Exceptions & Exclusions to the MA Rule
Municipal entities and employees of municipal entities (including elected officials) who are functioning within the normal scope of their employment are exempted from the MA rules. SEC guidance indicates that this exemption extends in cases where, for instance, a state treasurer is providing advice to a city or county of that state as part of the treasurer’s regular duties. The corollary to this is that municipal officials cannot serve as their own municipal advisor, especially with respect to the independent registered municipal advisor exemption (discussed below).
Municipal bond underwriters are excluded from the MA rules, but only in their capacity of providing underwriting services on a specific transaction for which they have been engaged. The underwriting exemption commences upon engagement for a specific transaction and concludes at the end of the underwriting period (typically on or shortly after closing on the bonds). Activities which occur before a transition exists (such as assisting with bond elections) and which occur after closing (such as investment of bond proceeds) are beyond the scope of the underwring exclusion.
SEC-registered investment advisers are excluded from the MA rules, but only to the extent they are providing advice with respect to the investment of bond proceeds. The MA regulations do not provide an exception or exclusion for state-registered investment advisers, even if they are solely advising on the investment of bond proceeds.If an issuer's investment portfolio includes a mix of bond proceeds and operating funds and the issuer uses a third-party investment adviser, that investment adviser will need to be SEC-registered in order to avoid a conflict with the MA rules.
Banks are exempted from the MA rules, but only to the extent that their interactions relate to banking activities: deposits of funds in regular bank accounts; the extension of credit (loans, letters of credit) to municipal entities; the purchase of municipal securities for the bank’s own account; or its activities as an indenture trustee, paying agent or escrow agent.
Attorneys are excluded from the MA rules but only to the extent that they are providing services of a traditional legal nature.
Engineers are excluded, but only to the extent that they providing engineering advice.
Accountants and auditors are exempted from the MA rules, but only to the extent they are providing auditing or attesting services or preparing financial statements.
Firms and individuals who desire to provide information to a municipal issuer or borrower that might constitute advice under the MA regulations can use an Independent Registered Municipal Advisor (IRMA) to channel that information to the issuer without that firm or individual falling under the MA registration requirements.
A municipal issuer or borrower may designate an IRMA as an intake point for this information. Commonly, an issuer would use its regular MA-registered financial advisor to serve as an IRMA for that issuer.
To qualify for the IRMA exemption in order to provide information constituting “advice” to an issuer or borrower without registration, the firm or individual providing such information must:
(1) work through a registered MA that
(2) cannot now be, or within the prior two years have been, associated with the firm or individual seeking to rely on the IRMA exemption, and where
(3) the firm or individual receives from the municipal issuer or borrower a representation in writing that it is represented by, and will rely on the advice of, an IRMA, and
(4) such firm or individual provides written disclosure to the municipal issuer or borrower that such firm or individual is not a municipal advisor and is not subject to the statutory fiduciary duty applicable to municipal advisors, and
(5) such firm or individual provides a copy of such disclosure to the IRMA.
Information that would otherwise constitute advice under the MA rules can also be provided to municipal entities subject to a bona fide request for proposals (RFP) process. The SEC guidance on this point requires the scope of the RFP to be relatively narrow and for the issuing entity to include enough potential RFP respondents to ensure that the intent of the process is truly to provide an open solicitation of ideas, rather than an artifice to exempt a single firm.
SEC guidance on this point does not prevent issuers from using prequalified pools of underwriters. The issuer can administer “mini-RFPs” to its prequalified pool in order to select an underwriter with respect to a specific transaction. The underwriting exclusion, however, does not protect underwriting pool participants until they are selected for a specific transaction.