On July 1, 2014, the Securities and Exchange Commission (the “SEC”) will begin enforcing its final rules (the “SEC Final Rule”)1 relative to the registration of municipal advisors. The SEC Final Rule is a result of the requirements of Section 975 of the Title IX of the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”)2 and Section 15B of the Securities Exchange Act of 1934 (the “Exchange Act”).
On January 10, 2014, the SEC released further “staff guidance” on the SEC Final Rule in the form of answers to frequently asked questions, or FAQs (the “SEC FAQs”)3 , which are not rules, regulations, or statements of the SEC, but represent the views of SEC staff on certain aspects of the SEC Final Rule. It is possible that the SEC may issue additional FAQs or other staff guidance from time to time.
Separately, on January 9, 2014, the Municipal Securities Rulemaking Board (the “MSRB”) released its draft of MSRB Rule G-42, Duties of Non-Solicitor Municipal Advisors (the “Proposed MSRB Rule G-42”)4 , which sets forth the basic duties and responsibilities of a municipal advisor. As noted in the release that accompanied Proposed MSRB Rule G-42, neither the Dodd-Frank Act nor the SEC Final Rule defined the contours of a municipal advisor’s fiduciary responsibilities. Proposed MSRB Rule G-42 is intended to address this issue. In releasing Proposed MSRB Rule G-42, the MSRB has allowed for an extended comment period (comments due on March 10, 2014) to permit sufficient time for industry input. Also, the MSRB has indicated that it may issue additional municipal advisor rules and further guidance.
Collectively, the SEC Final Rule, the SEC FAQs and Proposed MSRB Rule G-42 set forth a framework to guide a municipal advisor’s activities consistent with the Dodd-Frank Act. The implementation of these rules will significantly alter the relationships and course of dealings municipal bond issuers and borrowers experience with financial advisors, bond underwriters, banks and other participants in municipal bond transactions, as more fully discussed below.
The SEC Final Rule and SEC FAQs
The SEC Final Rule broadly defines the term “municipal advisor” to include “a person that provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or undertakes a solicitation of a municipal entity or an obligated person.” For purposes of the foregoing definition, a “municipal entity” broadly includes issuers of municipal bonds, i.e., states, political subdivisions, municipalities, agencies, authorities or other corporate instrumentalities of such entities. “Obligated persons” generally include conduit borrowers or other persons or entities that are committed by contract or other arrangement to support the payment obligations of municipal bonds.
In drafting the SEC Final Rule, the SEC took the position that the term “advice” is not susceptible to a bright-line definition and can be construed broadly, and the determination of whether a person provides advice to or on behalf of a municipal entity or obligated person regarding municipal financial products or the issuance of bonds depends on all facts and circumstances. For this reason, the SEC chose to define advice in the SEC Final Rule by setting forth what it “excludes,” i.e., the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of bonds.
The SEC FAQs attempt to build on this concept by making a distinction between the provision of general, factual information versus making a recommendation that is particularized to the specific needs, objectives, or circumstances of a bond issuer with respect to municipal financial products or the issuance of bonds. The more particularized the information, the more likely it is that such information may be viewed as a recommendation and constitute advice within the purview of the SEC Final Rule. While disclosures and disclaimers made by broker-dealers in providing such information may weigh in this analysis, they are not controlling. Hence, broker-dealers need to exercise great care in preparing general marketing materials and may need to rely on the “Independent Registered Municipal Advisor Exemption” described below.
From the bond issuer’s perspective, aside from traditional financial advisors, other participants to a municipal bond transaction will likely endeavor to avoid classification as a municipal advisor so as not to incur the related registration requirements and fiduciary duties. The SEC Final Rule sets forth certain limited “exclusions” and “exemptions” from the municipal advisor definition. As specifically noted below, the SEC FAQs provide additional insight into the SEC staff’s interpretation of certain of the exclusions and exemptions. Market participants should be mindful of the following exclusions and exemptions as they will impact their activities.
