In MSRB Notice 2011-04 (“Notice 2011-04”), dated January 14, 2011, the Municipal Securities Rulemaking Board (“MSRB”) proposed for comment:

  • MSRB Rule G-42, a “pay to play” rule for municipal advisors (“Proposed MSRB Rule”);
  • Changes to MSRB Rule G-37, the existing MSRB “pay to play” rule for brokers, dealers and municipal securities dealers (collectively, “dealers”); and
  • Changes to MSRB Rules G-8 and G-9, which relate to recordkeeping requirements.1

As discussed in more detail below, the Proposed MSRB Rule would, among other restrictions, prohibit municipal advisors from engaging in municipal advisory business with municipal entities for compensation for two years after a triggering political contribution is made to a state or local government official with authority to hire the municipal advisors, and prohibit compensation for soliciting certain types of third-party business from municipal entities.

In addition, the MSRB also requested comment on whether MSRB Rule G-38 (which relates to solicitation of municipal securities business) should be eliminated or amended, and on whether electronic filing of Forms G-42 and G-37 should be required Finally, the MSRB also proposed to restate its Interpretation of Prohibition on Municipal Securities Business Pursuant to Rule G-37 (the “Rule G-37 Interpretative Notice”) in light of the Proposed MSRB Rule Comments on these MSRB proposals are due by February 25, 2011.

The following discussion explores the interaction between Rule 206(4)-5 (“SEC Pay to Play Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”) and the Proposed MSRB Rule, and the requirements of the Proposed MSRB Rule as compared to the SEC Pay to Play Rule The other MSRB proposals noted above also are briefly discussed.

How Does the Proposed MSRB Rule Interact with the SEC Pay to Play Rule?

SEC Adopts SEC Pay to Play Rule2

On July 1, 2010, the U.S. Securities and Exchange Commission (“SEC”) adopted the SEC Pay to Play Rule to curtail what the SEC believes represent “pay to play” practices and arrangements involving state and local government entities, including public pension plans. Generally, an investment adviser registered or required to be registered under Section 203 of the Advisers Act is required to comply with the SEC Pay to Play Rule. The SEC Pay to Play Rule also generally applies to an investment adviser that manages covered investment pools5 in which a government entity invests or is solicited to invest.

Under the SEC Pay to Play Rule, as originally adopted, among other restrictions:

  • A covered investment adviser is prohibited from, directly or indirectly, providing investment advisory services for compensation to a government entity within two years after a triggering contribution to an official of the government entity is made by the investment adviser, or any covered associate of the investment adviser (including a person who becomes a covered associate within two years after the contribution is made); and  
  • A covered investment adviser, and its covered associates, also are prohibited from providing or agreeing to provide, directly or indirectly, payment to any third party (e.g., a solicitor or placement agent, but not an investment adviser’s employees, general partners, managing members or executive officers) to solicit a government entity for investment advisory services on behalf of such covered investment adviser, unless such third parties are “regulated persons” (regardless of whether the regulated persons are affiliated or non-affiliated with the investment adviser).

A “regulated person,” as originally defined, generally included registered investment advisers and registered broker-dealers, in each case themselves subject to SEC oversight (i.e., registered with the SEC) (and, in the case of broker-dealers, the oversight of a registered national securities association, such as FINRA) Registered broker-dealers also had to be subject to substantially equivalent or more stringent pay to play restrictions.

The SEC Pay to Play Rule became effective on September 13, 2010, and compliance is required for covered investment advisers by March 14, 2011, except that covered investment advisers are not required to comply with the rule’s prohibition on paying third parties to solicit business from state and local government entities except in compliance with the rule until September 13, 2011. The later compliance date for the solicitation prong of the SEC Pay to Play Rule was originally intended to afford FINRA time to propose and adopt a substantially equivalent or more stringent pay to play rule applicable to registered broker-dealers.

Dodd-Frank Act Requires Registration of Municipal Advisors7

President Obama signed the Dodd-Frank Act on July 21, 2010 Section 975 of the Dodd-Frank Act, which became effective on October 1, 2010:

  • Imposed registration requirements on “municipal advisors;”
  • Established a fiduciary duty for municipal advisors; and
  • Authorized the MSRB to establish a comprehensive body of regulation for municipal advisors designed to prevent fraudulent and manipulative acts and practices and to promote equitable principles of trade  

Municipal advisors generally include, subject to certain exceptions,8 individuals and entities that:

  • Provide advice to or on behalf of a municipal entity or obligated persons with respect to municipal financial products9 or the issuance of municipal securities (collectively, “Municipal Advisor Providers”);10 or
  • Engage in solicitation11 of a municipal entity or obligated person for municipal advisory services on behalf of an unaffiliated municipal advisor (collectively, “Municipal Advisor Solicitors”).

