Statement on Non-Solicitor Municipal Advisors’ Role in Disclosure

Table of Contents

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.

I. EXECUTIVE SUMMARY

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,[1] 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. This staff statement includes discussion of the following subjects:

• When does participation in the preparation of disclosure documents constitute "advice" and "municipal advisory activity" for purposes of the municipal advisor definition?
• In what ways might a municipal advisor participate in the preparation of disclosure documents and how might that participation constitute advice?
• What federal securities laws are municipal advisors subject to when participating in the preparation of disclosure documents?
• What are the considerations regarding primary liability for violations of the antifraud provisions where the municipal advisor participated in the preparation of those documents?
• What are the considerations regarding secondary liability for violations of the antifraud provisions where the municipal advisor participated in the preparation of those documents?
• What is the municipal advisor-specific antifraud provision?
• 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?
• 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?
• What are some special considerations regarding the type of sale for municipal advisors who participate in the preparation of disclosure documents?
• What are some special considerations regarding liability disclaimers for municipal advisors who participate in the preparation of disclosure documents?
• 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?

The discussion below includes references to enforcement actions that the Commission has brought against municipal advisors or brought against persons performing similar functions before the enactment of the municipal advisor provisions of the Exchange Act. The discussion of enforcement actions is provided for general reference only and is not meant as a comprehensive overview of situations that may give rise to municipal advisor liability. Whether a municipal advisor would be liable in connection with the activities discussed below would depend on all of the relevant facts and circumstances of a municipal advisor's activities, including its relationship to a municipal entity or obligated person, and the outcome in any particular situation may differ from what is described in the enforcement actions cited below.

II. STAFF STATEMENT FOR MUNICIPAL ADVISORS; ROLE IN DISCLOSURE

Section 975 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act" or "Dodd-Frank") amended Section 15B of the Exchange Act,[2] to create a new class of regulated persons, "municipal advisors," required to register with the Commission. The Exchange Act defines the term "municipal advisor" to mean a person (who is not a municipal entity or an employee of a municipal entity) that: (1) 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 (2) undertakes a solicitation of a municipal entity.[3] A municipal advisor described in clause (2) of the preceding sentence is referred to as a "solicitor municipal advisor."[4] The discussion in this staff statement does not relate to solicitor municipal advisors. This staff statement also does not address the potential applicability of the laws and/or regulations of state and local governments to municipal advisors, nor does it address the application of the Investment Advisers Act of 1940 ("Advisers Act") to municipal advisors or modify, amend, or alter the scope or substance of an investment adviser's federal fiduciary duty under the Advisers Act.

Prior to Dodd-Frank, a municipal advisor was commonly known as a "financial advisor," an imprecise term encompassing a broad range of roles. Because these pre-Dodd-Frank financial advisors typically provided the same or very similar types of services as post-Dodd-Frank municipal advisors, this staff statement will generally refer to such financial advisors as "pre-Dodd-Frank municipal advisors." The views of the staff expressed below are informed by certain actions involving pre-Dodd-Frank municipal advisors but represent the current views of the staff with respect to municipal advisors.

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?

In the staff's view, participating in the preparation of disclosure documents constitutes "municipal advisor activity" when it (1) is within the scope of the relationship between the municipal advisor and the municipal entity or obligated person,^[5] and (2) otherwise constitutes "advice" as described in the following paragraph. The scope of the relationship may be set forth in an agreement or exhibited through the actual municipal advisory activities undertaken.[6] The Commission previously recognized that providing advice with respect to the issuance of municipal securities may include the following, non-exclusive list of municipal advisory activities:

…assist[ing] municipal entities in developing a financing plan, assist[ing] municipal entities in evaluating different financing options and structures, assist[ing] in the selection of other parties to the financing (such as bond counsel and underwriters), coordinat[ing] the rating process, ensur[ing] adequate disclosure, and/or evaluat[ing] and negotiat[ing] the financing terms.^[7]

Notably, the Commission has indicated that municipal advisors "may" assist municipal entities and obligated persons in ensuring adequate disclosure. Thus, a municipal advisor may, but is not required to, participate in the preparation of disclosure documents. The Municipal Advisor Adopting Release does not specifically address whether or when taking actions to ensure adequate disclosure constitutes municipal advisor activity.[8]

For purposes of the municipal advisor definition, the Commission has stated that the term "advice" includes, without limitation, "a 'recommendation' that is particularized to the specific needs, objectives, or circumstances of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, based on all the facts and circumstances."^[9] Not all services provided by a municipal advisor, however, constitute advice under this definition.^[10] A municipal advisor's participation in the preparation of disclosure documents may constitute advice because structure, timing, terms, and other similar matters are frequently described in disclosure documents,[11] such as preliminary and final official statements.[12] Participation in the preparation of disclosure documents is one way in which a municipal advisor might convey its advice to its municipal entity or obligated person on such matters.

2. In What Ways Might a Municipal Advisor Participate in the Preparation of Disclosure Documents and How Might that Participation Constitute Advice?

Municipal advisors' participation in the preparation of their municipal entity or obligated persons' primary and secondary market disclosure documents varies significantly.^[13] For example, municipal advisors might, without limitation:

• Take primary drafting responsibility of a disclosure document;^[14]
• Take responsibility for drafting specified portions of a disclosure document;^[15]
• Take responsibility for reviewing or editing all of a disclosure document;^[16]
• Take responsibility for reviewing or editing a portion of a disclosure document;^[17]
• Perform administrative or clerical tasks with respect to all or a portion of a disclosure document;[18] or
• Decline to participate.[19]

The staff understands that it is market practice in some circumstances for a municipal advisor to agree to assemble a disclosure document from materials received from others in the transaction's working group without agreeing to independently confirm the accuracy of the underlying information.[20] Such an activity may not involve "advice"[21] for purposes of the municipal advisor definition and, if such activity does not involve advice, it is not municipal advisory activity under the Exchange Act. However, depending on the facts and circumstances of the situation, such compilation may create ambiguities about who is responsible for completing various tasks. For example, when assembling information from multiple sources, the text would need to be reviewed by someone to ensure that defined terms function as intended, and numbers, data, and text are internally consistent. Someone would also need to determine which data to include and what comments and changes to accept or reject. Such tasks may be undertaken by the municipal advisor that is assembling the information. In that case, the staff believes that it would be more likely that assembling a disclosure document may include an advisory component, for example, if it involves decisions regarding what comments to accept or reject if such comments relate to the structure, timing, terms, and other similar matters concerning municipal financial products or the issuance of municipal securities.

