MSRB Proposes Revised Duties for Municipal Advisors


The MSRB proposed a Revised Draft of Rule G-42 (“Duties of Non-Solicitor Municipal Advisors”) by Reg. Not. 2014-12 issued July 23, 2014. We addressed the original proposal in our January 23 blog post, here.

The Revised Draft Rule G-42 contains the same basic structure and objectives as originally proposed.  It establishes

(a)        DUTIES owed by Municipal Advisors (“MA’s”) to Municipal Entity (“ME”) clients and to Obligated Person (“OP’s”);

(b)        An engagement-letter-type disclosure regime with certain required DISCLOSURES;

(c)        A suitability requirement MA’s must follow (DO’S); and,

(d)       Various prohibitions (DON’TS)

The Draft Rule’s high-points and notable revisions, include:

DUTIES:  Section (a) of the Draft Rule imposes a fiduciary duty to ME clients (duties of care and loyalty), but a regular duty of care to OP’s.  The Supplementary Material removes the prior requirements of thorough OS review (-.01) and of investigating alternatives (-.02), instead allowing parties to determine and define the scope of each engagement.

DISCLOSURES: Sections (b-c)  implement an “engagement letter” disclosure regime.  Among the key revisions to this Draft:

•  Compensation disclosures are narrowed, by requiring compensation-related conflict disclosures only when they arise from compensation contingent on the size or closing of a transactions [(b)(i)(F)] and deleting the requirement to disclose the amount of expected compensation [(c)(ii)].

•  Conflicts disclosures have been narrowed, limiting disclosure of other engagements or relationships to the MA (and deleting affiliates, who must disclose their relationship conflicts themselves, e.g. in OS)[(b)(i)(G)] and limiting the no-conflict certification only to “known” conflicts.

•  The Revised Draft no longer requires disclosure of professional liability insurance [(b)(i)].

•  Disciplinary disclosures now mimic Form MA information, with instruction on accessing the Form and the date of last change or revision [(b)(ii-iii), (c)(iii-iv)].

•  The Revised Draft no longer requires recitation of specific undertakings requested by client [(c)(v)].

•  Engagement letters must address provisions for termination or withdrawal, and require updating with any material changes during relationship [(c)(vii) ].

DO’S:   The Revised Draft merges the suitability obligation for principal MA-client recommendations and third-party review engagements (previously articulated separately) and restates the Rule positively (“if, then must”).

The Revised Draft adds a new safe-harbor provision governing inadvertently-provided municipal advice.  An actor not otherwise an MA under the Rule may avoid MA status for inadvertent advice if it:  (a) Promptly documents by dated disclaimer and cessation of the inadvertent advice; (b) Notice to the recipient of non-disclosures that were required under the Rule; (c) Good-faith efforts to identify the unintended advice; (d) Request for client acknowledgement; and (e) A self-review of compliance/supervisory procedures to prevent recurrence.  See Supplementary Material .06.

DON’TS:  The Revised Draft clarifies or limits some prohibitions.  Key among them:

•  The fee-splitting prohibition between MA’s and underwriters now is limited to the same transaction on which the MA advised [(e)(i)(D)].

•  The “Principal Transaction” prohibition is limited in two ways:  First, it defines “Principal Transactions” on those involving the “purchase or sale of a security, derivative, GIC or financial product” for its own account to/from the counterparty ME by MA or affiliate [(e)(ii)]; and Second, it limits it to those directly related to the transaction or product on which the MA is advising [(f)(i)].  Finally, the Principal Transaction ban does not apply to the acquisition of entire offering as permitted by Rule G-23 [Supplementary Material -.07].

The comment period expires August 25, 2014.


The next day, July 24, the MSRB submitted the final Rule G-44 MA Supervision for SEC approval.  File SR-2014-06, here.  Proposed earlier this year in Reg. Not. 2014-04 (addressed in our March 11 blog post, here), Rule G-44 mimics the familiar supervision and compliance rules otherwise applicable to broker-dealers under FINRA Rule 3130.  Key provisions include:

•  A supervisory system reasonably designed to achieve compliance with applicable securities laws;

•  Written supervisory procedures;

•  Designation of MA principals responsible for supervision;

•  Compliance processes reasonably designed to achieve compliance with them;

•  Annual review and certification; under a

•  Designated Chief Compliance Officer to administer them; and

•  Accompanying books and records requirements.


Topics:  Compliance, Disclosure Requirements, Financial Regulatory Reform, MSRB, Municipal Advisers

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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