Municipal advisors were initially required to register with the SEC by October 1, 2010, and with the MSRB by December 31, 2010.12

Interaction Between Proposed MSRB Rule and SEC Pay to Play Rule

After the Dodd-Frank Act was enacted, the SEC proposed on November 19, 2010, certain amendments to the SEC Pay to Play Rule.1 In addition to proposing to amend the scope of the SEC Pay to Play Rule to make it apply to exempt reporting advisers and foreign private advisers, these amendments would:

  • Amend the definition of “covered associate” of an investment adviser to clarify that a legal entity, not just a natural person, that is a general partner or managing member of an investment adviser would meet the definition; and  
  • Amend the rule to replace the concept of “regulated persons” with “regulated municipal advisors” and replace references in the rule to FINRA’s pay to play rules with references to MSRB rules that the SEC finds are consistent with the objectives of the SEC Pay to Play Rule and impose substantially equivalent or more stringent pay to play restrictions  

Under the proposed amendments to the SEC Pay to Play Rule, it would be unlawful for a covered investment adviser, or its covered associates, to provide, or agree to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of the covered investment adviser unless such person is

  • A regulated municipal advisor; or
  • An executive officer, general partner, managing member (or, in each case, a person with similar status or function), or employee of the covered investment adviser  

The Proposed MSRB Rule represents the MSRB rules applicable to regulated municipal advisors that are intended to be at least as stringent as the SEC Pay to Play Rule.

A side effect of the SEC’s proposal to replace the term “regulated persons” as used in the SEC Pay to Play Rule, as originally adopted, with the term “regulated municipal advisors” is that a covered investment adviser would not be permitted under the amended SEC Pay to Play Rule to pay an affiliated solicitor to solicit investment advisory business from municipal entities unless the affiliated solicitor is otherwise required to register, or voluntarily registers, as a municipal advisor with the SEC and MSRB The SEC Pay to Play Rule does not contain an exception permitting payments to related persons (e.g., affiliates) and employees of related persons Persons who solicit investment advisory business on behalf of their affiliates are not within the definition of “municipal advisor” under Section 975 of the Dodd-Frank Act In the release proposing the amendments to the SEC Pay to Play Rule, the SEC indicated that such affiliated solicitors may voluntarily register as municipal advisors and subject themselves to the MSRB rules, including the Proposed MSRB Rule The MSRB specifically included a definition of “third-party business”14 in the Proposed MSRB Rule that would include solicitations on behalf of affiliated persons, as well as solicitations on behalf of unrelated third parties, in order to allow persons soliciting investment advisory business on behalf of affiliates to voluntarily subject themselves to the Proposed MSRB Rule.

It also is important to recognize that certain companies that are not required to comply with the SEC Pay to Play Rule may be required to comply with the Proposed MSRB Rule For example, a company that is exempt from registering as an investment adviser under the Advisers Act because of an available exception, or another available exemption, is not required to comply with the SEC Pay to Play Rule Accordingly, banks, broker-dealers and other individuals or entities exempt from the definition of an “investment adviser” are not directly subject to the SEC Pay to Play Rule.1 On the other hand, a bank or, unless acting as an underwriter, a broker-dealer may not be exempt from the definition of a “municipal advisor”; and, thus, could be subject to the Proposed MSRB Rule if the bank or broker-dealer is required to register as a municipal advisor A registered investment adviser that is subject to the SEC Pay to Play Rule also may be subject to the Proposed MSRB Rule if the investment adviser is not excluded from the definition of “municipal advisor” because the investment adviser engages in municipal advisory business that does not constitute the provision of investment advice (e.g., soliciting municipal entities on behalf of third-party investment advisers).

