On May 27, 2011, the Securities and Exchange Commission (“SEC”) approved the Municipal Securities Rulemaking Board’s (“MSRB”) proposed rule change to Rule G-23, effective for new issues after November 27, 2011. Rule G-23 establishes ethical standards and disclosure requirements for a broker, dealer and municipal securities dealer (“dealer”) that serves as a financial advisor to an issuer with respect to the issuance of municipal securities. The proposed rule change includes (i) amendments to Rule G-23 and (ii) interpretive guidance regarding Rule G-23.

The amendments to Rule G-23 delete longstanding provisions that allowed dealer financial advisors to act as underwriters in transactions so long as they first terminated their financial advisory role, disclosed expected compensation and potential conflicts of interest and obtained the issuer’s consent. The amended Rule G-23 prohibits, subject to certain exceptions, a dealer having a financial advisory relationship with respect to an issue of municipal securities from acquiring from the issuer all or any portion of an issue, or acting as agent for the issuer in arranging the placement of such issue. This prohibition pertains to negotiated and competitively sold issues of municipal securities.

The amendments to Rule G-23 also provide that a dealer financial advisor is not prohibited from acting as agent for the issuer in arranging the placement of an entire issue with another state, local or federal governmental entity (such as a bond bank) so long as the dealer financial advisor is not compensated for the placement of such issue and is not compensated as an underwriter in connection with any related transaction by the governmental entity with which such issue is placed. Additionally, the amendments include an exception whereby a dealer is not prohibited from serving as successor remarketing agent for such issue if the financial advisory relationship in connection with such issue has been terminated for a period of at least one year prior to such dealer being selected to serve as successor remarketing agent. Finally, a dealer financial advisor is not prohibited from purchasing securities of a particular issue for which it has served as financial advisor from an underwriter for its own trading account or the account of its customers, so long as such purchase does not contravene the intent and purpose of the rule.

With respect to the actions of underwriters, the MSRB’s Rule G-23 interpretive guidance states that a dealer that clearly identifies itself in writing to the issuer as an underwriter and not a financial advisor from the earliest stages of its relationship with the issuer with respect to that issue may provide advice to an issuer, including advice with respect to the structure, timing, terms, and other similar matters concerning the issuance of municipal securities without being considered to be acting as a financial advisor under Rule G-23. In such writing, the underwriter must make clear to the issuer that the primary role of the underwriter is to purchase, or arrange the placement of, securities in an arm’s-length commercial transaction between the issuer and the underwriter and that the underwriter has financial and other interests that differ from those of the issuer. However, an underwriter may provide advice on the investment of proceeds of the issue, municipal derivatives related to the issue, or other similar matters concerning the issue. An underwriter engaging in a course of conduct that is inconsistent with an arm’s-length relationship with the issuer in connection with such issue will be deemed to be a financial advisor with respect to that issue and precluded from underwriting that issue by Rule G-23.

Copies of MSRB Notice 2011-29 which includes the full text of the amendment to Rule G-23 and the interpretive guidance can be found on the MSRB’s website at http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2011/2011-29.aspx. The notice provides that Rule G-23 is a conflicts rule and does not address whether providing advice permitted by Rule G-23 would cause a dealer to be considered a “municipal advisor” subject to a fiduciary duty under the Securities Exchange Act of 1934, as amended.