Non-elected members of public agency boards beware!
Under the broad language of proposed rules of the Securities and Exchange Commission (the “SEC”), intended to implement provisions of Section 975 (“Section 975”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), non-elected members of the governing board of a municipal entity may fall under the definition of “municipal advisor” and thereby become subject to SEC registration, record-keeping requirements and expanded securities fraud liability.
While the proposed rules potentially impact others who may be involved in some capacity in municipal securities activities, this alert focuses on the inclusion of non-elected members of governing boards within the scope of municipal advisors who will be affected and governed by the rules, as proposed.
The underlying purpose of Section 975 is to subject independent municipal financial advisors to the same registration, record-keeping and liability burdens as already exist under federal securities law for brokers, dealers and investment advisors. In seeking to do so, however, the legislation provides a very broad definition of “municipal advisor” to include persons who “provide advice to or act on behalf of a municipal entity” with respect to “municipal financial products” (for example, guaranteed investment contracts) or the issuance of municipal securities, “including advice with respect to the structure, timing terms or other similar matters” concerning such products or securities. Noticeably absent from this broad definition is any reference to the person being engaged in the financial advisory business or even a reference to the person receiving compensation for whatever role the person may have. As pointed out by some of the early adverse comments, this could arguably include the action of a board member in commenting on and then voting on a resolution authorizing issuance of securities by the subject municipal entity.
Finally, the most controversial element of the proposed rules is that, while elected members of governing boards are exempted from the definition of “municipal advisor,” non-elected board members are not! It is this feature that has drawn the most fire to the proposed rules, with critics point out that this will serve to discourage qualified, public-spirited persons from volunteering to serve when doing so might draw them into the SEC’s registration, regulatory and liability regime, thereby depriving the municipal entities of the services of such persons.
It should be understood that this issue arises in the context of proposed rules which were released by the SEC on December 20, 2010, and are undergoing a public comment period, set to expire on February 22, 2011; and it would appear that this feature of the proposed rules is receiving a sufficient level of adverse comment from the public agency and public finance professional communities that it may be modified or eliminated prior to finalization of the rules.
We will continue to monitor this issue and update you on further developments. For more information or assistance with other public finance matters contact Sam Sperry or Sky Woodruff at 800.464.3559.