Statement Summary
The SEC’s Office of Municipal Securities released a staff statement detailing the role of municipal advisors in the preparation of disclosure documents under federal securities laws. It outlines how municipal advisors can provide advice that affects the accuracy of these documents, thereby implicating primary and secondary liability under antifraud provisions of the Securities Act and Exchange Act. Key points include the definition of ‘municipal advisory activity’, the fiduciary duties owed to municipal entities, and the legal responsibilities when participating in disclosure processes. The statement emphasizes that while municipalities can define engagement scopes, participation in disclosure document preparation raises significant legal implications, including the potential for liability in misleading disclosures. This guidance does not create new regulations but clarifies existing obligations and responsibilities for municipal advisors.
Original Statement
Office of Municipal Securities
I. EXECUTIVE SUMMARY
II. STAFF STATEMENT FOR MUNICIPAL ADVISORS; ROLE IN DISCLOSURE
- A. CONSIDERATIONS WITH RESPECT TO PARTICIPATION BY MUNICIPAL ADVISORS IN THE PREPARATION OF DISCLOSURE DOCUMENTS
- 1. When Does Participation in the Preparation of Disclosure Documents Constitute “Advice” and “Municipal Advisory Activity” for Purposes of the Municipal Advisor Definition?
- 2. In What Ways Might a Municipal Advisor Participate in the Preparation of Disclosure Documents and How Might that Participation Constitute Advice?
- 3. What Federal Securities Laws Are Municipal Advisors Subject to When Participating in the Preparation of Disclosure Documents?
- B. CONSIDERATIONS WITH RESPECT TO MUNICIPAL ADVISORS’ INVOLVEMENT IN THE DISCLOSURE PROCESS AND THE ANTIFRAUD PROVISIONS
- 1. What are the Considerations Regarding Primary Liability for Violations of the Antifraud Provisions Where the Municipal Advisor Participated in the Preparation of Those Documents?
- 2. What are the Considerations Regarding Secondary Liability for Violations of the Antifraud Provisions Where the Municipal Advisor Participated in the Preparation of Those Documents?
- 3. What is the Municipal Advisor-Specific Antifraud Provision?
- C. CONSIDERATIONS REGARDING A MUNICIPAL ADVISOR’S DUTIES TO MUNICIPAL ENTITIES AND OBLIGATED PERSONS WITH RESPECT TO THE PREPARATION OF DISCLOSURE DOCUMENTS
- 1. How is the Scope of a Municipal Advisor’s Relationship with a Municipal Entity (or Obligated Person) Determined for Purposes of its Fiduciary Duty and Duty of Care?
- 2. How Does a Municipal Advisor’s Fiduciary Duty, including its Duty of Care, Impact Its Responsibilities and Potential Liability When Participating in the Preparation of Disclosure Documents?
- D. ADDITIONAL CONSIDERATIONS FOR MUNICIPAL ADVISORS WITH RESPECT TO THE PREPARATION OF DISCLOSURE DOCUMENTS: TYPE OF SALE; LIABILITY DISCLAIMERS; PRACTICES CONSISTENT WITH MUNICIPAL ADVISOR’S LEGAL OBLIGATIONS
- 1. What are Some Special Considerations Regarding the Type of Sale for Municipal Advisors Who Participate in the Preparation of Disclosure Documents?
- 2. What are Some Special Considerations Regarding Liability Disclaimers for Municipal Advisors Who Participate in the Preparation of Disclosure Documents?
- 3. For a Municipal Advisor That Participates in the Preparation of Disclosure Documents, What Steps Can the Municipal Advisor Take to Ensure That its Obligations are Clear?
This document represents the views of the staff of the Office of Municipal Securities. It is not a rule, regulation, or statement of the Securities and Exchange Commission. The Commission has neither approved nor disapproved its content. This document, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
Overview of Municipal Advisors’ Responsibilities
The Office of Municipal Securities (“staff”) of the Securities and Exchange Commission (“SEC” or “Commission”) is publishing its views on the obligations of a municipal advisor under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”), depending on the role such municipal advisor performs in the disclosure process, if any. This document is based on the Exchange Act, the Securities Act, the Municipal Advisor Adopting Release, and prior Commission actions and Commission and staff guidance.
This staff statement addresses a municipal advisor’s role in preparing a municipal entity or obligated person’s primary and secondary market disclosure documents, a role which may vary widely, ranging from no participation to primary drafting responsibility.
Legal Implications of Participation
Municipal advisors participating in the preparation of disclosure documents are subject to the federal securities laws. All persons, including municipal advisors, are subject to the provisions of Securities Act Section 17(a), Exchange Act Section 10(b) and Exchange Act Rule 10b-5 relating to fraud in the offer or sale of securities or in connection with the purchase or sale of securities (collectively referred to herein as the “antifraud provisions”). Violations of some antifraud provisions require that the violator acted with scienter, although others do not. A municipal advisor could therefore be subject to primary or secondary liability under the antifraud provisions, depending on the facts and circumstances of the situation.
Additionally, as part of the Dodd-Frank Act, Section 15B of the Exchange Act was specifically amended to prohibit municipal advisors from engaging in fraudulent, deceptive, or manipulative conduct when engaging in municipal advisory activities. Municipal advisors retained to assist in the preparation of disclosure documents and that actively participate in offerings should have a professional understanding of the disclosure requirements under the federal securities laws.
Fiduciary Duties and Legal Responsibilities
When municipal advisors engage in municipal advisory activities on behalf of a municipal entity, which may include participating or agreeing to participate in the preparation of the municipal entity’s disclosure documents, such activities become subject to the municipal advisor’s statutory fiduciary duty established under Section 15B of the Exchange Act and owed to the municipal entity. A municipal advisor to an obligated person is not subject under the Exchange Act to a fiduciary duty to such obligated person but, nonetheless, has other obligations, such as a duty of fair dealing and a duty of care under current MSRB rules.
The federal securities antifraud provisions apply to a municipal advisor’s involvement with respect to a disclosure document, even if providing advice with respect to the preparation of disclosure documents is excluded from a written agreement outlining the municipal advisor’s duties.
Conclusion
Municipal advisors must be aware of their responsibilities and the potential legal implications of their actions in the preparation of disclosure documents. This staff statement serves to clarify existing obligations and responsibilities for municipal advisors, emphasizing the importance of maintaining accurate and complete disclosures to avoid liability under federal securities laws.
