The MSRB responded August 12 to the SEC’s initiation of proceedings on proposed conduct standards for Municipal Advisors, filing some amendments to the proposed Rule.

The MSRB’s Amendment No. 1:

  • Eliminates “includes, without limitation” language from the fiduciary-duty standard in Proposed Rule G-42(a)(ii) in response to SIFMA’s comment that it raised unnecessary ambiguity, because a fiduciary duty generally is understood to encompass duties of both care and loyalty. MSRB retained that language in Supplementary Material .02 to be clear that the Rule doesn’t purport to prescribe every aspect of fiduciary duty under all circumstances.
  • Modifies Proposed Rule G-42(b) and (c) to clarify that written engagement letters [required in G-42(c)] do not have to reiterate conflicts disclosures previously provided as required in G-42(b).
  • Modifies Proposed Rule G-42(c)(iv) to require a description of why any disciplinary reporting changes are material to a client.
  • Modifies the disclosure requirements to combine prior separate references to Proposed Rule G-42(b)(i)(A) and (G).
  • Clarifies Proposed Rule G-42(d) regarding the obligation to inform a client when a third-party’s prior recommendation is unsuitable.
  • Modifies the “inaccurate invoice” prohibition in Proposed Rule G-42(e)(i)(B) to add a materiality requirement (while declining to add a state-of-mind standard).

MSRB declined to make a number of other changes requested by various commenters, most aimed at narrowing the principal-transaction ban in Proposed Rule    G-42(e)(ii).

See SEC File No. SR-2015-03 (Amendment No. 1)(filed Aug. 12, 2015), here:View the amended rule language

As proposed last April for adoption by the SEC, the Rule broadly imposes:

  • A fiduciary duty to Municipal Entities, but only of care to Obligated Persons;
  • An “engagement letter” disclosure regime requiring conflicts and disciplinary disclosures, fee-basis, scope and termination of engagement provisions;
  • Suitability and Know-Your-Customer requirements; and
  • Prohibitions on certain conduct, including excessive compensation, misrepresentations or false claims, certain and undisclosed fee-splitting, most paid solicitation, and principal transactions with Municipal Entity clients.

Notable changes from the MSRB’s first Revised Draft include:

  • Revision of Rule G-42(e)(i)(E) for more specific description of allowable solicitor payments to affiliates, other MA’s or otherwise permissible under Rule G-20;
  • Revision of Supplementary Material .06 to clarify that the Inadvertent Advice safe-harbor relieves compliance only with required engagement letter and conflicts disclosures;
  • Deletion of former Supplementary Material .08 requiring direct disclosures to municipal-securities investors; and
  • Addition of Supplementary Material .11 including bank loans within prohibited principal transactions if they are $1 million or more and economically equivalent to a municipal-securities purchase.

The April Rule filing, SR-MSRB-2014-03, is here.