The Securities and Exchange Commission (SEC) has released for comment new rules to clarify what constitutes a “municipal advisor” and to provide a permanent registration process for them. If adopted as proposed, elected and ex officio members of governmental pension plan boards of trustees would be excluded from the definition, but appointed board members would be covered. The SEC thinks that elected members are accountable to the municipal entity as opposed to appointed members, who are not directly accountable “for their performance to the citizens of the municipal entity.” NCTR and NASRA have filed joint comments with the SEC objecting to this approach, arguing that all trustees of state and local government retirement systems (whether elected or appointed), are part and parcel of the plan that they govern, and not advisers to it. Comments were due by February 22nd, and a final rule is expected from the SEC sometime later this year.
Background
A provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act makes it unlawful for municipal advisors to provide advice to, or solicit, municipal entities without registering with the SEC. The new law also imposes an express fiduciary duty on municipal advisors in their dealings with municipal entities.
(“Municipal entities” are defined to include any state or state political subdivision or municipal corporate instrumentality; any agency, authority or instrumentality thereof; any plan, program or pool of assets sponsored or established by a state or state political subdivision or municipal corporate instrumentality (or an agency, authority or instrumentality thereof); or any other issuer of municipal securities. Furthermore, the SEC specifically notes that this definition includes public pension funds, local government investment pools and other state and local governmental entities or funds, along with participant-directed investment programs or plans such as 529, 403(b), and 457 plans. )
Accordingly, on December 20, 2010, the SEC proposed new rules to clarify what constitutes a “municipal advisor” and to provide a permanent registration process for them. However, since Dodd-Frank only excluded “employees of a municipal entity” from the definition of “municipal advisor” and did not explicitly refer to the board members of a municipal entity, the SEC decided that it had to address this issue in its regulations. Specifically, the SEC has proposed that elected and ex officio board members would be excluded from the definition of “municipal advisors,” but not appointed board members. The SEC’s rationale is that elected members are accountable to the municipal entity as opposed to appointed members, who are not directly accountable “for their performance to the citizens of the municipal entity.”
NCTR/NASRA Joint Comment Letter
NASRA and NCTR have filed joint comments with the SEC objecting to this approach. The letter argues that all trustees of state and local government retirement systems (whether elected or appointed), as members of a governing body of a governmental pension fund, are, per se, a part of that municipal entity, and, as such, are therefore expressly excluded from the definition of a “municipal advisor.”
Specifically, the letter underscores that the role of public pension trustees is to oversee the assets and administration of their retirement systems, and not to provide advice concerning investment strategies to other municipal entities, to their fellow trustees, or to participants in self-directed accounts. “Therefore, as a threshold matter, public pension trustees, in their capacity as members of the governing body of a public pension plan, are not, by definition, ‘municipal advisors,’” the letter stresses.
Also, NCTR and NASRA point out that, as members of the governing body of a state or local retirement system, public pension trustees are part and parcel of the plan that they govern, and not advisers to it. “To hold otherwise,” we point out, “would mean that any third party who provides advice within the meaning of the Dodd-Frank Act to the governing body of a municipal entity with respect to bonds, swaps, or any other specified municipal financial products, would NOT be required to register as a municipal advisor with the SEC. Such third party would also NOT be subject to the other municipal advisor provisions of the Dodd-Frank Act, such as the imposition of a fiduciary duty to the municipal entity, since the Dodd-Frank Act ‘s prohibitions refer to soliciting or providing advice to a “municipal entity.”
Finally, the comment letter notes that all public pension trustees (however selected) are already subject to strict accountability standards. Comments were due by February 22nd, and a final rule is expected from the SEC sometime later this year.
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