3. What Federal Securities Laws Are Municipal Advisors Subject to When Participating in the Preparation of Disclosure Documents?

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),[22] Exchange Act Section 10(b)^[23] and Exchange Act Rule 10b-5 relating to fraud in the offer or sale of securities^[24] or in connection with the purchase or sale of securities[25] (collectively referred to herein as the "antifraud provisions"). Violations of some antifraud provisions require that the violator acted with scienter, although others do not.[26] 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.[27] 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.^[28] 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.^[29]

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^[30] 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.[33] As discussed above, a municipal advisor's role in preparing primary and secondary market disclosure documents for a municipal entity or obligated person may vary widely, ranging from no participation to primary drafting responsibility.

B. CONSIDERATIONS WITH RESPECT TO MUNICIPAL ADVISORS' INVOLVEMENT IN THE DISCLOSURE PROCESS AND THE ANTIFRAUD PROVISIONS

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. For example, the Commission brought a settled action against a pre-Dodd Frank municipal advisor for materially misleading statements in the disclosure document. In that case the advisor's role was described as being the issuers' financial and marketing specialist, but during its course of business the advisor also participated in the preparation of the disclosure documents.^[34] The Commission found that the advisor had access to information from which they could have known or reasonably should have known of such materially misleading statements, and did not take action to adequately assure disclosure.^[35] Depending on the facts and circumstances of the situation, a municipal advisor's level of familiarity with a municipal entity or obligated person could, among other things, be considered in determining whether a municipal advisor knew or should have known of materially inaccurate or incomplete disclosures in a disclosure document. Regardless of whether the municipal advisor is contractually obligated or otherwise participates in the preparation of the disclosure document, a municipal advisor may, depending on the facts and circumstances of its role in the transaction, be aware of such materially inaccurate or incomplete disclosures.

The Commission has brought enforcement proceedings against municipal advisors (including pre-Dodd-Frank municipal advisors) finding them primarily or secondarily liable for violations of the antifraud provisions, including in connection with preparing municipal entity disclosure.^[36]

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?

Primary Liability Elements.A municipal advisor may be primarily liable under the antifraud provisions when participating in the preparation of disclosure documents. Under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, primary liability requires, in connection with the purchase or sale of any security: employing any device, scheme, or artifice to defraud; making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon any person.^[37] Under Section 17(a) of the Securities Act, primary liability requires, in the offer or sale of securities: employing any device, scheme, or artifice to defraud; obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.[38] Scienter is a required element of a violation of Section 17(a)(1) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; the term "scienter" refers to a mental state embracing intent to deceive, manipulate, or defraud and includes recklessness.[39] No scienter requirement exists for violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act; negligence alone is sufficient.^[40]

In some enforcement actions finding primary liability of pre-Dodd-Frank municipal advisors for violations of the antifraud provisions related to materially misleading statements in a municipal entity's disclosure document, the pre-Dodd-Frank municipal advisors were obligated to draft, review, or edit the disclosure documents and had knowledge of or could have reasonably discovered the materially misleading statements.^[41] In other settled Commission actions, pre-Dodd-Frank municipal advisory firms and personnel were found primarily liable for violations of Section 17(a)(2) of the Securities Act related to materially misleading statements in a municipal entity's disclosure documents where they participated in the preparation of the documents, in addition to violations of Section 17(a)(3) of the Securities Act related to material misrepresentations in those same disclosure documents.[42]

In a litigated action before an administrative law judge, the pre-Dodd-Frank municipal advisor had contractually obligated herself to prepare the municipal entity's official statement "in accordance with the disclosure required by [Exchange Act] Rule 15c2-12."^[43] However, the official statement that the pre-Dodd-Frank municipal advisor drafted contained various material misrepresentations of which she was either aware or about which she did not make sufficient inquiries to determine whether material statements were inaccurate.^[44] As the primary drafter of the disclosure document contractually obligated to fulfill Rule 15c2-12 disclosure requirements, she was more than a mere "compiler of data."^[45] She "undertook not only the procedural obligations set forth in [Exchange Act Rule 15c2-12], but also the substantive responsibility to see that the representations contained in the offering statement were accurate and complete."^[46] In light of these contractual obligations to act as drafter of the disclosure document in accordance with the disclosure requirements of Rule 15c2-12, and the key role that the pre-Dodd-Frank municipal advisor played in the financing, the pre-Dodd-Frank municipal advisor was found primarily liable for the materially misleading statements in the official statement and violated Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder.[47]

In a settled enforcement action, a pre-Dodd-Frank municipal advisor^[48] that described itself as a financial and marketing specialist, but who participated in preparing disclosure documents was found to be primarily liable for the violations of Securities Act Sections 17(a)(2) and (3) for materially misleading statements resulting from omitting material facts concerning the sources of repayment for the securities.^[49] The pre-Dodd-Frank municipal advisor recommended disclosure language for the disclosure documents, and other financial professionals participating in drafting the official statements made changes to the recommended disclosures which misrepresented material aspects of the financing.^[50] The pre-Dodd-Frank municipal advisor made no objection to these changes, but as a participant in the preparation of the disclosure documents, the pre-Dodd-Frank municipal advisor either received or had access to material information that was misleadingly omitted from the documents.^[51] Because the pre-Dodd-Frank municipal advisor participated in the preparation of the disclosure documents that it knew or reasonably should have known contained material omissions, the pre-Dodd-Frank municipal advisor and its personnel were found primarily liable for the materially misleading statements resulting from those omissions under Securities Act Sections 17(a)(2) and (3).[52]

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?

