted above, the form, as adopted, makes clear that 
social security numbers, foreign identification numbers, and date of 
birth will not be publicly disseminated.
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    As discussed in the Proposal, the information requested and the 
definition of control are consistent with that requested and used by 
the Commission in other contexts.\1086\ This

[[Page 67552]]

information will help to inform the Commission's understanding of the 
ownership structure of the municipal advisor and who ultimately 
controls the municipal advisor. Such information in turn will provide 
useful information in preparing for examinations and also in 
identifying potential conflicts of interest. The information requested 
also will inform the Commission about changes in control of the 
municipal advisor.
---------------------------------------------------------------------------

    \1086\ The requested information and definition of ``control'' 
are consistent with the information requested of, and definition 
used for, investment advisers required to register on Form ADV. See 
17 CFR 279.1. See also Proposal, 76 FR 845, note 195 and 
accompanying text.
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    One commenter, as discussed above with respect to Item 6,\1087\ 
cited Item 8 and Schedules A, B, C and D as another illustration of the 
burden imposed by the reach of Form MA's questions to information about 
affiliates. Although Item 8 refers to ``control persons,'' \1088\ the 
Commission notes that the disclosure requirements in Item 8 apply only 
to ``every person that, directly or indirectly, controls the applicant, 
or that the applicant directly or indirectly controls'' and does not 
include sister affiliates (although a control relationship in other 
contexts is sometimes understood to include two persons under common 
control). The very point of registration is that, to be permitted to 
register as a municipal advisor, a firm must provide certain basic 
information that will enable the Commission to oversee the activities 
of, and exercise jurisdictional authority over, those who register. The 
Commission notes that Forms BD and ADV require filers to provide 
substantially similar information.
---------------------------------------------------------------------------

    \1087\ SIFMA Letter I, supra note 1065.
    \1088\ The definition of ``control'' does not refer to persons 
under common control. On the other hand, the definition of 
``associated person'' of a municipal advisor does include a person 
that is under common control with the municipal advisor.
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Item 9: Disclosure Information and Related DRPs
    As discussed in the Proposal, Item 9 requires an applicant to 
provide certain information concerning any criminal, regulatory, and 
civil judicial actions relating to the applicant or any of its 
associated persons \1089\ (collectively referred to hereinafter as 
``disciplinary history'').\1090\ If an applicant indicates in Item 9 
that there has been a history of such actions involving itself or any 
of its associated persons, the applicant must report further 
information in the DRPs that comprise Part II of Form MA, which are 
described below.\1091\ The Commission received several comments 
regarding the disclosures required by Item 9 and its related DRPs, 
which are discussed below.\1092\ The Commission is adopting Item 9 with 
certain changes. Although, as adopted, Item 9 generally seeks the same 
information as in the Proposal, some questions have been more narrowly 
tailored and broken down into subparts. These changes and the reasons 
for them are detailed below.
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    \1089\ See supra note 1054 (discussing the definition of 
``person associated with a municipal advisor'' or ``associated 
person of a municipal advisor'').
    \1090\ However, as discussed further below, the disclosures 
regarding criminal actions are limited to the period of the past ten 
years.
    \1091\ See infra note 1115 and accompanying text.
    \1092\ See infra notes 1119-1121 and accompanying text.
---------------------------------------------------------------------------

    As discussed in the Proposal,\1093\ Section 975(c)(3) of the Dodd-
Frank Act amended Section 15B of the Exchange Act to direct the 
Commission, by order, to censure, place limitations on the activities, 
functions, or operations of, or suspend for a period not exceeding 
twelve months, or revoke the registration of any municipal advisor, if 
it finds \1094\ that such municipal advisor has committed or omitted 
any act, or is subject to an order or finding, enumerated in 
subparagraph (A), (D), (E), (G) or (H) \1095\ of paragraph (4) of 
Section 15(b) of the Exchange Act; has been convicted of any offense 
specified in Section 15(b)(4)(B) \1096\ of the Exchange Act within ten 
years of the commencement of the proceedings under Section 15B(c); or 
is enjoined from any action, conduct, or practice specified in Section 
15(b)(4)(C) \1097\ of the Exchange Act.\1098\
---------------------------------------------------------------------------

    \1093\ See Proposal, 76 FR 845.
    \1094\ Such findings must be on the record after notice and 
opportunity for hearing and include a finding that the particular 
disciplinary action is in the public interest. See 15 U.S.C. 78o-
4(c)(2).
    \1095\ See 15 U.S.C. 78o(b)(4)(A), (D), (E), (G) and (H).
    \1096\ See 15 U.S.C. 78o(b)(4)(B).
    \1097\ See 15 U.S.C. 78o(b)(4)(C).
    \1098\ The Commission has the same authority with respect to 
municipal securities dealers. See 15 U.S.C. 78o-4(c).
---------------------------------------------------------------------------

    Generally, Item 9 was designed to elicit information from a 
municipal advisor concerning certain of its activities or the 
activities of its associated persons that could subject the municipal 
advisor to disciplinary action by the Commission under these statutory 
provisions. The Commission intends to use this information to determine 
whether to approve an application for registration, to decide whether 
to institute proceedings to revoke registration, or to place 
limitations on an applicant's activities as a municipal advisor. In 
addition, the information will also identify potential problem areas on 
which to focus examinations.\1099\
---------------------------------------------------------------------------

    \1099\ See infra Section III.B. (discussing approval or denial 
of registration). See also Proposal, 76 FR 846, note 205 and 
accompanying text.
---------------------------------------------------------------------------

    In addition to its value for the Commission's oversight of 
municipal advisors, generally, as well as to inform MSRB rulemaking, 
the Commission seeks this information because it may indicate that a 
municipal advisor is statutorily disqualified from acting as a 
municipal advisor.\1100\ Further, this information may be valuable to 
municipal entities and obligated persons who engage municipal advisors 
and to investors who may purchase securities from offerings in which 
municipal advisors have participated, as well as to other regulators.
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    \1100\ See infra Section III.B. and Proposal, 76 FR 846, note 
206 and accompanying text. See also Section 15B(a)(2) of the 
Exchange Act, which directs the Commission to deny registration to 
an applicant municipal advisor if, among other things, it finds that 
if the applicant was registered, its registration would be subject 
to suspension or revocation.
---------------------------------------------------------------------------

    The information to be disclosed is substantially similar to the 
information required to be disclosed in Form BD \1101\ for broker-
dealers and in Form ADV \1102\ for investment advisers.\1103\ In 
addition to information sought on Forms BD and ADV with respect to 
investment-related activities Form MA also requests parallel 
information with respect to municipal advisory activities.
---------------------------------------------------------------------------

    \1101\ See 17 CFR 249.501.
    \1102\ See 17 CFR 279.1.
    \1103\ See Proposal, 76 FR 846.
---------------------------------------------------------------------------

    The requested information is also generally consistent with the 
disclosure requirements of the temporary registration form, Form MA-
T.\1104\ However, as discussed in the Proposal, in Form MA-T, the 
Commission limited the disciplinary history disclosure requirements to 
``associated municipal advisor professionals.'' \1105\ As

[[Page 67553]]

explained in the Proposal, due to the short timeframe between the 
passage of the Dodd-Frank Act and the deadline for registration of 
municipal advisors on October 1, 2010, the Commission believed it was 
appropriate to limit the disclosure requirement to this subgroup of 
associated persons, which is limited to persons who are closely 
associated with an advisor's municipal advisory activities.\1106\
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    \1104\ As discussed in the Proposal, in Form MA-T, the 
disclosure required with respect to orders entered against the 
municipal advisor by regulatory authorities, and whether any court 
has enjoined the municipal advisor or associated person in 
connection with investment related activities, are limited to the 
past 10 years. See Proposal, 76 FR 846, note 209. On Form MA, the 
Commission is not including any time limitation on this disclosure, 
as discussed further below.
    \1105\ The Commission defined the term ``associated municipal 
advisor professional'' in the glossary section of Form MA-T to mean: 
(A) any associated person of a municipal advisor primarily engaged 
in municipal advisory activities; (B) any associated person of a 
municipal advisor who is engaged in the solicitation of municipal 
entities or obligated persons; (C) any associated person who is a 
supervisor of any persons described in subparagraphs (A) or (B); (D) 
any associated person who is a supervisor of any person described in 
subparagraph (C) up through and including, the Chief Executive 
Officer or similarly situated official designated as responsible for 
the day-to-day conduct of the municipal advisor's municipal advisory 
activities; and (E) any associated person who is a member of the 
executive or management committee of the municipal advisor or a 
similarly situated official, if any; and excludes any associated 
person whose functions are solely clerical or ministerial. See also 
Proposal, 76 FR 846, note 211 and accompanying text.
    \1106\ This includes those persons who are primarily engaged in 
an advisor's municipal advisory activities, have supervisory 
responsibilities over those primarily engaged in municipal advisory 
activities, are engaged in day-to-day management of the conduct of 
an advisor's municipal advisory activities, or are responsible for 
executive management of the advisor. See Temporary Registration Rule 
Release, 67 FR 54469. See also Proposal, 76 FR 846, note 212 and 
accompanying text.
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    In connection with the permanent registration regime, however, the 
Commission believes it is appropriate to require in Item 9 that a 
municipal advisor disclose the disciplinary history, as applicable, of 
all its associated persons, as that term is defined in Exchange Act 
Section 15B(e)(7), with the exclusion of employees who perform solely 
clerical, administrative, support, or other similar functions.\1107\ 
The Commission believes that, for purposes of the permanent 
registration regime, it is important to collect information about 
disciplinary matters for all such associated persons, because, under 
the Exchange Act, such matters may form the basis for an action to 
suspend or revoke a municipal advisor's registration.\1108\
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    \1107\ See supra note 1054.
    \1108\ See Section 15B(c)(2) and (c)(4) of the Exchange Act and 
Rule 15Bc4-1 thereunder, discussed infra Section III.A.9. of this 
release, and Section 15(b)(4) of the Exchange Act. See also 
Proposal, 76 FR 847, note 217 and accompanying text.
---------------------------------------------------------------------------

    Specifically, Item 9 as proposed and adopted requires disclosure of 
disciplinary history with respect to any partner, officer, director or 
branch manager of a municipal advisor, and any other employee who is 
engaged in the management, direction, supervision, or performance of 
any municipal advisory activities relating to the provision of advice 
to or on behalf of a municipal entity or obligated person with respect 
to municipal financial products or the issuance of municipal 
securities; and any person that directly or indirectly controls, is 
controlled by, or under common control with the municipal advisor. As a 
result, Form MA will capture information with respect to employees that 
engage in municipal advisory activities, even if that is not their 
primary activity. Form MA, in contrast to temporary Form MA-T, also 
requires disclosure with respect to controlling persons and other 
affiliates of the municipal advisor.
    As proposed and adopted, Item 9 asks whether the applicant or any 
associated person has, in the last ten years, been convicted of any 
felony, or pled guilty or nolo contendere to any charge of a felony in 
a domestic, foreign, or military court, or charged with any felony. 
Item 9 further asks whether the applicant or any associated person has 
been convicted of any misdemeanor or pled guilty or nolo contendere in 
a domestic, foreign, or military court to any charge of a misdemeanor 
in a case involving municipal advisor-related business,\1109\ 
investments or an investment-related business, or any fraud, false 
statements, or omissions, wrongful taking of property, bribery, 
perjury, forgery, counterfeiting, extortion or a conspiracy to commit 
any of these offenses, or charged with any misdemeanor of the type 
described above.\1110\ With respect to charges alone, an applicant must 
respond only with respect to charges that are currently pending.
---------------------------------------------------------------------------

    \1109\ The term ``municipal advisor-related'' is defined as 
``[c]onduct that pertains to municipal advisory activities 
(including, but not limited to, acting as, or being an associated 
person of, a municipal advisor).'' See Glossary.
    \1110\ The disclosures relating to felonies, in Form MA as in 
Form BD, concern felonies of any kind, and are not limited to 
felonies relating to municipal advisor-related and investment-
related business.
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    A clarification has been added in Item 9, as adopted, regarding the 
provision that disclosure of an event in the Criminal Action Disclosure 
section is not required if the date of the event was more than ten 
years ago. The applicant is instructed that, for purposes of 
calculating the ten-year period, the date of an event is the date that 
the final order, judgment, or decree was entered, or the date that any 
rights of appeal from preliminary orders, judgments, or decrees lapsed. 
This instruction provides a clear-cut guideline by requiring any past 
cases to be resolved with finality before the ten-year period of no 
criminal history can begin. The Commission notes that this defining 
line has been set forth explicitly in other contexts.\1111\
---------------------------------------------------------------------------

    \1111\ See, e.g., Item 11 of Form ADV.
---------------------------------------------------------------------------

    In the Regulatory Action disclosure section of Item 9, Form MA as 
proposed and adopted asks for information regarding whether the SEC or 
the CFTC has ever: found the municipal advisor or any associated person 
to have made a false statement or omission; found the municipal advisor 
or any associated person to have been involved in a violation of its 
regulations or statutes; found the municipal advisor or any associated 
person to have been a cause of a municipal advisor- or investment-
related business having its authorization to do business denied, 
suspended, revoked, or restricted; entered an order against the 
municipal advisor or any associated person in connection with municipal 
advisor- or investment-related activity; or imposed a civil money 
penalty on the municipal advisor or any associated person, or ordered 
the municipal advisor or any associated person to cease and desist from 
any activity. Item 9 of the form also asks for similar information with 
respect to other federal regulatory agencies, any state regulatory 
agency, or any foreign financial regulatory authority.
    Item 9 further asks for information regarding whether any SRO or 
commodity exchange ever found the municipal advisor or any associated 
person to have made a false statement or omission; found the municipal 
advisor or any associated person to have been involved in a violation 
of its rules (other than a violation designated as a ``minor rule 
violation'' under a plan approved by the SEC); found the municipal 
advisor or any associated person to have been the cause of a municipal 
advisor- or investment-related business having its authorization to do 
business denied, suspended, revoked, or restricted; or disciplined the 
municipal advisor or any associated person by expelling or suspending 
it from membership, barring or suspending its association with other 
members, or otherwise restricting its activities. It also asks whether 
the municipal advisor or its associated persons have had authorization 
to do business or to act as an attorney, accountant or federal 
contractor revoked or suspended.
    The Civil Judicial Disclosure section of Item 9, as proposed, asks 
whether any domestic or foreign court has ever (a) enjoined the 
applicant or any associated person in connection with any municipal 
advisor-related or investment-related activity; (b) found that the 
applicant or any associated person was involved in a violation of any 
municipal advisor- or investment-related activity; or (c) dismissed a 
municipal advisor- or investment-related civil action brought against 
the applicant or an associated person by a state or foreign financial 
regulatory authority. Form MA, as adopted, retains the same questions, 
although the latter

[[Page 67554]]

question has been revised to explicitly include actions brought by U.S. 
jurisdictions other than states.\1112\
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    \1112\ The Commission notes that the question, as proposed, 
relates to actions in ``any domestic or foreign court.'' The 
Commission believes this phrase implicitly includes courts in U.S. 
jurisdictions other than states, but is making this explicit to 
clarify its intent. If an action was brought and dismissed in a U.S. 
jurisdiction other than a state or a foreign jurisdiction, the 
information requested is no less pertinent to regulators and 
investors.
---------------------------------------------------------------------------

    As already indicated, the Criminal Action Disclosure section of 
Form MA as proposed and adopted requires disclosure of events that 
occurred within the last ten years.\1113\ With respect to Regulatory 
and Civil Judicial Actions, the form as proposed and adopted places no 
time limit on how far back in time events must be disclosed. The 
applicability of these disclosure requirements to any event in the past 
is consistent with the disclosure reporting requirements on Form BD, 
adopted pursuant to Section 15(b)(1) of the Exchange Act,\1114\ with 
one exception. In Form BD, the requirement to disclose any civil 
judicial injunctions is limited to the past ten years. In contrast, the 
Commission proposed its corresponding question in Form MA regarding 
past civil injunctions without limiting the disclosure requirement to 
the past ten years. The Commission received no comment on this 
disclosure requirement and is adopting it as proposed.
---------------------------------------------------------------------------

    \1113\ As is the case with respect to brokers and dealers 
pursuant to Section 15(b)(4) of the Exchange Act (15 U.S.C. 
78o(b)(4)), Section 15B(c)(2) of the Exchange Act (15 U.S.C. 78o-
4(c)(2)), as amended by the Dodd-Frank Act, limits the Commission's 
ability to impose sanctions on municipal advisors for convictions of 
felonies and misdemeanors to convictions occurring within ten years 
preceding the filing of any application for registration.
    \1114\ See Proposal, 76 FR 846.
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    As mentioned above, Form MA includes three separate kinds of DRPs 
to report information, as relevant, relating to criminal, regulatory, 
and civil actions involving the municipal advisor or its associated 
persons reported in Item 9.\1115\ The Commission is adopting each of 
these DRPs as proposed. Some modifications have been made, however, and 
these are discussed below.
---------------------------------------------------------------------------

    \1115\ An applicant is required to complete a separate DRP of 
the relevant kind for each event or proceeding in which the 
applicant itself or any of its associated persons was involved, but 
the same event or proceeding may be reported for more than one 
person or entity using one DRP.
---------------------------------------------------------------------------

    Generally, each DRP requires detailed information about the 
reported action, such as the court where the charges were filed and 
when, a description of the charge and the circumstances relating to it 
(in the case of criminal actions); the authority that initiated the 
action and a description of the allegations and the product-type (in 
the case of regulatory actions); or the initiator of the court action, 
the relief sought, and the product type (in the case of civil judicial 
actions). Applicants are also required to indicate the status of the 
charge or action, including resolution details as appropriate. As 
discussed in the Proposal and consistent with the limitations set forth 
in Section 15(b)(4)(B) \1116\ of the Exchange Act,\1117\ however, 
information on the Criminal Action DRP is limited to matters within the 
last ten years.
---------------------------------------------------------------------------

    \1116\ 15 U.S.C. 78o(b)(4)(B). See also 15 U.S.C. 78o-4(c)(2).
    \1117\ See Proposal, 76 FR 847.
---------------------------------------------------------------------------

    The Commission believes that it is important to collect the 
information required by the DRPs in addition to the basic disclosures 
in Item 9 to further the aims described above regarding the information 
required in Item 9: to assist it in deciding whether to grant or 
institute proceedings to deny an application for registration or to 
revoke a registration; to manage the Commission's regulatory and 
examination programs; to make such information available to the MSRB; 
and to obtain information that can be of value to municipal entities 
engaging the services of municipal advisors and to investors who may 
purchase securities from offerings in which municipal advisors have 
participated, as well as to other regulators.\1118\
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    \1118\ See Proposal, 76 FR 847.
---------------------------------------------------------------------------

    One commenter expressed concerns about the ``vast information-
gathering burden on applicants'' imposed by Item 9.\1119\ The commenter 
indicated that its concerns, which focused on the requirement to 
collect information regarding sister affiliates of a municipal advisor, 
applied ``particularly in the light of the required disciplinary 
history disclosures.'' \1120\ This commenter observed that Form ADV, 
upon which Form MA is based, does not require disclosure of a sister 
affiliate's disciplinary history. Another commenter stated that 
``[s]ome entities, such as banks, broker-dealers and investment 
advisers, may have many branches, and branch managers, that have 
nothing to do with the entity's municipal advisory business'' and urged 
that Form MA be amended to require disciplinary history ``only with 
respect to branch managers of branches where a municipal advisory 
business is conducted.'' \1121\
---------------------------------------------------------------------------

    \1119\ See SIFMA Letter I. See also supra notes 1065 and 1087.
    \1120\ See SIFMA Letter I.
    \1121\ See ABA Letter.
---------------------------------------------------------------------------

    In considering these comments, the Commission notes that Section 
15B of the Exchange Act assigns the Commission oversight and 
disciplinary responsibilities with respect to all associated persons of 
a municipal advisor, a category that includes sister affiliates and 
branches. Moreover, as discussed elsewhere in this release,\1122\ the 
Commission is clarifying with new Rule 15Bc4-1 that associated persons 
of municipal advisors are subject to censure, limitations on their 
activities, suspension, or being barred from being associated. As 
explained above, with regard to the value of obtaining information 
regarding financial industry and related activities of associated 
persons, the Commission believes that the ability to discern 
connections within a large network of affiliations and other 
associations is important for investigations of wrongdoing. The ability 
to gain, through disclosure requirements, a base of knowledge that 
includes actions of past wrongdoing is all the more important for these 
purposes.
---------------------------------------------------------------------------

    \1122\ See infra Section III.A.9.
---------------------------------------------------------------------------

    Regarding the comment concerning the burden of obtaining 
information about sister affiliates, the Commission notes that Form 
ADV, too, requests certain information regarding an investment 
adviser's sister affiliates--specifically, business information--as the 
commenter acknowledged. Moreover, as the commenter also acknowledged, 
Form ADV requests the disciplinary history of the investment adviser 
and all of its ``advisory affiliates'' (emphasis added)--i.e., all 
current employees, all officers, partners or directors, and all persons 
directly or indirectly controlling or controlled by the investment 
adviser. Given that a municipal advisor is in any case required to 
gather certain facts about its sister affiliates' business activities, 
the Commission believes that it is appropriate to request the added 
information about any disciplinary history of these affiliates, 
particularly in view of its potential value to regulators for purposes 
of investigation and enforcement discussed above.
    The DRPs associated with the disclosures in Item 9 are being 
adopted substantially as proposed. However, as discussed below, some 
additional disclosure requirements and other revisions have been 
included in the DRPs, as adopted.\1123\
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    \1123\ Many of the same or similar revisions have also been made 
to the DRPs of Form MA-I, including those other than the Criminal, 
Regulatory, and Civil Judicial Action DRPs of that form, and a 
discussion of all of them will not be repeated in the section on 
Form MA-I below.

