SEC Staff Clarifies Municipal Advisor Liability and Fiduciary Duties in Preparing Disclosure Documen

Key Takeaways

• The SEC Office of Municipal Securities issued a staff statement explaining when a non-solicitor municipal advisor's participation in drafting, reviewing, or assembling disclosure documents is "advice" and municipal advisory activity, and how antifraud and fiduciary exposure follows.
• It creates no new legal obligations, but it shows how staff will assess advisor liability.
• Compliance teams should use it to recalibrate engagement scopes, supervisory controls, and disclosure-related practices.

Deep Dive

The SEC Office of Municipal Securities issued a staff statement explaining when a non-solicitor municipal advisor's participation in drafting, reviewing, or assembling disclosure documents is "advice" and municipal advisory activity, and how antifraud and fiduciary exposure follows. It creates no new legal obligations, but it shows how staff will assess advisor liability. Compliance teams should use it to recalibrate engagement scopes, supervisory controls, and disclosure-related practices.

On scope, staff takes the view that participating in disclosure document preparation is municipal advisory activity when it falls within the scope of the advisor's relationship with the municipal entity or obligated person (whether set by agreement or shown by actual conduct) and amounts to "advice." Because structure, timing, and terms are typically described in official statements, drafting or editing can convey advice. Pure assembly of third-party materials, without independent verification of accuracy, may not be advice. However, staff cautions that this becomes more likely to include an advisory component if the advisor decides which comments to accept or reject, or which data to include, on matters relating to structure, timing, or terms. Roles range from primary drafter to declining to participate, and ambiguity about who performs tasks such as checking defined terms and internal consistency is itself a risk.

On liability, antifraud provisions apply to municipal advisors even where disclosure work is excluded from the written agreement. Staff cites enforcement actions, mostly against pre-Dodd-Frank advisors, finding primary liability where advisors drafted, reviewed, or edited disclosure, or simply participated and had access to information showing material omissions or misstatements. Section 17(a)(2) and (3) require only negligence, while Section 17(a)(1), Section 10(b), and Rule 10b-5 require scienter, including recklessness. One litigated case found an advisor liable as more than a "compiler of data" after she contractually undertook Rule 15c2-12 compliant drafting. Another settled case found liability where an advisor did not object to others' misleading changes to its recommended language. Aiding and abetting and causing liability also apply. Municipal advisors to municipal entities owe a statutory fiduciary duty. Advisors to obligated persons owe duties of fair dealing and care under MSRB rules.

No deadlines or effective dates are set. Recommended actions:
- Review engagement letters to define clearly whether disclosure work is in scope, and the extent of responsibility (drafting, review, compilation, or none).
- Align actual practice with documented scope, since conduct can define the relationship.
- Document the escalation steps when advisors see inaccurate or incomplete disclosure, including objecting to changes by other working group members.
- Train staff on antifraud standards and Rule 15c2-12 requirements.
- Assess liability disclaimers and supervisory procedures for disclosure-related work.

Risk implications are moderate to high for firms with active disclosure roles. Negligence-based Section 17(a) exposure, together with the "knew or should have known" standard tied to the advisor's access to information, means informal involvement can create liability.

Source: Securities and Exchange Commission