Comparison of the Proposed MSRB Rule to the SEC Pay to Play Rule

Similar to the SEC Pay to Play Rule, the Proposed MSRB Rule seeks to protect the integrity and fairness of the process by which government business is awarded by preventing fraudulent and manipulative acts and practices The Proposed MSRB Rule specifically recites its intentions to ensure the high standards and integrity of the municipal advisory industry, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to perfect a free and open market, and to protect investors, municipal entities, obligated persons and the public interest Both rules aim to achieve their objectives by prohibiting, as fraudulent and manipulative acts and practices, certain pay to play practices and arrangements relating to making, coordinating or soliciting political contributions to, and making or receiving payments for soliciting business from, state and local government officials.

Operational Definitions/Scope

Because the Proposed MSRB Rule must be substantially equivalent to, or at least as stringent as, the SEC Pay to Play Rule, as proposed it is similar to the SEC Pay to Play Rule in many respects For example, the operational definitions within the rules, which define their scope, are similar The definitions of “municipal entity,” “contribution,” “official of a municipal entity,” “payment,” “solicitation” and “covered investment pool” generally either mirror or are substantially equivalent to their counterparts under the SEC Pay to Play Rule Interestingly, unlike the definition of “government entity” under the SEC Pay to Play Rule, the definition of “municipal entity” under the Proposed MSRB Rule does not limit plans or programs of a government entity to participant-directed investment programs or plans sponsored or established by a municipal entity, such as Section 529 plans and Section 403(b) or 457 plans.

In addition to the definition of “third-party business” discussed above, a key definition under the Proposed MSRB Rule is “municipal advisor professional. Unlike the definition of “municipal advisor” under Section 975 of the Dodd-Frank Act, the Proposed MSRB Rule distinguishes between an entity that is a “municipal advisor” and individuals that are “municipal advisor professionals. “Municipal advisor” is defined for purposes of the Proposed MSRB Rule to exclude “municipal advisor professionals.”1 To be a “municipal advisor professional,” a person would first have to be an “associated person of a municipal advisor,, which includes:

  • Any partner, officer, director, or branch manager of the municipal advisor (or any person occupying a similar status or performing similar functions);
  • Any other employee of such municipal advisor who is engaged in the management, direction, supervision, or performance of any activities relating to the provision of advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities; and  
  • Any person directly or indirectly controlling, controlled by, or under common control with the municipal adviso)  

An associated person of a municipal advisor becomes a “municipal advisor professional” if the associated person:

  • Is engaged in municipal advisory business17 with a municipal entity (a “Municipal Advisory Business Participant”);  
  • Solicits municipal advisory business with a municipal entity on its own behalf or solicits thirdparty business (this includes, but is not limited to, any affiliated person of the municipal advisor, which includes any person who is a partner, director, officer, or employee, of the municipal advisor or any entity directly or indirectly controlling, controlled by or under common control with the municipal advisor (i.e., an affiliated company of the municipal advisor) (a “Municipal Advisory Business Solicitor”);  
  • Is a supervisor of any persons described in the first two bullet points (“Municipal Advisory Business Supervisor”);  
  • Is a supervisor of any person described in the third bullet point up through and including the Chief Executive Officer or similarly situated official (“Supervisor of a Municipal Advisory Business Supervisor”); or  
  • Is a member of the municipal advisor’s executive or management committee or similarly situated officials, if any (“Municipal Advisor Management Member”).18  

Unlike the definition of “covered associate” under the SEC Pay to Play Rule, the definition of “municipal advisor professional” does not include controlled political action committees; however, the Proposed MSRB Rule separately applies each of its prohibitions to political action committees, including those controlled by the municipal advisor or by a municipal advisor professional

Prohibitions

As noted above, municipal advisors can include Municipal Advisor Providers and Municipal Advisor Solicitors According to the MSRB in Notice 2011-04, the Proposed MSRB Rule distinguishes between these two types of municipal advisors in two ways The first relates to the definition of “municipal advisory business” and the fact that it only covers the activities of Municipal Advisor Providers (i.e., the provision of advice to, or on behalf of, a municipal entity or an obligated person with respect to municipal financial products or the issuance of municipal securities) Therefore, solicitation activities of Municipal Advisor Solicitors are addressed separately under the Proposed MSRB Rule.