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[[Page 67555]]

    Generally in all the DRPs, as proposed, when an amendment was filed 
seeking to remove a previously-filed DRP, the applicant was asked for 
the reason. Some, but not all of the DRPs, gave the option of checking 
a box indicating that the DRP was filed in error. Some, but not all of 
the DRPs, additionally asked for an explanation of the circumstances 
that gave rise to the error. For the sake of consistency and to provide 
regulators, municipal entities, and others with important detail, all 
the DRPs, as adopted, have been revised to include these elements. 
Also, in the Criminal Action DRP, an additional option is given to 
indicate why the DRP was filed an error. The new option is that the 
event or proceeding occurred more than ten years ago.\1124\
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    \1124\ See supra note 1116 and accompanying text.
---------------------------------------------------------------------------

    As proposed, if a DRP pertains to an associated person of the 
municipal advisor, the DRP asks whether that person is registered with 
the Commission. In the DRPs, as adopted, if the associated person is 
registered, the registration number must be provided.\1125\ The 
Commission believes that, if an applicant for registration with the 
Commission has an associated person that is otherwise registered with 
the Commission, such information is valuable for cross-referencing and 
enforcement and other regulatory purposes and providing it should not 
constitute an undue burden.\1126\
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    \1125\ In all the DRPs, as adopted, if an applicant indicates 
that the DRP concerns one or more associated persons, the form asks 
how many. Because the names of all such associated persons must be 
identified in the DRP in any case, tallying the number involves no 
additional disclosure and will act as a cross-check to ensure that 
the information provided is complete.
    \1126\ On the other hand, the requirement to name the employer 
of an associated person when the activity occurred that led to an 
action has been eliminated.
---------------------------------------------------------------------------

    Each DRP, as proposed, asked if the municipal advisor or associated 
person whom the DRP concerned was registered through the IARD or CRD 
system or the municipal advisor was previously registered on Form MA-T, 
whether the advisor or associated person previously filed a DRP (with 
Form ADV, BD, or U4) or the advisor filed disclosure on Form MA-T 
regarding the same event. The adopted version of each DRP now asks 
whether an accurate and up-to-date DRP containing the information 
regarding the applicant or associated person required by the DRP is 
already on file in the IARD or CRD system (with a Form ADV, BD, or U4) 
or in the SEC's EDGAR system (with a Form MA or Form MA-I), and, if so, 
to specify the type of filing and provide specific information 
regarding the name of the filer, the CRD Number (where relevant), the 
date, and disclosure or accession number of the relevant other 
form.\1127\ As discussed above,\1128\ the ability to incorporate by 
reference any required information about the disciplinary history of an 
applicant or associated person from a DRP that already has been filed 
relieves the regulatory burden on applicants who can do so. At the same 
time, however, sufficient information about where the information is 
filed is necessary for regulators, municipal entities, and investors to 
be able to access it with reasonable ease.
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    \1127\ The DRPs, as adopted, do not provide the option of 
indicating that the information is already on file in a Form MA-T, 
as Form MA-T does not require the disclosures required in the DRPs.
    \1128\ See supra note 995 and accompanying text.
---------------------------------------------------------------------------

    As proposed, some of the DRPs, where relevant, asked for the name 
of the federal, military, state or foreign court where a case was 
formally brought or appealed. In the DRPs, as adopted, an applicant is 
presented with a list of types of courts from which to choose and must 
specifically check the type of court in which the case was 
brought.\1129\ In addition, ``international court'' and ``other'' have 
been added to the choices (and, if the latter is checked, the applicant 
must specify the type) and the street address and postal code of the 
court will now need to be provided in addition to the city or county 
and state or country. Requests for information in all the DRPs 
regarding courts and other panels have been made consistent to require 
the name of the case (in addition to the docket number, as proposed). 
The Commission believes that these additions will enable regulators, 
municipal entities, and investors to more easily locate information 
that may be relevant to them and, if need be, address further 
inquiries. The Commission further believes that complete responses to 
the questions in the DRPs, as proposed, would have supplied most of 
this same information.\1130\
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    \1129\ In the electronic form, the applicant must make a 
selection and thus cannot avoid answering the question specifically.
    \1130\ As proposed, the DRP asked the applicant to describe 
details of the event in narrative form, and to, among other things, 
``include charge(s)/charge Description(s), and for each charge 
provide: (1) Number of counts, (2) felony or misdemeanor, [and the] 
(3) plea for each charge'' and ``provide a brief summary of 
circumstances leading to the charge(s) as well as the disposition.'' 
The proposed version separately required the applicant to 
``[i]nclude, for each charge, (a) Disposition Type (e.g., convicted, 
acquitted, dismissed, pretrial, etc.), (b) Date, (c) Sentence/
Penalty, (d) Duration (if sentence-suspension, probation, etc., (e) 
Start Date of Penalty, (f) Penalty/Fine Amount, and (g) Date Paid.'' 
It also required an applicant to provide ``a brief summary of 
circumstances leading to the charge(s) as well as the disposition'' 
and to include ``the relevant dates when the conduct which was the 
subject of the charge(s) occurred.'' The Commission also notes that 
the Criminal Action DRP of Form MA-I, both as proposed and adopted, 
asks for information about amended or reduced criminal charges.
---------------------------------------------------------------------------

    For the same reason, similar changes have been introduced into the 
DRPs regarding regulatory adjudications and civil judicial actions. 
Where the proposed Regulatory Action DRP asked the filer to indicate 
whether a regulatory proceeding was initiated by the SEC, another 
federal authority, state, SRO, or foreign authority, the forms as 
adopted add, as choices, the CFTC, a federal banking agency, the 
National Credit Union Administration, or other regulator or authority 
that the applicant must specify. In addition, the applicant must now 
indicate, as applicable, the name of the administrative proceeding, 
commission or agency hearing, or other regulatory proceeding or forum 
in which the action was brought and the street address and postal code 
of the location where the case was heard. Specific choices added with 
respect to who initiated a Civil Judicial Action include the CFTC, 
another federal authority (which the applicant must specify), and a 
municipal advisory firm.
    As proposed, not all the DRPs contained instructions to the 
applicant regarding the language to be used in naming or describing the 
charges brought in a foreign jurisdiction. As adopted, the forms 
consistently require the applicant to provide all the information 
requested in English. The Commission believes that this requirement is 
appropriate in an application for U.S. registration designed to obtain 
information on behalf of U.S. regulators, municipal entities, and 
investors.
    As proposed, in the Criminal Action DRP, in a case where criminal 
charges were brought against a firm or organization over which the 
applicant or associated person had control, the applicant was required 
to indicate whether the firm or organization was engaged in a municipal 
advisor-related business. In the DRP, as adopted, the question has been 
revised to ask, in addition, whether the firm or organization was 
engaged in an investment-related business.\1131\ Because of the close 
relationship between investment-related business and municipal advisory 
activities, the Commission believes that it is important for 
regulators, municipal entities, and

[[Page 67556]]

investors in municipal securities to have this information.
---------------------------------------------------------------------------

    \1131\ In the form, as proposed, the applicant would have been 
required to indicate only whether the firm or organization was in 
municipal advisor-related business.
---------------------------------------------------------------------------

    The instructions in the Criminal Action DRP on how to report an 
event or proceeding have been revised in the form as adopted.\1132\ No 
substantive changes have been introduced in the reporting requirements. 
The revisions have been made solely for purposes of clarity. The 
adopted version of the instructions states: ``Use this DRP to report 
all charges, including multiple counts of the same charge, arising out 
of the same event and filed in one criminal action. The same DRP may be 
used for more than one person with respect to the same event or 
proceeding. Separate criminal actions arising out of the same event, 
and unrelated criminal actions, must be reported on separate DRPs.'' 
The Commission believes that the revised instructions, which are 
similar to instructions that appear in the DRPs for Forms BD and ADV, 
will help assure that the disciplinary information provided in response 
can be easily understood.
---------------------------------------------------------------------------

    \1132\ In the Criminal Action DRP, as proposed, the applicant 
was instructed: ``Use a separate DRP for each event of proceeding. 
The same event or proceeding may be reported for more than one 
person or entity using one DRP . . . Multiple counts of the same 
charge arising out of the same event(s) should be reported on the 
same DRP. Use this DRP to report all charges arising out of the same 
event. Unrelated criminal actions, including separate cases arising 
out of the same event, must be reported on separate DRPs. One event 
may result in more than one affirmative answer to the [questions 
asked earlier in the DRP].''
---------------------------------------------------------------------------

    An instruction has been added to the Criminal Action DRP advising 
applicants that applicable court documents must be attached to, and 
filed with, the DRP if not previously submitted.\1133\
---------------------------------------------------------------------------

    \1133\ This instruction, which was included in the proposed 
Criminal Action DRPs for Form MA-I, was not included in the proposed 
Criminal Action DRP for Form MA. The Commission notes that Form BD 
also requires applicable court documents to be attached to the 
Criminal Action DRP in that form.
---------------------------------------------------------------------------

    In the Criminal Action DRP, as proposed, an applicant was not 
required specifically to indicate whether the original criminal charge 
was amended or reduced. As adopted, the DRP asks for this information 
and for the relevant date. The Commission believes that the clearer 
picture of the disciplinary history that will emerge when this 
information is supplied should assist regulators, municipal entities, 
and investors in assessing the credentials and background of the 
municipal advisor and its associated persons.
    In the Criminal Action DRP, as proposed, an applicant was not 
required to state, if the case was on appeal, to whom it was appealed 
and the date of the appeal. As adopted, the DRP now requires these 
disclosures.\1134\
---------------------------------------------------------------------------

    \1134\ The Commission notes that the Regulatory and Civil 
Judicial Action DRPs, when proposed, already required similar 
information regarding appeals.
---------------------------------------------------------------------------

    The Criminal Action DRP, as proposed, asked for information 
generally about the disposition of the relevant action, in narrative 
form, and to include details concerning any sentence or penalty 
imposed, its start date, and its duration, and the amount and date of 
payment.\1135\ As adopted, the form requires the applicant to choose 
from among 16 types of disposition of a case (or to check ``other,'' 
and specify the other), and to further identify any other type of 
disposition. Choices are also provided to describe specifically the 
disposition of any appeal.\1136\ The DRP, as adopted, further asks 
specifically whether any incarceration was imposed in connection with 
the action, and, if so, the duration, the start and end dates, and any 
concurrent sentences.\1137\ It also asks, in question-by-question 
format, whether any portion of a monetary penalty was reduced or 
suspended, whether it has been paid in full, and, if not, how much 
remains unpaid. The Commission believes that these revisions will help 
ensure that the description of the disposition is complete.
---------------------------------------------------------------------------

    \1135\ See supra note 1130.
    \1136\ These choices are: affirmed; vacated and returned for 
further action; or vacated/final. An applicant may also respond 
``other,'' in which case the other type of disposition must be 
specified.
    \1137\ The DRP, as adopted, also asks specifically whether any 
sentence or any other penalty is ordered, and, if so, to list each 
type, giving the examples of prison, jail, probation, community 
service, counseling, education, or other (which must be specified).
---------------------------------------------------------------------------

    As proposed, the Regulatory Action DRP required the applicant to 
check off any of 14 types of ``principal sanctions'' \1138\ in the case 
(or to check ``other,'' and specify the other type), and to further 
identify any other sanctions. As adopted, the DRP does not 
differentiate between principal sanctions and any other kind of 
sanction, but adds more types to the list in addition to requiring the 
applicant to identify any others. This, too, will help ensure that the 
filer provides appropriate detail, thereby enabling interested parties 
to better assess the credentials and background of the applicant and 
its associated persons.
---------------------------------------------------------------------------

    \1138\ The DRP, as adopted, clarifies that the question refers 
to the sanctions sought.
---------------------------------------------------------------------------

    Similarly--and for the same reason--the Civil Judicial Action DRP 
no longer differentiates between ``principal relief'' sought and other 
relief, and provides a longer list of possible sanctions or relief 
sought from among which the applicant must select in addition to 
identifying any other sanctions or relief sought.
    The questions in the Regulatory and Civil Judicial Action DRPs 
regarding how a case was resolved, like the questions in the Criminal 
Action DRP regarding disposition, have been revised in the DRPs, as 
adopted, to be more specific and to offer more choices from among which 
an applicant must select, for the same reason as in the Criminal Action 
DRP. The Commission believes that these revisions will help ensure that 
the description of the disposition is complete. More possible answers 
are provided from among which the applicant must choose to describe 
specifically the type of resolution that resulted (acceptance, waiver, 
and consent, settlement, dismissal, judgment rendered, etc.) and 
choices are now given regarding how any appeal was resolved.
    Similarly, more choices are presented to describe any sanctions 
that were ordered in the relevant Regulatory or Civil Judicial 
Action.\1139\ In addition, questions are broken out into separate 
sections regarding the details of three specific types of sanctions 
and/or conditions of sanctions: (a) Bars, injunctions, and suspensions; 
(b) requalifications (by examination, retraining, or other process); 
and (c) monetary sanctions.\1140\
---------------------------------------------------------------------------

    \1139\ For example, the choices in the Regulatory Action DRP, as 
proposed, were: monetary/fine; revocation/expulsion/denial; censure; 
disgorgement/restitution; cease and desist/injunction; bar; 
suspension; and other (which must be specified). The choices added 
in the adopted version include: civil and administrative penalties/
fines; expulsion; prohibition; reprimand; rescission; 
requalification; revocation; and undertaking.
    \1140\ For example, in the Regulatory and Civil Judicial Action 
DRPs, as proposed, the applicant was asked broadly to describe, in 
narrative form: ``Sanction detail: if suspended, enjoined or barred, 
provide duration including start date and capacities affected 
(General Securities Principal, Financial Operations Principal, 
etc.). If requalification by exam/retraining was a condition of the 
sanction, provide length of time given to requalify/retrain, type of 
exam required and whether condition has been satisfied. If 
disposition resulted in a fine, penalty, restitution, disgorgement 
or monetary compensation, provide total amount, portion levied 
against the applicant or an associated person, date paid and if any 
portion of penalty was waived.''
    By contrast, in the DRPs as adopted, similar information is 
requested in question-by-question format in each of the separate 
sections described above. Questions relating to bars, injunctions, 
and suspensions are further subdivided into a separate subsection 
for each, and the questions distinguish between temporary and 
permanent bars. The applicant is also instructed to report any 
additional details if one or more bars, injunctions, or suspensions 
were imposed with regard to different activities and the terms 
specify different time periods, and a similar instruction is 
included with regard to requalifications. Details similar to those 
specified in the Criminal Action DRP, as adopted, see supra notes 
1135-1137 and accompanying text, are also requested.

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[[Page 67557]]

    As proposed, the Regulatory and Civil Judicial Action DRPs asked 
the applicant to provide a brief summary of details relating to the 
action's status with relevant terms, conditions, and dates. As adopted, 
the DRPs specifically ask whether any limitations or restrictions are 
in effect while the case is pending or on appeal, as applicable. For 
pending cases, the DRPs also ask for the date that notice or other 
process was served.\1141\ Here, too, the Commission believes that 
specifying these details as required elements will serve to ensure that 
the applicant's description is complete.
---------------------------------------------------------------------------

    \1141\ As previously mentioned, the DRPs, as proposed, already 
requested the date of any appeal. See supra text accompanying note 
1134.
---------------------------------------------------------------------------

    The Civil Judicial Action DRP, as proposed, did not ask for the 
full name of the defendant or ask whether the applicant is a named 
defendant. As adopted, the DRP requires this information, and, if the 
applicant is not a named defendant, further requires a description of 
how the action involves the defendant. This information should help 
interested parties more easily determine the role of the applicant or 
associated person in the civil judicial action as part of their 
assessment of the applicant.
    The DRPs, as adopted, now ask for various minor additional 
disclosures reflecting a level of detail generally similar to the 
disclosures discussed above, which the Commission believes should serve 
to enhance the usefulness of the information to regulators and the 
benefit it will have for municipal entities and the investing public 
without unreasonably burdening applicants for registration.\1142\
---------------------------------------------------------------------------

    \1142\ Some examples, when an applicant is asked to check the 
type of product involved in a case, more choices are included in the 
list of possibilities than in the proposed version. When the 
resolution of a case is an order, the applicant is asked whether it 
is a final order based on violations of any laws or regulations that 
prohibit fraudulent or deceptive conduct. Several changes were made 
so that if one or more DRPs asks a follow-up question when a certain 
response is given, other DRPs are consistent and ask the same 
follow-up question. Thus, each time an applicant selects more than 
one resolution of a case as having occurred or if the choice that 
the applicant has selected does not adequately summarize the 
resolution, the applicant must provide an explanation. Each time an 
applicant indicates that a relevant date provided is not exact, an 
explanation is required. See also infra note 1147. In addition, 
throughout the DRPs, instructions have been revised to offer more 
clarity on how to file a DRP or when a separate DRP must be filed 
regarding the same event. See also supra note 968.
---------------------------------------------------------------------------

Item 10: Small Businesses
    As described further in Section IX below, the Commission is 
required by the Regulatory Flexibility Act (``RFA'') \1143\ to consider 
the effect of its regulations on small entities. The Commission's rules 
do not define ``small business'' or ``small organization'' for purposes 
of municipal advisors. As discussed in the Proposal, the Small Business 
Administration (``SBA'') defines small business for purposes of 
entities that provide financial investment and related activities as a 
business that had annual receipts of less than $7 million during the 
preceding fiscal year and is not affiliated with any person that is not 
a small business or small organization.\1144\ The Commission proposed 
to use the SBA's definition of small business to define municipal 
advisors that are small entities for purposes of the RFA.\1145\ This 
definition will remain unchanged in the rules as adopted.
---------------------------------------------------------------------------

    \1143\ 5 U.S.C. 601 et seq.
    \1144\ See 13 CFR 121.201. See also Proposal, 76 FR 848, note 
222 and accompanying text.
    \1145\ See Proposal, 76 FR 848.
---------------------------------------------------------------------------

    The Commission proposed Item 10 of Form MA to enable it to 
determine how many applicants meet the SBA's definition of ``small 
business'' or ``small organization'' as applied to municipal advisors. 
Thus, Item 10 requires each applicant to disclose whether it had annual 
receipts of less than $7 million during its most recent fiscal year (or 
during the time it has been in business, if it has not completed its 
first fiscal year in business). Item 10 also requires each applicant to 
disclose whether any business or organization with which it is 
affiliated had annual receipts of more than $7 million in its most 
recent fiscal year (or during the time it has been in business, if it 
has not completed its first fiscal year in business).
    The Commission received no comments on the information requested by 
Item 10 and is adopting this item as proposed.\1146\
---------------------------------------------------------------------------

    \1146\ Several commenters did raise issues with respect to the 
impact that the new registration requirements could have, generally, 
on small businesses. See, e.g., supra note 986, and see also supra 
note 980. Such concerns are addressed in Section IX below.
---------------------------------------------------------------------------

Technical and Other Changes
    In addition to the modifications discussed above, a number of non-
substantive, technical and clarifying changes have been made to Form 
MA, its schedules and the DRPs as adopted.\1147\ Further, some of the 
multi-pronged questions have been broken down into separate parts to 
make the form clearer and more user-friendly.\1148\ The Commission has 
also made certain additional changes to correct inadvertent omissions 
in the form, as proposed.\1149\
---------------------------------------------------------------------------

    \1147\ For example, new guidance is included on Form MA, as 
adopted, that reminds applicants that they must supply supporting 
documents where applicable, and that Form MA-NR must be included for 
non-residents. Filers are also advised that false statements or 
omissions may result in administrative or civil actions, in addition 
to the other legal consequences mentioned in the Proposal. 
Instructions have been included regarding non-US telephone and fax 
numbers. References to U.S. state jurisdictions have been amended to 
consistently include other types of U.S. jurisdictions, and the 
choices on the forms, accordingly, include such jurisdictions by 
name. See also supra note 968.
    \1148\ For example, the questions in the DRPs regarding 
associated persons are divided into separate sections for firms and 
organizations, on the one hand, and natural persons on the other. 
Many of the questions now present applicants with a series of 
choices that they can check off. Some questions are renumbered, and 
some subsections have been given titles where there were none in the 
proposed version.
    \1149\ For example, the Criminal Action DRP requires that if the 
applicant is amending a previously filed DRP pertaining to an 
associated person because it was filed in error, the applicant is 
required to explain the circumstances. The Proposal inadvertently 
omitted a requirement to explain the circumstances when the error 
pertained to the applicant itself. The Regulatory and Civil Judicial 
Action DRPs as previously proposed and now adopted require an 
explanation in both cases.
---------------------------------------------------------------------------

Execution Page
    Form MA includes an Execution Page that an authorized person of the 
municipal advisor filing the form is required to sign electronically 
before the form can be submitted.\1150\ The Commission received no 
comments regarding the Execution Page, other than on the self-
certification contained therein. For reasons discussed below, the 
Commission is removing the self-certification section of the Execution 
Page in Form MA but otherwise is adopting the Execution Page 
substantially as proposed.\1151\
---------------------------------------------------------------------------

    \1150\ See Proposal, 76 FR 849. As proposed, the Execution Page 
(except for the self-certification section) is similar in purpose to 
the Execution Page of Form ADV (see 17 CFR 279.1), but deletes 
references to state registration, bonding requirements and other 
inapplicable components, and will require a non-resident municipal 
advisor to execute a separate form (Form MA-NR) to designate agent 
for service of process. See infra Section III.A.6.
    \1151\ The description immediately below relates to the 
Execution Page as adopted. Discussion of the removal of the self-
certification section follows.
---------------------------------------------------------------------------

    An authorized person signs the form by typing his or her name and 
submitting the form on behalf of the municipal advisor. The authorized 
person is required to sign one of two different Execution Pages, 
depending on whether the municipal advisor is resident in the United 
States or a ``non-resident'' municipal advisor. In either case, by 
signing the Execution Page, the authorized person states that he or she 
is signing Form MA on behalf, and with the authority, of the municipal 
advisor and affirms that the information in Form MA is true and 
correct.

[[Page 67558]]

    The Execution Page for both resident and non-resident municipal 
advisors requires the signatory to certify that the books and records 
of the municipal advisor will be preserved and available for inspection 
and to authorize any person with custody of the books and records to 
make them available to federal representatives. On the Execution Page 
for non-resident municipal advisors, the signatory, in signing the 
form, also states that the municipal advisor agrees that it will 
provide to the Commission, at its own expense, copies of all books and 
records that the municipal advisor is required to maintain by law. As 
discussed in the Proposal, the Commission believes that, before 
granting registration to a domestic or non-resident municipal advisor, 
it is appropriate to obtain assurance that such person has taken the 
necessary steps to be in the position to provide the Commission with 
prompt access to its books and records and to be subject to inspection 
and examination by the Commission.\1152\
---------------------------------------------------------------------------

    \1152\ See Proposal, 76 FR 848.
---------------------------------------------------------------------------

    On the Execution Page for domestic municipal advisors, the 
signatory also states that it appoints certain officials as agents for 
service of process in the state where the advisor maintains its 
principal office or place of business. Specifically, a domestic 
municipal advisor appoints the Secretary of State or other legally 
designated officer in the state where it maintains its principal office 
and place of business. As discussed in the Proposal, this appointment 
allows private parties and the Commission to bring actions against the 
municipal advisor by delivering necessary papers to the appointed 
agent.\1153\ The agent is able to receive any process, pleadings, or 
other papers in any action that arises out of or relates to or concerns 
municipal advisory activities of the municipal advisor. The agent also 
is able to receive service for investigation and administrative 
proceedings.
---------------------------------------------------------------------------

    \1153\ See id. Appointment of agent for service of process for 
non-resident municipal advisors is discussed further below. See 
infra Section III.A.6 (discussing Form MA-NR).
---------------------------------------------------------------------------

    On the Execution Page for non-resident municipal advisors, the 
signatory on behalf of the registrant also states that an opinion of 
counsel is attached as an exhibit to Form MA and that the municipal 
advisor can, as a matter of law, provide the Commission with access to 
the books and records of the municipal advisor, as required by law, and 
that the municipal advisor can, as a matter of law, submit to 
inspection and examination by the Commission.\1154\ As discussed in the 
Proposal, each jurisdiction may have a different legal framework with 
respect to its laws (e.g., privacy laws) that may limit or restrict the 
Commission's ability to receive information from a municipal 
advisor.\1155\ Providing an opinion of counsel that a municipal advisor 
can provide access to its books and records and can be subject to 
inspection and examination allows the Commission to better evaluate a 
municipal advisor's ability to meet the requirements of registration 
and ongoing supervision.\1156\ Failure to provide an opinion of counsel 
may be a basis for the Commission to deny an application for 
registration.\1157\
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    \1154\ The opinion of counsel is required by Rule 15Ba1-6, as 
adopted. General Instruction 13 (General Instruction 14 as proposed) 
now states that the non-resident municipal advisor filing Form MA 
must attach the opinion as an exhibit to the Execution Page.
    \1155\ The Execution Page for non-resident municipal advisors, 
as adopted, however, does not require the opinion of counsel to 
state that the municipal advisor is able, as a matter of law, to 
submit specifically to ``onsite'' inspection.
    \1156\ See Proposal, 76 FR 848.
    \1157\ See Section 15B(a)(2), providing that a municipal advisor 
applying for registration must file with the Commission an 
application for registration in such form and containing such 
information and documents concerning such municipal advisor as the 
Commission, by rule, may prescribe as necessary or appropriate in 
the public interest or for the protection of investors. Thus, 
failure to provide an opinion of counsel, as required, is a basis 
under the statute for the Commission to conclude that the 
requirements of Section 15B(a)(2) are not satisfied.
---------------------------------------------------------------------------

    As proposed, Form MA required the authorized person of a municipal 
advisor completing the Execution Page to certify separately on behalf 
of the municipal advisor that it and every natural person associated 
with it had met, or within any applicable required timeframes would 
meet, such standards of training, experience, and competence, and such 
other qualifications, including testing, for a municipal advisor and 
natural persons associated with it, required by the Commission, the 
MSRB, or any other relevant SRO. Under the Proposal, the authorized 
person, on behalf of the municipal advisor also would have been 
required to certify that the municipal advisor had conducted an initial 
or annual review, as applicable, of the municipal advisor's business, 
and had reasonably determined that the municipal advisor: (a) could 
carry out the activities described in the items that are checked in 
Item 4-K (Applicant's Business Relating to Municipal Securities) of 
Form MA; \1158\ (b) could comply with all applicable regulatory 
obligations; and (c) had met such regulatory obligations during the 
last year (or during such shorter period if the application was an 
initial application for registration). For these purposes, such 
applicable regulatory obligations were to include obligations under the 
federal securities laws and rules promulgated thereunder and applicable 
rules promulgated by the MSRB, or any other relevant SRO.
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    \1158\ Under the Proposal, factors to be considered in 
determining whether a municipal advisor can carry out the described 
activities included, but were not limited to, whether the municipal 
advisor has, with respect to the described activities, the 
appropriate technology systems and equipment; the appropriate 
financial resources; adequate staffing with appropriate skill sets, 
training, and expertise; and adequate facilities, such as office 
space, as appropriate. See Proposal, 76 FR 849.
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    Under the Proposal, the authorized person also would have been 
required to certify that the municipal advisor had documented this 
review process and would maintain all documents relating to the review 
in accordance with Rule 15Ba1-7 under the Exchange Act.\1159\ Such 
certification would have been required in conjunction with the filing 
of an initial application for registration as a municipal advisor and 
annually thereafter.\1160\
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    \1159\ Proposed Rule 15Ba1-7 also required municipal advisory 
firms to make and keep a record of the initial or annual review, as 
applicable, conducted by the municipal advisory firm of its business 
in connection with its self-certification on Form MA. Because the 
Commission is not adopting a self-certification requirement, the 
Commission is also not adopting this corresponding books and records 
requirement. See infra note 1344.
    \1160\ See proposed Rule 15Ba1-4(e). The rule required the 
annual self-certification to be filed by municipal advisory firms 
within 90 days of the end of the municipal advisor's fiscal year, or 
within 90 days of the end of the calendar year for municipal 
advisors that are sole proprietors.
---------------------------------------------------------------------------

