Yesterday, the Municipal Securities Rulemaking Board (MSRB) issued a request for comment on a supervision rule for municipal advisors, draft Rule G-44. The proposed rule contains similar concepts to Rule G-27, the MSRB’s existing supervision rule for broker-dealers.
Under draft Rule G-44, municipal advisors must establish, implement, and maintain a supervisory system reasonably designed to ensure compliance with applicable laws, rules, and regulations. The supervisory system must include:
Written supervisory procedures that can quickly adapt to regulatory changes and that consider the municipal advisor’s size, organizational structure, nature and scope of municipal advisory activities, number of offices, the disciplinary and legal history of its associated persons, the outside business activities of its associated persons, and “red flags” identifying potential irregularities or misconduct
The designation of at least one municipal advisory principal—with sufficient knowledge, expertise, and training—responsible for supervision
In addition, draft Rule G-44 requires a municipal advisor to have in place a compliance process by which it can review, test, and modify its compliance policies and supervisory procedures. The municipal advisor must, at a minimum, review its policies and procedures annually.
Draft Rule G-44 requires the municipal advisor to designate an individual to serve as its chief compliance officer. The individual may be a principal of the firm or a non-employee. The rule identifies four competencies required to fulfill this role:
Gaining an understanding of the types of services and activities undertaken by the municipal advisor that should be the subject of its written policies and procedures
Identifying applicable laws, rules, regulations, and standards of conduct related to the municipal advisor’s services and activities
Developing, or causing to be developed, policies and procedures reasonably designed to achieve compliance with applicable laws, rules, regulations, and standards of conduct
Developing programs to test compliance with the municipal advisor’s policies and procedures
The deadline for submitting comments regarding draft Rule G-44 is April 28, 2014. Municipal advisors will be subject to corresponding record-keeping requirements if the rule is adopted.
If adopted, draft Rule G-44 will be effective after the effective date for the MSRB’s conduct rule for municipal advisors, draft Rule G-42. Following its board meeting earlier this month, the MSRB announced that it will also soon request comment on establishing a professional qualification test for municipal advisors. The MSRB will also seek approval from the Securities and Exchange Commission (SEC) to assess municipal advisor firms a $300 annual fee, per professional, effective the second half of 2014 when the SEC’s final municipal advisor registration rules take effect.