Secondary Liability Elements. Like any other person, a municipal advisor may be liable for causing and/or aiding and abetting the primary violation of another person when participating in the preparation of disclosure documents.[53] Three elements must be established to show aiding and abetting of the violation of another: (1) the existence of a securities law violation by the primary violator; (2) knowledge (or recklessness as to the existence) of this violation on the part of the aider and abettor; and (3) "substantial assistance" by the aider and abettor in the achievement of the primary violation.^[54] A person may be liable for causing the securities law violation of the primary violator if that person knew or should have known that an act or omission would contribute to the primary violation.[55]

In a settled 1996 Commission action, a pre-Dodd-Frank municipal advisor participating in the preparation of disclosure documents was found liable for causing and aiding and abetting the municipal entity issuer's violation of the antifraud provisions.[56] The pre-Dodd-Frank municipal advisory firm and the municipal entity had an agreement pursuant to which the pre-Dodd-Frank municipal advisor prepared official statements which were to contain complete financial and other data.^[57] The pre-Dodd-Frank municipal advisor was aware the municipal entity had a material decline in cash flow since the prior year that was not disclosed in the financial information contained in the official statements and that the official statements misrepresented the municipal entity's intended use of the proceeds.^[58] Because the pre-Dodd-Frank municipal advisor and his firm failed to cause the municipal entity to include information about its cash flow decline and properly disclose the intended use of the bond proceeds in its official statements, under the circumstances the pre-Dodd-Frank municipal advisor and his firm were liable for causing and willfully aiding and abetting the municipal entity's violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder.^[59]

3. What is the Municipal Advisor-Specific Antifraud Provision?

Section 15B of the Exchange Act prohibits any fraudulent, deceptive, or manipulative act or practice by a municipal advisor while engaging in municipal advisory activities on behalf of a municipal entity or obligated person.^[60] This provision of Section 15B of the Exchange Act applies in addition to the antifraud provisions discussed in Sections II.B.1 and II.B.2 above. As a result, depending upon the facts and circumstances, actions taken or not taken by a municipal advisor in the course of participating in the preparation of disclosure documents may constitute a violation of this provision. The staff notes that the prohibitions in Section 15B of the Exchange Act are not limited to acts or practices aimed toward investors and are not limited to activities related to the purchase, offer, and sale of securities.^[61] The Commission has brought several enforcement actions against municipal advisors under this antifraud provision (Section 15B(a)(5) of the Exchange Act), although to date, none have involved preparation of disclosure documents.^[62]

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?

The two primary means of establishing the scope of a municipal advisor's relationship with a municipal entity or obligated person are: (i) an agreement^[63] between a municipal advisor and a municipal entity or obligated person; and/or (ii) the municipal advisory activities undertaken by the municipal advisor.^[64] The legal obligations and duties imposed on a municipal advisor participating in the preparation of disclosure documents depend on the scope of the relationship between such municipal advisor and a municipal entity or obligated person.[65] At one end of the spectrum, a municipal advisor may assume primary responsibility for preparing or drafting disclosure documents. At the other end of the spectrum, a municipal advisor may decline to participate in the preparation of the disclosure document and any due diligence process altogether. Perhaps more commonly, a municipal advisor may undertake responsibility somewhere in between. As discussed above, a municipal advisor may define the scope of its relationship with the municipal entity or obligated person, to include (or exclude) a range of disclosure-related obligations.

Defining the Scope of Relationship Through Agreement. A municipal advisor's fiduciary duty under the Exchange Act and/or duty of care under MSRB Rule G-42 attaches to all municipal advisory activity within the scope of its relationship with a municipal entity or obligated person, as applicable.[66] The scope can be determined by agreement between the municipal advisor and the municipal entity or obligated person. For example, a municipal advisor and a municipal entity or obligated person may agree to a scope of services where the municipal advisor explicitly does not participate in the preparation of the municipal entity's disclosure document. Alternatively, the municipal advisor and the municipal entity or obligated person may agree to a scope of services that is broader and includes participation in the preparation of the municipal entity's disclosure document expressly through agreement.^[67]

Defining the Scope of Relationship Through Municipal Advisory Activities. When municipal advisors participate and provide advice in the preparation of disclosure documents on behalf of a municipal entity or obligated person,^[68] such activities constitute municipal advisory activities whether or not such activities were part of an agreement between the municipal advisor and the municipal entity or obligated person. In the absence of a clear agreement stating otherwise, the staff believes a municipal advisor who routinely participates and provides advice in the preparation of a disclosure document for a municipal entity or obligated person may create an expectation by its client or among the parties to the transaction that such participation and advice will continue in a new transaction.^[69] Similar ambiguities may arise when a municipal advisor delivers a written description of its services to a municipal entity or obligated person to fulfill a regulatory requirement[70] but does not obtain a written agreement signed by the municipal entity or obligated person. In such a case, and if the municipal advisor's course of conduct does not indicate otherwise, a court may look to the written description even though there is not a contract signed by both parties. If the municipal advisor does not include providing advice with respect to the preparation of a disclosure document or otherwise participating in the preparation of a disclosure document in its written description of services but then later orally agrees to such preparation, that may suggest a course of dealing that differs from its written description of services. Actually providing advice with respect to the preparation of a disclosure document or otherwise participating in the preparation of a disclosure document would, of course, reflect such different course of dealing. A contractual agreement, like a written description of services, would be among the facts and circumstances relevant to a court in determining the actual course of dealing that a municipal advisor engaged in with a municipal entity or obligated person.

In the circumstances described above, the municipal entity or obligated person may not understand the scope of the services its municipal advisor is undertaking. Other participants in the transaction (other than the municipal advisor) may be similarly unclear as to the municipal advisor's role and might assume the municipal advisor has responsibility where it does not due to the common understanding of the relationship between a municipal entity or obligated person and its municipal advisor.^[71] In the staff's view, these ambiguities may increase the likelihood of false or materially misleading statements because of a lack of clear responsibility for verifying statements in the disclosure document.