    The Commission received one comment letter opposing the proposed 
self-certification requirement.\1161\ The commenter provided that self-
certification should not be required and noted that similar 
certifications are not

[[Page 67559]]

required with Form BD and Form ADV.\1162\ The commenter also asserted 
that requiring a municipal advisory firm to conduct an annual review of 
its business and determine that it can carry out its municipal advisory 
activities, including requiring the applicant to document the review 
process, would be costly, burdensome, and confusing. Further, the 
commenter noted that the Commission and the MSRB have yet to propose 
standards that are the subject of the certification. Accordingly, the 
commenter believed that, without such standards or related guidance, it 
is premature for prospective advisors to even comment. The commenter 
added that a municipal advisor would be unsure as to how to conduct the 
review, which may lead to unnecessary expense and exposure to liability 
(since the certification would be ``reports'' and therefore subject the 
municipal advisor to criminal liability). The commenter suggested that, 
if the Commission's interest is in ensuring competence of a municipal 
advisor, a better approach would be to create an MSRB examination 
process with qualifications clearly defined by the MSRB.
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    \1161\ Further, the Commission received two comment letters 
that, although did not object to the proposed self-certification 
requirement, related to the Commission's request for comment on an 
alternative to self-certification. See infra notes 1164 and 1165. 
The Commission also received many letters commenting, in the context 
of opposing the Commission's proposal to exclude appointed members 
of the governing body of a municipal entity from its interpretation 
of ``employee of a municipal entity,'' that the cost to comply with 
``reporting, record keeping, and certification requirements'' and 
the related continuing education requirements and training, would 
take away from the board members' full-time jobs and families, and 
that such costs were unjustified. See, e.g., letter from Susan N. 
Kelly, Senior Vice President of Policy Analysis and General Counsel, 
and Diane Moody, Director, Statistical Analysis, American Public 
Power Association, dated February 22, 2011; Nick Costanzo, Vice 
President Strategic, Financial, and Management Services, City of El 
Paso, Texas, dated February 22, 2011; and letter from Ben Gorzell, 
Chief Financial Officer and Michael D. Bernard, City Attorney, City 
of San Antonio, dated February 18, 2011.
    \1162\ See SIFMA Letter I.
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    After careful consideration of the comment received, the Commission 
is not requiring self-certification in Form MA, as adopted. As the 
commenter notes, Forms BD and ADV, on which Form MA is based, do not 
require self-certification. Further, as pointed out by the commenter, 
the MSRB has yet to propose standards that are the subject of the 
certification. Accordingly, at this time, the Commission does not 
believe that self-certification should be required of municipal 
advisors.
    In response to the Commission's request for comment regarding an 
independent third party review and whether the Commission should 
mandate a minimum level of review as an alternative to the self-
certification requirements,\1163\ the Commission received two letters. 
The two commenters did not object to the self-certification requirement 
but did oppose any third-party review or audit.\1164\ Both commenters 
assert that such a review would impose unnecessary costs, and that 
Commission review would be sufficient. One of these commenters also 
opposed any minimum review standards.\1165\ In concurrence with these 
commenters, the Commission has determined at this time not to establish 
a minimal level of review or require review by an independent third-
party.
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    \1163\ See Proposal, 76 FR 850.
    \1164\ See NAIPFA Letter I and Joy Howard WM Financial 
Strategies Letter. The Commission also received a third comment 
letter opposing, as overly-burdensome, any independent party review 
either prior to the filing of an initial application or on an annual 
or periodic basis thereafter. See Public FA Letter.
    \1165\ See NAIPFA Letter I.
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c. Information Requested in Form MA-I
    As discussed above, although Form MA-I was proposed as a 
registration form for all natural person municipal advisors, Rule15Ba1-
3, as adopted, exempts a natural person municipal advisor from the 
requirement to register, if such person is associated with a registered 
municipal advisory firm and engages in municipal advisory activities 
solely on behalf of a registered firm.\1166\ Rule 15Ba1-2(b)(1), as 
adopted, requires a municipal advisory firm, on behalf of which an 
associated natural person engages in municipal advisory activities, to 
file Form MA-I with the Commission with respect to each such 
individual. Pursuant to Rule 15Ba1-2(b)(2), as adopted, a natural 
person who is a sole proprietor must file Form MA-I in addition to 
filing an application to register as a municipal advisor on Form MA.
---------------------------------------------------------------------------

    \1166\ See supra note 938.
---------------------------------------------------------------------------

    The Commission received more than 30 comment letters relating to 
proposed Form MA-I. About 25 of these letters concerned the impact that 
the registration requirement for natural person municipal advisors 
would have if applied to volunteer members of public boards, in view of 
the fact that registration would require completing a Form MA-I. 
Because, under the rules as adopted, volunteer public board members 
would generally not be required to register, the Commission believes 
the concerns of these commenters have been otherwise addressed.\1167\
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    \1167\ See supra Section III.A.1.c.i. See also infra note 1187.
---------------------------------------------------------------------------

    The remaining comment letters concerned the nature and scope of the 
information requested by Form MA-I and are discussed below.\1168\ After 
considering the comments, the Commission is adopting Form MA-I 
substantially as proposed. However, the Commission is modifying Form 
MA-I to require a few additional points of information and is also 
eliminating some data requests. In addition, some of the language in 
Form MA-I has been modified to reflect the fact that, under the rules, 
as adopted, the form is no longer an application for registration and, 
except in the case of sole proprietors, will be completed by a firm, 
rather than by the individual with respect to whom the form is being 
filed.\1169\
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    \1168\ In addition, the Commission notes that a number of the 
comments received regarding proposed Form MA apply similarly to 
proposed Form MA-I. Examples include concerns about the duplicative 
nature of seeking information already gathered through other 
registration programs; confidentiality issues; and compliance 
burdens. These comments have been discussed in the section on Form 
MA above and are not further addressed here. See, e.g., supra notes 
991-992 and 995-996 and accompanying text and the Commission's 
response in the discussion following these comments.
    \1169\ For example, the form will now no longer refer to the 
individual as ``the applicant'' or ``the registrant.''
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    As a general matter, the information requested on Form MA-I, as 
proposed and adopted, is similar to information requested on FINRA's 
Form U4.\1170\ Some questions on Form U4 have been adapted for purposes 
of Form MA-I to relate specifically to municipal advisors. Other 
questions have been omitted as not necessary or appropriate in the 
municipal advisor context.
---------------------------------------------------------------------------

    \1170\ See Form U4, supra note 992. See also Proposal, 76 FR 
851, note 237 and accompanying text.
---------------------------------------------------------------------------

    One commenter argued that information sought by Form MA-I largely 
duplicates information relating to associated persons sought by Form 
MA.\1171\ The Commission acknowledges that a municipal advisory firm 
that registers by filing Form MA must already provide information on 
that form concerning the disciplinary history of each of its associated 
persons, including employees providing advice on behalf of the firm. 
However, there is very little overlap between the information required 
by Form MA and that required by Form MA-I that cannot be incorporated 
by reference.\1172\ Moreover, Form MA-I elicits additional information 
that would not be provided by the firm as part of its Form MA. For

[[Page 67560]]

example, Form MA-I requires the following information about each 
relevant natural person that would not be found on his or her firm's 
Form MA if engaged in municipal advisory activities on behalf of a firm 
or on his or her own Form MA if acting as a sole proprietor: social 
security number of the individual; other names of the individual; his 
or her residential and employment history; the offices of the firm 
where the individual is located and from which he or she is supervised; 
the names of any other municipal advisory firms that employ the 
individual; and any other businesses in which the individual is 
engaged.\1173\
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    \1171\ See SIFMA Letter I. The concern over duplication of 
information was raised as an argument against separate registration 
of individuals on Form MA-I. The rules, as adopted, no longer 
require registration for natural person municipal advisors acting 
solely as employees of a municipal advisory firm. However, because 
Form MA-I is being retained in the rules, as adopted, the Commission 
believes it important to address concerns that the information 
required by Form MA-I is redundant of information already available 
from the firm's Form MA.
    \1172\ Regarding incorporation by reference, see supra notes 
994-995 and accompanying text. The Commission acknowledges that a 
municipal advisory firm must already provide information on Form MA 
concerning the disciplinary history of each of its associated 
persons--a term that includes employees who are ``engaged in the 
management, direction, supervision, or performance of any activities 
relating to the provision of advice to or on behalf of a municipal 
entity or obligated person with respect to municipal financial 
products or the issuance of municipal securities.'' However, to the 
extent that the disciplinary history of an individual is reported in 
Form MA, it can be incorporated by reference in Form MA-I.
    \1173\ As noted above, the Commission believes that, in fact, 
there is very little overlap between the information required by 
Form MA and that required by Form MA-I. For example, when Form MA 
asks for the number of employees of the firm engaged in municipal 
advisory activities, such information might be gleaned, technically, 
by counting all the Form MA-I submissions filed by the firm, but is 
not readily apparent. When Form MA asks for the names of all 
associated persons of the firm and requires the firm to indicate 
whether each such person is active in certain municipal advisory 
related fields, the firm is not required to state whether the 
associated person is an employee and it does not capture information 
on other businesses in which the person is engaged. The requirement 
to list the firm's registration information (which, of course, is 
available on the firm's Form MA) on the Form MA-I of the individual 
will better serve to identify the individual and locate his or her 
firm when only the database of individuals reported on Form MA-I is 
being searched, separately from the database in which information 
obtained in Forms MA is collected. Similarly, the responses to Form 
MA's questions in Item 9, in which a firm must disclose whether any 
of its associated persons has had a disciplinary history, do not 
shed light on the history of any particular employee unless the 
relevant DRPs are consulted. Moreover, the disciplinary history 
questions in Item 6 of Form MA-I, other than those concerning 
criminal, regulatory, and civil judicial actions, do not appear in 
Form MA.
---------------------------------------------------------------------------

    Therefore, in completing a Form MA-I for each employee, the 
Commission believes that a firm will be supplementing, rather than 
duplicating, the information provided on Form MA. For this reason, as 
proposed and adopted, the rules require a sole proprietor to complete 
and file both forms.
    Among the comments received by the Commission, specifically with 
regard to Form MA-I, as has already been discussed, several commenters 
questioned the need for separate registration forms for firms and their 
individual employees.\1174\ One commenter believed that separate 
registration of individuals on Form MA-I could ``lead to confusion'' 
and ``inadvertent inconsistencies in the information.'' \1175\ Another 
commenter believed that processing the estimated 21,800 forms expected 
to be filed would put ``significant strain'' on the Commission.\1176\ 
In addition to these comments, one commenter suggested that, in lieu of 
requiring individuals to register separately with the Commission on 
Form MA-I, the Commission could ``work with the MSRB to establish, 
through the MSRB, a licensing and registration mechanism for 
individuals who are municipal advisors, which would be similar to the 
program used to register a broker-dealer's licensed associated persons 
with FINRA.'' \1177\ Further, the commenter stated that, if the 
Commission believes it is necessary to formally register individuals 
(in addition to licensing them), the MSRB could adopt Form U4 and 
require it to be filed in connection with granting a license to 
individuals who engage in municipal advisory activities on behalf of a 
Commission- and MSRB-registered municipal advisory firm.\1178\ The 
Commission believes that these comments have been addressed by the 
exemption created in the rules, as adopted, for natural persons who 
engage in municipal advisory activities solely on behalf of a 
registered municipal advisor.\1179\
---------------------------------------------------------------------------

    \1174\ See Deloitte Letter; JP Morgan Chase Letter; SIFMA Letter 
I. Deloitte stated that registration for natural persons should be 
eliminated altogether; or that individuals at least be required to 
register only as ``registered representatives.'' See also MSRB 
Letter I, stating that ``forms relating to individuals at municipal 
advisor entities should be viewed as officially submitted by the 
municipal advisor entity.''
    \1175\ See Deloitte Letter.
    \1176\ SIFMA Letter I.
    \1177\ Id. SIFMA stated that because the MSRB is already 
planning to develop qualification tests for individuals engaged in 
municipal advisory activities, ``having only the MSRB, as opposed to 
both the SEC and MSRB, involved in the licensing and registration of 
individuals would eliminate duplication and reserve the SEC 
resources for regulation of municipal advisory firms.''
    \1178\ See id. SIFMA added that, because many individual 
municipal advisors may also be associated persons of a broker-dealer 
or investment adviser, it would better serve the interests of the 
public to have a single source of information--on Form U4--about a 
licensed individual. It would also be easier for an individual and 
his or her employer to ensure that the individual is properly 
licensed under all applicable regulatory programs if only a single 
form is required to be filed with any applicable regulator. See also 
Financial Services Roundtable Letter (advocating use of Form U4 for 
individuals).
    \1179\ See supra note 938.
---------------------------------------------------------------------------

    Commenters also expressed concerns regarding the disclosures 
required by Form MA-I and the plan to make them publicly 
available.\1180\ For example, one commenter believed that some of the 
information required in Form MA-I ``could not be disclosed by a law 
enforcement agency, such as the individual's detailed criminal 
history--which includes arrests that do not result in prosecution or 
conviction.'' \1181\ The commenter further believed that ``[g]overnment 
disclosure of a compiled criminal history is a criminal offense.'' 
\1182\
---------------------------------------------------------------------------

    \1180\ The comments cited in this paragraph appeared in the 
context of letters opposing the application of the definition of 
municipal advisor to appointed members of public boards, see supra 
note 1161, but are treated here separately because of their possible 
relevance to any municipal advisor.
    \1181\ See letter from Jo Anne Bernal, County Attorney, El Paso 
County, Texas.
    \1182\ Id.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Exchange Act 
to require disclosure of such information in order to permit persons 
whom Form MA-I concerns to lawfully engage in municipal advisory 
activities.\1183\ Regarding a commenter's concern about government 
disclosure of compiled criminal history, the Commission notes that 
engaging in municipal advisory activities is voluntary. Persons 
engaging in municipal advisory activities are on notice that the 
information supplied to the Commission on Form MA and MA-I will not be 
kept confidential (except where indicated otherwise). Therefore, if a 
person does not wish to disclose his or her criminal history, such 
person may choose to not engage in municipal advisory activities. In 
addition, the Commission notes that the information requested on Form 
MA-I is consistent with comparable provisions in Forms BD and ADV, as 
well as Form U4.\1184\
---------------------------------------------------------------------------

    \1183\ See Section 15B(c)(2) and (4) of the Exchange Act.
    \1184\ Except where indicated otherwise, the information 
supplied on Forms BD, ADV, and U4 is not kept confidential.
---------------------------------------------------------------------------

    One commenter focused on the impact that Form MA-I could have on 
bank employees, believing that it would require such information as the 
addresses of all offices at which the employee will be physically 
located or supervised and noting that it was not uncommon for bank 
branch employees such as tellers to work at multiple branch locations 
in a geographic region.\1185\ As discussed above, the Commission is 
limiting the application of the term investment strategies, providing a 
limited exemption for banks, and permitting the registration of 
SIDs.\1186\ Due to these changes, few, if any, bank employees of the 
type described by the commenter will be engaging in municipal advisory 
activities that would require filing of a Form MA-I. For those who are, 
the Commission believes that it is as important to obtain this 
information as it is with respect to any other natural

[[Page 67561]]

person who is engaged in municipal advisory activities.
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    \1185\ Capital One Letter.
    \1186\ See supra Sections III.A.1.b.viii.
---------------------------------------------------------------------------

    The Commission also received comment letters on Form MA-I from many 
municipal entities and agencies concerned about the impact of requiring 
appointed members of public boards to make the disclosures required by 
the form.\1187\ As discussed in Section III.A.1.c.i., the Commission is 
exempting all members of the governing body of a municipal entity 
(acting in their capacity as such), including appointed members, from 
the requirement to register as municipal advisors. Thus, the concerns 
of these commenters should be alleviated.
---------------------------------------------------------------------------

    \1187\ See, e.g., letter from Barry Moline, Executive Director, 
Florida Municipal Electric Association, dated February 22, 2011; and 
Pennsylvania Public School Employees' Retirement Board Letter.
---------------------------------------------------------------------------

Items 1 and 2: Identifying Information and Other Names
    Item 1 of Form MA-I is being adopted substantially as proposed, 
with minor modifications as discussed below.\1188\ Item 1 requires 
certain basic identifying information to be disclosed about any natural 
person engaged in municipal advisory activities.\1189\ Although, as 
discussed above, certain information about an employee of a firm would 
already be available through the firm's Form MA, the individual's Form 
MA-I requires more information, including:
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    \1188\ No comments were received concerning Item 1.
    \1189\ This includes, for example, the individual's full legal 
name. It also requires the registration and other identifying 
numbers of the individual's firm to be provided directly in the Form 
MA-I, to make it easier for regulators, municipal entities and 
investors to gather the information they need.
---------------------------------------------------------------------------

     the individual's CRD Number, if he or she has one;
     the individual's social security number; \1190\
---------------------------------------------------------------------------

    \1190\ This information will not be made publicly available. As 
stated in the Proposal, this information is necessary in connection 
with the Commission's enforcement and examination functions pursuant 
to Section 15B(c) of the Exchange Act (15 U.S.C. 78o-4(c)). See 
Proposal, 76 FR 851, note 240. See also generally supra note 968.
---------------------------------------------------------------------------

     the date of the individual's employment or contract with 
the firm;
     whether the individual has an independent contractor 
relationship with the firm;
     the firm's registration status;
     all the offices of the firm where the individual may be 
physically located and all the offices from which the individual is or 
will be supervised; and
     whether any of these offices are located in a private 
residence.
    These elements of Item 1 are being adopted as proposed. With 
respect to information about the employee's firm, Item 1, as proposed, 
would have required the filer to provide any SEC file and registration 
numbers assigned to the firm in any registered capacity and also the 
firm's CRD Numbers, if any. To ease the completion of the form, Item 1, 
as adopted, requires a filer only to indicate whether the firm is 
currently registered as a municipal advisor on a Form MA and, if not, 
whether it has filed an application for registration on Form MA. If the 
latter, the filing date and the firm's EDGAR CIK number must be 
provided.
    Item 1, as adopted, additionally requires a filer to provide the 
name under which the firm primarily conducts its municipal advisor-
related business, if different from its legal name. It further also 
takes into account that an individual may be employed at more than one 
municipal advisory firm and requires entry of the relevant information 
for each such firm.\1191\ The Commission believes that this additional 
information would be useful to the Commission's oversight of the 
municipal advisory market, without unreasonably increasing the burdens 
upon registrants in completing the form.
---------------------------------------------------------------------------

    \1191\ The form also asks the filer for the total number of such 
firms. This question does not require a filer to research any 
further information than indicated above, but it can serve as a 
helpful cross-check to the filer as well as to regulators, and is 
also a useful number for interested parties who do not need the 
additional details.
---------------------------------------------------------------------------

    As proposed, Item 2 requires a filer to disclose all other names 
that the natural person engaged in municipal advisory activities is 
using or has been known by since the age of 18, such as nicknames, 
aliases, and names before and after marriage. No comments were received 
concerning Item 2, and it is being adopted substantially as proposed.
    As stated in the Proposal, the Commission believed that the 
information sought by Items 1 and 2 would be useful to municipal 
entities and obligated persons in exploring the background, 
credentials, reliability, and trustworthiness of an individual in the 
course of making a decision whether to engage that natural person or 
his or her firm as a municipal advisor.\1192\ The same information will 
be valuable to regulators in overseeing municipal advisors and 
investigating possible instances of wrongdoing.
---------------------------------------------------------------------------

    \1192\ See Proposal, 76 FR 851.
---------------------------------------------------------------------------

Item 3: Residential History
    In Item 3, which is being adopted substantially as proposed,\1193\ 
Form MA-I requires disclosure of each location where the natural person 
engaged in municipal advisory activities has resided for the past five 
years, including the time period at each residence.\1194\ Changes in 
residence must be reported (via an amendment) as they occur. In 
addition, no gaps greater than three months between addresses are 
permitted.
---------------------------------------------------------------------------

    \1193\ No comments were received concerning Item 3, other than 
in the general context of concerns that the degree of detail 
required by the forms was overly burdensome and, in particular, in 
the context of concerns about registration requirements for 
appointees to municipal entity boards, which concerns are discussed 
elsewhere in this release.
    \1194\ Non-substantive, technical, and clarifying changes have 
been made to Item 3. See infra note 1237.
---------------------------------------------------------------------------

    As stated in the Proposal, the Commission believes that the 
residential history of a natural person engaged in municipal advisory 
activities, like the additional identifying information Form MA-I 
seeks, will be useful for municipal entities and other interested 
parties in exploring the background, credentials, reliability, and 
trustworthiness of the individual and be valuable to regulators in 
overseeing municipal advisors and investigating possible instances of 
wrongdoing. The information that is required regarding residential 
history is similar to the information requested on Form U4.\1195\
---------------------------------------------------------------------------

    \1195\ See Proposal, 76 FR 852. As stated in the Proposal, the 
Commission does not intend to make the information required by Item 
3 publicly available. See id., at 852, note 241. A statement to this 
effect has been added to the introduction to Item 3, as adopted.
---------------------------------------------------------------------------

Item 4: Employment History
    In Item 4, which is being adopted substantially as proposed,\1196\ 
Form MA-I requires a listing of the complete employment history of the 
natural person engaged in municipal advisory activities for the past 
ten years, including full and part-time employment, self-employment, 
military service, and homemaking. All statuses during the ten-year 
period, such as unemployed, full-time education, extended travel, and 
other similar circumstances must be included. In addition, the filer 
may not leave a gap longer than three months between entries. As 
discussed in the Proposal, the information required is similar to the 
information requested on Form U4.\1197\ Such information will help 
inform an understanding of an employee's business experience and 
provide useful information in preparing for regulatory 
examinations.\1198\
---------------------------------------------------------------------------

    \1196\ No comments were received concerning Item 4, other than 
in the general context of concerns that the degree of detail 
required by the forms was overly burdensome and, in particular, in 
the context of concerns about registration requirements for 
appointees to municipal entity boards, which concerns are discussed 
elsewhere in this release.
    \1197\ The Commission intends to make this information publicly 
available.
    \1198\ See Proposal, 76 FR 852. Because no separate blanks are 
provided for statuses other than employment at a firm or company, 
(e.g., military service, homemaking, unemployment, education, or 
travel), guidance has been included in Item 4, as adopted, 
instructing the filer to enter such statuses in the space provided 
for ``Name of Municipal Advisory Firm or Company.'' Regarding non-
substantive, technical, and clarifying changes, generally, see infra 
note 1237.

