SEC Registration Proposal Raises Questions for Colleges and Universities

February 28, 2011 Update:

The American Council on Education, on behalf of a dozen higher education associations, including NACUBO, filed comments with the Securities and Exchange Commission, arguing against their interpretation that the Dodd-Frank financial reform legislation could require SEC registration by college and university trustees and employees. The association comments take the position that such registration is inconsistent with Congressional intent in passing the legislation as well as prior SEC positions on related issues, and would significantly discourage volunteer service on the boards of colleges and universities. A final decision is expected later this spring, and NACUBO will continue to advocate these views to the SEC in the meantime.

The Dodd-Frank Wall Street Reform and Consumer Protection Act included a new registration mandate for individuals and firms that advise state and local governmental entities on certain types of financial transactions, such as the issuance of tax-exempt bonds. On January 6, the Securities and Exchange Commission (SEC) published proposed rules to carry out the new law that would formally establish a process for individuals and firms that act as “municipal advisors” to register with the SEC and the Municipal Securities Rulemaking Board (MSRB) if they provide “advice” to the municipal entity regarding the issuance of municipal securities, entering into swap transactions, or any investment strategy relating to state or municipal funds. The proposed rules do not define what constitutes “advice,” however.

The draft rules raise the specter that appointed board members of a municipal bond issuer or other municipal entity that invests governmental funds, such as public college and university, may be required to register as municipal advisors. Although not specifically discussed, the proposed rules could also be interpreted to require that trustees and certain employees of conduit borrowers (including independent colleges and universities) of municipal bond proceeds register if they provide “advice” to such borrowers relating to the issuance of the municipal security, a related swap transaction, or investment strategy relating to the municipal bond proceeds.

The Dodd-Frank legislation excludes “an employee of a municipal entity” from the definition of “municipal advisor.” In the discussion accompanying the proposed rules, the SEC noted that a commenter on the interim rule for registration of municipal advisors had recommended that the SEC clarify that this statutory “employee” exclusion covers any person serving as a member of the governing body of a municipal entity, such as a public college or university. The SEC agreed that the “employee” exclusion should extend to elected members of a governing body of a municipal entity, and ex officio members who serve on such governing body by virtue of holding an elective office. The SEC did not take the view, however, that unpaid volunteers sitting on boards should be broadly exempted from the “municipal advisor” definition, and declined to use the “employee” exclusion in the law to categorically exclude appointed members of a municipal entity’s governing body from the definition of “municipal advisor.”

The fact that, under the proposed rules, appointed board members of a public college, and board members and employees of a private university that borrows using tax-exempt bonds are not specifically excluded from the definition of “municipal advisor” does not necessarily mean that they will be required to register as municipal advisors. The absence of any definition of what constitutes “advice” under the proposed rules makes the impact difficult to determine. The SEC may clarify what constitutes “advice” in a manner that makes it clear that a discussion or decision at a board or committee meeting on how a bond issue should be structured or timed, on whether a swap should be used, and/or on how municipal funds or bond proceeds should be invested does not constitute “advice” to the institution served by the board members.

In the proposal, the SEC solicited public comments on a number of questions that bear on who should, and should not, be considered municipal advisors. For example, the rules solicit comments on whether the distinction between appointed board members and elected board members is appropriate. NACUBO is working with other interested associations to file comments to the SEC and will work to ensure that they are clarified in ways that appropriately recognize the role of trustees and campus staff. Formal comments on the proposed rules are due no later than February 22nd.