In the wake of the subprime mortgage crisis and global financial meltdown of 2008-2009, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act enacted sweeping changes in the regulation of financial institutions, Financial Advisors, and the financial markets.

Municipal Advisor Rule

The Dodd-Frank Act created new standards, definitions, registration requirements and rules for “Municipal Advisors.” Two major results of the Dodd-Frank Act for Municipal Advisors are: (i) a requirement for Municipal Advisors to register with the SEC and the MSRB; and (ii) the codification of a fiduciary duty of Municipal Advisors to the municipal entities they serve.

The Dodd-Frank Act defines a “Municipal Advisor” as anyone (except for a municipal entity or an employee of a municipal entity) that (1) provides advice to a municipal entity or obligated person regarding municipal financial products or the issuance of municipal Securities; or (2) undertakes a solicitation of a municipal entity or obligated person on behalf of a broker, dealer, municipal Securities dealer, Municipal Advisor or investment advisor; for, or in connection with, municipal financial products, the issuance of municipal Securities or investment advisory services for a municipal entity. The statutory definition of Municipal Advisor explicitly excludes the following financial professionals, thereby exempting them from registration: (1) brokers, dealers and municipal Securities dealers acting as Underwriters; (2) investment advisors registered under the Investment Advisers Act of 1940 and providing traditional investment advice; (3) attorneys providing traditional legal services; and (4) engineers providing engineering advice.

Fiduciary Duty

The Dodd-Frank Act imposes a fiduciary duty on Municipal Advisors. The Dodd-Frank Act requires the MSRB to “prescribe means reasonably designed to prevent acts, practices and courses of business as are not consistent with a municipal advisor’s fiduciary duty to its clients.” The MSRB has adopted Rule G-42, which implements this rule.  

Regulation of Asset-Backed Securities (ABS)

The Dodd-Frank Act also conferred new powers upon the SEC to directly regulate Asset-Backed Securities (ABS), including those issued by municipal entities. The Dodd-Frank Act further gives the SEC discretion whether to apply the ABS regulations to Issuers of municipal Securities.

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See Also

Securities and Exchange Commission (SEC)

Federal agency that oversees and regulates the securities industry and aims “to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”

Municipal Securities Rulemaking Board (“MSRB”)

A self-regulatory organization charged with rulemaking authority over municipal securities dealers and municipal advisors.

Municipal (Financial) Advisor

A consultant to an issuer (or, in some cases, a borrower) which provides advice with respect to the structure, timing, terms or other similar matters concerning a bond issue.