MINNEAPOLIS — The Securities and Exchange Commission has released new frequently asked questions and answers on its municipal advisor rule that includes "transitional guidance" for market participants who had been anxious about providing advice to funds that might include bond proceeds.
SEC muni chief John Cross announced the new FAQs before beginning a presentation on the MA rule at the Government Finance Officers Association conference here Monday. The SEC had been aware of hand-wringing from asset managers and other professionals who said it was too difficult to determine whether a given fund or pool of money contained bond proceeds or not. Under the MA rule, anyone who provides advice advice on the investment of muni proceeds must register as an MA if they are not covered by an exemption provided in the rule. Firms have been sending letters to issuers asking them to certify that their funds contained no bond proceeds, but many issuers either would not or could not answer the question.
Cross said that for new investments taking place after the the rule's effective date of July 1, it should be relatively easy to figure out whether they contain bond proceeds or not. For existing investments, the new FAQs lay out a "reasonable diligence" standard firms could use in determining if a fund contains proceeds and is subject to the rule.
"In the staff's view, a reasonable diligence process could permit a market participant to form a reasonable belief, based on all the facts and circumstances, that the funds in an existing account or existing investment do not constitute proceeds of municipal securities," the guidance states.
Firms could consider such factors as the burden and cost of determining whether a fund contains muni proceeds, the liklihood that the fund contains muni proceeds based on the client who is investiong, and others. If the account holder is a municipality, the guidance suggests, a firm might reasonably conclude that the account might contain muni bond proceeds.
The guidance also addresses a major point some issuers had raised about the independent registered municipal advisor exemption from the registration rule. That provision allows a dealer or other professional to provide advice to a municipality as long as that government had retained and said it would rely on the advice of its own MA. Some issuers feared this meant they had to follow any advice they got from their IRMA, but the guidance makes clear that is not the case.
"In the staff's view, for purposes of this exemption, the term "rely on" means that the municipal entity or obligated person will seek and consider the advice, analysis, and perspective of the independent registered municipal advisor," the guidance states. "The staff does not believe, however, that, for purposes of this exemption, "rely on" means that the municipal entity or obligated person must follow the advice of the independent registered municipal advisor."
Leslie Norwood, managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association, said SIFMA appreciates the timely release of the guidance. The group had been preparing to ask for a delay if the newest FAQs were not available soon. However, Norwood said SIFMA still sees some issues with the transitional muni bond proceed guidance, saying that it will still be a challenge for firms to identify bond proceeds even for new accounts.
Cross said this is likely the last FAQ for the immediate future, though his office could still issue interpretive guidance in the future.