Breadth and Duration of Fiduciary Duty. The breadth of this fiduciary duty is not static: a municipal advisor may at any point revise the agreed scope of services provided to a municipal entity or obligated person to include or exclude disclosure-related obligations.[72] This change can occur through an agreement with the municipal entity/obligated person or because of municipal advisory activities undertaken.[73] For example, a municipal advisor may initially disclaim in writing any disclosure-related obligations, but then later proceed to draft the municipal entity's disclosure document in a manner that includes municipal advisory activity. In the staff's view, by engaging in this municipal advisory activity, the municipal advisor has redefined the scope of its services with the municipal entity or obligated person and the breadth of its fiduciary duty to the municipal entity or obligated person.

The Commission has not addressed the duration of a municipal advisor's fiduciary duty under the Exchange Act. Although there are circumstances in which a fiduciary duty continues to exist after the relationship has ended, an agent's fiduciary duty to a principal is generally coterminous with the duration of the agency relationship.[74] As a result, in the staff's view, a municipal advisor's fiduciary duty would generally last as long as the agreement between the municipal advisor and the municipal entity or obligated person or as long as municipal advisory activity is being undertaken, whichever is longer.[75] In the absence of any express agreement, it is also the staff's view that the duration of the municipal advisor's statutory fiduciary duty under the Exchange Act will be informed in general by the nature of the advisory arrangement based on the course of dealing and the actions taken by the municipal advisor.^[76]

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?

Although fiduciary duty and antifraud liability are legally distinct, the staff notes that there may be situations when a municipal advisor's fiduciary obligations, such as a duty to disclose all material conflicts of interest to a municipal entity or obligated person,[77] or a duty to have a reasonable basis for certain advice, representations or information provided to a municipal entity or obligated person,[78] could be relevant in assessing whether a municipal advisor knows or should know of a material misstatement or omission in a municipal entity's disclosure document. For example, in the staff's view, if a municipal advisor is involved in the preparation of disclosure documents, that municipal advisor should consider whether the failure to disclose information about such municipal advisor's business and financial relationships and arrangements with other parties to the transaction, including the issuer, such as those that create conflicts of interest, would be materially misleading to investors (and thus should be disclosed).[79] For further discussion of the potential for liability of municipal advisors under the antifraud provisions of the Securities Act and the Exchange Act, see Section II.B above.

Prior to Dodd-Frank, the Commission provided guidance that information regarding financial and business arrangements among the parties involved in the issuance of municipal securities, such as contingency fees and fee splitting arrangements, may be material in the context of municipal securities disclosure, depending on all of the relevant facts and circumstances.[80]

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?

When a municipal advisor participates in the preparation of a municipal entity's disclosure document, whether the type of sale is negotiated or competitive may be included among the facts and circumstances considered to determine whether a municipal advisor violated the antifraud provisions.

In one case involving a negotiated sale, an administrative law judge noted that a pre-Dodd-Frank municipal advisor drafting a disclosure document could rely on the underwriter's due diligence with respect to the material issues in the document.^[81] Understanding an underwriter's obligations in the different types of sale, and the basis of those obligations, might help a municipal advisor understand the context in which the municipal advisor is advising its client.[82] If a municipal advisor prepares or participates in the preparation of the municipal entity's or obligated person's preliminary disclosure document in a competitive offering^[83] and is providing advice with respect to such disclosure document, the municipal advisor may, depending on the facts and circumstances of the situation, be more likely than in a negotiated underwriting to either engage in direct communication with investors or undertake responsibility to inquire into the completeness and accuracy of certain elements of the disclosure presented by the municipal entity or obligated person as part of the offering that they would be obligated to confirm by operation of contract[84] or the federal securities laws.[85] Therefore, in the staff's view, the municipal advisor may have a greater obligation to inquire into the completeness and accuracy of those elements of the disclosure.

2. What are Some Special Considerations Regarding Liability Disclaimers for Municipal Advisors Who Participate in the Preparation of Disclosure Documents?

Parties to municipal securities transactions often include liability disclaimers in the disclosure document. However, a municipal advisor cannot avoid liability for violations of the antifraud provisions of the Exchange Act based on such a disclaimer,[86] even if the disclaimer may be effective for other purposes. Furthermore, a municipal advisor may not engage in conduct that is inconsistent with its fiduciary duty under the Exchange Act,[87] but may take steps to define the agreed-upon scope of the relationship to which the fiduciary duty applies.^[88]

While a municipal advisor cannot avoid antifraud liability by using a disclaimer, such a disclaimer may be considered in the context of a municipal advisor's overall relationship with the municipal entity or obligated person in determining whether the municipal advisor had been engaged to review the municipal entity's disclosure document. The administrative law judge in a litigated action considered the pre-Dodd-Frank municipal advisor's disclaimer language in the municipal entity's official statement and determined that the disclaimer language was evidence that the scope of the pre-Dodd-Frank municipal advisor's engagement did not include ensuring the accuracy and completeness of the disclosures in the official statement because there was no written agreement or contrary course of conduct suggesting that it was within the scope of the engagement.^[89] However, the judge stressed that this disclaimer language could not waive liability as to the activities within the scope of that relationship.^[90] If a municipal advisor obligates itself to review a disclosure document for accuracy and completeness, that municipal advisor cannot disclaim antifraud liability when engaged to review the accuracy and completeness of disclosures.^[91] In another litigated action, the administrative law judge stated that the general disclaimer in the official statement did not absolve the pre-Dodd-Frank municipal advisor from responsibility where her written engagement obligated her to prepare the disclosure document "in accordance with the disclosure required by Securities and Exchange Commission Rule 15c2-12" and she did, in fact, "check[] the accuracy of some, but not all, of the information in the official statement."[92]

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?

Maintaining Current Agreement. A municipal advisor's agreement with a municipal entity or obligated person may describe the obligations of the municipal advisor with varying levels of specificity. A highly specific agreement is much more likely to avoid misunderstandings and disputes between the parties. For example, an engagement letter might specify exactly which disclosure documents or portions of disclosure documents, if any, are the responsibility of the municipal advisor and in what capacity the municipal advisor is serving (e.g., provider, drafter, reviewer, editor, or assembler of specified data). Alternatively, such agreement might explicitly state that the municipal advisor will not be engaging in certain activities or participating in the preparation of a disclosure document.

