As summarized below, the MSRB recently provided guidance regarding the application of several of the most important MSRB rules applicable to municipal advisors that undertake the solicitation of a municipal entity or obligated person. Because much of the content of this notice applies to municipal advisors generally, the guidance provided may be useful to non-solicitor municipal advisors as well.
Because municipal advisors may engage in two broad and distinct categories of municipal advisory activities, limited initiatives have applied solely or differently to municipal advisors based on the type of municipal advisory activity in which they engage. In particular, Rule G-42 applies solely to municipal advisors that are not solicitor municipal advisors. Additionally, as discussed below, Rule G-37, on political contributions and prohibitions on municipal securities business and municipal advisory business, includes tailored provisions that apply differently to municipal advisors based on the type of municipal advisory activity in which they engage.
Associated Persons, Rule D-11
An entity (including a sole proprietorship) that engages in municipal advisory activities is considered a municipal advisor. Under the Exchange Act, a “person associated with a municipal advisor” or “associated person of an advisor” generally means any partner, officer, director, or branch manager of such municipal advisor; 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 certain advice to or on behalf of a municipal entity or obligated person; and any person directly or indirectly controlling, controlled by, or under common control with such municipal advisor.
Thus, depending on the facts and circumstances, the employees, independent contractors and other persons that perform municipal advisory activities on behalf of a municipal advisor may be “associated persons” of such municipal advisor.
The Registration Process under the Exchange Act, MSRB Rule A-12 and Form A-12
Solicitor municipal advisors, like all other municipal advisors, are required to be registered with the SEC and the MSRB prior to engaging in municipal advisory activities. To register, municipal advisors should review the SEC Final Rule, and provide the information required on SEC Form MA to the SEC. Generally, the information that is required under SEC Form MA is applicable to all municipal advisors, although some questions are directed solely to solicitor municipal advisors.
As part of its registration, a municipal advisor also must file an SEC Form MA-I for each natural person associated with the municipal advisor and engaged in municipal advisory activities on the municipal advisor’s behalf.
An entity that is required to register with the SEC as a municipal advisor also must register with the MSRB as a municipal advisor. The process and requirements for registering with the MSRB as a municipal advisor are set forth in Rule A-12 and the MSRB Registration Manual.
Professional Qualifications, Rules G-2, G-3 and A-16
The MSRB amended its professional qualification rules (Rules G-2 and G-3) to establish professional qualification requirements for municipal advisors. Among other things, the amendments established two new qualification classifications for persons engaged in municipal advisory activities on behalf of municipal advisors: municipal advisor representatives – those individuals who engage in municipal advisory activities; and municipal advisor principals – those individuals who engage in the management, direction or supervision of the municipal advisory activities of the municipal advisor and its associated persons.
Under the amendments, to qualify as a municipal advisor representative or, as a prerequisite to qualification as a municipal advisor principal, an individual first must take and pass a professional qualifications examination, the Municipal Advisor Representative Qualification Examination (Series 50).
Continuing Education, Proposed Amendments to Rule G-3
In March 2017, the MSRB filed with the SEC proposed amendments to Rule G-3 to establish continuing education requirements for certain associated persons of a municipal advisor. The proposed amendments would require municipal advisors, including solicitor municipal advisors, to develop a continuing education program.
Supervisory and Compliance Obligations of Municipal Advisors, Rule G-44
The MSRB adopted Rule G-44, which establishes the supervisory and compliance obligations of municipal advisors, including solicitor municipal advisors, and their associated persons.
Conduct of Municipal Securities and Municipal Advisory Activities, Rule G-17
The MSRB amended Rule G-17, regarding fair dealing, to require that, in the conduct of their municipal advisory activities, all municipal advisors, and their associated persons must deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice. Rule G-17 became applicable to all municipal advisors on December 22, 2010.
Investor and Municipal Advisory Client Education and Protection, Amended Rule G-10
Under Rule G-10, all municipal advisors will be required to provide in writing certain information to their municipal advisory clients. For a solicitor municipal advisor, the term “municipal advisory client” means the third party (i.e., the dealer, municipal advisor, or investment adviser) on behalf of whom the municipal advisor undertakes a solicitation of a municipal entity or obligated person. The solicitor municipal advisor must provide the following items of information:
- a statement that it is registered with the SEC and the MSRB;
- the website address for the MSRB; and
- (iii) a statement as to the availability to the municipal advisory client of a municipal advisory client brochure that is posted on the website of the MSRB that describes the protections that may be provided by the MSRB rules and how to file a complaint with an appropriate regulatory authority.
Gifts, Gratuities, Non-Cash Compensation and Expenses of Issuance, MSRB Rule G-20
The MSRB amended Rule G-20, regarding gifts and gratuities, to extend the restrictions regarding gift giving and the related recordkeeping requirements to all municipal advisors and their associated persons. All municipal advisors became subject to the provisions of Rule G-20 as of May 6, 2016.
The rule is primarily designed to address improprieties and conflicts of interest that may arise from the giving of gifts by municipal advisors or their associated persons. Included in the rule is a key provision that prohibits municipal advisors and their associated persons from giving a gift or providing a gratuity of more than $100 per person per year in relation to the municipal advisory activities of the gift recipient’s employer (“the $100 limit”). There are certain exceptions to the $100 limit in the rule.
Political Contributions and Prohibitions on Municipal Securities Business and Municipal Advisory Business, Rule G-37
The MSRB amended Rule G-37, regarding political contributions and prohibitions on municipal securities business and municipal advisory business, to extend the core standards under Rule G-37 to municipal advisors, certain of their associated persons, their political contributions and the provision of municipal advisory business. All municipal advisors became subject to Rule G-37 on August 17, 2016.
The rule is designed to address potential “pay-to-play” practices by municipal advisors consistent with the MSRB’s existing regulation of dealers. Rule G-37 generally prohibits municipal advisors from engaging in municipal advisory business with a municipal entity within two years of certain contributions to an official of such municipal entity.
Recordkeeping and Preservation of Records, Rules G-8 and G-9
Along with the adoption of certain rules applicable to municipal advisors, the MSRB also has established related recordkeeping obligations that apply to municipal advisors under Rule G-8. Similarly, records preservation obligations that are specific to municipal advisors have been incorporated in Rule G-9. Generally, recordkeeping obligations that relate to municipal advisory activities are found in Rule G-8(h).
Advertising by Municipal Advisors, Draft Rule G-40
In February 2017, the MSRB sought public comment on a new draft rule on advertising by municipal advisors and their associated persons. The draft rule, which is not effective and, as of the date of this notice, has not been filed with the SEC for approval, would address advertising by municipal advisors in a manner that would be comparable to the regulation of advertising by other regulated participants in the securities markets.
Draft Rule G-40, if filed with the SEC in substantially the form included in the Request for Comment, and if subsequently approved, would:
- Provide general provisions defining key terms, such as “advertisement,” “form letter,” and “municipal advisory client” and set forth the related general standards and content standards for advertisements;
- Provide the definition of “professional advertisements,” and define the standard for those advertisements; and
- Require the approval by a principal, in writing, before the first use of an advertisement.
For further information regarding the guidance provided by the MSRB, please refer to MSRB Regulatory Notice 2017-08.