Like the SEC Pay to Play Rule, the Proposed MSRB Rule contains prohibitions relating to conducting municipal advisory business for compensation within two years after a triggering political contribution is made and soliciting and coordinating political contributions and payments to state and local political parties Unlike the SEC Pay to Play Rule, to address the distinction noted above, the Proposed MSRB Rule also prohibits soliciting third-party business from a municipal entity for compensation, and receiving compensation for soliciting third-party business from a municipal entity, within two years after a triggering contribution is made.19  

Specifically, subject to certain exceptions discussed below, the Proposed MSRB Rule would:

  • Two-Year Ban on Engaging in Municipal Advisory Business for Compensation – Prohibit a municipal advisor from, directly or indirectly, engaging in municipal advisory business with a municipal entity for compensation within two years after any contribution to an official of such municipal entity made by the municipal advisor, any municipal advisor professional associated with such municipal advisor (including a person who becomes a municipal advisor professional within two years after the contribution is made), or any political action committee controlled by such municipal advisor or by a municipal advisor professional;  
  • Two-Year Ban on Soliciting, Receiving Compensation for Soliciting, Third-Party Business – Prohibit a municipal advisor from, directly or indirectly, soliciting third-party business from a municipal entity for compensation, or receiving compensation for the solicitation of third-party business from a municipal entity, within two years after any contribution to an official of such municipal entity made by the municipal advisor, any municipal advisor professional associated with such municipal advisor (including a person who becomes a municipal advisor professional within two years after the contribution is made), or any political action committee controlled by such municipal advisor or by a municipal advisor professional;  
  • Ban on Soliciting or Coordinating Political Contributions – Prohibit a municipal advisor, and any municipal advisor professional of the municipal advisor, from soliciting any person (including, but not limited to, any affiliated company of the municipal advisor) or political action committee to make any contribution, or coordinating any contributions, to an official of a municipal entity with which the municipal advisor is engaging or seeking to engage in municipal advisory business or soliciting third-party business;  
  • Ban on Soliciting or Coordinating Payments to Political Parties – Prohibit a municipal advisor, and any individual designated as a municipal advisor professional of the municipal advisor, from soliciting any person (including, but not limited to, any affiliated company of the municipal advisor) or political action committee, to make any payment, or coordinate any payment, to a political party of a state or locality where the municipal advisor is engaging or is seeking to engage in municipal advisory business with a municipal entity or soliciting thirdparty business This prohibition does not apply to any individual designated as a Supervisor of a Municipal Advisory Business Supervisor or a Municipal Advisor Management Member if such municipal advisor engaged solely in municipal advisory business (and does not solicit any thirdparty business from municipal entities); and  
  • Prohibition on Indirect Violations – Prohibit a municipal advisor, or any municipal advisor professional, from, directly or indirectly, through or by any other person or means, doing any act that would result in a violation of the prohibitions in Proposed MSRB Rule.  

The second way in which the Proposed MSRB Rule distinguishes between Municipal Advisor Providers and Municipal Provider Solicitors relates to the duration of the bans on receiving compensation described above According to the MSRB in Notice 2011-04, Municipal Advisor Providers are subject to a fiduciary duty to the municipal entity with which they ars engaging in municipal advisory business and may not be able to cease municipal advisory business for that municipal entity immediately upon a triggering contribution being made In that case, like an investment adviser subject to the two-year ban under the SEC Pay to Play Rule, the Municipal Advisor Provider would be expected to continue to provide its municipal advisory services without compensation for a reasonable transition period.2 However, unlike the SEC Pay to Play Rule, the two-year ban applicable to Municipal Advisor Providers does not end two years after the triggering contribution The Proposed MSRB Rule provides that, in the case of a municipal advisor engaged in municipal advisory business with a municipal entity (i.e., a Municipal Advisor Provider), the prohibition on engaging in municipal advisory business with a municipal entity for compensation begins on the date of the triggering contribution and ends two years after the date on which all of the municipal advisor’s municipal advisory business with the municipal entity has been terminated.  

Regarding the ban on soliciting and receiving compensation for soliciting third-party business described above, according to the MSRB in Notice 2011-04, a Municipal Advisor Solicitor does not have a municipal entity as its client and, accordingly, has no fiduciary duty to the municipal entity; therefore, a Municipal Advisor Solicitor has no need for a transition period before it ceases its solicitation activities. According to the MSRB, as a result, the ban on soliciting and receiving compensation for soliciting third-party business begins immediately upon the making of a triggering contribution and ends two years after such triggering contribution is made.

