MSRB Proposes Revised Duties for Municipal Advisors

by Burr & Forman

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.


Written by:

Burr & Forman

Burr & Forman on:

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