A municipal advisor's role in disclosure may evolve over the course of the transaction and municipal advisors must promptly amend the agreement between the municipal advisor and municipal entity or obligated person to reflect any change in the scope of the relationship.[93] Maintaining current agreements may avoid misunderstandings and disputes between the parties. In the staff's view, municipal advisors with longstanding agreements with municipal entities or obligated persons should consider also periodically reviewing their agreements to ascertain that the agreements reflect the current understanding between the parties.[94]

Inquiries into Accuracy and Completeness. Depending on the facts and circumstances of the situation, when the municipal advisor has a role in disclosure, the municipal advisor should perform an appropriate level of inquiry into the accuracy and completeness of the disclosure.^[95] As discussed above, all municipal advisors are subject to a statutory fiduciary duty that includes a duty of care owed to the municipal entity.[96] When a municipal advisor takes a role in the preparation of disclosure documents, that may have a bearing on the types of inquiries it should make concerning the accuracy and completeness of those disclosure documents.[97] For example, in a competitive sale of municipal securities, where there is no underwriter in place at the time the disclosure document is prepared, this duty of care might impose heightened responsibility on a municipal advisor undertaking more of a primary role in disclosure.[98]

Policies and Procedures. A municipal advisor might consider adopting policies and procedures relating to its participation in the preparation of disclosure documents reasonably designed to achieve compliance with applicable securities laws and regulations.[99] Other market participants, such as issuers,[100] have been encouraged to adopt written policies and procedures as well.

For a municipal advisor that participates in the preparation of disclosure documents, reasonably designed policies and procedures, when consistently implemented, can help a municipal advisor provide more accurate, timely, and comprehensive information to a municipal entity or obligated person related to potential disclosure issues; better manage communications with a municipal entity or obligated person related to its participation in the preparation of disclosure documents; and comply with the antifraud provisions.

[1] Registration of Municipal Advisors, Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 67468 (Nov. 12, 2013) ("Municipal Advisor Adopting Release").

[2] See 15 U.S.C. 78a et seq.

[3] 15 U.S.C. 78o-4(e)(4)(A); see also 17 CFR 240.15Ba1-1(e) (defining "municipal advisory activities" similarly to include "[p]roviding 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.").

[4] See MSRB Rule G-46(a)(vi).

[5] The staff believes that such a reading of the Municipal Advisor Adopting Release is consistent with Restatements of Law. See Restatement (Second) of Agency § 13 (1957) ("An agent is a fiduciary with respect to matters within the scope of his agency") and § 390, comment d at 211 ("An agent is not … in a fiduciary relation with the principal as to matters in which he is not employed."); Restatement (Second) of Trusts § 2, comment b (1959) ("A person in a fiduciary relation to another is under a duty to act for the benefit of the other as to matters within the scope of the relation."). Further, MSRB Rule G-42 requires that a municipal advisor document each municipal advisory relationship in writing and identify specific municipal advisory activities undertaken. However, the presence of limiting language in a written agreement does not define the scope of the relationship if the actual activities undertaken are broader than the limiting language.

[6] See MSRB Rule G-42; see also infra Section II.C.1.

[7] Municipal Advisor Adopting Release, 78 FR at 67472 (emphasis added).

[8] See 15 U.S.C. 78o-4(c)(1) ("A municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor."); see also MSRB Rule G-42.

[9] Municipal Advisor Adopting Release, 78 FR at 67479-80. Note that this staff statement does not address or affect the "advising others" element of the definition of "investment adviser" under Section 202(a)(11) of the Advisers Act. As noted above, this staff statement does not address the Advisers Act or modify, amend or alter the scope or substance of an investment adviser's federal fiduciary duty under the Advisers Act.

[10] Whether or not an activity related to the issuance of municipal securities constitutes advice depends on all of the relevant facts and circumstances. Advice does not include general information that is not a recommendation regarding the issuance of municipal securities. 17 CFR 240.15Ba1-1(d)(1)(ii). Additionally, performing clerical or ministerial services for a municipal entity or obligated person is not municipal advisory activity. See Municipal Advisor Adopting Release, 78 FR at 67479-80, n. 163.

[11] As discussed above, the definition of "municipal advisor" includes any person who provides advice with respect to the structure, timing, terms, and other similar matters concerning the issuance of municipal securities. See 15 U.S.C. 78o-4(e)(4)(A).

[12] See 17 CFR 240.15c2-12(f). Disclosure documents produced in connection with a primary offering of municipal securities are referred to herein as "official statements."

[13] See Supplementary Material .01(c) to MSRB Rule G-42, which provides that a municipal advisor must have a reasonable basis for any information provided to the municipal entity or obligated person or other parties in the municipal securities transaction in connection with the preparation of an official statement for any issue of municipal securities as to which the municipal advisor is advising.

[14] See, e.g., Peacock, Hislop, Staley & Given, Inc., Securities Act Release No. 7353, Exchange Act Release No. 37777, 1996 WL 566598 (Oct. 2, 1996) (settled action); County of Nevada, Securities Act Release No. 153, 1999 WL 982426 (ALJ Oct. 29, 1999) (litigated action affirmed by the Commission); infra note 37.

[15] See Leifer Capital, Inc., Securities Act Release No. 7630, 1999 WL 11533 (Jan. 14, 1999) (settled action) (finding that a pre-Dodd-Frank municipal advisor assisted in the preparation of official statements for a municipal entity by reviewing and proposing form language for section describing investment pools).

[16] See Leifer Capital, 1999 WL 11533 at *5.

[17] See Public Finance Consultants, Inc., Exchange Act Release No. 274, 2005 WL 464865 at *52 (ALJ Feb. 25, 2005) (litigated action affirmed by the Commission).

[18] See Municipal Advisor Adopting Release, 78 FR at 67479-80, n. 163.

[19] See Municipal Advisor Adopting Release, 78 FR at 67472 (providing advice with respect to the issuance of municipal securities may include ensuring adequate disclosure).

