MSRB Seeks Second Round of Comments on Municipal Advisor Conduct Rule

by Ballard Spahr LLP

The Municipal Securities Rulemaking Board (MSRB) recently released a revised draft of Rule G-42 (Draft Rule G-42) following receipt of more than 40 comments on its Initial Draft Rule in January 2014. Rule G-42 regulates standards of conduct and duties of municipal advisors in non-solicitor roles. The deadline for comments on the revised draft is August 25, 2014.

In response to commenters, the MSRB has scaled back or eliminated certain prohibitions and requirements, which should allay concerns expressed about potential heavy-handedness on the part of the MSRB. The proposed rule provides more clarity and guidance regarding conduct of municipal advisors, and allows many to operate in a manner similar to current practice.

The following portions of Rule G-42 and its Supplementary Material were revised or added:

  • Duty of Care and Duty of Loyalty
  • Disclosure of Conflicts of Interest and Other Information
  • Documentation of the Municipal Advisory Relationship
  • Recommendations and the Review of Recommendations of Others
  • Principal Transactions
  • Specified Prohibitions
  • Inadvertent Advice

A more detailed explanation of the revisions follows.

Duty of Care and Duty of Loyalty

To allow clients to determine the scope of services and control the engagement with municipal advisors, the MSRB removed the duty of care requirement to undertake a thorough review of the official statement. Additionally, the duty of loyalty requirement to investigate or consider other reasonably feasible alternatives to any recommended municipal securities transaction or financial product has been likewise removed.

Disclosure of Conflicts of Interest and Other Information

Draft Rule G-42 regarding disclosure of conflicts has been revised to require disclosure of material conflicts of interest if such conflicts arise due to compensation being contingent on the size or closing of a transaction. Previously, the Initial Draft Rule required a broader compensation disclosure requirement that many commenters believed would confuse clients. An affirmative disclosure that there are "no known" conflicts is now required.

The requirement to disclose the amount and scope of professional liability insurance has been removed, but such disclosure may still be provided voluntarily or upon request. The municipal advisor must also now disclose any material legal or disciplinary event, including a description of the event, where the client may access the advisor's most recent Securities and Exchange Commission (SEC) forms on the event, and the date the last form was filed.

Documentation of the Municipal Advisory Relationship

A provision was added to detail the steps that may be taken if a party inadvertently engages in municipal advisory activities or enters into a municipal advisory relationship and does not intend to continue, but seeks a safe harbor to withdraw. See “Inadvertent Advice” below.

Revisions were made to simplify the documentation of compensation required under the Initial Draft Rule. Draft Rule G-42 requires that only the form and basis of any direct and indirect compensation be documented, but the parties may still agree to provide further information. The documentation of the advisory relationship must include any term relating to withdrawal from the relationship and can be amended only if there are material changes or additions.

Recommendations and the Review of Recommendations of Others

Draft Rule G-42 clarifies the provisions on recommendations by the municipal advisor and the municipal advisor's review of recommendations from other parties. This draft states that if a municipal advisor makes a recommendation of a municipal securities transaction or financial product, or if review of a recommendation of another party is requested by the municipal entity or obligated person client, then the municipal advisor, using reasonable due diligence, must determine whether such action is suitable for the client.

Principal Transactions

The Initial Draft Rule prohibited municipal advisors from engaging in any transaction in a principal role in which the municipal entity or obligated person client is a counterparty. Draft Rule G-42 eliminates the prohibition concerning obligated persons and limits the prohibited principal transactions between a municipal advisor or its affiliates and a municipal entity client to those transactions directly related to the same municipal transaction or financial product on which the municipal advisor is providing advice.

Inadvertent Advice

The MSRB added a provision to Draft Rule G-42 covering municipal advisors who unintentionally engage in municipal advisory activities. Such advisors are not subject to Draft Rule G-42’s disclosure and documentation requirements if they promptly provide a disclaimer and other information to a municipal entity or obligated person following the provision of inadvertent advice. Draft Rule G-42 further requires a review of the municipal advisor’s supervisory and compliance policies and procedures to ensure they are reasonably designed to prevent such inadvertent advice.

Specified Prohibitions

In response to numerous comments criticizing the excessive fee provisions in the Initial Draft Rule, the Draft Rule G-42 added a list of factors relevant to excessive compensation. Factors include municipal advisor expertise, transaction complexity, types of contingent fees, and time spent on the closing of the transaction or product.

Lastly, various Initial Draft Rule definitions were modified to match those found in the SEC Municipal Advisor Final Rule, and the definition of when the municipal advisory relationship begins and ends was also clarified to require written documentation.

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.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.