Exclusions from the Definition of Municipal Advisor
Serving as Underwriter
SEC Final Rule - A broker, dealer, or municipal securities dealer serving as an underwriter (the “Underwriter Exclusion”) of a particular issuance of municipal bonds is excluded to the extent that such broker, dealer, or municipal securities dealer engages in activities that are within the scope of an underwriting of such bonds (the “Underwriter Exclusion”). For this exclusion to apply, the broker or dealer must be the underwriter of theparticular bond deal. Being a member of an “underwriting pool” will not qualify an entity for the underwriting exclusion unless such broker or dealer is assigned to underwrite a specific transaction. Additionally, the SEC has cited certain advice as being outside the scope of the underwriting exclusion: (i) advice on investment strategies; (ii) advice on municipal derivatives; and (iii) advice otherwise identified by the SEC to be outside the scope of an underwriting. Furthermore, the scope of the underwriting exclusion generally terminates with the “end of the underwriting period,” as defined in SEC Rule 15c2-12.
SEC FAQs – The SEC FAQs provide additional guidance regarding the Underwriter Exclusion. For example, SEC Staff strongly recommends, but does not require, that broker-dealers evidence their engagement to serve as underwriter through a writing, such as an engagement letter, which sets forth the role of the broker-dealer in the transaction. Note that a general engagement for underwriting services that does not relate to a particular bond transaction may not meet the requirements of this exclusion. Although the SEC Final Rule does not require a broker-dealer to have a written engagement letter, the burden is on the broker-dealer to demonstrate it is engaged as underwriter for a bond transaction to rely on the Underwriter Exclusion. Additionally, the SEC FAQs state that if a broker-dealer acts as a municipal advisor in the early stages of a bond transaction, it may not switch its role and serve as underwriter for the transaction. As set forth below under the discussion regarding Proposed MSRB Rule G-42, the MSRB imposes a similar restriction on municipal advisors acting as an underwriter or principal in transactions where its client, the bond issuer, is the counterparty.
The availability of the Underwriter Exclusion to provide post-issuance advice is very limited. In this regard, the SEC FAQs reiterate that advice with respect to a bond issue after the underwriting period has terminated would generally not be covered by the Underwriter Exclusion, except in limited circumstances such as: (i) updating or correcting omissions in an offering document, (ii) assisting a bond issuer to compile specific factual information (data) to complete an annual disclosure filing that does not involve subjective assumptions, opinions or views, (iii) reminding a bond issuer generally of its continuing disclosure obligations, (iv) providing assistance in submitting continuing disclosure items on EMMA and (v) notifying an issuer whether and to what extent any of its continuing disclosure filings actually appeared on EMMA. Also, where a broker-dealer is serving as underwriter on a transaction and discovers that an issuer has failed to comply with its continuing disclosure commitment for an outstanding bond issue, the broker-dealer may rely on the Underwriter Exclusion to advise the bond issuer to take corrective actions such as completing the missed filings and adopting written policies and procedures to ensure future compliance. The SEC views these activities as promoting compliance with the anti-fraud provisions of federal securities laws, and, therefore, believes that reliance on the Underwriter Exclusion is appropriate.
Remarketing agent services after the underwriting period has terminated are generally not covered by the Underwriter Exclusion. To avoid being viewed as engaging in municipal advisory activities, the SEC cautions that remarketing agents should limit themselves to providing “factual” information and not include recommendations, opinions or views as to whether a certain course of action should be taken with respect to a bond issue.
Registered Investment Advisors
SEC Final Rule - Any investment advisor registered under the Investment Advisors Act of 1940 (15 U.S.C. 80b-1 et seq.), including any person associated with such registered investment advisor (a “Registered Investment Advisor”) is excluded to the extent such person is providing investment advice. However, for the purposes of this exclusion, “investment advice” does not include advice concerning whether and how to issue municipal bonds, advice concerning the structure, timing, and terms of an issuance of municipal bonds and other similar matters, advice concerning municipal derivatives, or a solicitation of a municipal entity or obligated person.
SEC FAQs – The SEC FAQs clarify that a Registered Investment Advisor may provide advice with respect to municipal derivatives (e.g., for an investment portfolio) without breaching the requirements of the exclusion; provided, that such municipal derivatives are not used in connection with the issuance of bonds.
Registered Commodity Trading Advisors
SEC Final Rule - Any commodity trading advisor registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.), including persons associated with a registered commodity trading advisor, is excluded to the extent such person is providing advice related to swaps. However, this exclusion would not apply to the extent a registered commodity trading advisor provides advice with respect to an issue of municipal bonds or any municipal financing product other than a swap.
