THE SHORT ANSWER
The independent registered municipal advisor exemption is the carve-out at 17 CFR 240.15Ba1-1(d)(3)(vi) that lets a person give advice on a municipal financial product or issue without registering as a municipal advisor when three conditions are met: an independent registered municipal advisor is advising the client on the same aspects of the transaction, the client gives a written representation that it relies on that advisor, and the person makes written disclosures.
The independent registered municipal advisor exemption is the carve-out in the SEC's municipal advisor registration rule that lets a person advise on a municipal financial product or issue without registering, provided the client is separately represented by an independent registered municipal advisor on the same aspects of the transaction.
The exemption sits at 17 CFR 240.15Ba1-1(d)(3)(vi), inside the list of exemptions from the registration requirement described in the guide to what a municipal advisor does.
It comes up when a provider or underwriter wants to discuss terms for bond proceeds with an issuer that already has independent advice.
How does the IRMA exemption work?
The exemption applies when three conditions are met under 17 CFR 240.15Ba1-1(d)(3)(vi).
First, an independent registered municipal advisor is advising the client on the same aspects of the municipal financial product or issue that the other person is addressing.
Independence has a definition in the rule: an independent registered municipal advisor is a registered municipal advisor that "is not, and within at least the past two years was not, associated" with the person relying on the exemption.
Second, the person receives from the municipal entity or obligated person a representation in writing that it is represented by, and will rely on the advice of, an independent registered municipal advisor.
Third, the person makes the written disclosures the rule requires.
For a municipal entity client, those disclosures state in writing that the person is not a municipal advisor and is not subject to the Exchange Act Section 15B(c)(1) fiduciary duty, and the person must copy the independent registered municipal advisor.
The disclosure must be made at a time and in a manner that lets the client assess the person's incentives and conflicts.
| Condition | What 15Ba1-1(d)(3)(vi) requires |
|---|---|
| Independent advice on the same aspects | A registered municipal advisor that is not, and within at least the past two years was not, associated with the person advises the client on the same aspects of the product or issue |
| Written representation | The municipal entity or obligated person represents in writing that it is represented by, and will rely on the advice of, that advisor, and the person has a reasonable basis for that reliance |
| Written disclosures | For a municipal entity client, the person discloses in writing that it is not a municipal advisor and not subject to the Section 15B(c)(1) fiduciary duty, copies the advisor, and times the disclosure so the client can assess incentives and conflicts |
The same-aspects condition limits how far the exemption reaches: a general representation letter does not cover everything on a deal automatically, and SEC staff FAQ 3.2 discusses advisors who serve in a general capacity.
Why do underwriters ask for it?
Underwriters and providers ask for an IRMA letter because advice on investments of bond proceeds is the kind of advice the SEC's Municipal Advisor Rule can bring inside registration, and the exemption lets that conversation proceed without registration.
GFOA's best practice on the investment and management of bond proceeds notes that brokers may be considered municipal advisors if they provide advice on investments of bond proceeds to governments, and that governments may obtain broker-dealer advice through an RFP process or when they have retained an independent registered municipal advisor.
A firm on the provider or underwriter side therefore asks the issuer to give the written representation and to accept its written disclosures, so that discussions of structure, pricing and terms can proceed under the exemption.
The SEC's enforcement record in this market is background on how undisclosed payments have affected reinvestment bidding.
On December 7, 2010, the SEC settled charges with Banc of America Securities for rigging bids on the reinvestment of municipal bond proceeds, and it found that BAS won bids on 88 affected reinvestment instruments (GICs, repos and FPAs) through "last looks" and "set-ups," while bidding agents received undisclosed gratuitous payments and kickbacks.
BAS agreed to pay more than $36 million in disgorgement and interest to the SEC, with BAS and its affiliates paying another $101 million to other federal and state authorities.
On May 4, 2011, the SEC charged UBS Financial Services with rigging at least 100 municipal bond reinvestment transactions in 36 states over a 2000 to 2004 conduct period, and UBS agreed to pay $47.2 million to the SEC and $113 million in parallel cases, $160 million in total.
The SEC said UBS won bids as a provider and also rigged bids for other providers while acting as a bidding agent, routing undisclosed payments to bidding agents through interest rate swaps.
Both matters were settled without the firms admitting or denying the SEC's allegations.
What should issuers weigh before giving the representation?