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[[Page 67562]]

Item 5: Other Business
    Item 5 of Form MA-I is being adopted substantially as 
proposed.\1199\ Item 5 requires information about the individual's 
other business activities, if any, in which he or she is currently 
engaged, as a proprietor, partner, officer, director, employee, 
trustee, agent or otherwise. The form asks for the name of the other 
business, its address, whether it is municipal advisor-related and, if 
not, the nature of the business in which it is engaged.
---------------------------------------------------------------------------

    \1199\ No comments were received concerning Item 5. Only slight 
clarifying changes have been made in the wording of this item as 
adopted.
---------------------------------------------------------------------------

    The filer is required to provide the individual's position, title, 
or relationship with the other business, the start date of the 
relationship, the approximate number of hours per month the individual 
devotes to the other business, and a brief description of his or her 
duties relating to the other business. As discussed in the Proposal, 
the information sought in this section is similar to the information 
sought by the equivalent section in Form U4. Such information will help 
the Commission understand the other business activities of a natural 
person engaged in municipal advisory activities and will help staff 
prepare for examinations.\1200\
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    \1200\ See Proposal, 76 FR 853.
---------------------------------------------------------------------------

Item 6: Disclosures Relating to Any Criminal Action, Regulatory Action, 
Investigation, Civil Judicial Action, Customer Complaint/Arbitration/
Civil Litigation, Termination, Certain Financial Matters, and Judgments 
and Liens
    Item 6 of Form MA-I, regarding the disciplinary history of the 
individual, is being adopted substantially as proposed.\1201\ However, 
the Commission has made some modifications to the information sought in 
the DRPs, which are discussed below.
---------------------------------------------------------------------------

    \1201\ The Commission received no comments specifically relating 
to Item 6 in the Proposal.
---------------------------------------------------------------------------

    Item 6 of Form MA-I includes three sections that require the same 
general types of information regarding an individual's criminal, 
regulatory, and civil judicial history, if any, as required regarding 
municipal advisory firms in corresponding sections in Form MA,\1202\ 
although the questions in these sections of Form MA-I differ somewhat 
from those in the corresponding sections of Form MA, as will be 
discussed below. As in Form MA, certain responses in the criminal, 
regulatory, and civil judicial action sections of Form MA-I require 
disclosure of complete details of all events or proceedings in DRPs 
pertaining to these areas.
---------------------------------------------------------------------------

    \1202\ See supra Section III.A.2.b.
---------------------------------------------------------------------------

    Item 6 of Form MA-I also has five additional disclosure sections 
\1203\ relating to an individual, which are also discussed below. Four 
of these ask about any investigations, terminations, customer 
complaints/arbitration/civil litigation, or judgments/liens relating to 
the individual. Each of these four sections has an associated DRP 
requiring further detail where applicable. The fifth additional 
section, which has no associated DRP, asks for certain financial 
disclosures. As discussed in the Proposal, the Commission believes that 
additional disclosures in these five areas, which are also required of 
individuals associated with broker-dealers and investment advisers on 
Form U4, are appropriate to aid municipal entities, obligated persons, 
and other members of the public in researching the background of 
municipal advisors and to aid regulators in enhancing their oversight 
of municipal advisors.\1204\
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    \1203\ In the proposed version of Item 6, the question about 
investigations appeared at the end of the Regulatory Action section. 
In the adopted version, a separate section has been created for this 
question (which remains the same) for the sake of clarity, as it 
concerns both criminal and regulatory investigations. Form MA-I, 
both as proposed and adopted, has a separate DRP that concerns only 
investigations reported in this question.
    \1204\ See Proposal, 76 FR 853.
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    As discussed in the Proposal, the Commission believes that the 
additional disclosure items in the DRPs will be helpful to municipal 
entities and obligated persons as clients or prospective clients of 
municipal advisors.\1205\ The information may also serve as the basis 
for granting or instituting proceedings to deny a registration or for 
revoking a registration or imposing other sanctions by the Commission 
with respect to an individual.\1206\
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    \1205\ See id., at 854.
    \1206\ See supra notes 1093-1097 and accompanying text 
(discussing grounds for revocation of a municipal advisor's 
registration or imposing other sanctions).
---------------------------------------------------------------------------

    As a general matter, as was the case with the proposed DRPs of Form 
MA, many of the questions in the proposed DRPs of Form MA-I did not ask 
for specifics. The Commission believes that, with regard to certain 
questions, additional details of the kind requested in the adopted 
versions of Form MA's DRPs will help regulators, municipal entities, 
and other interested parties more easily research and better assess the 
background of the individual that is the subject of the DRP of Form MA-
I.\1207\ Thus, many of the revisions made to the DRPs of Form MA have 
also been made to the DRPs of Form MA-I.
---------------------------------------------------------------------------

    \1207\ See supra note 1123.
---------------------------------------------------------------------------

    Among these are changes in questions relating to: removing a DRP 
filed in error; \1208\ incorporation by reference of disclosures 
already filed elsewhere; \1209\ names and types of courts, regulatory 
authorities and forums and their locations, and parties who initiated 
the relevant action; \1210\ how to report an event; \1211\ appeals; 
\1212\ disposition of a case and sanctions imposed in criminal cases; 
\1213\ sanctions and/or relief sought, type of resolution, and 
sanctions ordered in regulatory and civil judicial actions; \1214\ and 
other matters.\1215\
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    \1208\ See supra text following note 222.
    \1209\ See supra notes 1127-1128 and accompanying text.
    \1210\ See supra notes 1129-1130 and accompanying and following 
text.
    \1211\ See supra text accompanying note 1132.
    \1212\ See supra note 1134 and accompanying text.
    \1213\ See supra notes 1135-1137 and accompanying text.
    \1214\ See supra notes 1137-1139 and accompanying text.
    \1215\ See supra notes 1140-1142 and accompanying text.
---------------------------------------------------------------------------

    The following discussion summarizes Item 6 and its related DRPs as 
well as additional revisions made in their adopted versions:
Criminal Action Disclosures
    With respect to felonies, Item 6 of Form MA-I--in contrast to the 
disclosures required by Item 9-A of Form MA--requires disclosure of:
     any past conviction of, or plea of guilty or nolo 
contendere to, a felony by the individual, rather than limiting the 
disclosure to the past ten years, as in a firm's or solo practitioner's 
Form MA;
     any charges of felony against the individual in the past, 
rather than limiting disclosure to currently pending charges, as in a 
firm's or sole proprietor's Form MA; and
     any convictions of, or plea of guilty or nolo contendere 
to, a felony by an organization based on activities that occurred when 
the individual exercised control over the organization--a disclosure 
not required in Form MA.
    With respect to misdemeanors, while Form MA requires only 
disclosures of convictions and pleas concerning an individual looking 
back ten years, and requires only disclosures of charges that are 
currently pending, Form MA-I requires disclosure of such convictions, 
pleas, and charges that occurred at any time in the individual's past. 
Misdemeanors, and convictions, pleas,

[[Page 67563]]

and charges of misdemeanor against an organization while the individual 
exercised control over the organization are also required to be 
disclosed.
    These criminal action disclosure requirements regarding individuals 
beyond the information required in Form MA, are consistent with the 
disclosure requirements on Form U4. In addition, as discussed in the 
Proposal, these disclosures provide additional information with respect 
to natural persons engaged in municipal advisory activities that will 
be useful to the Commission's regulatory and examination programs, and 
may be useful to municipal entities and obligated persons who are 
clients or prospective clients of the individual or his or her 
firm.\1216\
---------------------------------------------------------------------------

    \1216\ See Proposal, 76 FR 853.
---------------------------------------------------------------------------

    As proposed and adopted, the Criminal Action DRP of Form MA-I asks 
for additional details regarding, among other things: the charges, 
number of counts, and the court in which they were brought; status of 
the action; details of its disposition and sanctions ordered; and the 
date of amended charges, if any. It also provides an option and space 
for comment consisting of a brief summary of the circumstances leading 
to the charge(s) as well as their current or final disposition.
    Certain revisions have been made in the adopted version of the DRP. 
For example, in its disclosure requirements concerning the charges, the 
DRP, as adopted, asks specifically whether the charge is (a) municipal 
advisor-related or (b) investment-related; and, if so, in each case, 
(c) what product type it involved.\1217\
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    \1217\ The Commission believes that these additional details 
contribute to an accurate picture of the individual's disciplinary 
history and notes that the same questions are asked in the 
equivalent DRP of Form MA, as both proposed and adopted. On the 
other hand, specific questions regarding pleas to amended charges 
have been removed as unnecessary because the requested information 
should be provided in responses to other questions.
---------------------------------------------------------------------------

    Moreover, as proposed, the DRP required a description, in narrative 
form, of details concerning any sentence or penalty imposed, its start 
date, and its duration, and the amount and date of payment.\1218\ As 
adopted, the DRP asks specifically whether any sentence or any other 
penalty is ordered, and requires, if so, a description of whether it 
involved prison, jail, probation, community service, counseling, 
education, or other. It further asks, in question-by-question format, 
for the duration in days, months, and/or years of any incarceration, 
the start and end dates, whether any concurrent sentence is to be 
served, and, if so, the end date. It also asks, in question-by-question 
format, whether any portion of a monetary penalty was reduced or 
suspended, whether it has been paid in full, and, if not, how much 
remains unpaid. These details should contribute to the clarity of the 
picture received by regulators, municipal entities, and investors of 
the individual's disciplinary background.
---------------------------------------------------------------------------

    \1218\ The form provided a blank space for: ``Sentence/Penalty, 
Duration (if suspension, probation, etc.), Start Date of Penalty: 
(MM/DD/YYYY), End date of Penalty (MM/DD/YYYY); If Monetary penalty/
fine--Amount paid, Date monetary/penalty fine paid: (MM/DD/YYYY), if 
not exact, provide explanation.'' It also gave the filer the option 
of providing ``a brief summary of circumstances leading to the 
charge(s) as well as the current status or final disposition.''
---------------------------------------------------------------------------

    Finally, the proposed Criminal Action DRP of Form MA-I did not ask 
specifically about appeals. In its adopted version, the DRP asks 
whether the criminal action was appealed, and, if so, the name and 
location of the appeals court, and other details. Choices are also 
provided to describe specifically the disposition of any appeal.\1219\ 
The Commission believes that obtaining this information will better 
enable regulators, municipal entities, and other interested parties to 
research the complete criminal history of the individual.\1220\
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    \1219\ These choices are: affirmed; vacated and returned for 
further action; or vacated/final. An applicant may also respond 
``other,'' in which case the other type of disposition must be 
specified.
    \1220\ See also supra note 1134.
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Regulatory Action Disclosures
    As proposed and adopted, the questions in Item 6 of Form MA-I 
relating to regulatory actions by the Commission or the CFTC, similar 
to those in Form U4, require the same disclosures as in proposed Item 9 
of Form MA and additional disclosures, including whether the Commission 
or the CFTC has ever found the individual to have:
     willfully violated, or been unable to comply with, any 
provision of the federal securities laws, the Commodity Exchange Act, 
and the rules thereunder, and any rule of the MSRB;
     willfully aided, abetted, commanded, induced, or procured 
the violation by any other person of these laws and rules; and
     failed reasonably to supervise another person subject to 
his or her supervision with a view to preventing violation of these 
laws and rules.
    As proposed and adopted, Form MA-I requires the same disclosures as 
proposed Form MA with respect to findings and actions relating to the 
individual by other federal regulatory agencies, state regulatory 
agencies, and foreign financial regulatory authorities. It also 
requires additional disclosures, including whether the individual has 
ever been subject to a final order of a state securities commission or 
similar agency or office; state authority that supervises or examines 
banks, savings associations, or credit unions; state insurance 
commission; an appropriate federal banking agency; or the National 
Credit Union Administration that:
     bars the individual from association with an entity 
regulated by such commission, agency, authority or office, or from 
engaging in the business of securities, insurance, banking, savings 
association activities, or credit union activities; or
     constitutes a final order based on violations of laws or 
regulations that prohibit fraudulent, manipulative, or deceptive 
conduct.
    In addition to the disclosures required of a municipal advisory 
firm regarding its individual associated persons on proposed Form MA, 
Form MA-I as proposed and adopted requires disclosure of any finding by 
an SRO that the individual:
     willfully violated, or is unable to comply with, any 
provision of the federal securities laws, the Commodity Exchange Act 
and the rules thereunder, or the rules of the MSRB;
     willfully aided, abetted, counseled, commanded, induced, 
or procured the violation of any of these laws or rules; or
     failed reasonably to supervise another person subject to 
his or her supervision, with a view to preventing such violations.

Like Form MA, Form MA-I as proposed and adopted also requires 
disclosure of whether the individual had an authorization to act as an 
attorney, accountant or federal contractor revoked or suspended.

    Item 6 of Form MA-I as proposed and adopted also requires 
disclosure of whether the individual has been notified in writing that 
he or she is currently the subject of a regulatory complaint or 
proceeding that could result in any occurrence of the kind that would 
trigger any of the disclosure requirements described above relating to 
regulatory actions, except the latter occurrence pertaining to 
attorneys, accountants, and federal contractors. The form advises that 
if the answer is affirmative, the filer must complete a Regulatory 
Action DRP.\1221\
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    \1221\ Form MA does not include an analogous question and 
advisory in its regulatory action section. Item 6, as proposed, also 
asked whether the individual has been notified in writing that he or 
she is the subject of an investigation that could result in 
affirmative answers to questions about criminal and regulatory 
actions above in the form. This question has been separated into a 
separate section in the form, as adopted, titled ``Investigation 
Disclosures.'' See infra note 1223 and accompanying text.

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[[Page 67564]]

    The DRP for regulatory action disclosure in Form MA-I, as proposed 
and adopted, requires the filer to provide further details, including: 
the allegations, which regulatory authority initiated the action, the 
kind of product involved, and the sanctions sought; the status of the 
action; the disposition or resolution of the action, the sanctions 
ordered, and their duration; the registration capacities of the 
individual that were affected; whether requalification was a condition 
of any sanction reported, and whether it was by exam, retraining, or 
other process; the length of time given to requalify; and whether the 
requalification condition was satisfied. Disclosures required in the 
Regulatory Action DRP, as proposed, also include details of any 
monetary sanction imposed, including amount; portion levied against the 
individual; any amount waived; payment plan; whether such plan was 
current; date paid; and whether the sanction was a civil or 
administrative penalty or fine, a monetary penalty other than a fine, 
disgorgement, or restitution. Revisions made in the Regulatory Action 
DRP, as adopted, include the following:
     In the DRP, as proposed, a filer was asked to identify 
every type of product involved in the action. As adopted, the DRP 
requires the filer to distinguish between principal product types and 
other products.
     As proposed, the DRP asked about any bars and suspensions 
of the individual from his or her registration capacities. As adopted, 
the DRP also requires information specific to any injunction that was 
imposed as a regulatory sanction.
     In addition to the questions about requalification and 
exams, as described above, the DRP as adopted asks for a description in 
narrative form of any examination, re-training, or other process that 
was required as a condition for the person to re-qualify.
    The Commission believes that these additional details will provide 
regulators, municipal entities, and investors with a more accurate 
picture of disciplinary history of the individual.\1222\
---------------------------------------------------------------------------

    \1222\ Other revisions in the adopted version of the Regulatory 
Action DRP: The form now asks for date of service of process in 
pending actions; and additional details when one or more injunctions 
specify different time periods; and more choices to describe 
sanctions sought, how the action was resolved, and sanctions 
ordered.
---------------------------------------------------------------------------

Disclosure of Investigations \1223\
---------------------------------------------------------------------------

    \1223\ See supra note 1203.
---------------------------------------------------------------------------

    Item 6 of Form MA-I, as proposed and adopted, asks whether the 
individual has been notified in writing that he or she is currently the 
subject of any investigation that could result in a positive answer to 
any of the questions in either the criminal and regulatory sections of 
Item 6 described, except the question pertaining to attorneys, 
accountants, and federal contractors. If the answer is positive, an 
Investigation DRP must be filed.
    The Investigation DRP requires details of any such investigation, 
including the date the investigation was initiated and whether it was 
initiated by an SRO, a foreign financial regulatory authority (giving 
the specific jurisdiction), the Commission, other federal agency, or 
``other.'' The Investigation DRP requires that the full name of the 
authority that initiated the investigation be specified. Space is 
provided for the filer to briefly describe the nature of the 
investigation, if known; whether it was pending or resolved; and 
details of any resolution. Space for optional comment is also provided 
to present a brief summary of the circumstances leading to the 
investigation and its current status or final disposition and/or 
findings.
    The Investigation DRP also asks for similar details regarding a 
criminal investigation by a federal, military, state, foreign or 
international authority or court. Although Item 6 requires a DRP for 
criminal investigations, the DRP, as proposed, did not specifically 
reference criminal investigations or authorities.
Civil Judicial Action Disclosure
    The disclosures required by Form MA-I with respect to certain 
matters relating to an individual's civil judicial history are the same 
as disclosures required on Form MA. Thus, a filer is required to 
disclose on Form MA-I whether the individual:
     was ever enjoined by a domestic or foreign court in 
connection with any investment-related or municipal advisor-related 
activity;
     was ever found by a domestic or foreign court to be 
involved in a violation of any investment-related or municipal advisor-
related statute or regulation; or
     ever had an investment-related or municipal advisor-
related civil action brought against him or her dismissed, pursuant to 
a settlement agreement, by a domestic jurisdiction \1224\ or foreign 
financial regulatory authority; or
---------------------------------------------------------------------------

    \1224\ The phrase ``domestic jurisdiction'' is used in the form, 
as adopted, in place of ``state'' in the proposed version. The 
question of whether such an occurrence is part of the individual's 
history was not intended to be limited to state actions.
---------------------------------------------------------------------------

     was ever named in any such pending action that could 
result in a positive answer to the three previous questions.
    As discussed in the Proposal, the Commission believes that it is 
appropriate to seek information regarding investment-related activities 
as well as municipal advisor-related activities due to the significant 
similarities that exist between the two advisory functions. Moreover, 
such information could serve as a basis to institute proceedings to 
deny registration of a municipal advisor or to impose other sanctions 
on the municipal advisor's activities.\1225\
---------------------------------------------------------------------------

    \1225\ See Proposal, 76 FR 854-855.
---------------------------------------------------------------------------

    A DRP is required for affirmative responses to questions under this 
item. Specifically, the DRP requires, among other things, information 
regarding: by whom the court action was initiated; the name of the 
party initiating the proceeding; information about the relief sought; 
the date on which the action was filed and notice or process was 
served; the types of financial products involved; a description of the 
allegations relating to the civil action; the current status, including 
whether the action is on appeal and details relating to any such 
appeal; sanction details; and if the disposition resulted in a fine, 
disgorgement, restitution or monetary compensation, information 
relating thereto. The DRP also provides the opportunity for a filer to 
provide additional comment, including a summary of the circumstances 
leading to the action and current status.
    The Civil Judicial Action DRP, as adopted, has been modified to ask 
whether the individual is a named defendant in the action for which the 
DRP is being completed; \1226\ indicate, if an order was issued, 
whether the order is a final order based on violations of any laws or 
regulations that prohibit fraudulent or deceptive conduct; and indicate 
whether a condition of any sanction was requalification by examination, 
retraining, or other process. The Commission believes that these 
changes generally will add clarity

[[Page 67565]]

for filers in determining the type of information that must be 
provided.\1227\
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    \1226\ In addition, this DRP, as proposed and adopted, asked for 
the full name(s) of the plaintiff(s) in the action. The adopted 
version further asks the filer whether all plaintiffs were fully 
identified, to make clear that the information needs to be complete.
    \1227\ In addition, the list of sanctions or relief that are 
specified as required to be reported has more detail in order to 
provide more choices for filers. The list of specific possible 
resolutions of the action that the applicant can indicate as 
applicable has also been expanded. More information also is sought 
regarding details of how the action was resolved, and, if resolved 
with sanctions, more details about those sanctions.
---------------------------------------------------------------------------

Customer Complaints/Arbitration/Civil Litigation
    Form MA does not require a municipal advisory firm to disclose any 
customer complaints, arbitration matters, and civil litigation 
concerning natural person municipal advisors. Form MA-I, however, 
requires disclosure of whether an individual engaged in municipal 
advisory activities has ever been:
     the subject of a complaint initiated by a customer, 
whether written or oral, regarding investment-related or municipal 
advisor-related matters, which alleged that he or she was involved in 
fraud, false statements, omissions, theft, embezzlement, wrongful 
taking of property, bribery, forgery, counterfeiting, extortion, and 
dishonest, unfair or unethical practices; or
     the subject of an arbitration or civil litigation 
initiated by a customer regarding investment-related or municipal 
advisor-related matters, which alleged that he or she was involved in 
fraud, false statements, omissions, theft, embezzlement, wrongful 
taking of property, bribery, forgery, counterfeiting, extortion, and 
dishonest, unfair or unethical practices.
    In the case of a complaint, the filer must indicate whether the 
complaint is still pending or was settled. In the case of arbitration 
or civil litigation, the filer must indicate whether the arbitration or 
litigation is still pending; resulted in an arbitration award or civil 
judgment against the individual in any amount; or was settled.
    A DRP is required for affirmative responses to questions under this 
item. Specifically, the relevant DRP requires the filer to disclose the 
customer's name; the customer's state of residence and other states of 
residence; the employing firm of the individual when the activities 
occurred that led to the complaint, arbitration, CFTC reparation or 
civil litigation; and the allegations and a brief summary of events 
related to the allegations, including the dates when they occurred; the 
product type; and the alleged compensatory damage amount.
    For customer complaints, arbitration, CFTC reparation, or civil 
litigation in which the individual is not a named party, the DRP 
requires disclosure of whether the complaint is oral or written, or 
whether it is an arbitration, CFTC reparation or civil litigation (and 
the arbitration or reparation forum, docket or case number, and the 
filing date); whether the complaint, arbitration, CFTC reparation or 
civil litigation is pending, and if not, the status. The DRP requires 
disclosure of the status date and the settlement award amount, 
including the individual's contribution amount.
    If the matter involves an arbitration or CFTC reparation and the 
individual is a named respondent, the DRP requires disclosure of the 
entity with which the claim was filed; the docket or case number; the 
date process was served; whether the arbitration of CFTC reparation is 
pending, and if not pending the form of disposition; the disposition 
date; and the amount of the monetary award, settlement or reparation 
(including the individual's contribution).
    If the matter involves a civil litigation in which the individual 
is a defendant, the DRP requires disclosure of the court in which the 
case was filed; the location of the court; the docket or case number; 
the date the complaint was served on or received by the individual; 
whether the litigation is still pending; if not still pending the form 
of its disposition; the disposition date; the judgment, restitution or 
settlement amount, including the individual's contribution amount; 
whether the action is currently on appeal, and if so, the date the 
appeal was filed, the court in which the appeal was filed, the location 
of the court, and the docket or case number for the appeal. The DRP 
also provides for optional additional comment, such as a summary of the 
circumstances leading to the complaint.
    As discussed in the Proposal, these disclosures, too, mirror 
similar disclosures in Form U4, provide additional information about 
natural persons engaged in municipal advisory activities that may be 
useful to municipal entities or obligated persons as clients or 
prospective clients, and help the Commission prepare for and plan 
examinations.\1228\
---------------------------------------------------------------------------

    \1228\ See Proposal, 76 FR 855.
---------------------------------------------------------------------------

    Several revisions have been made to this DRP, as adopted. In the 
questions relating to settlements, awards, and monetary judgments, the 
DRP now additionally asks whether any portion of the individual's 
settlement, award, or monetary judgment amount was waived, and, if so, 
how much; and whether the final amount was paid in full, and, if so, 
the date. In the section relating to civil litigation, the DRP now 
additionally asks whether the individual appealed, and, if so, to which 
court, its location, and other details.\1229\
---------------------------------------------------------------------------

    \1229\ See generally supra notes 1208-1215.
---------------------------------------------------------------------------

Termination Disclosure
    Unlike Form MA, Form MA-I requires disclosure regarding the 
termination of a natural person's employment. Specifically, consistent 
with Form U4, Form MA-I asks whether the individual ever voluntarily 
resigned or was discharged or permitted to resign after allegations 
were made that accused him or her of:
     violating investment-related or municipal advisor-related 
statutes, regulations, rules, or industry standards of conduct;
     fraud or the wrongful taking of property; or
     failure to supervise in connection with investment-related 
or municipal advisor-related statutes, regulations, rules or industry 
standards of conduct.
    An affirmative response to the questions described above requires 
additional information on a related DRP. Specifically, the DRP requires 
disclosure of the name of the firm, the type of termination (whether 
discharged, permitted to resign, or voluntary resignation), the 
termination date, the allegations, and the product types. The DRP also 
provides for optional additional comment, such as a summary of the 
circumstances leading to the termination.
    As discussed in the Proposal, this disclosure will provide 
information that will be useful to the Commission in planning and 
preparing for inspections and examinations. The disclosure also will be 
useful to the public generally (including municipal entities and 
obligated persons, as clients or prospective clients).\1230\
---------------------------------------------------------------------------

    \1230\ See Proposal, 76 FR 856.
---------------------------------------------------------------------------

Financial Disclosures
    Item 6 of Form MA-I, as proposed and as adopted, also requires 
financial disclosures regarding individuals that are not required to be 
made on Form MA by municipal advisory firms, generally, regarding their 
associated persons or by sole proprietors regarding themselves. 
Specifically, the form asks the filer whether, within the past ten 
years:
     the individual has made a compromise with creditors, filed 
a bankruptcy petition, or been the subject of an involuntary bankruptcy 
petition;
     an organization controlled by the individual has made a 
compromise with

[[Page 67566]]

creditors, filed a bankruptcy petition, or been the subject of an 
involuntary bankruptcy petition based upon events that occurred while 
he or she exercised control over it; or
     a broker or dealer controlled by the individual has been 
the subject of an involuntary bankruptcy petition, had a trustee 
appointed, or had a direct payment procedure initiated under the 
Securities Investor Protection Act based upon events that occurred 
while he or she exercised control over it.
    In addition, a filer must disclose whether a bonding company ever 
denied, paid out on, or revoked a bond for the individual. There is no 
DRP associated with these financial disclosures.
Judgment/Lien Disclosure
    Item 6 of Form MA-I also asks whether the individual has any 
unsatisfied judgments or liens against him or her. An affirmative 
response requires additional disclosure on a DRP. Specifically, the 
filer must disclose the amount, holder, and type of the judgment or 
lien. The form also requires information about the date the judgment or 
lien was filed, the court in which the action was brought, the name and 
location of the court, the docket or case number,\1231\ whether the 
judgment or lien is outstanding, and if the judgment or lien is not 
outstanding, the status date and how the matter was resolved. The DRP 
also provides for optional comment, such as a brief summary of the 
circumstances leading to the action.\1232\
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    \1231\ See supra note 968.
    \1232\ Modifications made to the DRPs of Form MA-I as adopted 
are discussed below under the sub-heading, ``Other Changes in Form 
MA-I, As Adopted.''
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    As discussed in the Proposal, the Commission believes that the 
information that is required, which is consistent with that required by 
Form U4, will be useful for its regulatory purposes, including planning 
and preparing for inspections and examinations. The Commission also 
believes that the information will be useful to the public generally 
(including municipal entities and obligated persons, as clients or 
prospective clients).\1233\
---------------------------------------------------------------------------

    \1233\ See Proposal, 76 FR 856.
---------------------------------------------------------------------------

