Banks Still Have To Worry About Being Regulated By The SEC As "Municipal Advisors"

Section 975 of Dodd-Frank amended Section 15B(a) of the Securities Exchange Act of 1934 to forbid a "municipal advisor" from "provid[ing] 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 SEC]." That registration requirement became effective on October 1, 2010.

On September 1, 2010, the SEC adopted, "on an interim final temporary basis," Exchange Act Rule 15Ba2-6T (17 C.F.R. § 240.15Ba2-6T). That rule allows municipal advisors to continue their business after October 1, 2010 by submitting the new Form MA-T. This is the procedure to follow until the SEC promulgates a final permanent registration program. The interim temporary rule will expire on December 31, 2011.

So, why would banks need to worry about this new municipal advisor registration requirement? This question is of particular importance to community banks that do not engage in underwriting or brokering municipal securities and therefore believe (logically), that they could not possibly be a "municipal advisor." But, many community banks hold significant deposits of municipal entities, discuss those deposits extensively with the municipality and the bank's business dealings with respect to those deposits, may, in some cases, bring the bank within the scope of Dodd-Frank and the new municipal advisor registration regime.

Therefore, we need to look carefully at the rule and especially the definitions to evaluate whether and how banks might be covered. Obviously, registration is not to be taken lightly, since the filing itself is subject to criminal penalties for misstatements and will subject the bank to the SEC's inspection and examination of its municipal advisor activities and the SEC's authority to discipline or limit municipal advisor activities.

Neither Dodd-Frank nor the SEC's release adopting the new temporary rule includes any exemption for the activities of banks related to municipal deposits. Industry comments on this rule, such as those from The Financial Services Roundtable and the Independent Community Bankers of America, have clearly expressed to the SEC the need to exempt banks from municipal advisor status. Without such an exemption, several of the definitions are broad enough to include a range of traditional banking services and products, such as cash management, deposit and lending activities and trust and custody services. There are compelling arguments for such an exemption, including the fact that Section 975 of Dodd-Frank appears aimed at unregulated institutions and the longstanding regulatory tradition of allowing bank regulators exclusive authority to regulate and examine traditional banking activities.

Take a look at the key definitions in Section 975 of Dodd-Frank (which are now added as a new subsection "(e)" to Section 15B of the Securities Exchange Act of 1934):

There are obviously significant risks and regulator burdens that a bank takes on if it registers as a municipal advisor. Given that the SEC has not yet granted a clear exemption for banks, one possible path is for banks to prepare a policy for interacting with municipalities and carefully document their interaction with municipal entities and thus demonstrate (to the extent possible) that the bank is not soliciting municipal entities or providing advice to them. If this is done carefully with the input of legal counsel, and not as a subterfuge, then the bank may be able to avoid registration. Apparently, most banks have decided not to register, since only 40 or so banks have registered as of late May 2011.

Any bank that decides it should file a Form MA-T must complete the form very carefully. It is unlawful for the advisor to willfully make a misleading statement or omit to state a material fact in the Form MA-T and doing so constitutes a Federal crime. Thus, banks must carefully answer the questions for itself and for each of its "associated municipal advisor professionals." Doing this may require background searches on each of the bank employees that fit the definition. Form MA-T is accessible through a link on the SEC's website at www.sec.gov/info/municipal/form_MA-T.htm and may not be filed in paper form. The General Instructions and Glossary for the Form provide further instructions and explanation in preparing and filing the form. If the bank has a broker-dealer affiliate, it will recognize the form as very similar to Form BD for broker-dealers.

The SEC provides little guidance on whether an institution like a bank should file the form on behalf of the bank or on behalf of its employees who meet the definition of "associated municipal advisor professionals" (and not the bank). However, it seems unlikely that a filing only for the individuals would suffice. It would be unusual for those employees to be true independent consultants or contractors and deposits are a core business activity of the bank. Thus, the bank will likely have to file in its own name and name the individual employees as "associated municipal advisor professionals." What several banks have done is file in the name of the particular department, such as "XYZ Bank Government Banking Department," although it is not clear whether this tactic will succeed in limiting SEC oversight to the particular department as opposed to the entire banking organization.

Daniel Wheeler is a banking regulatory partner in the Buchalter Nemer law firm.

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