The MSRB has a warning for financial advisors and government officials about the regulatory implications of private placements and "bank loan" financings used by state and local governments.  Two particular implications associated these instruments, which increasingly are being used as alternatives to traditional public municipal securities offerings:

• financial advisers to state and local government issuers should understand that engaging in certain activities may cause them to be placement agents.
• certain financings - “bank loans” - may, in fact, be private placements of municipal securities.

Introducing Investors.   Financial advisors that introduce potential investors to issuers or negotiate with potential investors, and earn 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.

• might these activities require registration with the SEC as a broker to avoid inadvertent violations of relevant securities laws? 
• and, if the financial advisor undertakes activities that require it to register as a broker, he or she 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.

Permitted Activities with Muni Placements.   Historically, the SEC permitted firms to engage in certain activities concerning the placement of municipal securities - e.g., introducing an issuer of securities to investors and receiving transaction-based compensation - without having to register as a broker-dealer.  That changed in 2000 when the SEC reconsidered its position, and expressed by the following observation:  

“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.”

This means that financial advisors that act as placement agents:  (i) would also be subject to other MSRB rules, including those on assessments, reporting of underwritings and private placements, fair dealing, CUSIPs, and political contributions;  and (ii) are required to register with the MSRB as broker-dealers, even if they're 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.

For further details, go to:   [MSRB News Release, 8/3/11]