SEC Final Rule - Attorneys are excluded from the definition of municipal advisor to the extent that the attorney is offering legal advice or providing services that are of a traditional legal nature with respect to the issuance of municipal securities or municipal financial products. However, to the extent an attorney represents himself or herself as a financial advisor or financial expert regarding the issuance of municipal bonds or municipal financial products, such attorney would not be excluded from the definition of municipal advisor.
SEC Final Rule - Engineers are excluded to the extent that the engineer is providing engineering advice. However, this exclusion is limited. For example, in its commentary, the SEC states that an engineer that is engaged by a municipal entity or obligated person to prepare revenue projections to support the structure of an issuance of bonds would be providing advice outside the scope of the engineering exclusion. Further, while the inclusion of an engineering feasibility study in an official statement or other offering document for a bond transaction alone does not cause an engineer’s activities with respect the feasibility study to be treated as municipal advisory activity, other facts and circumstances, such as the inclusion of revenue projections and debt service coverage calculations in the feasibility study, may suggest municipal advisory activity. The foregoing limitation is especially notable as many offering documents for revenue project financings (e.g., airports, water and sewer, solid waste disposal facilities, etc.) will incorporate revenue projections and debt service coverage ratios derived from engineering reports. In this scenario, an engineering firm may need to seek the broad exemption provided by the Independent Registered Municipal Advisor Exemption as discussed below.
Exemptions from SEC Final Rule Registration
SEC Final Rule - An accountant is exempt from registration under the SEC Final Rule to the extent the accountant is providing audit or other attest services, preparing financial statements, or issuing letters for underwriters for, or on behalf of, a municipal entity or obligated person. This exemption, however, does not apply to accountants performing non-attest services, including advice regarding the structure, timing, terms and other matters that may be the basis for the issuance of municipal bonds.
Public Officials and Employees; Members of the General Public
SEC Final Rule - Any person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, a municipal entity or obligated person is exempt to the extent that such person is acting within the scope of such person’s official capacity. The foregoing exemption applies regardless of whether such person is elected or appointed to such position. Additionally, any employee of a municipal entity or obligated person is exempt to the extent that such person is acting within the scope of such person’s employment. In response to concerns expressed after the release of the proposed draft of the SEC Rule, the SEC adopted this exemption to broadly exempt members of a governing body that are acting within the scope of their official duties. The SEC agrees that individuals who engage in deliberative and decision-making functions with respect to municipal financial products or the issuance of municipal bonds as part of their duties as members of a governing body or advisory committee should not be required to register as municipal advisors. However, board members, officials, and employees would be required to register if they are engaged by other municipal entities or obligated persons to provide services as compensated advisors in addition to their normal duties as an employee, official, or board member of the municipal entity.
SEC FAQs – The SEC FAQs make clear that citizens providing comments and opinions in a public forum in connection with municipal financial products or the issuance of bonds would not be required to register with the SEC as a municipal advisor, as the SEC does not want to impede public discourse on such matters.
SEC Final Rule - A bank is exempt to the extent such bank provides advice with respect to the following: (1) any investments that are held in a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank; (2) any extension of credit by a bank to a municipal entity or obligated person, including the issuance of a letter of credit, the making of a direct loan, or the purchase of a municipal security by the bank for its own account; (3) any funds held in a sweep account that meets the requirements of section 3(a)(4)(B)(v) of the Exchange Act; or (4) any investment made by a bank acting in the capacity of an indenture trustee or similar capacity.
RFPs and RFQs
SEC Final Rule - Any person providing a response in writing or orally to a request for proposals or qualifications from a municipal entity or obligated person for services in connection with a municipal financial product or the issuance of municipal bonds is exempt (the “RFP Exemption”), assuming that such person does not receive separate direct or indirect compensation for advice provided as part of such response.
SEC FAQs – The SEC FAQs set forth certain “parameters” that must be observed for an RFP or RFQ process to qualify for the RFP Exemption. These parameters include: (i) the municipal entity or obligated person, or a registered municipal advisor acting on their behalf, conducts the RFP or RFQ; (ii) a particular objective is identified in the RFP or RFQ; (iii) the RFP or RFQ is open for a specified period of time that is reasonable under the facts and circumstances and that is not indefinite; and (iv) the RFP or RFQ involves a competitive process under the facts and circumstances, e.g., the RFP or RFQ is sent to at least three reasonably competitive market participants or the RFP or RFQ is publicly disseminated by posting it on the official website of the municipal entity or obligated person. Note that the RFP/RFQ does not need to be part of the municipal entity’s formal procurement process to qualify for the RFP Exemption. Also, the SEC FAQs recognize that the RFP/RFQ process may be more targeted to solicit ideas and proposals from pre-screened or pre-qualified market participants. A so-called “mini-RFP” can meet the requirements of the RFP Exemption, provided that the process is consistent with the types of parameters described above.