Other Changes in Form MA-I, as Adopted
Additional Modifications to the DRPs
    The Commission has made the following modifications to the DRPs in 
addition to those discussed above. An instruction has been added at the 
beginning of all the DRPs, regarding incorporation by reference, to 
clarify that the filer of Form MA-I may incorporate information either 
from a DRP that was filed by the firm, or from a DRP filed by another 
Commission registrant about the individual. This should help filers 
avoid the inconvenience and burden of completing the additional 
information.
    When a DRP is being filed to remove a previously filed DRP, the 
filer in each case is asked whether the reason is because the matter 
was resolved in the individual's favor, or because the DRP was filed in 
error.\1234\ Moreover, as proposed, several of the DRPs asked for the 
name of the employing firm of the individual when the relevant event 
occurred only if the firm was a municipal advisory firm.\1235\ The 
Commission has concluded, however, that the name of the individual's 
employer when the activity occurred can be useful to regulators, 
municipal entities, and investors regardless of whether the individual 
was employed specifically by a municipal advisory firm, and is not 
limiting the requested information to such firms. In the case of a 
municipal advisory firm employer, however, the DRPs as adopted ask for 
the municipal advisor registration number of the firm.\1236\
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    \1234\ This question is adapted from a similar question in the 
DRPs to Form MA, and should help clarify the status of the applicant 
for users of the information.
    \1235\ Included are the Regulatory, Civil Judicial Action, 
Termination, and Customer Complaint/Arbitration/Civil Litigation 
DRPs.
    \1236\ The Commission believes this specific information is 
particularly relevant for municipal advisor regulation.
---------------------------------------------------------------------------

    As proposed, the Regulatory and Civil Action DRPs asked the filer 
to identify the principal product types that were the subject of the 
activity regarding which the formal action involving the individual was 
taken. As adopted, they also ask for any other product types. Finally, 
the adopted versions of the Regulatory and Civil Action DRPs ask for 
the date on which notice or other process was served if the action 
being reported on the DRP is still pending.
An Associated Person Who Ceases To Be Engaged in Municipal Advisory 
Activities
    Because Form MA-I, as adopted, is not a registration form, when a 
natural person associated with a registered municipal advisor ceases to 
engage in municipal advisory activities on its behalf, Form MA-W--which 
is a form designed for withdrawal of registration--will not be 
required. Instead, the change must be reported by the registered 
municipal advisor that filed the Form MA-I relating to that person. 
This is accomplished by filing an amendment to the Form MA-I, which 
must be submitted promptly, like any other amendment.
    For this purpose, a filer submitting an amendment to Form MA-I can 
indicate that the purpose of the amendment is to report that the 
individual to whom the form relates is no longer an associated person 
of the municipal advisory firm or no longer engages in municipal 
advisory activities on its behalf. When submitting an amendment of this 
kind, the filer must complete only the portion of the form asking for 
the name of the individual, his or her social security number, and CRD 
Number if any (Item 1-A) and the Execution Page of the form (Item 7).
Non-Substantive, Technical, and Clarifying Changes
    In addition, a number of non-substantive, technical and clarifying 
changes have been made to Form MA-I, as adopted, to make the form 
clearer and more user-friendly. These include, where applicable, the 
same kinds of changes made to Form MA.\1237\
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    \1237\ See supra note 1147. Examples of other revisions of this 
nature in Form MA-I include: Guidance advising filers to refer to 
the Specific Instructions for Form MA-I; corrections of inaccurate 
references; clarifying and editorial changes; and additional 
instructions to aid the filer that do not introduce any substantive 
changes.
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Item 7: Execution of the Form
    If Form MA-I is being filed by a municipal advisory firm with 
respect to a natural person engaged in municipal advisory activities on 
its behalf, the authorized representative of the firm who signs the 
Execution Page of Form MA-I must attest to the truth and correctness of 
the information provided in the form. He or she must also attest that 
the firm has obtained and retained written consent from the individual 
that service of any civil action brought by, or notice of any 
proceeding before, the SEC or any self-regulatory organization in 
connection with the individual's municipal advisory activities may be 
given by registered or certified mail to the individual's address given 
in Item 1 of the firm.
    If Form MA-I is being filed by a natural person municipal advisor 
who is a sole proprietor, by signing the Execution Page of Form MA-I, 
the filer must represent that the information and statements made in 
the form are true and correct. He or she must also consent that service 
of process of any civil action or notice of any proceeding before the 
Commission or an SRO

[[Page 67567]]

regarding its municipal advisory activities may be given by registered 
or certified mail to the address he or she has supplied in Item 1 of 
the form.
    As proposed, Form MA-I also required its signatory to certify that 
he or she has: (a) Sufficient qualifications, training, experience, and 
competence to effectively carry out his or her designated functions; 
(b) met, or within any applicable required timeframes will meet, such 
standards of training, experience, and competence, and such other 
qualifications, including testing, for a municipal advisor, required by 
the Commission, the MSRB or any other relevant SRO; and (c) the 
necessary understanding of, and ability to comply with, all applicable 
regulatory obligations.
    The Commission received comment letters on the self-certification 
requirement in Form MA-I from many municipal entities and agencies 
concerned about the impact of requiring appointed members of public 
boards to make such certifications. As discussed in Section 
III.A.1.c.i., the Commission is exempting all members of the governing 
body of a municipal entity (acting in their capacity as such), 
including appointed members, from the requirement to register as 
municipal advisors. Thus, the Commission believes that the concerns of 
these commenters have been addressed. However, one comment received by 
the Commission regarding the self-certification requirement in Form MA-
I, as proposed, called the requirement ``problematic.'' \1238\
---------------------------------------------------------------------------

    \1238\ See SIFMA Letter I.
---------------------------------------------------------------------------

    In view of the change in the nature of Form MA-I, as adopted, 
including who is required to sign the form, the Commission has decided 
to eliminate the self-certification requirement in Item 7. Because, 
under the rules, as adopted, individuals who engage in municipal 
advisory activities on behalf of a registered firm are exempt from 
registration, and, with respect to these individuals, the function of 
Form MA-I is only to provide information, the self-certification 
requirement is no longer a propos. Moreover, as discussed above, the 
Commission has determined to remove the self-certification requirement 
with respect to firms in Form MA. Thus, Form MA-I, as adopted, will no 
longer require self-certification.
3. Rule 15Ba1-3: Exemption of Certain Natural Persons Associated With 
Registered Municipal Advisors From Registration\1239\
---------------------------------------------------------------------------

    \1239\ Rule 15Ba1-3, under the Proposal, contained the 
requirements for a municipal advisor to withdraw an existing 
registration. This provision is being adopted as Rule 15Ba1-4, which 
is discussed below.
---------------------------------------------------------------------------

    Rule 15Ba1-3, as adopted, exempts certain natural persons from 
registration with the Commission as a municipal advisor if the natural 
person is associated with a registered municipal advisor and engages in 
municipal advisory activities solely on behalf of a registered 
municipal advisor. This exemption is discussed above in Section 
III.A.2.a.\1240\
---------------------------------------------------------------------------

    \1240\ See supra notes 938-939 and accompanying text.
---------------------------------------------------------------------------

4. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration; Form 
MA-W
a. Rule 15Ba1-4: Withdrawal From Municipal Advisor Registration
    Proposed Rule 15Ba1-3 provided that notice of withdrawal from 
registration as a municipal advisor must be filed on Form MA-W, in 
accordance with the instructions to the form, and set forth other 
requirements regarding withdrawal of a municipal advisor from 
registration. The Commission received one comment letter regarding this 
proposed rule which supported the proposed rule.\1241\ The Commission 
is adopting Rule 15Ba1-4 as it was set forth in proposed Rule 15Ba1-3, 
with certain minor, technical modifications.\1242\ The rule as adopted, 
however, only applies to municipal advisors registered on Form MA, 
because the Commission is exempting from registration certain natural 
persons who are associated persons of a registered municipal advisor 
and who engage in municipal advisory activities solely on behalf of a 
registered municipal advisor.\1243\
---------------------------------------------------------------------------

    \1241\ See MSRB Letter I.
    \1242\ See Rule 15Ba1-4, as adopted. The modifications are non-
substantive and are limited to updating citations in the rule text 
or changing the article ``such'' to the article ``the.''
    \1243\ In the Proposal, the Commission proposed to require 
natural person municipal advisors to register on proposed Form MA-I 
and accordingly proposed that these natural person municipal 
advisors would be required to file a Form MA-W to withdraw from 
registration with the Commission as a municipal advisor. See 
Proposal, 76 FR 850, 857. As discussed in more detail in Section 
III.A.2.a. and Section III.A.3., the Commission is adopting an 
exemption from registration for certain natural persons and Form MA-
I will not be an application for registration.
---------------------------------------------------------------------------

    As with Forms MA and MA-I, Form MA-W must be filed electronically 
with the Commission.\1244\ Form MA-W also constitutes a ``report'' for 
purposes of Sections 15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78o-4(c), 
78q(a), 78r(a), 78ff(a)) and other applicable provisions of the 
Exchange Act.\1245\
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    \1244\ See Rule 15Ba1-4(b).
    \1245\ See Rule 15Ba1-4(d). As a consequence, it will also be 
unlawful for a municipal advisor to willfully make or cause to be 
made, a false or misleading statement of a material fact or omit to 
state a material fact in Form MA-W.
---------------------------------------------------------------------------

    Rule 15Ba1-4 also provides that a notice of withdrawal from 
registration becomes effective for all matters on the 60\th\ day after 
the filing of the Form MA-W. It may also become effective within a 
longer time period to which the municipal advisor consents or which the 
Commission by order determines as necessary or appropriate in the 
public interest or for the protection of investors, or within a shorter 
time if the Commission so determines.\1246\
---------------------------------------------------------------------------

    \1246\ See Rule 15Ba1-4(c).
---------------------------------------------------------------------------

    The rule further provides that if a municipal advisor filed a 
notice of withdrawal from registration with the Commission at any time 
subsequent to the date of issuance of a Commission order instituting 
proceedings pursuant to Section 15B(c) of the Exchange Act \1247\ to 
censure, place limitations on the activities, functions or operations 
of, or suspend or revoke the registration of the municipal advisor or 
if, prior to the effective date of the notice of withdrawal, the 
Commission institutes such a proceeding or a proceeding to impose terms 
and conditions upon the withdrawal, the notice of withdrawal will not 
become effective except at the time and upon the terms and conditions 
as deemed by the Commission as necessary or appropriate in the public 
interest or for the protection of investors.\1248\
---------------------------------------------------------------------------

    \1247\ 15 U.S.C. 78o-4(c).
    \1248\ See Rule 15Ba1-4(c).
---------------------------------------------------------------------------

b. Form MA-W
    The Commission received one comment letter regarding Form MA-W, 
which was generally supportive of the form.\1249\ As discussed in more 
detail above,\1250\ the Commission is exempting certain natural persons 
from municipal advisor registration. Accordingly, the Commission is 
adopting Form MA-W substantially as proposed, but is modifying it 
solely to remove all references to individual registration of natural 
persons associated with a municipal advisor and engaged in municipal 
advisory activities on its behalf and to Form MA-I as an

[[Page 67568]]

application for registration \1251\ and to add an introductory 
direction to refer to the General Instructions for the forms in the MA 
series before completing Form MA-W. Form MA-W for municipal advisors is 
designed to be generally consistent with the requirements of Form ADV-W 
for investment advisers withdrawing from registration. First, Form MA-W 
requires a municipal advisor to provide identifying information keyed 
to the identifying information on, and the SEC file number of, the 
municipal advisor's Form MA. A municipal advisor is required to provide 
on Form MA-W the name of a principal or employee of the municipal 
advisor who is authorized to receive information and respond to 
questions about the Form MA-W. Contact information for a municipal 
advisor's outside counsel is insufficient.
---------------------------------------------------------------------------

    \1249\ See MSRB Letter I.
    \1250\ See supra note 1243 and supra Section III.A.2.a. and 
Section III.A.3.
    \1251\ The Commission has removed references in certain 
instructions that contemplated individual registration of certain 
natural persons on Form MA-I and that designated Form MA-I as a 
registration form. Additionally, on the Execution Page, the 
Commission has also removed the certification for natural person 
municipal advisors other than sole proprietors.
    When a natural person for whom a municipal advisory firm filed a 
Form MA-I is no longer an associated person or no longer engages in 
municipal advisory activities on behalf of the firm, the firm must 
file an amendment to the Form MA-I to indicate this change. See 
General Instruction 2.d. of the General Instructions and supra 
Section III.A.2.c., under sub-heading ``An Associated Person Who 
Ceases to be Engaged in Municipal Advisory Activities.''
---------------------------------------------------------------------------

    A municipal advisor filing to withdraw its registration is required 
to indicate on Form MA-W whether it has received any pre-paid fees for 
municipal advisory activities that have not been delivered, including 
subscription fees for publications, and, if so, to specify the amount. 
In addition, the withdrawing municipal advisor is required to indicate 
how much money, if any, it has borrowed from clients and has not 
repaid. If the municipal advisor responds affirmatively to either 
question, it is required to disclose on Schedule W2 to Form MA-W the 
nature and amount of its assets and liabilities and its net worth as of 
the last day of the month prior to the filing of the Form MA-W.
    A municipal advisor that is filing to withdraw its registration is 
required to indicate on Form MA-W whether it has assigned any municipal 
advisory contracts to another person that engages in municipal advisory 
activities, and if so, the municipal advisor is required to list in 
Section 4 of Schedule W1 to Form MA-W each person to whom it has 
assigned any such municipal advisory contracts and provide the 
requested information.
    A municipal advisor filing to withdraw its registration also is 
required to indicate whether there are any unsatisfied judgments or 
liens against it. If the municipal advisor responds affirmatively that 
it owes money or has any judgments or liens against it, it is required 
to disclose on Schedule W2 to Form MA-W the nature and amount of its 
assets and liabilities and its net worth as of the last day of the 
month prior to the filing of the Form MA-W.
    As discussed in the Proposal, the Commission believes that 
requiring such information from a withdrawing municipal advisor is 
appropriate for the protection of investors and those persons who do 
business with municipal advisors.\1252\ The filing of Form MA-W and the 
information contained in the form will provide notice that the 
municipal advisor is no longer registered and, therefore, is not able 
to engage in municipal advisory activities without violating federal 
securities laws.\1253\ Additionally, the information provided will 
alert clients and prospective clients to a municipal advisor's 
financial stability if the municipal advisor received fees from clients 
for services not yet delivered, borrowed any money from clients that 
has not been repaid, or has any unsatisfied judgments or liens at the 
time of withdrawal because the municipal advisor would be required to 
disclose the nature and amount of its assets and liabilities and net 
worth on Schedule W2. This information also will help regulators' 
investigative and enforcement efforts. Additionally, as noted in the 
Proposal, an investment adviser that withdraws from registration must 
supply similar information on its Form ADV-W.\1254\
---------------------------------------------------------------------------

    \1252\ See Proposal, 76 FR 857.
    \1253\ See id.
    \1254\ See 17 CFR 279.2. See also Proposal, 76 FR 857.
---------------------------------------------------------------------------

    As discussed below, Rule 15Ba1-8(c), as adopted, requires a 
municipal advisor withdrawing from registration to preserve its books 
and records.\1255\ Therefore, a municipal advisor filing a Form MA-W is 
required to list the name and address of each person who has or will 
have custody or possession of the municipal advisor's books and records 
and the location at which such books and records are or will be kept. 
In addition, as discussed above, a withdrawing municipal advisor also 
is required to identify on Schedule W1 each person to whom it has 
assigned any of its contracts. As discussed in the Proposal, the 
Commission believes that such a requirement--which also exists for 
investment advisers--is important for the protection of participants in 
the municipal securities markets.\1256\
---------------------------------------------------------------------------

    \1255\ See infra Section III.C.
    \1256\ See Proposal, 76 FR 857.
---------------------------------------------------------------------------

    The signatory to the Form MA-W is required to certify, under 
penalty of perjury, that the information and statements made in the 
Form MA-W, including any exhibits or other information submitted, are 
true. If the form is being filed on behalf of a municipal advisor that 
is not a sole proprietor,\1257\ the signature constitutes such 
certification by both the municipal advisor and the signatory. 
Similarly, the signatory is required to certify that the municipal 
advisor's books and records will be preserved and available for 
inspection as required by law. The signatory is also required to 
authorize any person having custody or possession of these books and 
records to make them available to authorized regulatory 
representatives.
---------------------------------------------------------------------------

    \1257\ As discussed in the Proposal, in the case of a municipal 
advisor that is not a sole proprietor, the signatory's certification 
includes a statement that he or she has signed on behalf of and with 
the authority of the municipal advisor firm withdrawing the 
registration. See id., at 857, note 254.
---------------------------------------------------------------------------

    The certification includes a statement that all information 
previously submitted on the municipal advisor's most recent Form MA 
(and Form MA-I for sole proprietors) is accurate and complete as of the 
date the Form MA-W was signed. It also includes an understanding by the 
signatory that if any information contained in items on the Form MA-W 
is different from the information contained on the most recent Form MA 
(and MA-I for sole proprietors), the information on the Form MA-W will 
replace the corresponding entry on the municipal advisor's Form MA 
(and/or MA-I for sole proprietors). As discussed in the Proposal, the 
Commission believes that the certification requirement should serve as 
an effective means to assure that the information supplied in Form MA-W 
is correct.\1258\
---------------------------------------------------------------------------

    \1258\ See id., at 858.
---------------------------------------------------------------------------

5. Rule 15Ba1-5: Amendments to Form MA and Form MA-I
    Proposed Rule 15Ba1-4 set forth requirements regarding when 
amendments to Form MA and Form MA-I are required and how such 
amendments must be filed. The Commission received one comment letter 
regarding this proposed rule which supported the proposed rule.\1259\ 
The Commission is adopting Rule 15Ba1-5 substantially as proposed in 
Rule 15Ba1-4, but is modifying the rule

[[Page 67569]]

primarily to be consistent with the exemption of certain natural 
persons from municipal advisor registration that the Commission is 
adopting in Rule 15Ba1-3. Specifically, the Commission's modifications 
to Rule 15Ba1-5 are limited to removing or revising rule text to 
reflect that natural persons who are associated with a municipal 
advisor and engaged in municipal advisory activities on its behalf are 
not required to register as municipal advisors on Form MA and that Form 
MA-I is not an application for registration and to update citations in 
the rule text. Therefore, the requirement in Rule 15Ba1-5 to amend 
promptly Form MA and Form MA-I applies exclusively to registered 
municipal advisors since they will be responsible for amendments to 
their own Form MA and amendments to Form MA-I for each natural person 
who is a person associated with the municipal advisor and engaged in 
municipal advisory activities on its behalf.\1260\
---------------------------------------------------------------------------

    \1259\ See MSRB Letter I.
    \1260\ See Rule 15Ba1-5(a) and (b).
---------------------------------------------------------------------------

    Rule 15Ba1-5(a) requires that a registered municipal advisor must 
promptly amend the information in its Form MA: (1) At least annually, 
within 90 days of the end of the municipal advisor's fiscal year, or of 
the end of the calendar year for a sole proprietor; \1261\ and (2) more 
frequently than annually if required by the General Instructions.\1262\
---------------------------------------------------------------------------

    \1261\ See Rule 15Ba1-5(a)(1).
    \1262\ See Rule 15Ba1-5(a)(2). See also infra Section III.A.8. 
(discussing the General Instructions and Glossary).
---------------------------------------------------------------------------

    In addition to the annual update amendment to Form MA, General 
Instruction 8 specifies that a municipal advisory firm must amend its 
Form MA promptly whenever a material event has occurred that changes 
the information provided in the form. General Instruction 8 further 
states that, for purposes of Form MA, a material event will be deemed 
to have occurred if information provided in response to Item 1 
(Identifying Information), Item 2 (Form of Organization), or Item 9 
(Disclosure Information) becomes inaccurate in any way; or if 
information provided in response to Item 3 (Successions), Item 7 
(Participation or Interest of Applicant, or of Associated Persons of 
Applicant in Municipal Advisory Client or Solicitee Transactions), or 
Item 8 (Owners, Officers and Other Control Persons) becomes materially 
inaccurate.\1263\
---------------------------------------------------------------------------

    \1263\ See General Instruction 8 in the Instructions for the 
Form MA Series. General Instruction 8 further notes that a municipal 
advisor submitting an amendment between annual updates is not 
required to update the responses to Item 4 (Information About 
Applicant's Business), Item 5 (Other Business Activities), Item 6 
(Financial Industry and Other Related Affiliations of Associated 
Persons), or Item 10 (Small Businesses), even if the responses to 
those items have become inaccurate.
---------------------------------------------------------------------------

    In addition, General Instruction 8 provides that a non-resident 
municipal advisory firm must promptly file an amendment to Form MA to 
attach an updated opinion of counsel after any changes in the legal or 
regulatory framework or the firm's physical facilities that would 
impact its ability, as a matter of law, to provide the Commission with 
access to its books and records or to inspect and examine the municipal 
advisory firm.\1264\ As the Commission stated in the Proposal,\1265\ an 
amendment in such case should include a revised opinion of counsel 
describing how, as a matter of law, the municipal advisor will continue 
to meet its obligations to provide the Commission with the required 
access to the municipal advisor's books and records and to be subject 
to the Commission's onsite \1266\ inspection and examination under the 
new regulatory regime. If a registered non-resident municipal advisory 
firm becomes unable to comply with this requirement, then this may be a 
basis for the Commission to institute proceedings to revoke the 
municipal advisor's registration.
---------------------------------------------------------------------------

    \1264\ See General Instruction 8 in the Instructions for the 
Form MA Series. See also infra note 1308 and accompanying text. For 
a discussion of Rule 15Ba1-6 (Consent to Service of Process to be 
Filed by Non-Resident Municipal Advisors) and Form MA-NR 
(Designation of U.S. Agent for Service of Process for Non-
Residents), see Section III.A.6.
    \1265\ See Proposal, 76 FR 858.
    \1266\ As adopted, General Instruction 8 does not require the 
opinion of counsel to state that the municipal advisor is able, as a 
matter of law, to be subject specifically to ``onsite'' inspection 
and examination.
---------------------------------------------------------------------------

    Regarding amendments to Form MA-I, Rule 15Ba1-5(b) provides that a 
registered municipal advisor must promptly amend the information 
contained in Form MA-I by filing an amended Form MA-I whenever the 
information contained in the Form MA-I becomes inaccurate for any 
reason. As discussed above, registered municipal advisors will be 
responsible for filing and amending Form MA-I for each natural person 
associated with the municipal advisor and engaged in municipal advisory 
activities on its behalf.\1267\ As discussed in the Proposal, unlike 
municipal advisors filing Form MA, who must file annual updating 
amendments, the Commission is not requiring municipal advisory firms to 
update annually the Forms MA-I for each natural person who is 
associated with the municipal advisor and engaged in municipal advisory 
activities on its behalf.\1268\ The Commission believes that the 
additional gains obtained by requiring the confirmation of an annual 
update would impose unnecessary burdens on municipal advisors and that 
the standard adopted in Rule 15Ba1-5(b) strikes an appropriate balance 
between maintaining current information regarding natural persons and 
minimizing the burden on municipal advisors to provide this 
information.
---------------------------------------------------------------------------

    \1267\ See supra note 1260 and accompanying text.
    \1268\ See Proposal, 76 FR 858. As discussed in the Proposal, in 
the case of firms, changes commonly occur over the course of a year, 
and a wide range of changes is possible--e.g., changes in control 
persons and personnel, number of employees, nature of services 
provided, types of clients, and compensation arrangements, among 
others, as well as new disclosures that may be necessary for all of 
the firm's associated persons, rather than just one natural person. 
Accordingly, the Commission believes it is appropriate to require a 
firm to confirm through an annual update that its registration is 
up-to-date. With respect to natural person municipal advisors, 
however, an amendment to Form MA-I is promptly required whenever 
information previously provided becomes inaccurate. The Commission 
believes that any additional benefits of an annual update would not 
justify the burden such a requirement would impose. See id.
---------------------------------------------------------------------------

    All amendments to Form MA and Form MA-I are required to be filed 
electronically with the Commission.\1269\ In addition, amendments to 
Form MA and Form MA-I constitute ``reports'' for purposes of Sections 
15B(c), 17(a), 18(a), 32(a) (15 U.S.C. 78o-4(c), 78q(a), 78r(a), 
78ff(a)) and other applicable provisions of the Exchange Act.\1270\ As 
discussed in the Proposal, these rules are consistent with the 
Commission's requirements for other registrants (e.g., national 
securities exchanges, securities information processors (``SIPs''), 
broker-dealers) to file updated and annual amendments with the 
Commission.\1271\ The Commission believes that such amendments are 
important for obtaining updated information for registered municipal 
advisory firms and their associated natural persons engaged in 
municipal advisory activities on the firms' behalf so that the 
Commission can assess whether such persons continue to be in compliance 
with the federal securities laws and the rules and regulations 
thereunder.\1272\ Obtaining updated information will also assist the 
Commission in its inspection and examination of municipal advisors and 
better inform the MSRB's regulation of municipal advisors. In addition, 
the Commission believes it is important for

