[Federal Register Volume 78, Number 218 (Tuesday, November 12, 2013)]
[Rules and Regulations]
[Pages 67467-67798]
[FR Doc No: 2013-23524]

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

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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<PHONE_NUMBER>; or Mary
Simpkins, Senior Special Counsel, at<PHONE_NUMBER>; 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<PHONE_NUMBER>;
Brian Baltz, Special Counsel, at<PHONE_NUMBER>; Jennifer Dodd, Special
Counsel, at<PHONE_NUMBER>; Derek James, Special Counsel, at (202) 551-
5792; Yue Ding, Attorney-Adviser, at<PHONE_NUMBER>; or Eugene Hsia,
Attorney-Adviser, at<PHONE_NUMBER>; 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

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)

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

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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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\
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    \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

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

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

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

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \111\ See Temporary Registration Rule Release, supra note 5, for
a full description of the requirements of Form MA-T.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

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.''
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

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.
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    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\
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    \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.
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    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,

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\
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    \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).
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    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/<EMAIL_ADDRESS>    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.
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    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.
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    \168\ See supra notes 162 and 165.
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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\
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    \169\ 15 U.S.C. 78o-4(e)(8).
    \170\ See infra note 191 (defining 403(b) and 457 plans).
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    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.
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    \171\ See Proposal, 76 FR 835.
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    Several commenters suggested that the definition of ``municipal
entity'' should be limited to issuers of municipal securities \172\
because the

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\
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    \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)).
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    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\
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    \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.
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    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\
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    \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.
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    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