Like the SEC Pay to Play Rule, the Proposed MSRB Rule does not ban political contributions or limit the amount of any political contribution; rather, it imposes a two-year ban on receiving compensation for the prescribed activities. A violation would not result from the making of a triggering contribution itself, but rather from receiving, or continuing to receive, any compensation for the prescribed activities after the contribution is made. Like the SEC, the MSRB indicated in Notice 2011-04 that it would consider compensation to include any economic benefit to the municipal advisor, whether in the form of an advisory fee or some other fee relating to the total services rendered, reimbursements for costs (whether internal or out-of-pocket costs), commissions, or some combination of the foregoing. For example, according to the MSRB, a municipal advisor would not be permitted to accept a new engagement to provide non-advisory services to a municipal entity in return for the provision of other uncompensated municipal advisory services to the municipal entity. A municipal advisor also could not accept increased compensation (such as increased underwriting compensation) for the provision of other services designed to replace the compensation that the Proposed MSRB Rule prohibits. A Municipal Advisor Solicitor that is prohibited from receiving compensation for soliciting third-party business from a municipal entity due to a triggering compensation could not receive increased compensation for soliciting business from another potential investor to replace the banned compensation.

Application of Provisions – “Looking Back”  

Like the SEC Pay to Play Rule, the Proposed MSRB Rule contains certain look-back provisions applicable to the prohibition imposing a two-year ban on engaging in business for compensation. The Proposed MSRB Rule also applies these look-back provisions to the prohibition imposing a two-year ban on soliciting/receiving compensation for soliciting third-party business. According to the MSRB in Notice 2011-04, in general, contributions made within two years before an individual’s employment as a municipal advisor could trigger these prohibitions; however, no contributions made before the effective date of the Proposed MSRB Rule would trigger such a ban, with the exception of contributions made prior to the effective date of the rule by dealer financial advisors already subject to MSRB Rule G-37. The Proposed MSRB Rule also places certain limits on these two-year lookback provisions:

  • Municipal Advisor Professionals As a Result of Supervisory Responsibilities – For an individual designated as a municipal advisor professional solely because he/she is a Municipal Advisory Business Supervisor, a Supervisor of a Municipal Advisory Business Supervisor, or a Municipal Advisor Management Member, the municipal advisor would be required to “look back” to determine if the individual made a triggering contribution within six months of becoming a municipal advisor professional.  
  • Municipal Advisor Professionals As a Result of Solicitation Activities – For an individual designated as a municipal advisor professional solely because he/she is a Municipal Advisory Business Solicitor, the two-year ban on contributions applies to contributions made by such individual to officials of a municipal entity prior to becoming a municipal advisor professional only if such individual solicits municipal advisory business from such municipal entity. According to the MSRB in Notice 2011-04, this limitation on the look-back provisions only applies to persons who solicit municipal advisory business on their own behalf, and it would not apply to persons who solicit third-party business. According to the MSRB, this distinction was drawn to ensure that the Proposed MSRB Rule is at least as stringent with respect to such solicitors as the SEC Pay to Play Rule. The SEC Pay to Play Rule only applies a two-year look back (rather than a six-month look back) to new covered associates that solicit clients on behalf of the investment adviser.  
  • As discussed above, in the case of a municipal advisor engaged in municipal advisory business with a municipal entity (i.e., a Municipal Advisor Provider), the prohibition on engaging in municipal advisory business with a municipal entity for compensation begins on the date of the triggering contribution and ends two years after the date on which all of the municipal advisor’s municipal advisory business with the municipal entity has been terminated. Given these provisions, a municipal advisor will need to require full disclosure of relevant past political contributions from municipal advisor professionals or potential municipal advisor professionals to ensure compliance.  

Ability to Cure a Violation

Like the SEC Pay to Play Rule, the Proposed MSRB Rule contains certain exceptions or exemptions from the prohibition imposing a two-year ban on engaging in municipal advisory business for compensation. The Proposed MSRB Rule also contains the same exceptions or exemptions from the prohibition imposing a two-year ban on soliciting/receiving compensation for soliciting third-party business. These exceptions or exemptions include an automatic exception for de minimis contributions by municipal advisor professionals, an automatic exception for certain returned contributions, and the ability to apply for the SEC for a discretionary exemption. Specifically, these exceptions or exemptions include:

  • De Minimis Contributions by Municipal Advisor Professionals – “De minimis” contributions by municipal advisor professionals (not municipal advisors) are permitted.21 A “de minimis contribution” includes contributions made:
  • To bond ballot campaigns22 for a ballot initiative for which such municipal advisor professional or non-MAP executive officer23 was entitled to vote and which contributions, in total, were not in excess of $250 per ballot initiative; or
  • To officials (e.g., elected officials or candidates) of a municipal entity for whom the municipal advisor professional or non-MAP executive officer was entitled to vote and which contributions, in total, were not in excess of $250 to each official of such municipal entity, per election.
  • Returned Contributions of $250 or Less – In the case of a triggering contribution by a municipal advisor professional that does not exceed $250, a municipal advisor may prevent the application of the two-year bans if:
  • The municipal advisor discovers the contribution that resulted in the prohibition on business within four months of the date of such contribution; and  
  • Within 60 days of the date of discovery of such contribution by the municipal advisor, the contributor obtains a return of the contribution.  

Like small investment advisers under the SEC Pay to Play Rule, a municipal advisor can avail itself of this exemption to the two-year ban no more than two times in any 12-month period. Like all investment advisers under the SEC Pay to Play Rule, a municipal advisor may not avail itself of this exemption more than once with respect to contributions by the same municipal advisor professional of the municipal advisor regardless of the time period.

  • Discretionary Exemptive Relief. A municipal advisor may apply for exemptive relief from the two-year bans on engaging in municipal advisory business for compensation, and soliciting and receiving compensation for soliciting third-party business. The SEC, upon application, would be able to conditionally or unconditionally exempt a municipal advisor from these prohibitions. In determining whether or not to grant an exemption, the SEC would take into consideration the following factors (among others):  
  • Whether the exemption is consistent with the public interest, the protection of investors, municipal entities, and obligated persons, and the purposes of the Proposed MSRB Rule;  
  • Whether the municipal advisor:
    • Prior to the time the contribution(s) that resulted in the prohibition was made, had developed and instituted procedures reasonably designed to ensure compliance with this rule;  
    • Prior to or at the time the contribution(s) that resulted in the prohibition was made, had no actual knowledge of the contribution(s);  
    • Has taken all available steps to cause the contributor involved in making the contribution(s) that resulted in the prohibition to obtain a return of the contribution(s); and  
    • Has taken such other remedial or preventive measures, as may be appropriate under the circumstances, and the nature of such other remedial or preventive measures has been directed specifically toward the contributor who made the relevant contribution and all employees of the municipal advisor;  
  • Whether, at the time of the contribution, the contributor was a municipal advisor professional or otherwise an employee of the municipal advisor, or was seeking such employment;  
  • The timing and amount of the contribution that resulted in the prohibition;  
  • The nature of the election (e.g., federal, state or local); and  
  • The contributor’s apparent intent or motive in making the contribution that resulted in the prohibition, as evidenced by the facts and circumstances surrounding such contribution.  

Disclosure and Recordkeeping Requirements

Unlike the SEC Pay to Play Rule, the Proposed MSRB Rule would impose significant disclosure and reporting obligations on municipal advisors. It would, among other things, require municipal advisors to file Form G-42 publicly disclosing all non-de minimis political contributions to officials of municipal entities, payments to state and local political parties, and contributions to bond ballet campaigns made by municipal advisors, municipal advisor professionals, and their political action committees, and non-MAP executive officers, as well as information regarding the municipal advisory business, and solicitation of third-party business, activities engaged in by the municipal advisors. Form G-42 would be submitted by municipal advisors through the existing MSRB Political Contribution Submission Service, and each submitted Form G-42 would be publicly available through the MSRB website. The Proposed MSRB Rule also would require Form G-42x to be filed by a municipal advisor that is no longer engaged in municipal advisory business or solicitation activities covered by the Proposed MSRB Rule.