SEC Final Rule - A swap dealer (as defined in Section 1a(49) of the Commodity Exchange Act (7 U.S.C. 1 a(49)) and the rules and regulations thereunder) registered under the Commodity Exchange Act or associated person of the swap dealer recommending a municipal derivative or a trading strategy that involves a municipal derivative is exempt, so long as the registered swap dealer or associated person is not acting as an advisor to the municipal entity or obligated person with respect to the municipal derivative or trading strategy. The SEC adopted this exemption in recognition of the very rigorous regime already imposed on swap dealers by the Commodity Futures Trading Commission and its external business conduct rules.
Independent Registered Municipal Advisor
SEC Final Rule - Any person engaging in municipal advisory activities in a circumstance in which a municipal entity or obligated person is otherwise represented by an independent registered municipal advisor under the SEC Final Rule with respect to the same aspects of a municipal financial product or an issuance of municipal securities is exempt from registration (the “Independent Registered Municipal Advisor Exemption”), provided that the following requirements are met:
(i) an independent registered municipal advisor is providing advice with respect to the same aspects of the municipal financial product or issuance of municipal securities, and that is not, and within at least the past two years was not, associated with the person seeking to rely on this exemption, and
(ii) the person seeking to rely on this exemption receives from the municipal entity or obligated person a representation in writing that it is represented by, and will rely on the advice of, an independent registered municipal advisor, provided that the person receiving such representation has a reasonable basis for relying on the representation.
Additionally, the person that is seeking to rely on this exemption is required to make the following disclosures:
(i) with respect to a municipal entity, such person discloses in writing that, by obtaining such representation, such person is not a municipal advisor and is not subject to the fiduciary duty set forth in section 15B(c)(1) of the Exchange Act with respect to the municipal financial product or issuance of municipal securities, and provides a copy of such disclosure to the independent registered municipal advisor, and
(ii) with respect to an obligated person, such person discloses in writing that, by obtaining such representation, such person is not a municipal advisor with respect to the municipal financial product or issuance of municipal securities, and provides a copy of such disclosure to the independent registered municipal advisor.
Each such disclosure must be made at a time and in a manner reasonably designed to allow the municipal entity or obligated person to assess the material incentives and conflicts of interest that such person may have in connection with the municipal advisory activities.
SEC FAQs – The SEC FAQs emphasize that the scope of this exemption was intended to be broad, because the SEC “does not seek to curtail the receipt of important advice and information so long as the municipal entities and obligated persons are represented by and rely on independent registered municipal advisors who are subject to a fiduciary or other duties and who can help the municipal entities and obligated persons evaluate the advice and identify potential conflicts of interest.” The SEC FAQs also provide that a bond issuer could provide the required representations in any reasonable manner, including one written disclosure to multiple transaction participants or public posting on its official website clearly stating that the bond issuer intends that market participants receive and use it for purposes of the Independent Registered Municipal Advisor Exemption. Additionally, the independent registered municipal advisor does not have to be present when a broker-dealer is discussing issues relating to the planned issuance of municipal bonds for the exemption to apply.
As noted earlier, it is likely that in their dealings with municipal entities and obligated persons many market participants will seek to ascertain that the Independent Registered Municipal Advisor Exemption applies to them to avoid SEC registration and the duties and responsibilities imposed on municipal advisors under the SEC Final Rule.
Persons that provide advice on certain investment strategies
SEC Final Rule - A person that provides advice with respect to investment strategies that are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments is exempt.
SEC Final Rule - A person that undertakes a solicitation of a municipal entity or obligated person for the purpose of obtaining or retaining an engagement by a municipal entity or by an obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for municipal financial products that are investment strategies is exempt to the extent that those investment strategies are not plans or programs for the investment of the proceeds of municipal securities or the recommendation of and brokerage of municipal escrow investments.
Proposed MSRB Rule G-42
Proposed MSRB Rule G-42 and related “Supplementary Material” elaborate on the duties of a municipal advisor, including the fiduciary duties of a municipal advisor towards its municipal entity clients. Proposed MSRB Rule G-42 uses many of the definitions used in the SEC Final Rule.