[20] See SIFMA, "Model Municipal Advisor Engagement Letter" (June 2, 2016), available at https://www.sifma.org/resources/general/municipal-securities-markets.

[21] Performing clerical or ministerial services for a municipal entity or obligated person is not a municipal advisory activity. See Municipal Advisor Adopting Release, 78 FR at 67479-80.

[22] 15 U.S.C. 77q(a).

[23] 15 U.S.C. 78j(b).

[24] 15 U.S.C. 77q(a).

[25] 15 U.S.C. 78j(b); 17 CFR 240.10b-5.

[26] See infra Section II.B.

[27] Id.

[28] 15 U.S.C. 78o-4(a)(5).

[29] See Municipal Securities Disclosure, Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799, 28811 n. 84 (July 10, 1989) ("1989 Adopting Release") (stating "[b]ecause they are ultimately liable for the content of their disclosure, issuers should insist that any persons retained to assist in the preparation of their disclosure documents have professional understanding of the disclosure requirements under the federal securities laws.").

[30] Participation in the preparation of a disclosure document may include drafting, reviewing, editing, or performing administrative or clerical tasks with respect to all or a portion of the disclosure document in a primary or support capacity. Such participation constitutes "municipal advisory activity" only when and to the extent that it includes "advice." See 15 U.S.C. 78o-4(e)(4)(A); see also supra Section II.A.1.

[31] The Commission has noted that, in connection with the issuance of municipal securities, a municipal advisor "may assist municipal entities in developing a financing plan, assist municipal entities in evaluating different financing options and structures, assist in the selection of other parties to the financing (such as bond counsel and underwriters), coordinate the rating process, ensure adequate disclosure, and/or evaluate and negotiate the financing terms." See Municipal Advisor Adopting Release, 78 FR at 67472.

[32] 15 U.S.C. 78o-4(c)(1) ("A municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor.").

[33] See MSRB Rules G-17 (fair dealing) and G-42(a)(i) (duty of care).

[34] See Leifer Capital, 1999 WL 11533 (finding a pre-Dodd-Frank municipal advisor violated Sections 17(a)(2) and (3) of the Securities Act when such pre-Dodd-Frank municipal advisor who participated in drafting the municipal entity's official statements was aware of changes made to the disclosure language of the municipal entity's official statements and did not object to them even though it knew, or should have known, that such changes made the official statements misleading because they omitted material information).

[35] See id.

[36] See Leifer Capital, Inc., 1999 WL 11533; Peacock, Hislop, Staley & Given, Inc., 1996 WL 566598; County of Nevada 1999 WL 982426; Kenneth D. Ough, Securities Act Release No. 8141, Exchange Act Release No. 46736, 2002 WL 31422636 (Oct. 29, 2002) (settled action); In the Matter of John S. Reger II and Business & Financial Advisors, Inc., Securities Act Release No. 7973, 2001 WL 410501 (Apr. 23, 2001) (settled action). Butsee Final Judgment, SEC v. City of Rochester, New York, No. 6:22-CV-06273 (W.D.N.Y Dec. 26, 2024).

[37] See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195-96 (1976); see also supra notes 24-25.

[38] 15 U.S.C. 77q(a).

[39] See Ernst & Ernst, 425 U.S. at 195-96. The scienter requirement for these violations of the antifraud provisions may be satisfied by a showing of recklessness. See, e.g., Miller v. Champion Enter., Inc., 346 F.3d 660, 672 (6th Cir. 2003); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999); In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999). Recklessness has been defined as an "extreme departure from the standards of ordinary care, and which represents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." See, e.g., McLean v. Alexander, 599 F.2d 1190, 1197 (3d Cir. 1979) (quoting Sunstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1976)); Hackbart v. Holmes, 675 F.2d 856 (10th Cir. 1982).

[40] See Aaron v. SEC, 446 U.S. 680, 701-02 (1980) (finding that the Commission "need not establish scienter as an element of an action to enjoin violations of § 17(a)(2) and § 17(a)(3) of the [Securities] Act"); Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986) (noting that the Commission "need only prove negligence in actions under sections 17(a)(2) or (3) [of the Securities Act]").

[41] See County of Nevada, 1999 WL 982426; Peacock, Hislop, Staley & Given, 1996 WL 566598; but see Public Finance Consultants, 2005 WL 464865.

[42] See, e.g., Leifer Capital, Inc., 1999 WL 11533; Reger, 2001 WL 410501.

[43] See County of Nevada, 1999 WL 982426 at *16.

[44] Id. at *22.

[45] Id. at *24.

[46] Id. at *17. The administrative law judge found that the pre-Dodd-Frank municipal advisor: (i) did not take on the underwriter's responsibility to conduct a due diligence investigation; (ii) could have checked public records to establish land title, but instead relied on statements of the developer; and (iii) relied on the developer's ability to obtain a bank loan for proof of its financial stability rather than ask the underwriter for the results of its due diligence investigation.

[47] Id. at *25.

[48] See Leifer Capital, 1999 WL 11533.

[49] Id.

[50] Id. at *6, *8, and *9.

[51] Id. at *7.

[52] Id. at *9.

[53] See Orlando Joseph Jett, Securities Act Release No. 8395, Exchange Act Release No. 49366, 2004 WL 2809317 at *24, n.46 (Mar. 5, 2004) (litigated action); Abraham & Sons, Exchange Act Release No. 44624, Investment Company Act Release No. IA - 1956, 2001 WL 865448 at *7, n.24 (litigated action) (citing Graham v. SEC, 222 F.3d 994, 1000 (D.C. Cir. 2000)); Donald T. Sheldon, Exchange Act Release No. 31475, 1992 WL 353048 at *4 (1992) (litigated action), aff'd, 45 F.3d 1515 (11th Cir. 1995).

[54] See SEC v. Apuzzo, 689 F.3d 204, 206, 211 n.6 (2d Cir. 2012).

[55] See KPMG Peat Marwick LLP, Exchange Act Release No. 43862, 2001 WL 47245 at *19 - *23 (Jan. 19, 2001) (litigated action).