[[Page 67570]]

municipal entities and obligated persons, as well as the public 
generally, to have access to current information regarding advisors 
registered with the Commission.
---------------------------------------------------------------------------

    \1269\ See Rule 15Ba1-5(c).
    \1270\ See Rule 15Ba1-5(d).
    \1271\ See, e.g., Rules 6a-2 and 15b3-1 under the Exchange Act. 
17 CFR 240.6a-2 and 240.15b3-1. See also 17 CFR 249.1001 (Form SIP, 
application for registration as a securities information processor 
or to amend such an application or registration).
    \1272\ See Proposal, 76 FR 858.
---------------------------------------------------------------------------

6. Rule 15Ba1-6: Consent To Service of Process To Be Filed by Non-
Resident Registered Municipal Advisors; Legal Opinion To Be Provided by 
Non-Resident Municipal Advisors; and Form MA-NR
a. Rule 15Ba1-6: Consent To Service of Process To Be Filed by Non-
Resident Registered Municipal Advisors; Legal Opinion To Be Provided by 
Non-Resident Municipal Advisors
    Proposed Rule 15Ba1-5 required each non-resident \1273\ municipal 
advisor and each non-resident general partner and managing agent \1274\ 
of a municipal advisor to furnish to the Commission, at the time of 
filing Form MA or Form MA-I, a written irrevocable consent and power of 
attorney on Form MA-NR to appoint an agent in the United States upon 
whom may be served any process, pleadings, or other papers in any 
action brought against the non-resident municipal advisor, general 
partner or managing agent.\1275\ Proposed Rule 15Ba1-5 also specified 
circumstances when each non-resident municipal advisor, general partner 
and managing agent would be required to amend Form MA-NR. In addition, 
proposed Rule 15Ba1-5 required that each non-resident municipal 
advisor, other than a natural person, provide an opinion of counsel 
that the municipal advisor can provide the Commission with access to 
the advisor's books and records and submit to onsite inspection and 
examination by the Commission. The Commission received one comment 
letter regarding this proposed rule which supported the proposed 
rule.\1276\
---------------------------------------------------------------------------

    \1273\ The definition of ``non-resident'' in Rule 15Ba1-1(j) 
that the Commission is adopting is substantially similar to the 
definition of ``non-resident'' that the Commission set forth in 
proposed Rule 15Ba1-1(h). However, the Commission is modifying this 
definition so that it includes only those persons residing, having 
their principal office and place of business, or incorporated in any 
place not subject to the jurisdiction of the United States. 
Therefore, persons residing; having their principal office and place 
of business; and incorporated in the United States or a territory of 
the United States would not be considered non-residents. Rule 15Ba1-
1(j), as adopted, defines ``non-resident'' as ``(1) [i]n the case of 
an individual, one who resides in or has his principal office and 
place of business in any place not subject to the jurisdiction of 
the United States; (2) [i]n the case of a corporation, one 
incorporated in or having its principal office and place of business 
in any place not subject to the jurisdiction of the United States; 
or (3) [i]n the case of a partnership or other unincorporated 
organization or association, one having its principal office and 
place of business in any place not subject to the jurisdiction of 
the United States.'' As adopted, this definition of ``non-resident'' 
is similar to the definition of ``non-resident broker-dealer'' in 
Rule 15b1-5 under the Exchange Act. See 17 CFR 240.15b1-5. See also 
17 CFR 275.0-2 (defining the term ``non-resident'' for purposes of 
serving non-residents in connection with Form ADV).
    \1274\ Rule 15Ba1-1(c) defines a ``managing agent'' as ``any 
person, including a trustee, who directs or manages, or who 
participates in directing or managing, the affairs of any 
unincorporated organization or association other than a 
partnership.'' As discussed in the Proposal, this definition is 
consistent with the definition of a ``managing agent'' as used in 
Rule 15b1-5 under the Exchange Act relating to consent to service of 
process to be furnished by non-resident brokers or dealers and by 
non-resident general partners or managing agents of brokers or 
dealers. See 17 CFR 240.15b1-5. See also 17 CFR 275.0-2 (discussing 
general procedures for serving non-resident investment advisers in 
connection with Form ADV); and Proposal, 76 FR 859, note 262 and 
accompanying text.
    \1275\ See Rule 15Ba1-5(a). The agent may not be a Commission 
member, official, or employee.
    \1276\ See MSRB Letter I.
---------------------------------------------------------------------------

    While adopted Rule 15Ba1-6 retains the same purpose and focus of 
the proposed rule, the Commission is adopting Rule 15Ba1-6 with certain 
modifications to reflect the Commission's decision to exempt certain 
natural persons from municipal advisor registration in Rule 15Ba1-3, as 
adopted, and to clarify and update the rule text as described below. 
First, the Commission is removing certain references that contemplate 
individual registration on Form MA-I of natural persons associated 
persons with a municipal advisor and is revising the rule text to 
clarify that a municipal advisor is required to file a Form MA-NR for 
each of its non-resident general partners, managing agents, and 
associated natural persons engaged in municipal advisor activities on 
the municipal advisor's behalf. Second, since the term registered 
municipal advisor no longer includes natural persons who are associated 
with a municipal advisor and engaged in municipal advisory activity on 
its behalf, the Commission is adding new language to Rule 15Ba1-6 to 
address such persons. For example, Rule 15Ba1-6(a)(2) requires a 
registered municipal advisor, at the time of the Form MA-I filing, to 
file with the Commission a Form MA-NR for each non-resident natural 
person associated with a municipal advisor and engaged in municipal 
advisory activities on its behalf.\1277\ Third, the Commission is 
modifying the rule to require registered municipal advisors to file a 
new Form MA-NR in the instances where the proposed rule required an 
amendment because, unlike Form MA and Form MA-I, Form MA-NR is not 
completed online and signed electronically.\1278\ Form MA-NR must be 
printed out and signed manually and a scanned copy of the signed and 
notarized form must be attached as a PDF file to the Form MA or Form 
MA-I being submitted.\1279\ Finally, the Commission made other 
clarifying revisions to and updated the citations in the rule 
text.\1280\
---------------------------------------------------------------------------

    \1277\ Similarly, Rule 15Ba1-6(c)(2), as adopted, sets forth 
requirements regarding when a registered municipal advisor is 
required to file a new Form MA-NR for its non-resident natural 
persons who are associated with the municipal advisor and engaged in 
municipal advisory activities on its behalf.
    \1278\ See General Instruction 2.c. in the Instructions for the 
Form MA Series.
    \1279\ See id.
    \1280\ For example, the Commission removed ``onsite'' from Rule 
15Ba1-6(d), as adopted, because the Commission does not conduct all 
inspections and examinations onsite.
---------------------------------------------------------------------------

    As discussed in the Proposal,\1281\ the provisions in Rule 15Ba1-6, 
as adopted, are designed to allow the Commission and others to provide 
service of process to a registered non-resident municipal advisor, a 
non-resident general partner or managing agent of a registered 
municipal advisor, and non-resident natural person associated with a 
municipal advisor and engaged in municipal advisory activities on its 
behalf by requiring the municipal advisor to file a written irrevocable 
consent and power of attorney on Form MA-NR to appoint an agent in the 
United States for service of process.\1282\ Rule 15Ba1-6 also requires 
a municipal advisor to file promptly a new Form MA-NR to reflect any 
change to the name or address of the agent for service of process for 
itself if the municipal advisor is a non-resident and for each of a 
municipal advisor's non-resident general partners, managing agents, or 
natural persons associated with the municipal advisor and engaged in 
municipal advisory activities on its behalf.\1283\ The rule further 
requires a registered non-resident municipal advisor to appoint 
promptly a successor agent and file a new Form MA-NR if the non-
resident municipal advisor discharges its agent or if its agent becomes 
unwilling or unable to accept service on behalf of the non-resident 
municipal advisor.\1284\ Similarly, Rule 15Ba1-6(c)(2) provides that 
each registered municipal advisor must require each of its non-resident 
general partners or non-resident managing agents, or non-resident 
natural persons

[[Page 67571]]

associated with the municipal advisor and engaged in municipal advisory 
activities on its behalf to appoint promptly a successor agent and the 
registered municipal advisor must file a new Form MA-NR if such non-
resident general partner, managing agent, or associated natural person 
discharges the agent or if the agent is unwilling or unable to accept 
service on behalf of such person. Rule 15Ba1-6 also requires each non-
resident municipal advisor applying for registration to provide an 
opinion of counsel on Form MA that the municipal advisor can, as a 
matter of law, provide the Commission with access to the municipal 
advisor's books and records and that the municipal advisor can, as a 
matter of law, submit to inspection and examination by the 
Commission.\1285\ Finally, similar to the other forms in the MA series, 
Form MA-NR must be filed electronically.\1286\
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    \1281\ See Proposal, 76 FR 859.
    \1282\ See Rule 15Ba1-6(a)(1) and (2) (requiring a non-resident 
municipal advisor to file a Form MA-NR on its own behalf and 
requiring municipal advisors to file a Form MA-NR for each of the 
municipal advisor's non-resident general partners, managing agents, 
or natural persons associated with the municipal advisor and engaged 
in municipal advisory activities on its behalf).
    \1283\ See Rule 15Ba1-6(b).
    \1284\ See Rule 15Ba1-6(c)(1).
    \1285\ See Rule 15Ba1-6(d). See also supra notes 1264-1265 and 
accompanying text (discussing when a non-resident municipal advisory 
firm must file an amendment to Form MA to attach an updated opinion 
of counsel).
    \1286\ See Rule 15Ba1-6(e).
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b. Form MA-NR
    The Commission received one comment letter on proposed Form MA-NR, 
which generally supported Form MA-NR.\1287\ While Form MA-NR, as 
adopted, retains the same purpose and focus of the proposed Form MA-NR, 
the Commission is adopting Form MA-NR with certain modifications. 
First, the Commission has provided more detailed instructions to 
improve the form's readability and ease of use. For example, the 
Commission included an introductory direction to refer to the General 
Instructions for the forms in the MA series before completing Form MA-
NR, a paragraph explaining the purpose of the form, and a specific 
instruction providing technical guidance for how to attach Form MA-NR 
to Form MA or Form MA-I. Second, the Commission has expanded its 
discussion of certain concepts in Form MA-NR so that persons executing 
the form have a clearer and more complete understanding of the 
information they are required to provide. For example, Section A of 
Form MA-NR, as adopted, instructs the person executing the form to 
``[i]dentify the agent for service of process for the non-resident 
municipal advisor, for the non-resident general partner or managing 
agent of a municipal advisor, or for the non-resident natural person 
associated with the municipal advisor and engaged in municipal advisory 
activities on its behalf. Fill in all lines.'' \1288\ The Commission 
expanded the discussions in several other parts of Form MA-NR, such as 
the description relating to the designation and appointment of the 
agent for service of process immediately following the agent's address 
and phone number in Section A.2, including language addressing the 
effect on partnerships of the irrevocable power of attorney appointment 
and consent to service of process, the designator's certification, and 
the method by which the designator discloses the capacity in which he 
or she is signing the form. Third, the Commission has included Section 
B and Section C in Form MA-NR, as adopted. Section B requires the 
municipal advisor to obtain the signature of the United States person 
identified in Section A as the agent for service of process to 
demonstrate that this person has accepted the designation and 
appointment as the agent for service of process. This certification 
that the agent for service of process has accepted the designation and 
appointment is necessary to ensure effective service of process upon a 
non-resident municipal advisor, non-resident general partner or 
managing agent of a municipal advisor, or non-resident natural person 
associated with the municipal advisor and engaged in municipal advisory 
activities on its behalf. Additionally, the Commission believes that 
the additional burden imposed on municipal advisors to obtain the 
signature of the U.S. agent for service of process would be minimal. 
Section C requires the person executing the form to disclose whether 
any signature is pursuant to a written authorization and whether there 
is a written contractual agreement or other written document evidencing 
the designation and appointment of the named agent for service of 
process and/or the agent's acceptance, and if so, to identify the 
document and provide an accurate and complete copy with submission of 
the Form MA or Form MA-I.
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    \1287\ See MSRB Letter I.
    \1288\ Section A in Form MA-NR, as proposed, consisted only of 
``Name of United States person applicant designates and appoints as 
agent for service of process'' with space for the name provided in a 
blank box immediately underneath.
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    Pursuant to General Instruction 2, and consistent with the rule, 
every non-resident municipal advisor must file Form MA-NR in connection 
with the municipal advisor's initial application for registration on 
Form MA and file a new Form MA-NR when required.\1289\ In addition, 
regardless of whether a municipal advisory firm is a resident of the 
United States, the firm must file a separately completed and executed 
Form MA-NR for (i) non-resident general partners and managing agents of 
the firm, and (ii) every non-resident natural person associated with 
the firm and engaged in municipal advisory activities on the firm's 
behalf.\1290\ Form MA-NR for general partners and managing agents is 
filed by the firm together with the firm's Form MA.\1291\ Form MA-NR 
for natural persons associated with the firm and engaged in municipal 
advisory activities on the firm's behalf is filed by the firm together 
with the Form MA-I relating to the natural person associated with the 
firm.\1292\
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    \1289\ See General Instruction 2.c. As discussed in the 
Proposal, failure to attach a signed and notarized Form MA-NR, where 
required, for a non-resident municipal advisor or for any non-
resident general partner or managing agent of a municipal advisory 
firm or non-resident natural person associated with a municipal 
advisor who engages in municipal advisory activities on behalf of 
the advisor, may delay SEC consideration of the municipal advisor's 
application for registration. Additionally, an SEC-registered 
municipal advisory firm that becomes a non-resident after the 
municipal advisor firm's initial application has been submitted must 
file a Form MA-NR within 30 days of becoming a non-resident. The 
same applies when a general partner or managing agent of a municipal 
advisory firm becomes a non-resident, or a non-resident becomes a 
general partner or managing agent of a municipal advisory firm, 
after the firm's initial application. Also, a municipal advisory 
firm must file a Form MA-NR together with Form MA-I if, after the 
firm's initial registration, a non-resident natural person becomes 
associated with the firm and engages in municipal advisory 
activities on the firm's behalf. In addition, a municipal advisory 
firm must file a form MA-NR if a natural person associated with the 
firm and engaged in municipal advisory activities on behalf of the 
firm becomes a non-resident after the firm has filed a Form MA-I 
relating to that individual. The firm must file the Form MA-NR 
within 30 days of such individual becoming a non-resident. See 
Instruction 3 in the General Instructions to Form MA-NR. See also 
Proposal, 76 FR 859, note 263.
    \1290\ See General Instruction 2.c.
    \1291\ See id.
    \1292\ See id.
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7. Rule 15Ba1-7: Registration of Successor to Municipal Advisor
    Proposed Rule 15Ba1-6 was designed to govern the registration of a 
successor to a registered municipal advisor.\1293\

[[Page 67572]]

The rule is substantially similar to Rule 15b1-3 under the Exchange 
Act, which governs the registration of a successor to a registered 
broker-dealer.\1294\ The Commission received no comments on the 
proposed Rule 15Ba1-6 and is adopting the rule as Rule 15Ba1-7 without 
modification.
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    \1293\ As discussed in the Proposal, the purpose of Rule 15Ba1-7 
is to enable a successor municipal advisor to operate without an 
interruption of business by relying for a limited period of time on 
the registration of the predecessor municipal advisor until the 
successor's own registration becomes effective. See Proposal, 76 FR 
860. The rule is intended to facilitate the legitimate transfer of 
business between two or more municipal advisors and to be used only 
where there is a direct and substantial business nexus between the 
predecessor and the successor municipal advisor. The rule is not 
designed to allow a registered municipal advisor to sell its 
registration, eliminate substantial liabilities, spin off personnel, 
or facilitate the transfer of the registration of a ``shell'' 
organization that does not conduct any business. As discussed in the 
Proposal, no entity is permitted to rely on Rule 15Ba1-7 unless it 
is acquiring or assuming substantially all of the assets and 
liabilities of the predecessor's municipal advisor business, or 
there has been no practical change of control. See General 
Instruction 1 to Form MA.
    The Commission will not apply Rule 15Ba1-7 to a reorganization 
that involves only registered municipal advisors. See Proposal, 76 
FR 860. In those situations, the registered municipal advisors need 
not rely on the rule because they can continue to rely on their 
existing registrations. The rule also will not apply to situations 
in which the predecessor intends to continue to engage in municipal 
advisory activities. Otherwise, confusion may result as to the 
identities and registration statuses of the parties.
    \1294\ See 17 CFR 240.15b1-3. See also Registration of 
Successors to Broker-Dealers and Investment Advisers, Exchange Act 
Release No. 31661 (December 28, 1992), 58 FR 7 (January 4, 1993) 
(providing interpretive guidance regarding amendments to Rule 15b1-
3).
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Succession by Application
    Rule 15Ba1-7(a) provides that in the event that a municipal advisor 
succeeds to and continues the business of a municipal advisor 
registered pursuant to Exchange Act Section 15B(a), the registration of 
the predecessor will be deemed to remain effective as the registration 
of the successor if the successor, within 30 days after the succession, 
files an application for registration on Form MA and the predecessor 
files a notice of withdrawal from registration with the Commission on 
Form MA-W. The rule further provides that the registration of the 
predecessor municipal advisor will cease to be effective as the 
registration of the successor municipal advisor 45 days after the 
application for registration on Form MA is filed by the 
successor.\1295\ In other words, the 45-day period will not begin to 
run until a complete Form MA has been filed by the successor with the 
Commission. This 45-day period is consistent with Exchange Act Section 
15B(a)(2), pursuant to which the Commission has 45 days to grant a 
registration or institute proceedings to determine if a registration 
should be denied.\1296\
---------------------------------------------------------------------------

    \1295\ See Rule 15Ba1-7(a).
    \1296\ See 15 U.S.C. 78o-4(a)(2).
---------------------------------------------------------------------------

Succession by Amendment
    Rule 15Ba1-7(b) provides that, notwithstanding Rule 15Ba1-7(a), if 
a municipal advisor succeeds to and continues the business of a 
registered predecessor municipal advisor, and the succession is based 
solely on a change in the predecessor's date or state of incorporation, 
form of organization, or composition of a partnership, the successor 
may, within 30 days after the succession, amend the registration of the 
predecessor municipal advisor on Form MA to reflect these changes. Such 
an amendment will be deemed an application for registration filed by 
the predecessor and adopted by the successor.
    In all three types of successions specified in Rule 15Ba1-7(b) 
(change in the date or state of incorporation, change in form of 
organization, and change in composition of a partnership), the 
predecessor must cease operating as a municipal advisor. As stated in 
the Proposal, the Commission believes that it is appropriate to allow a 
successor to file an amendment to the predecessor's Form MA in these 
types of successions because such successions do not typically result 
in a change of control of the municipal advisor.\1297\
---------------------------------------------------------------------------

    \1297\ See Proposal, 76 FR 860.
---------------------------------------------------------------------------

8. General Instructions and Glossary
    The Commission proposed a set of instructions, which includes 
general instructions for proper completion and submission of Forms MA, 
MA-I, MA-W, and MA-NR (``General Instructions''),\1298\ as well as 
specific instructions relating to each of the forms individually, as 
applicable. A glossary of terms (``Glossary'') is included at the end 
of the General Instructions to help applicants complete the forms. As 
discussed in the Proposal, the definitions in the Glossary generally 
are derived from the terms in Exchange Act Section 15B(e),\1299\ the 
definitions in Rule 15Ba1-1,\1300\ and Form ADV.\1301\ For ease of 
reference, the Commission proposed one Glossary to define terms that 
may appear in any or all of the forms. All terms that are defined or 
described in the Glossary appear in the forms in italics.
---------------------------------------------------------------------------

    \1298\ Form MA-W is for withdrawal from registration as a 
municipal advisor, and Form MA-NR is for the appointment of an agent 
for service of process by a non-resident municipal advisor, non-
resident general partner or managing agent of a municipal advisor, 
or non-resident natural person associated with a municipal advisor 
and engaged in municipal advisory activities on behalf of the 
municipal advisor. See supra Sections III.A.4.b. and III.A.6. 
(discussing Forms MA-W and MA-NR, respectively).
    \1299\ See 15 U.S.C. 78o-4(e).
    \1300\ See Rule 15Ba1-1. See also Proposal, 76 FR 839.
    \1301\ See 17 CFR 279.1.
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    The Commission did not receive any comments on the General 
Instructions and Glossary and is adopting the General Instructions and 
Glossary generally as proposed. However, some revisions have been made 
to clarify or modify instructions and definitions or to provide 
additional guidance, as discussed more fully below. In particular, the 
instructions are being revised to reflect that Form MA-I, as adopted, 
will not serve as a registration form and that municipal advisory 
firms, rather than natural persons (other than sole proprietors), have 
the obligation to file and complete Form MA-I. In addition, some 
sections of the General Instructions have been reorganized to enhance 
their readability, three new instructions have been added, additional 
defined terms have been introduced and included in the Glossary, and 
one term has been removed from the Glossary.
    General Instruction 1, as proposed, directed applicants to the 
Commission's Web site for additional information about the Commission's 
rules regarding municipal advisors and the Exchange Act. General 
Instruction 1, as adopted, notes that a comprehensive explanation of 
the form requirements is provided in this release.
    General Instruction 2, as proposed, discussed who should file Form 
MA and Form MA-I and explained that these forms must be used to 
register with the Commission and to amend previously submitted Forms MA 
and MA-I. The instruction also discussed the responsibility of sole 
proprietors to file both forms. General Instruction 2, as proposed, 
further included information regarding voluntary registration for 
certain individuals; the requirement that a Form MA-NR must be 
submitted for municipal advisors and general partners and managing 
agents of municipal advisors that are not residents of the United 
States; and the requirement that a municipal advisor that is no longer 
required to be registered must file Form MA-W.
    As adopted, General Instruction 2 has been revised for clarity and 
now also provides more details about the use of Form MA. For example, 
it now notes the requirement for a municipal advisor that registers on 
Form MA to submit an annual update of that form.\1302\
---------------------------------------------------------------------------

    \1302\ The instruction, as proposed, referred only to 
amendments, which may have implied that additional filings are 
required only in the instance of changes in the information provided 
on previously-submitted forms.
---------------------------------------------------------------------------

    General Instruction 2 has been revised to reflect the fact that 
Form MA-I is no longer a registration form. It explains that municipal 
advisory firms must complete and file Form MA-I on behalf of natural 
persons associated with the firm and engaged in municipal advisory 
activities on behalf of the firm, including employees of the firm. In

[[Page 67573]]

addition, General Instruction 2 notes that independent contractors are 
included in the definition of ``employee'' of a municipal advisor for 
purposes of a firm's obligation to complete and file Form MA-I.\1303\ 
The instruction explains that Form MA-I is also used to amend a 
previously submitted Form MA-I.
---------------------------------------------------------------------------

    \1303\ Although independent contractors are included in the 
definition of employee for purposes of these forms in the Glossary 
(as both proposed and adopted), their inclusion is noted in General 
Instruction 2, as adopted, because it might otherwise be overlooked.
---------------------------------------------------------------------------

    With regard to Form MA-NR, General Instruction 2 now more clearly 
indicates that every municipal advisory firm must file with the firm's 
Form MA a separately completed and executed Form MA-NR for every 
general partner and/or managing agent of a firm that is a non-resident. 
In addition, the instruction has been revised to indicate that 
municipal advisory firms must also file Form MA-NR for every non-
resident natural person associated with the firm and engaged in 
municipal advisory activities on the firm's behalf together with the 
Form MA-I related to the person. General Instruction 2 indicates that 
firms have an obligation to file Form MA-NR in these circumstances, 
regardless of whether the firm itself is domiciled in the United States 
or is a non-resident filing a Form MA-NR on its own behalf. In 
addition, General Instruction 2 clarifies that a Form MA-NR for a non-
resident general partner or managing agent of a municipal advisor must 
be filed with the Form MA of the municipal advisor. The instruction, as 
adopted, also explains that, unlike the other forms in the Form MA 
series, which are completed online and signed electronically, Form MA-
NR must be printed out and signed manually by both the non-resident and 
the person designated as agent for service of process. Each of the 
signatures must be separately notarized, and a scanned copy of the 
signed and notarized form must then be attached as a PDF file to the 
electronically-completed Form MA or Form MA-I. To emphasize the 
importance of submitting a Form MA-NR, where required, General 
Instruction 2, as adopted, includes a warning that failure to attach a 
signed and notarized Form MA-NR for a non-resident municipal advisor, 
any non-resident general partner or managing agent of a municipal 
advisory firm, or non-resident natural person associated with a 
municipal advisory firm who engages in municipal advisory activities on 
behalf of the firm may delay Commission consideration of the municipal 
advisor's application for registration.
    General Instruction 2 indicates that Form MA-W does not need to be 
completed when a natural person with respect to whom a municipal 
advisory firm filed Form MA-I is no longer associated with the firm or 
no longer engaged in municipal advisory activities on behalf of the 
firm. The instruction now explains that the firm must indicate this 
change by filing an amendment to Form MA-I.
    The proposed instructions in General Instruction 2 regarding 
voluntary registration as a municipal advisor have been deleted, as the 
purpose for which this option was created is no longer relevant.\1304\
---------------------------------------------------------------------------