Standard of Conduct
Under Proposed MSRB Rule G-42, a municipal advisor in the conduct of its municipal advisory activities on behalf of a bond issuer is subject to a fiduciary duty, which includes a duty of care and a duty of loyalty.
Duty of Care
Under the “Duty of Care” standard, a municipal advisor must:
(i) exercise due care in performing its municipal advisory activities;
(ii) possess the degree of knowledge and expertise needed to provide the client with informed advice;
(iii) make a reasonable inquiry as to the facts that are relevant to a client’s determination as to whether to proceed with a course of action or that form the basis for any advice provided to the client; and
(iv) undertake a reasonable investigation to determine that the municipal advisor is not basing any recommendation on materially inaccurate or incomplete information.
In addition, a municipal advisor that is engaged by a client in connection with either an issuance of bonds or a municipal financial product that is related to an issuance of bonds must also undertake a thorough review of the official statement for that issue unless otherwise directed in writing by the bond issuer.
Since neither the Proposed MSRB Rule G-42 nor the related Supplementary Material set forth due diligence standards for the municipal advisor’s review of the official statement, it may be appropriate to delineate these responsibilities in the documentation of the municipal advisory relationship as discussed below. Additionally, if an affiliate of a municipal advisor prepares a document that is included in the official statement (e.g., a feasibility study, accountant’s letter, etc.); disclosure of such affiliation must be made to the bond investors which disclosure may be included in the official statement.
Duty of Loyalty
Under the “Duty of Loyalty” standard, a municipal advisor must deal honestly and with the utmost good faith with a municipal entity and act in such client’s best interests without regard to the financial or other interest of the municipal advisor.
Disclosure of Conflicts of Interest and Other Information
Proposed MSRB Rule G-42 requires a municipal advisor to fully and fairly disclose to a bond issuer in writing all material conflicts of interest, and to do so at or prior to the inception of a municipal advisory relationship. These include any actual or potential conflict of interest that might impair the advisor’s ability to render unbiased and competent advice to or on behalf of the client. Among the items required to be disclosed are the following: provision by any affiliate of certain advice, services, or products to or on behalf of the client; payments to obtain or retain the client’s municipal advisory business; payments received from third parties to enlist the municipal advisor’s recommendations; any fee-splitting arrangement with any provider of investments or services to the client; conflicts that may arise from the use of the form of compensation under consideration or selected by the client; and any other engagements or relationships of the municipal advisor or any affiliate that might impair the advisor’s ability either to render unbiased and competent advice to or on behalf of the client or to fulfill its fiduciary duty to the client, as applicable. The municipal advisor is also required to disclose the amount and scope of professional liability insurance coverage and certain legal or disciplinary events. Additionally, if a municipal advisor concludes that it has no material conflict of interest, it must provide the bond issuer with written documentation to that effect. As more fully discussed below, a municipal advisor has a duty to promptly update the foregoing information to reflect changes that occur after the inception of the municipal advisory relationship.
The Municipal Advisory Relationship Must be in Writing
Proposed MSRB Rule G-42 requires that the municipal advisory relationship must be in writing and documented prior to, upon or promptly after the inception of the municipal advisory relationship. This requirement may be new to some bond issuers that have long standing arrangements with their financial advisors that are not documented. The writing must be dated and include, at a minimum:
(i) the form and basis of direct or indirect compensation, if any;
(ii) the reasonably expected amount of any such compensation (stated in dollars to the extent it can be quantified);
(iii) the scope of municipal advisory activities to be performed and any limitations on the scope of the engagement;
(iv) in the case of municipal advisory activities relating to a new issue or reoffering of municipal securities, the specific undertakings, if any, requested by the client to be performed by the advisor relating to the preparation or finalization of the official statement or similar disclosure document; and
(v) certain terms relating to the termination of the municipal advisory relationship or, if there are no such terms, then a statement to that effect.
Additionally, the writing must address any conflicts of interest as described above. The municipal advisor also has a duty to promptly amend and supplement the writing for any changes to the information described above and any information with respect to conflicts of interest, provided that changes in the amount of reasonably expected compensation need only be made to the writing if material. Furthermore, Proposed MSRB Rule G-42 imposes a due diligence requirement on municipal advisors to discover the need for such changes.
