New Federal Regulations for Municipal Advisors

By Brent Clemmens [1]

Under the auspices of Eric G. Orlinsky and James E. Cumbie[2]


States and municipalities issue bonds to provide themselves with cash flow and to finance public projects such as infrastructure improvements, health care facilities and education facilities.  These bonds historically have had a low risk of default, and are particularly attractive to investors because the interest paid on them is usually exempt from both federal and state taxes.  According to the Report on the Municipal Securities Market released by the Securities and Exchange Commission on July 31, 2012, there is more than $3.7 trillion invested in over a million municipal bonds.[3]

Congress passed Section 975 of the Dodd-Frank Act after recognizing the need to regulate the individual and corporate financial advisors involved in the municipal bond market.  Section 975 created a new class of regulated persons called “municipal advisors.”[4]  The term “municipal advisor” became the new moniker for financial advisors in the municipal bond market.  Traditionally, municipal bond advisors were not subject to heavy regulation or oversight.  Because of this, municipal advisors such as banks and investment firms often engaged in corrupt practices like “pay-to-play” schemes, in which they offered campaign contributions and other remuneration to governmental officials, in exchange for lucrative assignments advising those governments.[5]  Additionally, many municipal advisors had little to no training or qualifications, and should not have been giving advice to municipalities concerning bond issuances and related financial transactions.  In particular, municipal advisors giving unqualified advice about complicated derivative markets was a major problem.[6]  These schemes often resulted in significant long-term losses for the municipalities and for the investing public.[7]

Section 15(B)(a)(1) of the Securities Exchange Act of 1934, as amended by Section 975(a)(1)(B) of the Dodd-Frank Act of 2010, made it unlawful for a municipal advisor to provide advice to or on behalf of a municipal entity regarding the issuance of municipal securities unless the municipal advisor was registered with the SEC.[8]  However, when the Act was passed, a registration regime for municipal advisors had not yet been created or implemented.

After proposing regulations in 2010 and allowing time for public comment, the SEC passed a final regulation in 2013 creating a registration regime that facilitated oversight of municipal advisors.  The registration requirement was aimed at curbing municipal advisors’ corrupt practices.  The regulations also provided the Municipal Securities Rulemaking Board (MSRB) with the power to make additional rules governing municipal advisor conduct.  The regulations apply to those who advise state and local governments, and also to those who advise private entities that participate in certain governmental loan programs.

The proposed SEC regulations attempted to define who qualified as a municipal advisor to determine the necessary registrants and clear up any confusion with the term’s broad statutory definition.  However, the SEC received so many comments from potential advisors concerned with loopholes in the definition, that it opted to remain focused on identified activities rather than on the status of market participants.  For example, the new regulations cover any person engaged in advising or soliciting municipalities rather than certain statutorily defined classes of people, but the municipal advisor definition still excludes municipal entities and municipal employees.  The regulations also exempt attorneys, but only so long as they offer legal advice or provide services of a traditional legal nature.  These decisions keep the definition broad and confusing, and may leave many wondering if they need to register with the SEC as municipal advisors.

Although the SEC promulgated the regulations containing the registration regime, implementation was recently delayed.  The delay gives municipal advisors time to learn how to comply with the registration requirements and counsel their employees on the new procedures.  The regulations are currently slated to go into effect on July 1, 2014.


[1] Brent Clemmens is a Fellow of the MSBA-University of Baltimore Business Law Clerkship Program.

[2] Eric Orlinsky of Saul Ewing, L.L.P. and James E. Cumbie of Venable, L.L.P.

[3] See Commission Report on the Municipal Securities Market, 1 (July 31, 2012), available at (“2012 Report on the Municipal Securities Market”).

[4] Securities and Exchange Commission, “Registration of Municipal Advisors,” 5 Release No. 34-70462; File No. S7-45-10 (2013).

[5] See Kyle Glazier, Regulators Urge Treasurers to Lead, The Bond Buyer (Mar. 18, 2014, 2:40 PM),

[6] See S. Rep. No. 111-176, at 38 (2010).

[7] See Liz Farmer, Why’s the SEC’s New Municipal Advisor Rule so Confusing?, Governing (Feb. 25, 2014),

[8] See 15 U.S.C. 78o-4(a)(1)(B) (West 2014).

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