Re: File No. S7-45-10
Release No. 34-63576
76 Fed.Reg. 4 (January 6, 2011)
Proposed 17 CFR Parts 240-249, Registration of Municipal Advisors
I am writing to comment on the proposed new rules 15Ba1-1 through 15Ba1-7, and new Forms MA and MA-I.
I serve as counsel to the Metropolitan Water District of Salt Lake & Sandy (MWDSLS). MWDSLS is a political subdivision of the State of Utah. MWDSLS is governed by Utah statutes applicable to Local Districts generally, and the Metropolitan Water District Act in particular. MWDSLS was formed after a public election process in 1935.
MWDSLS is a supplemental wholesale provider of drinking water to its 2 member cities, Salt Lake City and Sandy City. By state statute all authority of MWDSLS is exercised by and through a 7 member Board of Trustees. The MWDSLS Board of Trustees is the governing body of MWDSLS. The Salt Lake City Council appoints 5 members of the MWDSLS Board. The Sandy City Council appoints 2 members of the MWDSLS Board. Trustees are appointed for 4 year terms. They are eligible to receive a small amount of compensation for their service (statutorily limited to $5,000/year), as well as reimbursement for certain expenses, but may decline compensation.
MWDSLS Trustees, when acting within the course and scope of their duties as MWDSLS Trustees, are not acting as “municipal advisors.” The applicable statute seems clear:
For purposes of this section—
. . . .
(4) the term “municipal advisor”—
(A) means a person (who is not a municipal entity or an employee of a municipal entity) that—
(i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or
(ii) undertakes a solicitation of a municipal entity;
(B) includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described in any of clauses (i) through (iii) of subparagraph (A); and
(C) does not include a broker, dealer, or municipal securities dealer serving as an underwriter (as defined in section 77b(a)(11) of this title), any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice, any commodity trading advisor registered under the Commodity Exchange Act or persons associated with a commodity trading advisor who are providing advice related to swaps, attorneys offering legal advice or providing services that are of a traditional legal nature, or engineers providing engineering advice; . . . .
15 U.S.C. § 78o-4(e)(4).
I draw your attention to the fact that Congress explicitly said a “municipal advisor” is “a person who is not a municipal entity. . . .” By definition, all entities must act by and through individuals. Because all authority and power of MWDSLS must be exercised by and through its Board of Trustees, the MWDSLS Trustees, when acting in that capacity, are MWDSLS. They are the “municipal entity,” and thus explicitly excluded from the statutory definition of “municipal advisor.” I do not understand how the words used by Congress, “a person who is not a municipal entity” could be interpreted otherwise.
In addition, I draw your attention to the next portion of the statutory definition of “municipal advisor.” To be considered a “municipal advisor” a person who is not a municipal entity must either “advise” a municipal entity or “undertake solicitation of” a municipal entity. When MWDSLS Trustees are acting as such they do not “advise” MWDSLS, they receive the advice directed to MWDSLS for the purpose of making the decisions of MWDSLS. As you know, the terms “solicitation of a municipal entity or obligated person” are defined at 15 U.S.C. § 78o-4(e)(9). When a MWDSLS Trustee is acting as such they receive solicitations to MWDSLS, they do not make them to MWDSLS.
I also wish to draw your attention to the next portion of the statutory definition. Congress gave examples, “municipal advisor” . . . “includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described in any of clauses (i) through (iii) of subparagraph (A). . . .” MWDSLS Trustees, when acting as such, do not function as anything like these Congressional examples.
I am concerned about the discussion of “Employees of a Municipal Entity” found at the bottom of column 2, page 834 of the Federal Register notice, 76 Fed. Reg., No. 4, page 834 (January 6, 2011). It suggests that if a member of the governing body of a municipal entity is paid, that member would be considered an “employee” of such municipal entity, and thus would not be a “municipal advisor.” Generally, whether one is considered an “employee” is not a function of payment, but rather, is a function of being subject to direction and control as to method and manner of service. MWDSLS does not direct and control MWDSLS Trustees. To the contrary, the MWDSLS Trustees, acting in quorum and subject to certain procedural rules, control and direct MWDSLS. MWDSLS Trustees cannot be dismissed by MWDSLS. It would not be appropriate to refer to MWDSLS Trustees as “employees” of MWDSLS. In fact, such a role is expressly prohibited by applicable state statute. With limited exceptions, a Trustee of a Utah Local District may not also serve as an “employee” of such district.
Included in the discussion referenced above at page 834 of the Federal Register notice is an even stranger notion, Appointed members of a governing body that are not ex officio will be considered to be municipal advisors, but appointed members of a governing body that are ex officio are exempt? This distinction is not explained. I respectfully submit it is arbitrary, capricious and contrary to the statute.
Lastly, I believe that making individual members of governing bodies register as “municipal advisors” when they would not otherwise be required to do so will chill the willingness of qualified individuals to serve. The Salt Lake City Council and Sandy City Council have long histories of selecting accomplished individuals from a variety of backgrounds to serve on our Board. These individuals are motivated by a desire to provide public service to their respective communities. In most cases that motivation would not be enough to rationally suffer the proposed SEC registration process and the resulting loss of privacy.
Please make it clear in your final rules that members of governing boards of municipal entities are not “municipal advisors” within the definition of 15 U.S.C. 78o-4(e)(4) when acting within the course and scope of their responsibilities as members of such governing boards. This should be so whether they are appointed or elected, whether they are compensated or volunteer, whether or not they are ex officio, and whether or not they are considered to be “employees” of their respective municipal entities under the applicable state law.
Thank you for your consideration of these comments.
Shawn E. Draney
10 Exchange Place, Eleventh Floor, Salt Lake City, Utah 84111
555 S. Bluff Street, #301, St. George, Utah 84770
Phone: (801) 521-9000 Fax: (801) 363-0400 www.scmlaw.com