With regard to recommendations, Proposed MSRB Rule G-42 provides that a municipal advisor must not recommend that its client enter into any municipal securities transaction or municipal financial product unless the advisor has a reasonable basis for believing that the transaction or product is suitable for the client. The advisor also is required to discuss with its client its evaluation of the material risks, potential benefits, structure and other characteristics of the recommended municipal securities transaction or municipal financial product; the basis upon which the advisor reasonably believes the recommended transaction or product is suitable for the client and whether the municipal advisor has investigated or considered other reasonably feasible alternatives. The advisor must only recommend a transaction or product that is in the bond issuer’s best interest.
The Supplementary Material imposes a suitability requirement in making recommendations and must be based on: the client’s financial situation and needs, objectives, tax status, risk tolerance, liquidity needs, experience with municipal securities transactions or municipal financial products generally or of the type and complexity being recommended, financial capacity to withstand changes in market conditions during the term of the municipal financial product or the period that municipal securities to be issued are reasonably expected to be outstanding and any other material information known by the municipal advisor about the client and the municipal securities transactions or municipal financial product, after reasonable inquiry.
Furthermore, the Supplementary Material includes a “Know Your Client” standard when making recommendations and otherwise maintaining the municipal advisory relationship. The facts “essential” to “knowing your client” include those required to: (i) effectively service the municipal advisory relationship with the client; (ii) act in accordance with any special directions from the client; (iii) understand the authority of each person acting on behalf of the client; and (iv) comply with applicable laws, regulations and rules.
Review of Recommendations of Other Parties
When requested, a municipal advisor must undertake a thorough review of any recommendation made by any third party regarding a municipal securities transaction or municipal financial product. In addition, the municipal advisor must discuss with its client:
(i) the municipal advisor’s evaluation of the material risks, potential benefits, structure, and other characteristics of the recommended municipal securities transaction or municipal financial product;
(ii) whether the municipal advisor reasonably believes that the recommended municipal securities transaction or municipal financial product is suitable for the client, and the basis for such belief; and
(iii) whether the municipal advisor has investigated or considered other reasonably feasible alternatives to the recommended municipal securities transaction or municipal financial products that might also or alternatively serve the client’s objectives.
Principal Transaction Limitation
A municipal advisor, including its affiliates, is prohibited from engaging in any transaction in a principal capacity to which its client is a counterparty. This prohibition carves out the limited exception permitted under MSRB Rule G-23 that allows a municipal advisor to act as agent for an issuer in arranging the placement of a bond issue with another state, local or federal governmental entity (such as a bond bank) so long as the municipal advisor (including any broker-dealer affiliates) 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.
Proposed MSRB Rule 42 prohibits a municipal advisor from:
(i) receiving compensation that is excessive in relation to the municipal advisory activities actually performed;
(ii) delivering an invoice for fees or expenses for municipal advisory activities that do not accurately reflect the activities actually performed or the personnel that actually performed those services;
(iii) making any representation or the submission of any information about the capacity, resources or knowledge of the municipal advisor, in response to requests for proposals or qualifications or in oral presentations to a client or prospective client, for the purpose of obtaining or retaining municipal advisory business that the advisor knows or should know is materially false or misleading;
(iv) making, or participating in, any fee-splitting arrangements with underwriters, and any undisclosed fee-splitting arrangements with providers of investments or services to a municipal entity or obligated person client of the municipal advisor; and
(v) making payments for the purpose of obtaining or retaining municipal advisory business other than reasonable fees paid to another municipal advisor registered with the SEC and the MSRB.
Books and Records of the Municipal Advisor
In connection with Proposed MSRB Rule 42, the MSRB has proposed revisions of MSRB Rules G-8 and G-9 to enhance the recordkeeping requirements of municipal advisors and establish a five-year record retention requirement.
General Observations on Proposed MSRB Rule 42
The requirements of Proposed MSRB Rule 42 are quite rigorous and very demanding, and it is likely that there will be some consolidation within the financial advisory industry as a result. Additionally, the Standard of Conduct and other requirements of Proposed MSRB Rule 42 impose significant challenges for municipal advisors that are affiliated with broker-dealers. In this regard, we expect additional guidance to be forthcoming.
We invite you to contact the Edwards Wildman lawyer responsible for your public finance matters or one of the authors of this Client Advisory if you have any questions regarding this client advisory, the SEC Final Rule, SEC FAQs or Proposed MSRB Rule G-42.