On November 6, 2015, the U.S. Securities and Exchange Commission (SEC) approved amendments by the Municipal Securities Rulemaking Board (MSRB) to MSRB Rule G-20 regarding gifts, gratuities and non-cash compensation. The amendments to MSRB Rule G-20 make certain changes to the rules applicable to broker-dealers and then extend the relevant provisions to municipal advisers. These rule changes become effective on May 6, 2016. The purpose of this Alert is to provide a brief overview of these upcoming changes to MSRB Rule G-20. A link to the MSRB’s Regulatory Notice announcing the SEC’s approval of the amendments to MSRB Rule G-20 and the full text of the amendments can be found here.

Purpose of MSRB Rule G-20

The purpose of MSRB Rule G-20 is to maintain the integrity of the municipal securities market and to preserve investor and public confidence in the municipal securities market, including the bond issuance process. MSRB Rule G-20 protects against improprieties and conflicts of interest that may arise when regulated entities or their associated persons give gifts or gratuities in relation to the municipal securities or municipal advisory activities of the recipient’s employer.

Gifts and Gratuities

The amendments to MSRB Rule G-20 retain the prohibition for broker-dealers on providing gifts and gratuities over $100 per person per year to any person in relation to the covered business activities of the employer, subject to certain exceptions. The amendments to MSRB Rule G-20 also retain the existing exceptions for normal business dealings and compensation and codify certain Financial Industry Regulatory Authority (FINRA) and MSRB interpretive guidance on gifts and gratuities. Such exceptions to the $100 per person per year limit are now codified in amended MSRB Rule G-20 and include the following types of gifts, provided that such gifts do not give rise to any apparent or actual material conflict of interest:

• Transaction-Commemorative Gifts – gifts that are solely decorative items commemorating a business transaction, such as a customary plaque or desk ornament (e.g., Lucite tombstone);
• De Minimis Gifts – gifts of de minimis value (e.g., pens, notepads, or modest desk ornaments);
• Promotional Gifts – promotional items of nominal value displaying the regulated entity’s corporate or other business logo (the value of the item must be substantially below the $100 limit to be considered of nominal value);
• Bereavement Gifts – bereavement gifts that are reasonable and customary for the circumstances; and
• Personal Gifts – gifts that are personal in nature given upon infrequent life events (e.g., a wedding gift or a congratulatory gift for the birth of a child).

Amended MSRB Rule G-20 extends to municipal advisers and their associated persons: (i) the general prohibition of gifts or gratuities in excess of $100 per person per year in relation to the municipal securities activities or municipal advisory activities of the recipient’s employer and (ii) the various exclusions from the $100 limit (noted above). Amended MSRB Rule G-20 does not, however, extend the prohibitions on non-cash compensation in connection with primary offerings (which remains unchanged for broker-dealers) to municipal advisers or their associated persons.

Entertainment and Travel Expenses

New subsection (e) to MSRB Rule G-20 prohibits broker-dealers and municipal advisers from requesting or obtaining reimbursement of their costs and expenses related to the entertainment of any person, including, but not limited to, any official or other personnel of the municipal entity or personnel of the obligated person, from the proceeds of such offering of municipal securities. For purposes of this prohibition, entertainment expenses do not include ordinary and reasonable expenses for meals hosted by the regulated entity and directly related to the offering for which the regulated entity was retained. Thus, amended MSRB Rule G-20 allows the continuation of the generally accepted market practice of a regulated entity advancing normal travel costs (e.g., reasonable airfare and hotel accommodations) to personnel of a municipal entity or obligated person for business travel related to a municipal securities issuance and obtaining reimbursement for such costs (e.g., bond rating agency trips). Some examples of entertainment expenses that cannot be reimbursed are tickets to theater, sporting or other recreational spectator events, sightseeing tours and transportation relating to attending such entertainment events.

No Impact on State and Local Restrictions

In addition, the supplementary material to amended MSRB Rule G-20 provides that regulated entities and their associated persons may be subject to other duties, restrictions or obligations under state or other laws and that amended MSRB Rule G-20 shall not be deemed to supersede any more restrictive provision of state or other laws applicable to the activities of regulated entities or their associated persons.

Upcoming MSRB Webinar

The MSRB is planning to host a webinar on March 24, 2016 to discuss the amendments to MSRB Rule G-20. A link to the registration for the webinar can be found here.