Attorneys reacting to last week's statement from the Securities and Exchange Commission's Office of Municipal Securities regarding municipal advisors' role in disclosure said the document provides MAs additional clarity and speaks to the SEC's desire not to use enforcement actions as its only guidance.
"The statement is a good example of [SEC Chairman Paul] Atkins' desire to avoid regulation by enforcement," said attorney Peg Henry, a municipal securities legal expert and a co-author of the most recent edition of The Securities Law of Public Finance.
In its "Statement on Non-Solicitor Municipal Advisors' Role in Disclosure," OMS said it was publishing its views regarding the obligations of a municipal advisor under the Securities Act of 1933 and the Securities Exchange Act of 1934, depending on the role, if any, the MA performs in the disclosure process.
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The statement "is a significant policy document providing guidance to MAs as to their roles, responsibilities, and potential liability under the federal securities laws," said Paul Kisslinger, a partner and co-chair of the financial and regulatory litigation group at law firm Barnes & Thornburg LLP.
"While the SEC periodically issues MA guidance, and maintains and updates a Registration of Municipal Advisors [FAQs] page which covers some of these topics, the Q&A document is now 86 pages long, covers a wide variety of MA topics, and is difficult to navigate," Kisslinger said.
The OMS document published last week "consolidates existing guidance and provides some more clarity as to current Commission policies concerning [an] MA's role in issuer disclosures," he said.
The key takeaways from the document "involve more detailed guidance regarding complex, fact-specific disclosure topics," Kisslinger said, citing guidance on when participating in disclosure document preparation constitutes "municipal advisory activity " as one example.
Other examples include guidance "that antifraud liability can apply regardless of carve-outs in written engagement letters" and that disclaimers in engagement letters aren't safe harbors from SEC enforcement, Kisslinger said.
Another key takeaway from the OMS statement is that the "course of dealing is important," he said. For example, an MA that routinely participates in disclosure over the course of several transactions might "create an expectation that it will continue to do so, expanding the scope of its fiduciary duty," Kisslinger said.
Another important takeaway is that MAs involved in preparing disclosure documents in connection with competitive offerings "may face greater obligations to inquire into accuracy and completeness" of certain disclosure facts provided to them by the issuer, he said.
The OMS statement "provides a comprehensive analysis of the duties of a municipal advisor when it prepares an offering document," said Henry, who launched Peg Henry PLLC, a municipal securities legal consulting and expert witness services business last year after retiring from her role as head of municipal securities group legal at Stifel Financial Corp.
"Importantly, the municipal advisor's fiduciary duty to its issuer client does not negate its duties to provide disclosure to investors under the federal securities laws that does not contain inaccurate or misleading information," she said, adding that the OMS document, "clearly puts municipal advisors on notice about their potential duties to investors."
Henry pointed to an SEC enforcement action against the City of Rochester, New York, that was referenced in an OMS document endnote. In June 2022, the SEC charged defendants including the city and Capital Markets Advisors, LLC – the city's long-time municipal advisor – with misleading investors in connection with notes the city sold in 2019. In its complaint, filed in the U.S. District Court for the Western District of New York, the SEC alleged that offering documents prepared by the city's former finance director, CMA and Richard Ganci, a principal at CMA, "were materially misleading."
The SEC's complaint also alleged that CMA, Ganci and another CMA principal failed to disclose to nearly 200 CMA clients, including the city, that CMA had material conflicts of interest stemming from its compensation arrangements.
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While the fraud claims against CMA and Ganci were dismissed, Henry pointed to a portion of the OMS statement addressing the federal securities laws MAs are subject to when they participate in the preparation of disclosure documents.
The OMS document said all persons, including MAs, are subject to the provisions of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5.
In addition, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 15B of the Exchange Act was amended "to prohibit municipal advisors from engaging in fraudulent, deceptive, or manipulative conduct when engaging in municipal advisory activities," the OMS document noted.
"Municipal advisors retained to assist in the preparation of disclosure documents and that actively participate in offerings should have a professional understanding of the disclosure requirements under the federal securities laws," the OMS statement said.
Kisslinger agreed with Henry's assessment that the OMS statement puts MAs on notice regarding their potential duties to investors.
The OMS document "has made it a point to explain that [an] MA's duties are not limited or defined by the particular engagement agreement it has entered into with the issuer," he said.
"MAs should take away the point that they need to carefully prepare for engagements with issuers, perform necessary and appropriate due diligence concerning disclosure facts and take protective measures to ensure that their roles and responsibilities are not beyond what they intended," Kisslinger said regarding the OMS statement.
Kathleen Marcus, a partner at law firm Stradling Yocca Carlson & Rauth LLP, said while the primary focus of the OMS statement is to provide information and clarify expectations for MAs, the document "can also be helpful in considering whether certain consultants or other parties who are involved in some portion of the content of the disclosures may be unintentionally wading into unregistered municipal advisor activity."