    \1304\ The Commission notes that several commenters raised 
concerns regarding the interaction of the Commission's proposed rule 
regarding voluntary municipal advisor registration with amendments 
that had been proposed in November 2010 to the Commission's ``Pay-
to-Play Rule.'' See, e.g., ICI Letter and MFA Letter. See also 
Investment Advisers Act Release No. 3010 (November 10, 2010), 75 FR 
77052 (December 10, 2010) (Pay-to-Play Proposed Amendments); and 
Proposal, 76 FR 832 n.104 and accompanying text. The Commission 
notes that it adopted amendments to its Pay-to-Play Rule on June 22, 
2011. See Rules Implementing Amendments to the Investment Advisers 
Act of 1940, Investment Advisers Act Release No. 3221 (June 22, 
2011), 76 FR 42950 (July 19, 2011). As proposed, the amendments to 
the Pay-to-Play Rule would have excepted only registered municipal 
advisors from that rule's ban on compensating third-party 
solicitors. If the amendments had been adopted as proposed, an 
investment adviser may have been unable to hire an affiliated 
solicitor to solicit government entities on its behalf (absent the 
option for voluntary municipal advisor registration) because 
affiliated solicitors would not fall within the statutory definition 
of municipal advisor. The final amendments to the Pay-to-Play Rule, 
however, permit advisers to compensate municipal advisors and 
Commission registered investment advisers and broker-dealers for 
soliciting government entities if they are subject to restrictions 
substantially equivalent to or more stringent than the Pay-to-Play 
Rule. See id. See also Rule 206(4)-5 under the Investment Advisers 
Act (17 CFR 275.206(4)(5)). Consequently, the option of voluntary 
registration as a municipal advisor for persons undertaking 
solicitation of a municipal entity is no longer necessary.
---------------------------------------------------------------------------

    General Instruction 3, as proposed, instructed applicants with 
respect to the organization of Form MA (for example, that Form MA also 
includes Schedules A, B, C, and D, as well as Criminal Action, 
Regulatory Action, and Civil Judicial Action DRPs) and made clear that 
an applicant must complete all items in Form MA. General Instruction 3 
is being adopted substantially as proposed, with only minor revisions, 
including an explanation that Form MA includes an ``Execution Page'' 
where the form is signed.
    General Instruction 4, as proposed, provided comparable 
instructions with respect to the organization and completion of Form 
MA-I and the schedules and the DRPs required by that form. General 
Instruction 4 is being revised to state that Form MA-I asks questions 
about sole proprietors and natural persons associated with a municipal 
advisory firm and engaged in municipal advisory activities on behalf of 
the firm, and to reflect the fact that Form MA-I, as adopted, is not a 
registration form.
    General Instructions 5-7 are being adopted substantially as 
proposed, with revisions to reflect the fact that municipal advisory 
firms, not natural persons associated with the firms and engaged in 
municipal advisory activities on behalf of the firms, must sign and 
file Form MA-I. However, the order of these instructions has been 
rearranged in their adopted version for purposes of clarity.
    First, General Instruction 5 (in the order as adopted) sets forth 
who must sign Form MA or MA-I. General Instruction 5 explains that such 
person will be a sole proprietor (in the case of a sole 
proprietorship), a general partner (in the case of a partnership), an 
authorized principal (in the case of a corporation), and, for all 
others, an authorized individual who participates in managing or 
directing the municipal advisor's affairs.\1305\ It further makes clear 
that in all cases the signature should be a typed name. Next, General 
Instruction 6 makes clear where Form MA must be signed, explaining that 
domestic municipal advisors are required to execute the Domestic 
Execution Page to Form MA, while non-resident municipal advisors are 
required to execute the Non-Resident Municipal Advisor Execution 
Page.\1306\ General Instruction 7 provides that a municipal advisory 
firm signs Item 7 of Form MA-I.
---------------------------------------------------------------------------

    \1305\ Because natural persons that are not sole proprietors are 
not required to file Form MA-I, the part of General Instruction 5 
set forth in the Proposal that stated that a natural person filing 
Form MA-I on his or her own behalf must sign the form has been 
deleted.
    \1306\ See supra Section III.A.6. (discussing Rule 15Ba1-6 and 
Form MA-NR).
---------------------------------------------------------------------------

    General Instructions 8 and 9 discuss when to amend and/or update 
Forms MA and MA-I respectively, as discussed above.\1307\ General 
Instruction 8 (which pertains to Form MA), has been adopted 
substantially as proposed, but has been revised to distinguish more 
clearly between an amendment and an annual update. To clarify how 
amendments and updates will work in the electronic filing system, the 
instruction also now explains that each time a firm accesses its Form 
MA after its initial filing of the form, the

[[Page 67574]]

information from the firm's most recent previous filing will appear. 
Only the information that has changed will need to be amended; the 
applicant will not need to complete the entire form again. The 
statement in General Instruction 8 regarding the requirement for a non-
resident municipal advisor to amend its form and attach an updated 
opinion of counsel has been revised to more accurately reflect the 
required content of the opinion of counsel as stated on Form MA.\1308\ 
General Instruction 9, as proposed, concerned when Form MA-I (for 
natural person municipal advisors) needs ``to be updated.'' The 
instruction has been revised in its adopted form to state generally 
that Form MA-I must ``be amended'' whenever information previously 
provided on the form becomes inaccurate.\1309\
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    \1307\ See supra Section III.A.5.
    \1308\ See supra note 1264 and accompanying text for the revised 
language.
    \1309\ The instruction no longer states that every ``natural 
person municipal advisor'' must amend Form MA-I because the rule, as 
adopted, requires municipal advisory firms, and not natural persons 
(other than sole proprietors), to complete and file Form MA-I. See 
Rule 15Ba1-2(b)(1) of the adopted rules.
---------------------------------------------------------------------------

    General Instruction 10, as proposed, provided that an applicant 
must complete and file the forms electronically. As adopted, General 
Instruction 10 provides that a municipal advisor must complete and 
submit the relevant form, including any required attachments, 
electronically. General Instruction 10 reflects the change to Rule 
15Ba1-2(c), as adopted,\1310\ that Form MA is considered filed upon 
submission of a completed Form MA, together with all additional 
required documents, including all required filings of Form MA-I (17 CFR 
249.1310), to EDGAR. General Instruction 10 also explains that when a 
municipal advisor's submitted Form MA is accepted by the Commission, 
the municipal advisor will receive an SEC file number. General 
Instruction 11 is being adopted to provide more specific information 
about how to electronically file the forms in the Form MA series and, 
specifically, how to obtain access to EDGAR to do so.\1311\
---------------------------------------------------------------------------

    \1310\ See supra note 971 and accompanying text.
    \1311\ See supra note 961. General Instructions 12 and 13 as 
proposed, regarding self-certification by municipal advisors filing 
on Form MA and Form MA-I, have been removed, because, as discussed 
above, the Commission has eliminated the self-certification 
requirement in Form MA and Form MA-I as adopted.
---------------------------------------------------------------------------

    A new General Instruction 12 has been added to the General 
Instructions, as adopted, to clarify what a municipal advisor (or, in 
the case of a firm, its authorized representative) represents by 
signing and executing the form as a whole.\1312\ General Instruction 12 
explains that, by signing the Execution Page of Form MA, the authorized 
signatory of a domestic municipal advisory firm is appointing the 
Secretary of State or other legally designated officer of the state in 
which the firm maintains its principal office and place of business as 
the firm's agent to receive service of process.\1313\ The signatory is 
also attesting to the truth and correctness of the information provided 
in the form and declaring that the firm's books and records will be 
preserved and available for inspection and that any person having 
custody of the books and records is authorized to make them available 
to federal regulators.
---------------------------------------------------------------------------

    \1312\ General Instruction 12 does not introduce new substantive 
requirements that are being added in the adopting phase of this 
rulemaking. They were set forth in the forms, as proposed, and are 
now being added to the General Instructions in order to highlight 
them for applicants preparing to file. See also supra notes 1150-
1156 and accompanying text.
    \1313\ See also supra notes 1275-1287 and accompanying text.
---------------------------------------------------------------------------

    General Instruction 12 further explains that a signatory on behalf 
of a non-resident municipal advisory firm must use the version of the 
Execution Page of Form MA that is specifically required for non-
resident firms. Besides attesting to the truth and correctness of the 
information provided on the form and making the same representations as 
a U.S. firm regarding books and records, the signatory on behalf of the 
firm is agreeing to provide, at the firm's own expense, current, 
correct, and complete copies of its books and records to the SEC upon 
request. The instruction explains that a non-resident firm must 
designate an agent for service of process on a separate form, Form MA-
NR.
    General Instruction 12 explains that an authorized signatory of a 
domestic municipal advisory firm filing Form MA-I with respect to a 
natural person who is associated with the firm and engaged in municipal 
advisory activities on behalf of the firm, by signing the Execution 
Page of Form MA-I, is attesting to the truth and correctness of the 
information provided in the form. The instruction also explains that 
the authorized signatory is attesting that the firm has obtained and 
retained written consent from the natural person associated with the 
firm that service of any civil action brought by, or notice of any 
proceeding before, the SEC or any SRO in connection with the 
individual's municipal advisory activities may be given by registered 
or certified mail to the individual's address provided in Item 1 of the 
form.
    General Instruction 12 further explains that by signing the 
Execution Page of Form MA-I, a sole proprietor filing Form MA-I is 
consenting that service of process may be given by registered or 
certified mail to the address the sole proprietor has supplied in Item 
1 of the form and is also attesting to the truth and correctness of the 
information he or she has provided in the form.
    General Instruction 13, as adopted, (General Instruction 14 as 
proposed) discusses the requirement for a non-resident municipal 
advisory firm to attach a legal opinion to its Form MA that the 
municipal advisor can, as a matter of law, provide the Commission with 
access to its books and records and that the municipal advisor can, as 
a matter of law, submit to inspection and examination by the 
Commission.\1314\ As adopted, General Instruction 13 reflects the fact 
that the opinion of counsel that non-residents must file no longer 
needs to state that the municipal advisor can submit to ``onsite'' 
inspection and examination.\1315\
---------------------------------------------------------------------------

    \1314\ See supra note 1154 and accompanying text.
    \1315\ See supra note 1280 and accompanying text.
---------------------------------------------------------------------------

    The Commission has also added new General Instruction 14 to list 
together in one place all the circumstances in which additional 
documents must be attached to a Form MA or Form MA-I. The list of such 
documents does not include any new requirements that were not included 
in the Proposal. General Instruction 14 has been added for purposes of 
clarity and convenience. The required documents enumerated include: (1) 
any documents relating to criminal actions, as specified in the 
Criminal Action DRPs of Form MA and Form MA-I, and any other supporting 
documentation; (2) a manually-signed Form MA-NR for each non-resident 
for whom such form is required; \1316\ (3) any written document (e.g., 
board resolution or power of attorney) authorizing a signatory to sign 
a Form MA-NR; and (4) any written contractual agreements relating to 
Form MA-NR; and (5) the required opinion of counsel for non-resident 
municipal advisory firms.
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    \1316\ Form MA-NR, by which a non-resident municipal advisor 
designates an agent for service of process in the U.S., is accessed 
electronically via links within Form MA and Form MA-I. The 
information requested by the form may be entered online. However, 
the form must be printed out and signed manually--both by the 
applicant (an authorized signatory in the case of a firm) and by the 
designated agent for service of process--and each of the signatures 
must be notarized. After the signatures and notarizations are 
completed, Form MA-NR must be attached in PDF format to the Form MA 
or Form MA-I.
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    The Commission has added new General Instruction 15 to provide 
clarity

[[Page 67575]]

with respect to filing deadlines. General Instruction 15 provides that 
if the deadline for submitting an initial filing, annual update, or 
amendment to a form occurs on a Saturday, Sunday, or holiday on which 
the Commission is not open for business, then the deadline shall be the 
next business day.
    The General Instructions also provide some instructions and 
explanations specific to certain items in Form MA and Form MA-I.\1317\ 
In addition, the General Instructions provide some instructions and 
explanations specific to Form MA-NR. Specific Instruction 1 for Form 
MA, as adopted, explains that a municipal advisor that is not currently 
registered as a municipal advisor and has taken over the business of 
another municipal advisor or was registered as a municipal advisor but 
has changed its structure or legal status will be a new organization 
with registration obligations under the Exchange Act.\1318\ It further 
explains that an applicant not registered with the SEC as a municipal 
advisor that is acquiring or assuming substantially all of the assets 
and liabilities of the advisory business of a registered municipal 
advisor will be required to file a new application for registration on 
Form MA within 30 calendar days after the succession. The instruction 
also provides that, once the new registration is effective, Form MA-W 
(as described above) must be filed to withdraw the registration of the 
acquired municipal advisor. The instruction also explains that, if a 
new municipal advisor is formed solely as a result of a change in the 
form of organization or in the composition of a partnership or the date 
or the state of incorporation, and there has been no practical change 
in control or management, the applicant will be permitted to amend the 
existing registration to reflect the changes by filing an amendment 
within 30 calendar days after the change or reorganization.
---------------------------------------------------------------------------

    \1317\ As proposed, the sections of the General Instructions 
that explained how to complete certain items in Form MA and Form MA-
I did not have names. As adopted, these sections are now called 
``Specific Instructions for Certain Items in Form MA'' and 
``Specific Instructions for Certain Items in Form MA-I.''
    \1318\ Specific Instruction 1 for Form MA as adopted has been 
significantly revised for purposes of clarity but includes no 
substantive changes. See also infra Section III.A.7, regarding Rule 
15Ba1-7, adopted as part of this rulemaking, upon which this 
instruction is based.
---------------------------------------------------------------------------

    Specific Instruction 2 for Form MA is being adopted substantially 
as proposed and has been revised only for clarity and to correct 
certain citations that have changed. The instruction provides guidance 
for newly-formed municipal advisors regarding how to respond to several 
questions in Item 4 of Form MA (described above) that may be difficult 
to answer when the applicant for registration has not been in existence 
for a significant amount of time. The instruction advises that, for a 
newly-formed municipal advisor, responses should reflect the 
applicant's current municipal advisory activities (i.e., its activities 
at the time of filing, with certain exceptions). With respect to 
specified questions regarding the applicant's compensation 
arrangements, the instructions provide that the applicant base its 
responses on the types of compensation it expects to accept. Further, 
with respect to its business activities relating to municipal 
securities, the applicant is instructed to base its responses on the 
types of municipal advisory activities in which it expects to engage 
during the next year.
    Specific Instruction 3 for Form MA is being adopted substantially 
as proposed, with non-substantive revisions. The instruction explains 
that Schedule D is to be completed if any response to Form MA requires 
further explanation, or if the applicant wishes to provide additional 
information.
    The Specific Instructions for Certain Items in Form MA-I, as 
adopted, have been revised to reflect the fact Form MA-I is not a 
registration form and that municipal advisory firms, rather than 
natural persons (other than sole proprietors), have the obligation to 
complete and file Form MA-I. Specific Instruction 1 for Form MA-I 
explains that, in Item 1 of Form MA-I, the municipal advisory firm must 
enter the individual's CRD Number (if assigned), the individual's 
social security number,\1319\ and the addresses of all offices at which 
the individual is or will be physically located or from which the 
individual is or will be supervised, even if the individual does not 
work at that location.\1320\
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    \1319\ As discussed above, social security numbers will not be 
made publicly available. This information is necessary in connection 
with the Commission's enforcement and examination functions pursuant 
to Section 15B(c) of the Exchange Act (15 U.S.C. 78o-4(c)). See 
Proposal, 76 FR 840, note 171.
    \1320\ General Instruction 1 to Form MA-I in its adopted form 
has been expanded to provide more explanation for a firm that 
submits Form MA-I on behalf of natural persons associated with the 
firm and engaged in municipal advisory activities on the firm's 
behalf, but no new requirements have been added.
---------------------------------------------------------------------------

    Specific Instruction 2 for Form MA-I is being adopted substantially 
as proposed, with revisions made for clarity. The instruction 
emphasizes that, for purposes of completing Item 2 to Form MA-I, the 
firm must enter all the other names that the individual is using, has 
used, is known or has been known by, other than the individual's legal 
name, since the age of 18, which includes nicknames, aliases, and names 
used before and after marriage.
    Specific Instruction 3 for Form MA-I is being adopted substantially 
as proposed, but expanded with more information. The instruction 
explains that, for purposes of Item 3, with respect to the individual's 
residential history for the past 5 years, post office boxes may not be 
used to complete the response and the firm may not leave any gaps in 
the individual's residential history greater than three months. As 
adopted, this instruction also includes the statement: ``This 
information is needed for regulatory purposes. However, the version of 
completed Form MA-I that will be available for viewing by the public 
will not show the private residential addresses that you enter.''
    Specific Instruction 4 for Form MA-I is being adopted substantially 
as proposed, with an added clarification. The instruction provides 
that, with respect to Item 4 of Form MA-I, the individual's employment 
history for the past 10 years must be provided with no gaps greater 
than three months; that the history should account for full-time and 
part-time employment, self-employment, military service and homemaking; 
and that unemployment, full-time education, extended travel, and other 
similar statuses should be included. The added clarification explains 
that such statuses should be entered on the line provided for ``Name of 
Municipal Advisor or Company.''
    Specific Instruction 5 for Form MA-I, regarding Item 5 of Form MA-I 
(``Other Business''), has been revised in its adopted version. Instead 
of restating, as proposed, some of the information requests specified 
in Item 5, the instruction explains that other businesses in which the 
individual ``is engaged'' is intended to capture such engagements as a 
proprietor, partner, officer, director, or employee (including 
independent contractor, trustee, agent or otherwise). As adopted, the 
instruction also informs firms that if the number of hours per week 
that individuals devote to the other business varies, the firms should 
provide an average.
    Specific Instruction 6 for Form MA-I, regarding Item 6 of Form MA-
I, is being adopted as proposed. The instruction advises firms that 
affirmative responses to certain disclosure questions in the form could 
make an individual subject to a statutory disqualification.
    Specific Instruction 7 for Form MA-I is being adopted as proposed, 
with an

[[Page 67576]]

added reminder for non-residents. The instruction indicates that, as 
with Form MA, the form is to be signed (in Item 7 of Form MA-I) by 
typing a signature in the designated field and makes clear that, by 
typing a name, the signatory acknowledges and represents that the entry 
constitutes in every way, use, or aspect, his or her legally binding 
signature. The added reminder advises the firm that if the individual 
is a non-resident, the firm must attach a manually-signed Form MA-NR to 
the form.
    The General Instructions contain a new section called ``General 
Instructions to Form MA-NR'' that consists of instructions and 
explanations specific to Form MA-NR. General Instruction 1 to Form MA-
NR repeats the information in General Instruction 2, discussed above, 
regarding when Form MA-NR must be filed.
    General Instruction 2 to Form MA-NR describes the circumstances in 
which more than one Form MA-NR must be filed by a municipal advisory 
firm. For example, the instruction states that a non-resident municipal 
advisory firm filing a Form MA for itself would also need to file Form 
MA-NR for each of its non-resident general partners and managing 
agents, even if a Form MA-NR had been previously filed by another 
municipal advisor for the general partner or managing agent. In 
addition, a firm filing Form MA-I must attach Form MA-NR for every non-
resident natural person associated with the firm and engaged in 
municipal activities on the firm's behalf.
    General Instruction 3 to Form MA-NR describes when a Form MA-NR 
must be filed at times other than when a municipal advisor submits its 
initial application for registration. The instruction explains that a 
registered municipal advisory firm must file a Form MA-NR within 30 
days of the firm becoming a non-resident. The same applies when a 
general partner or managing agent of the municipal advisory firm 
becomes a non-resident, or a non-resident becomes a general partner or 
managing agent of the firm after the firm's initial application for 
registration. In such cases, the municipal advisor must file an 
amendment to Form MA with the new Form MA-NR attached. The instruction 
explains that a municipal advisory firm must also file Form MA-NR with 
Form MA-I if, after the firm's initial registration, a non-resident 
natural person becomes associated with the firm and engages in 
municipal advisory activities on the firm's behalf. In addition, a firm 
must file Form MA-NR if a natural person associated with the firm and 
engaged in municipal advisory activities on behalf of the firm becomes 
a non-resident after the firm has filed Form MA-I relating to that 
individual. The firm must file Form MA-NR within 30 days of the 
individual becoming a non-resident.\1321\
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    \1321\ General Instruction 3 to Form MA-NR also contains a note 
reminding non-resident municipal advisory firms of two additional 
requirements for non-resident municipal advisory firms that are 
discussed in General Instruction 12 (to complete Form MA Execution 
Page for non-residents and the undertaking regarding books and 
records) and General Instruction 13 (to attach an opinion of counsel 
that the firm can provide the Commission with access to its books 
and records and can submit to inspection and examination by the 
Commission).
---------------------------------------------------------------------------

    General Instruction 4 to Form MA-NR describes when a new Form MA-NR 
must be filed. The instruction indicates that a new Form MA-NR must be 
filed promptly if a previously-filed Form MA-NR becomes invalid or 
inaccurate.\1322\ This includes any change to the name or address of 
the non-resident municipal advisory firm, general partner, managing 
agent, or natural person associated with the firm and engaged in 
municipal advisory activities on behalf of the firm, or any change to 
the name or address of the agent of service of process of such non-
resident, to which the previously-filed Form MA-NR relates. The 
instruction explains that a non-resident must promptly appoint a 
successor agent for service of process and the municipal advisor must 
file a new Form MA-NR if the non-resident discharges its identified 
agent for service of process or if its agent for service of process 
becomes unwilling or unable to accept service on behalf of the non-
resident.
---------------------------------------------------------------------------

    \1322\ A new Form MA-NR is filed by submitting an amendment to 
Form MA with a new Form MA-NR attached.
---------------------------------------------------------------------------

    In the Proposal, the term ``non-resident'' was defined as an 
individual, corporation, or partnership or other unincorporated 
organization or association that resides in or has his or its principal 
office and place of business in ``any place not in the United States.'' 
As adopted, the language in the term ``non-resident'' that determines 
whether an individual, corporation, or partnership or other 
unincorporated organization or association is a ``non-resident'' has 
been slightly modified to whether the person resides in or has his or 
its principal office and place of business in ``any place not subject 
to the jurisdiction of the United States.'' The language has been 
changed to clarify that persons that reside or have their principal 
office and place of business in United States territories do not fall 
within the definition of ``non-resident.''
    The Glossary of Terms is being adopted substantially as proposed. 
However, the Glossary, as adopted, contains some revisions that are 
being made for clarity. As adopted, the Glossary includes some 
revisions to terms that reflect changes to the definitions being 
adopted in Rule 15Ba1-1. For example, the definition of ``Guaranteed 
Investment Contract'' has been revised to clarify that the contract at 
issue must relate to investments of proceeds of municipal securities or 
municipal escrow investments. The definition of the term ``municipal 
advisor,'' as adopted, has been revised to make clear that the 
definition is subject to the exclusions that are being adopted under 
Rule 15Ba1-1(d)(2) \1323\ and the exemptions under Rule 15Ba1-
1(d)(3).\1324\ Likewise, the definition of the term ``obligated 
persons,'' consistent with the definition in adopted Rule 15Ba1-1, has 
been revised to state that the term does not include a person whose 
financial information or operating data is not material to a municipal 
securities offering or the federal government. The Glossary contains 
other revisions to terms that are consistent with revisions to the 
definitions in Rule 15Ba1-1, as adopted.
---------------------------------------------------------------------------

    \1323\ 17 CFR 240.15Ba1-1(d)(2).
    \1324\ 17 CFR 240.15Ba1-1(d)(3).
---------------------------------------------------------------------------

    The Glossary includes some new definitions that were not in the 
Proposal. For example, the Glossary now defines the term ``federal 
regulatory agency'' to include any federal banking agency and the 
National Credit Union Administration. The Glossary also defines the 
term ``state regulatory agency'' to include any State securities 
commission (or any agency or officer performing like functions); State 
authority that supervises or examines banks, savings associations, or 
credit unions; or State insurance commission (or any agency or office 
performing like functions to the above). The definitions of the terms 
``federal regulatory agency'' and ``state regulatory agency'' are 
consistent with the language in Exchange Act Section 15(b)(4)(H).\1325\ 
The Glossary has also been revised to include a new definition of the 
term ``affiliate, affiliated, affiliation,'' which is derived from the 
definition of ``advisory affiliate'' for Form ADV.
---------------------------------------------------------------------------

    \1325\ The statutory disqualification language of Section 
15(b)(4)(H) is referenced in Exchange Act Section 15B(c)(2), which 
describes the Commission's power to censure, place limitations on 
the activities, functions, or operations, or suspend, or revoke the 
registration of a municipal advisor.
---------------------------------------------------------------------------