Similar to the SEC Pay to Play Rule, the proposed amendments to MSRB Rules G-8 and G-9 impose additional, specific recordkeeping requirements on municipal advisors. The recordkeeping requirements applicable to municipal advisors, however, generally are more comprehensive than the recordkeeping requirements applicable to investment advisers under amended Rule 204-2 under the Advisers Act. Under proposed MSRB Rule G-8(h)(i),24 each municipal advisor would be required to maintain:

  • A listing of the names, titles, city/county and state of residence of all municipal advisor professionals;  
  • A listing of the names, titles, city/county and state of residence of all non-MAP executive officers;  
  • The states in which the municipal advisor is engaging, or is seeking to engage, in municipal advisory business with municipal entities or soliciting third-party business from a municipal entity;  
  • In the case of municipal advisory business engaged in by the municipal advisor with, or on behalf of, municipal entities, a list of municipal entities with which the municipal advisor has engaged in municipal advisory business, along with the type of municipal advisory business with municipal entities engaged in during the current year, and separate listings for each of the previous two calendar years; and  
  • In the case of third-party business solicited from a municipal entity, a list of each municipal entity solicited , along with the names of the persons on behalf of which business was solicited and the nature of the business solicited, during the current year, and separate listings for each of the previous two calendar years;  
  • The contributions, direct or indirect, to officials of a municipal entity and payments, direct or indirect, made to political parties of states and political subdivisions, by the municipal advisor and each political action committee controlled by the municipal advisor for the current year, and separate listings for each of the previous two calendar years, which records would be required to include:
    • The identity of the contributors,  
    • The names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions and payments, and  
  • The amounts and dates of such contributions and payments;  
  • The contributions, direct or indirect, to officials of a municipal entity made by each municipal advisor professional, any political action committee controlled by a municipal advisor professional, and non-MAP executive officer for the current year, which records would be required to include:
    • The names, titles, city/county and state of residence of contributors,  
    • The names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions,  
    • The amounts and dates of such contributions; and  
    • Whether any such contribution was the subject of an automatic exemption, pursuant to subsection (j) of the Proposed MSRB Rule, including the amount of the contribution, the date the municipal advisor discovered the contribution, the name of the contributor, and the date the contributor obtained a return of the contribution;

provided, however, that such records would not need to reflect any de minimis contribution made by a municipal advisor professional or non-MAP executive officer. In addition, municipal advisors would be required to maintain separate listings for each of the previous two calendar years containing the information required pursuant to this requirement of proposed MSRB Rule G-8(h)(i) for those individuals meeting the definition of municipal advisor professional as Municipal Advisory Business Participants and Municipal Advisory Business Solicitors, and for any political action committee controlled by such individuals, and separate listings for the previous six months containing the information required pursuant to this requirement of proposed MSRB Rule G-8(h) (i) for those individuals meeting the definition of municipal advisor professional as Municipal Advisory Business Supervisors, Supervisors of Municipal Advisory Business Supervisors, and Municipal Advisor Management Members, and for any political action committee controlled by such individuals and for any non-MAP executive officers; and

  • The payments, direct or indirect, to political parties of states and political subdivisions made by all municipal advisor professionals, any political action committee controlled by a municipal advisor professional, and non-MAP executive officers for the current year, which records would have to include:
    • The names, titles, city/county and state of residence of contributors,
    • The names, and titles (including any city/county/state or other political subdivision) of the recipients of such payments, and
    • The amounts and dates of such payments; provided, however, that such records need not reflect those payments made by any municipal advisor professional or non-MAP executive officer that are de minimis.

In addition, municipal advisors would be required to maintain separate listings for each of the previous two calendar years containing the information required pursuant to this requirement of proposed MSRB Rule G-8(h)(i) for those individuals meeting the definition of municipal advisor professional as Municipal Advisory Business Participants and Municipal Advisory Business Solicitors and for any political action committee controlled by such individuals, and separate listings for the previous six months containing the information required pursuant to this requirement of proposed MSRB Rule G-8(h)(i) for those individuals meeting the definition of municipal advisor professional as Municipal Advisory Business Supervisors, Supervisors of Municipal Advisory Business Supervisors and Municipal Advisor Management Members, and for any political action committee controlled by such individuals and for any non-MAP executive officers;

  • The contributions, direct or indirect, to bond ballot campaigns made by the municipal advisor and each political action committee controlled by the municipal advisor for the current year, which records would be required to include:
    • The identity of the contributors,  
    • The official name of each bond ballot campaign receiving such contributions, and the jurisdiction (including city/county/state or political subdivision) by or for which municipal securities, if approved, would be issued, and  
    • The amounts and dates of such contributions;  
  • The contributions, direct or indirect, to bond ballot campaigns made by each municipal advisor professional, any political action committee controlled by a municipal advisor professional, and non-MAP executive officer for the current year, which records would have to include:
    • The names, titles, city/county and state of residence of contributors,  
    • The official name of each bond ballot campaign receiving such contributions, and the jurisdiction (including city/county/state or political subdivision) by or for which municipal securities, if approved, would be issued, and  
    • The amounts and dates of such contributions;

provided, however, that such records would not need to reflect any contribution made by a municipal advisor professional or non-MAP executive officer to a bond ballot campaign for a ballot initiative that is de minimis.25