[56] Peacock, Hislop, Staley & Given, Inc., 1996 WL 566598.

[57] Id. at *1. The official statements included a preliminary and final official statement.

[58] Id. at *2. The official statements were reviewed by the municipal entity, the pre-Dodd-Frank municipal advisor, and others for accuracy and completeness.

[59] Id. at *3.

[60] 15 U.S.C. 78o-4(a)(5).

[61] Section 15B of the Exchange prohibits any fraudulent, deceptive, or manipulative act or practice by a municipal advisor while engaging in municipal advisory activities on behalf of a municipal entity or obligated person, not just acts or practices against investors. See 15 U.S.C. 78o-4(a)(5).

[62] See, e.g., School Business Consulting Inc., Exchange Act Release No. 78054, Investment Company Act Release No. IC - 32147, 2016 WL 3226838 (June 13, 2016) (settled action); Keygent LLC, Exchange Act Release No. 78053, 2016 WL 3226837 (June 13, 2016) (settled action); Barcelona Strategies, LLC, Exchange Act Release No. 83191, Investment Company Act Release No. IC - 33093, 2018 WL 2128677 (May 9, 2018) (settled action); SEC v. Malachi Financial Products, Inc., et al., Litigation Release No. 24182, 2018 WL 3217611 (July 2, 2018) (settled action).

[63] See, e.g., County of Nevada, 1999 WL 982426 at *7 (finding that a pre-Dodd-Frank municipal advisor contractually obligated herself to "[p]repare the preliminary and final official statements describing [the municipal entity's] financing program, the bonds, security for payment of the bonds, and the economic and financial background of the property owners in accordance with the disclosure required by Securit[ies] and Exchange Commission Rule 15c2-12."); see also MSRB Rule G-42(c) (adopted pursuant to the MSRB's rulemaking mandate under Section 15B of the Exchange Act, which requires that a municipal advisory relationship be evidenced by a writing or writings created and delivered to the municipal entity or obligated person prior to, upon, or promptly after the establishment of the municipal advisory relationship, and establishes certain minimum requirements).

[64] When an agreement is unclear or absent, course of dealing may be considered in determining the scope of a municipal advisor's relationship with its municipal entity or obligated person. See Public Finance Consultants, 2005 WL 464865 at *52. In Public Finance Consultants, the administrative law judge noted that over the years, the municipal entity "relied on the [pre-Dodd-Frank municipal advisor] to perform a wide range of duties," and that the municipal advisor's fees on transactions for the municipal entity issuer ranged from $1,000 to as high as $220,000. Id. The statutory fiduciary duty under the Exchange Act extends to all municipal advisory activity for a municipal entity. See Municipal Advisor Adopting Release, 78 FR at 67469.

[65] See MSRB Rule G-42; see also supra note 64.

[66] See, e.g., MSRB Rule G-42(a), Supplemental Material .04; MSRB, Municipal Advisors Understanding Standard of Conduct, (April 2016) available at https://www.msrb.org/sites/default/files/2022-08/MSRB-Rule-G-42-for-Municipal-Advisors.pdf.

[67] See MSRB Rule G-42(c), which requires, among other things, that such agreement be in writing and identify specific municipal advisory activities undertaken.

[68] The Commission stated that, in connection with the issuance of municipal securities, a municipal advisor "may assist municipal entities in developing a financing plan, assist municipal entities in evaluating different financing options and structures, assist in the selection of other parties to the financing (such as bond counsel and underwriters), coordinate the rating process, ensure adequate disclosure, and/or evaluate and negotiate the financing terms." See Municipal Advisor Adopting Release, 78 FR at 67472.

[69] For example, if a municipal advisor participates in the preparation of disclosure documents of a municipal entity or obligated person over several consecutive transactions, and if such participation constitutes municipal advisory activity, such municipal advisor may also have established a course of dealing with that municipal entity or obligated person.

[70] See, e.g., MSRB Rule G-42(c) ("A municipal advisor must evidence each of its municipal advisory relationships by a writing or writings created and delivered to the municipal entity or obligated person prior to, upon or promptly after the establishment of the municipal advisory relationship.").

[71] See, e.g., Restatement 3d. of Agency § 3.03 Creation of Apparent Authority ("Apparent authority . . . is created by a person's manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation.").

[72] See MSRB Rule G-42(c), Supplemental Material .06.

[73] See id.

[74] See Restatement (Third) of Agency, § 8:01, cmt. c (Am. L. Inst. 2006). Fiduciary duties may exist after the relationship. For example, an agent may be subject to post-termination duties applicable to the agent's use of property of the principal and confidential information provided by the principal or otherwise acquired in the course of the agency relationship. Id.

[75] Because activities undertaken pursuant to the agreement between the municipal advisor and a municipal entity or obligated person constitute municipal advisory activities, the municipal advisor's fiduciary duty attaches during the term of the agreement. See supra notes 66-67 and accompanying text. However, as discussed above, the fiduciary duty also may continue longer than the term of the agreement if the municipal advisor continues to engage in municipal advisory activity on behalf of that municipal entity or obligated person. See id.

[76] See, e.g., Restatement 3d. of Agency § 3.06 Termination of Actual Authority-In General, cmt. a ("Several distinct types of events terminate an agent's actual authority . . . notwithstanding any agreement between principal and agent, either may terminate the agent's actual authority by a manifestation to the other."); § 3.11 Termination of Apparent Authority (2006) ("Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.").

[77] The United States Supreme Court has previously articulated how a fiduciary relationship or certain similar relationships of trust create a duty to disclose or speak, which can then serve as a basis for liability under the antifraud provisions. See Chiarella v. United States, 445 U.S. 222, 228 (1980) (citing Restatement (Second) of Torts § 551(2)(a) (Am. L. Inst. 1976)). In Chiarella, the Court also noted that "[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Chiarella, 445 U.S.C. at 235.

[78] See MSRB Rule G-42 and Supplementary Material .01.