    The term ``natural person municipal advisor'' has been removed from 
the Glossary, as adopted. In the Proposal,

[[Page 67577]]

the term was defined to mean any natural person that is a municipal 
advisor, including sole proprietors. The term had been included in the 
Proposal to collectively describe natural persons who were required to 
file Form MA-I. Because municipal advisory firms, rather than natural 
persons (other than sole proprietors), are now responsible for filing 
Form MA-I, the term is no longer necessary, and is therefore being 
removed from the Glossary.
9. Rule 15Bc4-1: Persons Associated With Municipal Advisors
    As noted in the Proposal, Section 975(c)(5) of the Dodd-Frank Act 
provides the Commission with authority to censure or place limitations 
on the activities or functions of any person associated with a 
municipal advisor or to suspend or bar any such person from being 
associated with a municipal advisor. As discussed in the Proposal, 
however, it appears that a technical error was made in the final draft 
of this provision.\1326\ Specifically, Section 975(c)(5) of the Dodd-
Frank Act provides that Section 15B(c)(4) of the Exchange Act be 
amended ``by inserting `or municipal advisor' after `municipal 
securities dealer or obligated person' each place that term appears.'' 
\1327\ At the time the Dodd-Frank Act was enacted, however, Section 
15B(c)(4) of the Exchange Act included the term ``municipal securities 
dealer,'' but did not include the phrase ``municipal securities dealer 
or obligated person'' (emphasis added).
---------------------------------------------------------------------------

    \1326\ See Proposal, 76 FR 850, n.233.
    \1327\ See Section 975(c)(5) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    To address any ambiguity created by this error, the Commission 
stated in the Proposal its intent to recommend a technical amendment to 
Section 975(c)(5) of the Dodd-Frank Act.\1328\ To date, however, the 
Exchange Act has not been amended to correct this technical error. 
Therefore, to clarify the Commission's interpretation of Section 
15B(c)(4) of the Exchange Act, the Commission is adopting new Rule 
15Bc4-1 to make clear the Commission's understanding of its authority 
with respect to associated persons of municipal advisors. Specifically, 
Rule 15Bc4-1 states that the Commission has the authority to, by order, 
censure or place limitations on the activities or functions of any 
person associated, seeking to become associated, or, at the time of the 
alleged misconduct, associated or seeking to become associated with a 
municipal advisor, or suspend for a period not exceeding 12 months or 
bar any such person from being associated with a broker, dealer, 
investment adviser, municipal securities dealer, municipal advisor, 
transfer agent, or nationally recognized statistical rating 
organization, if the Commission finds, on the record after notice and 
opportunity for hearing, that such censure, placing of limitations, 
suspension, or bar is in the public interest and that such person has 
committed any act, or is subject to an order or finding, enumerated in 
subparagraph (A), (D), (E), (H), or (G) of paragraph (4) of Section 
15(b) of the Exchange Act, has been convicted of any offense specified 
in subparagraph (B) of such paragraph (4) within 10 years of the 
commencement of the proceedings under section 15B(c)(4) of the Exchange 
Act, or is enjoined from any action, conduct, or practice specified in 
subparagraph (C) of Section 15(b)(4). Rule 15Bc4-1 also states the 
Commission's interpretation that Section 15B(c)(4) of the Exchange Act 
makes it unlawful for any person, as to whom an order is entered 
pursuant to Section 15B(c)(4) or Section 15B(c)(5) of the Exchange Act 
suspending or barring him from being associated with a municipal 
advisor is in effect, willfully to become, or to be, associated with a 
municipal advisor without the consent of the Commission. Further, Rule 
15Bc4-1 sets forth the Commission's understanding that it is unlawful 
for any municipal advisor to permit such a person to become, or remain, 
an associated person without the consent of the Commission, if such 
municipal advisor knew, or, in the exercise of reasonable care should 
have known, of such order. Not only does the Commission believe that 
such interpretation is the only one that is consistent with the 
Congressional intent underlying Section 975(c)(5) of the Dodd-Frank 
Act, and that any other reading would produce the absurd result that no 
amendment would be made to Section 15(c)(4) of the Exchange Act, but 
the Commission also believes that this interpretation and the adoption 
of Rule 15Bc4-1 are necessary and appropriate to ensure that the 
Commission may censure or place limitations on the activities or 
functions of any person associated with a municipal advisor or to 
suspend or bar any such person from being associated with a municipal 
advisor.
---------------------------------------------------------------------------

    \1328\ See Proposal, 76 FR 850, n.233.
---------------------------------------------------------------------------

B. Approval or Denial of Registration

    As discussed in the Proposal,\1329\ Exchange Act Section 15B(a)(2) 
provides that within forty-five days of the filing of an application to 
register as a municipal advisor,\1330\ the Commission must either: 
``(A) by order grant registration, or (B) institute proceedings to 
determine whether registration should be denied. Such proceedings shall 
include notice of the grounds for denial under consideration and 
opportunity for hearing and shall be concluded within one hundred 
twenty days of the date of the filing of the application for 
registration. At the conclusion of such proceedings, the Commission, by 
order, shall grant or deny such registration. The Commission may extend 
the time for the conclusion of such proceedings for up to ninety days 
if it finds good cause for such extension and publishes its reasons for 
so finding or for such longer period as to which the applicant 
consents.'' \1331\
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    \1329\ See id., at 860.
    \1330\ The statute allows for a longer period if the applicant 
consents. See 15 U.S.C. 78o-4(a)(2).
    \1331\ See 15 U.S.C. 78o-4(a)(2).
---------------------------------------------------------------------------

    In accordance with Exchange Act Section 15B(a)(2), the Commission 
will grant the registration of a municipal advisor if the Commission 
finds that the requirements of Section 15B of the Exchange Act are 
satisfied. The Commission will deny the registration of a municipal 
advisor if the Commission does not make such a finding or if it finds 
that, if the applicant were registered, its registration would be 
subject to suspension or revocation under Section 15B(c) of the 
Exchange Act.\1332\
---------------------------------------------------------------------------

    \1332\ See 15 U.S.C. 78o-4(c).
---------------------------------------------------------------------------

    As discussed in the Proposal, the information currently required by 
Form MA-T is not reviewed by the Commission prior to registration, 
although the Commission retains full authority to review such 
information and examine any registered municipal advisor at any 
time.\1333\ The Commission intends that the permanent registration 
process will entail a review of each filed Form MA.
---------------------------------------------------------------------------

    \1333\ See Proposal, 76 FR 860.
---------------------------------------------------------------------------

    In considering whether to grant an application for registration as 
a municipal advisor, the Commission will review the information 
provided on Form MA. For example, as discussed in the Proposal, the 
Commission may perform cross checks of applicants through the use of 
the applicant's other registration numbers, such as its CRD or other 
SEC registration numbers, to the extent available.\1334\ Also, the 
Commission may review the disclosures required by Item 9 of Form MA, 
including the disciplinary history of an applicant.\1335\ In addition, 
as discussed

[[Page 67578]]

in the Proposal, the municipal advisor registration process will allow 
the Commission and staff to ask questions and, as needed, to request 
amendments before granting an application for registration.\1336\
---------------------------------------------------------------------------

    \1334\ See id.
    \1335\ See id.
    \1336\ See id.
---------------------------------------------------------------------------

C. Rule 15Ba1-8: Books and Records To Be Made and Maintained by 
Municipal Advisors

    Section 17(a)(1) of the Exchange Act provides, in pertinent part, 
that all registered municipal advisors shall make and keep for 
prescribed periods such records, furnish such copies thereof, and make 
and disseminate such reports as the Commission, by rule, prescribes as 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Exchange 
Act.\1337\ With proposed Rule 15Ba1-7, the Commission proposed to 
specify the books and records requirements applicable to municipal 
advisors.\1338\ The Commission is adopting Rule 15Ba1-7 as proposed, 
but renumbered as Rule 15Ba1-8, with a few technical clarifications, 
the addition of general ledgers, and the addition of written consents 
to service of process from certain natural persons.
---------------------------------------------------------------------------

    \1337\ See 15 U.S.C. 78q(a)(1).
    \1338\ See Proposal, 76 FR 860-862. In addition, Section 
15B(b)(2)(G) of the Exchange Act provides that the rules of the MSRB 
shall ``prescribe records to be made and kept by . . . municipal 
advisors and the periods for which such records shall be 
preserved.'' 15 U.S.C. 78o-4(b)(2)(G).
---------------------------------------------------------------------------

Record-Keeping for Municipal Advisors
    As discussed in the Proposal, the Commission based Rule 15Ba1-7(a) 
(as adopted, Rule 15Ba1-8(a)) generally on the books and records 
requirements for broker-dealers and investment advisers.\1339\ Rule 
15Ba1-8(a), among other things, requires a municipal advisory firm to 
make and keep true, accurate, and current certain books and records 
relating to its municipal advisory activities.\1340\ Specifically, Rule 
15Ba1-8(a) requires all municipal advisory firms to make and keep 
originals or copies of all written communications received, and 
originals or copies of all written communications sent, by such 
municipal advisor (including inter-office memoranda and communications) 
relating to municipal advisory activities, regardless of the format of 
the communications.\1341\ Municipal advisory firms also must keep all 
check books, bank statements, general ledgers,\1342\ cancelled checks, 
and cash reconciliations; a copy of each version of the municipal 
advisor's policies and procedures, if any, that (i) are in effect or 
(ii) at any time within the last five years were in effect (not 
including those in effect prior to the effective date of Rule 15Ba1-8); 
and a copy of any document created by the municipal advisor that was 
material to making a recommendation to a municipal entity or obligated 
person that memorializes the basis for that recommendation. In 
addition, a municipal advisory firm must keep all written agreements 
(or copies thereof) entered into by the municipal advisor with any 
municipal entity, employee of a municipal entity, or an obligated 
person or otherwise relating to the business of the municipal advisor 
as such. Further, a municipal advisory firm is required to keep a 
record of the names of persons who are, or have been in the past five 
years, associated with the municipal advisor (not including persons 
associated with the municipal advisor prior to the effective date of 
Rule 15Ba1-8); names, titles, and business and residence addresses of 
all persons associated with the municipal advisor;\1343\ all municipal 
entities or obligated persons with which the municipal advisor is 
engaging or has engaged in municipal advisory activities in the past 
five years (not including those prior to the effective date of Rule 
15Ba1-8); the name and business address of each person to whom the 
municipal advisor provides or agrees to provide payment to solicit a 
municipal entity, an employee of a municipal entity, or an obligated 
person on its behalf; and the name and business address of each person 
that provides or agrees to provide payment to the municipal advisor to 
solicit a municipal entity, an employee of a municipal entity, or an 
obligated person on its behalf.\1344\ Finally, a municipal advisory 
firm must keep written consents to service of process from each natural 
person who is a person associated with the municipal advisor and 
engages in municipal advisory activities solely on behalf of such 
municipal advisor.\1345\
---------------------------------------------------------------------------

    \1339\ See Proposal, 76 FR 861, note 274 and accompanying text.
    \1340\ Therefore, the books and records listed in Rule 15Ba1-
8(a) are limited to those relating to a municipal advisor's 
municipal advisory activities.
    \1341\ As discussed in the Proposal, materials posted on a 
municipal advisor's Web site relating to municipal advisory 
activities are written communications sent by the municipal advisor 
for purposes of this provision. See Proposal, 76 FR 861, note 275. 
The Commission notes that written communications may be in 
electronic form, such as emails or instant messages. Further, as 
discussed above, in determining whether or not funds to be invested 
constitute proceeds of municipal securities for purposes of Rule 
15Ba1-1(m), a person may rely on representations in writing made by 
a knowledgeable official of a municipal entity or obligated person 
whose funds are to be invested regarding the nature of such funds, 
provided that the person seeking to rely on such representations has 
a reasonable basis for such reliance. See Rule 15Ba1-1(m)(3). 
Similarly, in determining whether or not funds to be invested or 
reinvested constitute municipal escrow investments for purposes of 
Rule 15Ba1-1(h), a person may rely on representations in writing 
made by a knowledgeable official of a municipal entity or obligated 
person whose funds are to be invested or reinvested regarding the 
nature of such investments, provided that the person seeking to rely 
on such representations has a reasonable basis for such reliance. 
See Rule 15Ba1-1(h)(2). Such representations provided by the 
municipal entity or obligated person official constitute written 
communications received by a municipal advisor relating to municipal 
advisory activities.
    \1342\ As discussed below in this section, the Commission is 
including ``general ledgers'' in the final books and records rule.
    \1343\ The Commission notes that this provision does not cover 
persons who were previously and are no longer associated with the 
municipal advisor.
    \1344\ Proposed Rule 15Ba1-7 also required municipal advisory 
firms to make and keep a record of the initial or annual review, as 
applicable, conducted by the municipal advisory firm of its business 
in connection with its self-certification on Form MA. Because the 
Commission is not adopting a self-certification requirement, the 
Commission is also not adopting this corresponding books and records 
requirement.
    \1345\ As discussed below in this section, the Commission is 
including ``written consents to service of process from each natural 
person who is a person associated with the municipal advisor and 
engages in municipal advisory activities solely on behalf of such 
municipal advisor'' in the final books and records rule.
---------------------------------------------------------------------------

    Rule 15Ba1-8(b)(1) requires municipal advisory firms to maintain 
and preserve all books and records required to be made for a period of 
not less than five years, the first two years in an easily accessible 
place. Further, corporate governance documents, such as articles of 
incorporation and stock certificate books of the municipal advisor, and 
those of any predecessor, excluding those that were only in effect 
prior to the effective date of Rule 15Ba1-8, must be maintained in the 
principal office of the municipal advisor and preserved until at least 
three years after termination of the business or withdrawal from 
registration as a municipal advisor.
    As discussed in the Proposal, Rule 15Ba1-7(d) (as adopted, Rule 
15Ba1-8(d)) is modeled on Rule 204-2 under the Investment Advisers 
Act.\1346\ Specifically, Rule 15Ba1-8(d) permits, and sets forth the 
requirements for, electronic storage of the records required to be 
maintained and preserved pursuant to Rule 15Ba1-8. The rule further 
sets forth requirements with respect to the prompt \1347\ provision of

[[Page 67579]]

records upon request by the Commission or by its staff or other 
representatives. In addition, Rule 15Ba1-8(e) provides that any books 
or records made, kept, maintained, and preserved in compliance with 
Rules 17a-3 and 17a-4 under the Exchange Act, rules of the MSRB, or 
Rule 204-2 under the Investment Advisers Act, which are substantially 
the same as the books and records required to be made, kept, 
maintained, and preserved under Rule 15Ba1-8, will satisfy the record-
keeping requirements under Rule 15Ba1-8.\1348\ Subparagraph (e) of Rule 
15Ba1-8 is designed to minimize the record-keeping burden for municipal 
advisory firms that are otherwise subject to similar record-keeping 
requirements.\1349\
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    \1346\ See 17 CFR 275.204-2. See also Proposal, 76 FR 861.
    \1347\ For purposes of Rule 15Ba1-8(d), the Commission 
interprets the term ``prompt'' to mean making reasonable efforts to 
produce records that are requested by the staff during an 
examination without delay. The Commission believes that in many 
cases a municipal advisor could, and therefore will be required to, 
furnish records immediately or within a few hours of a request. The 
Commission expects that only in unusual circumstances would a 
municipal advisor be permitted to delay furnishing records for more 
than 24 hours.
    \1348\ See Rule 15Ba1-8(e).
    \1349\ See Proposal, 76 FR 861.
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    In the Proposal, the Commission requested comment on the proposed 
books and records requirements. Specifically, the Commission requested 
comment regarding, among other things, the types of documents and data 
that should be retained; whether it is appropriate for the books and 
records requirements to be based on the books and records requirements 
for broker-dealers and investment advisers; the length of the period 
for maintaining and preserving books and records; the format of the 
records retained; and whether the proposed requirements are overly 
burdensome.\1350\
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    \1350\ See id., at 862.
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    The Commission received several letters that specifically addressed 
the books and records requirements. One commenter generally supported 
the proposed record-keeping rule. This commenter stated it does not 
oppose establishing a five-year period for municipal advisor record 
retention and suggested that a record retention period of five years 
should be the same for broker-dealers, investment advisers, and 
municipal advisors.\1351\ However, other commenters criticized some of 
the requirements as being too burdensome, especially for small 
independent municipal advisors.\1352\ For example, one commenter noted 
that the expense required for firms to retain originals or copies of 
all written communications, internal or external, relating to their 
municipal advisory activities caused particular concern.\1353\ This 
commenter recommended that this requirement be eliminated, while all 
other books and records requirements could remain.\1354\ Alternatively, 
this commenter suggested that only certain communications with a client 
or generated internally be required to be kept.\1355\ Another commenter 
stated that, because independent municipal advisors neither hold client 
accounts nor hold custody of monies from clients, audited financial 
statements should not be required, particularly as they are costly and 
burdensome for small firms.\1356\ This commenter suggested that the 
Commission should narrow the record-keeping requirements to 
communication material specifically relevant to financing topics and 
financing recommendations or advice.\1357\ One commenter also requested 
that the Commission clarify that every iteration of commonly used and 
routinely changing technical financial documents, typically referred to 
as ``numbers runs,'' need not be retained, and that only iterations 
either sent to a client or used internally to form the basis for a 
recommendation to a client must be retained.\1358\
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    \1351\ See MSRB Letter I.
    \1352\ See, e.g., letter from Gerald Gornish, Chief Counsel, 
Pennsylvania Public School Employees' Retirement System, 
Pennsylvania Municipal Retirement System, Jeffrey B. Clay, Executive 
Director, Pennsylvania Public School Employees' Retirement System, 
and James B. Allen, Secretary, Pennsylvania Municipal Retirement 
System, dated February 22, 2011 (``Pennsylvania Public School 
Employees' Retirement Board Letter'') (noting that the Commission's 
estimate of 181 burden hours for books and records is not broken 
down further to an individual municipal advisor); letter from John 
B. Payne, Principal, B-Payne Group Financial Advisors, dated March 
28, 2011 (``Bradley Payne Letter'') (``I can manage and support fee 
and conflict disclosures and outgoing email and client file 
retention, but that is it.''); letter from UFS Bancorp, dated 
February 22, 2011 (``UFS Bancorp Letter'') (``[The 181-hour annual 
burden for books and records] is nearly ten percent of a full-time 
person's time.''); letter from Adam W. Rygmyr, Associate General 
Counsel, TIAA-CREF, Individual & Institutional Services, LLC, dated 
February 22, 2011 (stating that the books and records requirement 
would largely duplicate existing record-keeping requirements for 
broker-dealers).
    \1353\ See Rule 15Ba1-8(a)(1) and NAIPFA Letter I (``The 
information technology and storage facilities required to keep all 
email or similar electronic communication and to segregate those 
that relate to municipal advisory business from other unrelated 
email is expensive. Firms would be required to either outsource this 
function or develop the capability in-house, which would necessitate 
hiring one or more IT professionals. Either way, the cost would be 
significant to firms with such limited revenue.''). See also letter 
from Thomas DeMars, Managing Principal, Fieldman, Rolapp & 
Associates, dated February 22, 2011 (``Fieldman Rolapp Letter'') 
(recommending that the Commission modify the record-keeping 
requirements to eliminate the need to retain all written 
communications, and clarify all other record-keeping requirements); 
and letter from Phillip C. Dotts, President, Public FA, Inc., dated 
February 22, 2011 (``Public FA Letter'').
    \1354\ See NAIPFA Letter I.
    \1355\ See id.
    \1356\ See Public FA Letter.
    \1357\ See id.
    \1358\ See NAIPFA Letter I.
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    The Commission has carefully considered the issues raised by 
commenters and is adopting Rule 15Ba1-7 generally as proposed, but 
renumbered as Rule 15Ba1-8 and with modifications to include general 
ledgers, as well as written consents to service of process from each 
natural person who is a person associated with the municipal advisor 
and engages in municipal advisory activities solely on behalf of such 
municipal advisor.
    General ledgers would reflect asset, liability, reserve, capital, 
income and expense accounts.\1359\ In the Proposal, the Commission 
inadvertently omitted general ledgers from proposed Rule 15Ba1-7. The 
Commission notes that ledgers are part of the books and records 
requirements for broker-dealers and investment advisers, and would 
already be made and kept by dually-registered municipal advisors.\1360\ 
The Commission believes that general ledgers will assist its staff in 
understanding a municipal advisor's business dealings and financial 
condition, identifying and tracking illicit expenses, identifying 
sources of revenue that were previously undisclosed or that pose a 
conflict of interest, identifying and tracing possible acts of fraud 
and violations of applicable laws and rules (e.g., MSRB Rule G-37 
(Political Contributions and Prohibitions on Municipal Securities 
Business)), and conducting asset verification. In addition, the 
Commission notes that a municipal advisor's balance sheet and profit 
loss statement are derived from the general ledger.
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    \1359\ See Rule 15Ba1-8(a)(2).
    \1360\ See 17 CFR 240.17a-3(a)(2) and 17 CFR 275.204-2(a)(2).
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    The Commission believes it is also appropriate to include in the 
record-keeping requirement written consents to service of process from 
each natural person who is a person associated with the municipal 
advisor and engages in municipal advisory activities solely on behalf 
of such municipal advisor. Under proposed Rule 15Ba1-2(b), each natural 
person who met the definition of municipal advisor would have been 
required to register as a municipal advisor by filing Form MA-I.\1361\ 
Proposed Form MA-I included consent to service of process that a 
natural person would have been required to execute. In contrast, 
adopted Rule 15Ba1-2(b) requires a person applying

[[Page 67580]]

for registration or registered as a municipal advisor to complete Form 
MA-I with respect to each natural person who is a person associated 
with the municipal advisor and engaged in municipal advisory activities 
on its behalf.\1362\ As such, Form MA-I no longer includes consents to 
service of process executed by such natural persons. Because the 
Commission would no longer receive these consents to service of process 
as part of Form MA-I, the Commission believes it is appropriate to 
include in the record-keeping requirement written consents to service 
of process from each natural person who is a person associated with the 
municipal advisor and engages in municipal advisory activities solely 
on behalf of such municipal advisor. Specifically, the Commission 
believes that this requirement will help ensure that such natural 
persons have indeed executed consents to service of process and will 
allow Commission staff to examine such consents to service of process.
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    \1361\ See proposed Rule 15Ba1-2(b).
    \1362\ See Rule 15Ba1-2(b).
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    With respect to concerns related to the burden of the books and 
records requirements, including the burden for retaining originals or 
copies of all written communications relating to municipal advisory 
activities,\1363\ the Commission continues to believe that the final 
books and records requirements are appropriate for all municipal 
advisors because they will facilitate the Commission's inspections and 
examinations of municipal advisors and assist the Commission in 
evaluating a municipal advisor's compliance with Section 15B of the 
Exchange Act, the rules and regulations thereunder, and MSRB rules. 
Moreover, even though it recognizes that such requirements may impose 
burdens and costs upon municipal advisors, the Commission understands 
that many municipal advisors already make and keep certain types of the 
books and records required to be made and kept under Rule 15Ba1-8(a) 
under other regulatory requirements or general industry practices. 
Specifically, because the books and records required to be made and 
kept under Rule 15Ba1-8(a) are generally based on the existing books 
and records requirements for broker-dealers and investment advisers, 
the Commission believes that many municipal advisors would already be 
familiar and in compliance with such requirements because they are also 
registered as broker-dealers or investment advisers. Moreover, as noted 
above, to reduce the burden that would result from the books and 
records requirements, Rule 15Ba1-8(e)(1) provides that any books or 
other records made, kept, maintained, and preserved in compliance with 
Rules 17a-3 and 17a-4 under the Exchange Act, rules of the MSRB, or 
Rule 204-2 under the Investment Advisers Act, which are substantially 
the same as the books and records required to be made, kept, 
maintained, and preserved under Rule 15Ba1-8, will satisfy the 
requirements of Rule 15Ba1-8.
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    \1363\ See supra notes 1353-1355.
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    With respect to those municipal advisors that are not also 
registered with the Commission as broker-dealers or investment 
advisers, the Commission recognizes that Rule 15Ba1-8 establishes new 
record-keeping requirements for these entities and may impact these 
entities to a greater degree than entities that have previously 
registered as broker-dealers or investment advisers.\1364\ However, the 
Commission believes that all municipal advisors should be subject to 
the same record-keeping requirements, regardless of whether they have 
previously registered with the Commission in another capacity. As noted 
above, the Commission believes that Rule 15Ba1-8 is appropriate for all 
municipal advisors because it will facilitate the Commission's 
inspections and examinations of municipal advisors \1365\ and assist 
the Commission in evaluating a municipal advisor's compliance with 
Section 15B of the Exchange Act, the rules and regulations thereunder, 
and MSRB rules. The Commission also believes that regulation of 
municipal advisors is in the public interest and will improve the 
protection of municipal entities and investors.
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    \1364\ See infra Sections VII.D.8.; VIII.D.3.a.; and X.D. 
(discussing the costs and bu