MSRB Warns About Application of Federal Securities Laws to Private Placements; "Bank Loans" May Be Municipal Securities

Date: August 3, 2011

Contact: Jennifer Galloway
             (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) said today that given the growing use of private placements as an alternative to traditional public municipal securities offerings, it is important that financial advisors to state and local government issuers understand that engaging in certain activities may cause them to be placement agents. The MSRB also warned that certain financings called “bank loans” may, in fact, be private placements of municipal securities.

The MSRB said financial advisors that introduce potential investors to issuers or negotiate with potential investors, in either case in exchange for transaction-based compensation, may unknowingly be subject to federal securities laws, including MSRB rules that apply to “broker-dealers.” Engaging in these activities may make them subject to MSRB rules on placement agents.

“Private placements of municipal securities are on the rise and it is critical that financial advisors determine whether their activities require registration with the Securities and Exchange Commission as a broker to avoid inadvertent violations of relevant securities laws,” said MSRB Executive Director Lynnette Kelly Hotchkiss.

If a financial advisor undertakes activities that require it to register with the SEC as a broker, it will be subject to MSRB rules that apply to brokers, dealers, and municipal securities dealers (broker-dealers). These rules include recently revised MSRB Rule G-23, which generally prohibits financial advisors that are broker-dealers from switching from financial advisor to underwriter or placement agent for the same issue of municipal securities.

Historically, the Securities and Exchange Commission (SEC) permitted firms to engage in certain activities concerning the placement of municipal securities, such as introducing an issuer of securities to investors and receiving transaction-based compensation, without requiring registration as a broker-dealer. However, in 2000, the SEC reconsidered this position, stating that “in the intervening years, technological advances, including the advent of the Internet, as well as other developments in the securities markets, have allowed more and different types of persons to become involved in the provision of securities-related services.”

Financial advisors that act as placement agents would also be subject to other MSRB rules, including those on assessments, reporting of underwritings and private placements, fair dealing, CUSIPs, and political contributions.

Financial advisors that act as placement agents are required to register with the MSRB as broker-dealers, even if they are already registered as municipal advisors. Financial advisors may refer to the SEC’s “Guide to Broker-Dealer Registration” for more information about registration. Financial advisors registered as dealers should consult with their counsel on whether engaging in certain placement activities could trigger the application of MSRB rules that apply to placement agents.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.