[79] See 1994 Disclosure Guidance, 59 FR at 12751 (explaining that "investors reasonably expect participants in municipal securities offerings to follow standards and procedures" and that such standards and procedures include disclosing information regarding financial and business arrangements among the parties involved in the issuance of municipal securities that could indicate the existence of actual or potential conflicts of interest).

[80] See id.

[81] County of Nevada, 1999 WL 982426 at *17 (finding that the pre-Dodd-Frank municipal advisor had no due diligence obligation, but stating "the persuasive evidence is that [the municipal advisor] caused to be distributed to investors an official statement that misidentified the land owner without confirming, or even asking, whether the underwriter had conducted the most basic due diligence inquiry on this point - a title search to determine who held legal title to the land"). The underwriter in County of Nevada had also agreed to perform and apparently did perform a due diligence investigation that the pre-Dodd-Frank municipal advisor did not ask about. Id. at *55.

[82] By participating in an offering, an underwriter makes an implied recommendation about the securities. See Municipal Securities Disclosure, Exchange Act Release No. 26100 (Sept. 22, 1988), 53 FR 37778, 37786 (Sept. 28, 1988) ("1988 Proposing Release"). This recommendation implies that the underwriter has a reasonable basis for belief in the truthfulness and completeness of the key representations contained in the official statement. See 1989 Adopting Release, 54 FR at 28803. Although the Commission expects that all underwriters will, at a minimum, "review the issuer's disclosure documents in a professional manner for possible inaccuracies and omissions" regardless of the type of sale, the Commission has also recognized that for competitive sales "[t]he fact that an offering is underwritten on a competitive basis does not negate the responsibility that the underwriter perform a reasonable review. Nevertheless, the Commission recognizes that municipal underwriters may have little initial access to background information concerning securities that have been bid on a competitive basis. Therefore, the fact that offerings are competitively bid, rather than sold through a negotiated offering, is an element to be considered in determining the reasonableness of the underwriters' basis for assessing the truthfulness of key representations in final official statements." See 1988 Proposing Release, 53 FR at 37789.

[83] In a competitive sale context, responsibilities for drafting have evolved over time. In 1989, for example, the Commission acknowledged that the preliminary official statement is generally "prepared by the issuer for dissemination to potential bidders or purchasers." 1989 Adopting Release, 54 FR at 28805. Since then, other parties, such as disclosure counsel or municipal advisors, have at times taken on a more prominent role in the preparation of disclosure and the issuer may not take primary drafting responsibility. See NABL, "Disclosure Counsel," available at https://www.nabl.org/bond-basics/disclosure-counsel.

[84] See County of Nevada, 1999 WL 982426.

[85] In 2011, the MSRB amended Rule G-23 to prohibit a municipal advisor from serving as an underwriter with respect to an issue of municipal securities. Before the prohibition of municipal advisors serving as underwriters, the Commission had made statements regarding a municipal advisor's obligations in a competitive sale when the municipal advisor undertakes a disclosure role similar to that of underwriters. See, e.g., 1988 Proposing Release, 53 FR at 37790 n. 92 ("[W]here financial advisers have access to issuer data and participate in drafting the disclosure documents, they will have a comparable obligation under the antifraud provisions to inquire into the completeness and accuracy of disclosure presented during the bidding process."). In the staff's view, the fact that this statement was made in the context of a pre-Dodd Frank municipal advisor may make current applicability to municipal advisors unclear. Municipal advisors do not have a disclosure role similar to underwriters in that the Commission has never stated that they make an implied recommendation about the securities. However, as stated above, understanding an underwriter's obligations in the different types of sale, and the basis of those obligations, could inform the municipal advisor's responsibilities with respect to the disclosure document.

[86] 15 U.S.C. 78cc.

[87] See 15 U.S.C. 78o-4(c)(1); see also MSRB Rule G-42. This duty applies to all municipal advisory activities for municipal entities.

[88] Cf. IA Fiduciary Duty Interpretation, 84 FR at 33672; citing Restatement 3d. of Agency, § 8.06 Principal's Consent (2006); see also MSRB Rule G-42, Supplement Material .04 ("Nothing contained in this rule shall be construed to permit the municipal advisor to alter the standards of conduct or impose limitations on any of the duties prescribed herein. If requested or expressly consented to by the municipal entity or obligated person client, however, a municipal advisor may limit the scope of the municipal advisory activities to be performed to certain specified activities or services. If the municipal advisor engages in a course of conduct that is inconsistent with any such agreed upon limitations, it may result in negating the effectiveness of such limitations.").

[89] Public Finance Consultants, 2005 WL 464865 at *53.

[90] Id.

[91] See County of Nevada, 1999 WL 982426 at *51-52 (finding a general disclaimer did not override underlying agreement to draft official statement "in accordance with the disclosure required by Securities and Exchange Commission Rule 15c2-12.").

[92] See id. at *7-*9

[93] See MSRB Rule G-42(c), Supplemental Material .06 (indicating that relationship documentation "must be promptly amended or supplemented to reflect any material changes or additions, and the amended writing(s) or supplement must be promptly delivered to the client.").

[94] See id.

[95] See, e.g., County of Nevada, 1999 WL 982426 at *17, *21 (pre-Dodd-Frank municipal advisor "agreed to prepare an official statement for the offering that met the requirements of Rule 15c2-12" but did not confirm or ask "whether the underwriter had conducted the most basic due diligence inquiry [of] a title search to determine who held legal title to the land" securing the bonds).

[96] See supra notes 30-33 and accompanying text. 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. See MSRB Rules G-17 (fair dealing) and G-42(a)(i) (duty of care).

[97] See supra notes 91-92.

[98] Seesupra Section II.D.1.

[99] MSRB Rule G-44(b).

[100] The Commission has previously recommended that issuers adopt policies and procedures reasonably designed to comply with their obligations under federal securities laws. See, e.g., Report of Investigation in the Matter of the City of Harrisburg, Pa. Concerning the Potential Liability of Public Officials with Regard to Disclosure Obligations in the Secondary Market, Exchange Act Release No. 69516 (May 6, 2013), available at https://www.sec.gov/litigation/investreport/34-69516.htm; 1994 Disclosure Guidance, 59 FR at 12756.