The Interplay Between the Proposed MSRB Rule and Existing MSRB Rule G-37

As noted above, MSRB Rule G-37 is the existing MSRB “pay to play” rule for dealers (i.e., brokers, dealers and municipal securities dealers). The proposed amendments to MSRB Rule G-37 generally are intended to remove “financial advisory or consultant services” from Rule G-37 because they would be covered for municipal advisors under the Proposed MSRB Rule. The definitions of “solicit,” “affiliated company,” and “affiliated person of the broker, dealer, or municipal securities dealer” also would be conformed to those in the Proposed MSRB Rule.

According to the MSRB in Notice 2011-04, the Proposed MSRB Rule differs from MSRB Rule G-37 in the following substantive respects:

  • First, MSRB Rule G-37 provides for a ban on municipal securities business, which the MSRB interpreted as new municipal securities business in the Rule G-37 Interpretative Notice. Rather than create a ban on new municipal advisory business with municipal entities, in a manner comparable to MSRB Rule G-37, the Proposed MSRB Rule would ban municipal advisory business with municipal entities for compensation and solicitations of third-party business from municipal entities for compensation.  
  • Second, the term “municipal advisor professional” would include associated persons who are engaged in municipal advisory business, rather than associated persons who are primarily engaged (as per MSRB Rule G-37) in municipal advisory business. According to the MSRB, were the term “primarily engaged” to be used in the Proposed MSRB Rule, persons performing some financial advisory services, but not primarily engaged in municipal advisory business, would not be considered municipal advisor professionals, and their financial advisory activities would, therefore, be subject to neither Rule G-37, nor the Proposed MSRB Rule. According to the MSRB, this change from MSRB Rule G-37 was made to ensure that the Proposed MSRB Rule is at least as stringent as SEC Pay to Play Rule 206(4)-5 for investment advisers.  
  • Third, the term “municipal advisor professional” also includes any associated person who is a member of the municipal advisor’s executive or management committee or similarly situated officials, regardless of whether there are any other municipal advisor professionals in the municipal advisory firm. Under MSRB Rule G-37, members of a dealer’s executive or management committee or similar situated officials are not “municipal finance professionals” if the dealer has no municipal finance professionals According to the MSRB, this change from MSRB Rule G-37 also was made to ensure that the Proposed MSRB Rule is at least as stringent as the SEC Pay to Play Rule.  
  • Fourth, the types of supervisors that are included within the definition of “municipal advisor professional” would be different from the types of supervisors that are included in the definition of “municipal finance professional” found in MSRB Rule G-37(g)(iv) According to the MSRB, if an individual who is a municipal advisor professional engages in municipal advisory business or solicits third-party business, as well as other activities (e.g., municipal securities activities), the individual’s supervisors for both types of activities would be considered municipal advisor professionals.

In Notice 2011-04, the MSRB also indicated that it has issued a great deal of interpretive guidance under MSRB Rule G-37, some of which is in the form of questions and answers, and that much of that guidance is equally applicable to the Proposed MSRB Rule According to the MSRB, it expects to adopt similar guidance under the final municipal advisor pay to play rule.

Finally, in Notice 2011-04, the MSRB recognized that the Proposed MSRB Rule is inconsistent with the Rule G-37 Interpretive Notice, which was issued in 1997 The proposed restatement would remove references to financial advisory services, which would be covered by the Proposed MSRB Rule.

Conclusion

The Proposed MSRB Rule, and the related proposed amendments to MSRB Rules G-8 and G-9, will impose new, and in some cases potentially onerous, restrictions and requirements on asset managers, banks and other organizations that engage in municipal advisory business or solicit third-party business from municipal entities Among other action items, the Proposed MSRB Rule will require organizations to consider how it applies to their business models and what modifications to compliance policies and procedures, organizational reporting lines, hiring practices, solicitation agreements, and other business practices, etc., would be necessary to comply with the Proposed MSRB Rule and the related proposed amendments to MSRB Rules G-8 and G-9