Scope comes first: the exemption reaches only advice on the same aspects of the transaction the independent registered municipal advisor is actually covering.
The scope of that advisor's engagement therefore sets the limits of what the representation can cover.
On refundings, GFOA describes three roles: an escrow agent, typically a commercial bank, holds the escrow investments; a verification agent, typically a CPA firm, confirms the escrow is sufficient and, where yield is limited, that the escrow yield does not exceed the permitted yield; and an escrow bidding agent solicits bids for open-market escrow securities.
GFOA adds that a municipal advisor, if engaged, may be able to act as the escrow bidding agent, which is one place the independent-advisor role and the Bidding Agent role meet.
Whether an issuer's engagement letters, governing documents and disclosure obligations line up with a particular representation letter is a legal conclusion for bond counsel and tax counsel.
mGIC is an independent, SEC-registered municipal advisor and, as one, has a duty of care to act in the issuer's best interest; it does not sell a proprietary investment product or act as principal in the reinvestment alternatives it evaluates.
Since 2002, Managing Director Robert Rasmussen has had primary responsibility for the firm's Bidding Agent and reinvestment advisory work.
Since then the firm's record covers more than $60 billion in bond proceeds invested and swap notional executed across more than 1,000 transactions for issuers in more than 40 states.
An issuer that wants independent representation on a reinvestment decision can work with an SEC-registered advisor through a free, no-obligation review, and the page about mGIC has the firm's background.
What are the other exemptions from municipal advisor registration?
The IRMA exemption at (d)(3)(vi) sits alongside several others at 15Ba1-1(d)(3)(i) through (v).
| Exemption | What the rule exempts |
|---|---|
| Accountants | Advice given in doing audit or attest work for the entity |
| Public officials and employees | Advice given in an official capacity |
| Banks | Advice on deposits, extensions of credit or sweep accounts, and on investments made as indenture trustee, a narrow carve-out at (d)(3)(iii)(D) |
| RFP or RFQ responses | A written or oral response to a request for proposals or qualifications, where the responder receives no separate direct or indirect compensation for the advice in the response, at (d)(3)(iv) |
| Swap dealers | Certain recommendations of a registered swap dealer, only where it is not acting as an advisor under CEA Section 4s(h)(4), under which the municipal entity is treated as a "special entity", at (d)(3)(v) |
SEC staff illustrated an RFP process that would generally fit the exemption in FAQ 2.1: the issuer or its registered municipal advisor runs the RFP, a particular objective is stated, the request stays open for a reasonable, finite period, and the process is competitive.
Staff's examples of a competitive process are sending the RFP to at least three reasonably competitive market participants or posting it publicly, and staff called an open period of up to six months generally reasonable.
An RFP need not be part of a formal procurement process, and the FAQ calls the description illustrative only.
That three-participant example belongs to the SEC's RFP exemption and is a different test from the Treasury three-bid rule for investment bidding under Treas. Reg. 1.148-5, which the guide to the fair-market-value safe harbor covers.
Frequently asked questions
How long must a person be unaffiliated to count as an independent registered municipal advisor?
The rule defines an independent registered municipal advisor as a registered municipal advisor that is not, and within at least the past two years was not, associated with the person relying on the exemption. Independence is measured against that two-year lookback, not only the current engagement.
What must the written disclosures under the exemption say?
For a municipal entity client, the person must disclose in writing that it is not a municipal advisor and is not subject to the Exchange Act Section 15B(c)(1) fiduciary duty, and it must copy the independent registered municipal advisor. The disclosure must come at a time and in a manner that lets the client assess the person's incentives and conflicts.
Does a general IRMA representation letter cover all advice on a deal?
No. The exemption reaches advice on the same aspects of the product or issue that the independent registered municipal advisor is covering, and SEC staff FAQ 3.2 discusses advisors who serve in a general capacity. Whether an engagement is broad enough for a particular conversation is a question for the issuer and its bond counsel.
How long can an RFP stay open under the SEC's RFP exemption?
SEC staff FAQ 2.1, dated January 10, 2014, described an illustrative process in which the issuer or its registered municipal advisor runs the RFP, states a particular objective, keeps the request open for a reasonable, finite period and makes the process competitive. Staff called an open period of up to six months generally reasonable and noted an RFP need not be part of a formal procurement process.
Sources
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
