Introduction
Since the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted in July 2010, the Municipal Securities Rulemaking Board (“MSRB”) has been working to establish comprehensive regulations for municipal advisors.1 Since October 1, 2010, the MSRB has been responsible for regulating municipal advisors, and has implemented several rules to achieve that goal, including the requirement that effective November 15, 2010, all municipal advisors must register with the MSRB.2 Currently, the MSRB has adopted 10 rules which apply to municipal advisors.3
As part of that effort, on May 25, 2011, the MSRB issued a request for comment for draft Rule G-44 on supervision of municipal advisory activities (the “Notice”).4 According to the Notice, the MSRB believes that “[t]he establishment of a basic supervisory system for municipal advisors is particularly important as the MSRB adopts rules for municipal advisors and municipal advisors must educate themselves about these new rules and adopt procedures for compliance.”5
Although MSRB Rule G-27 currently requires the supervision of brokers, dealers and municipal securities dealers (collectively “dealers”) and their associated persons engaged in municipal securities activities, including financial advisory activities, it does not include all municipal advisory activities now subject to MSRB rules. As a result, without the proposed Rule G-44, municipal advisors that are not dealers would not be subject to a comparable MSRB rule. Therefore, the MSRB has proposed Rule G-44 to require all municipal advisors to adopt a basic supervisory structure for municipal advisory activities not already subject to Rule G-27. Notably, the MSRB stated that at this time it does not believe it is necessary to extend the more detailed supervisory structure required by Rule G-27 to other municipal advisory activities. By way of example, the MSRB noted that many of the provisions of Rule G-27 concerning dealer relationships with customers that do not have a municipal advisor counterpart (e.g., customer complaints) would not be required, nor would the creation of “offices of municipal supervisory jurisdiction” in the case of municipal advisors with multiple offices be required. MSRB requests that comments to the proposed rule be filed with it no later than June 24, 2011.
Proposed Rule G-44 Requirements
Rule G-44 would require municipal advisors to:
1. Supervise the municipal advisory activities of the municipal advisor and its associated persons to ensure compliance with applicable MSRB and SEC rules;
2. Establish and maintain a system to supervise the municipal advisory activities of each associated person designed to ensure compliance with applicable MSRB and SEC rules;
3. Adopt, maintain and enforce written supervisory procedures designed to ensure that the conduct of the municipal advisory activities of the municipal advisor and its associated persons comply with MSRB and SEC rules;
4. Conduct an annual review of the municipal advisory activities of the firm; and
5. Review and keep records of correspondence.
With respect to establishing a supervisory system and written supervisory procedures for the municipal advisor’s supervisory obligations, the MSRB set forth certain minimum standards with which municipal advisors will have to comply. Those minimum standards are as follows.
Supervisory System Minimum Standards Under Rule G-44
• Establish and maintain written supervisory procedures;
• Designate one or more municipal advisor principal(s) based on experience or training;
• Maintain a written record of the designation of the municipal advisor principals and their responsibilities regarding supervision; and
• Conduct an annual compliance interview or meeting to discuss compliance matters relevant to the municipal advisory activities of associated persons.
Written Supervisory Procedures Minimum Standards Under Rule G-44
• Procedures relating to the manner in which a designated principal shall monitor compliance and supervise municipal advisory activities;
• Procedures relating to the periodic review by a designated principal of each office that engages in municipal advisory activities;
• Procedures relating to the maintenance and preservation of books and records; and
• Procedures relating to the maintenance of the written supervisory procedures, a copy of which must be available in each office of the municipal advisor and in each office where supervisory activities with respect to municipal advisory activities are conducted.
Even though the Notice speaks in terms of “minimums” for supervisory systems and procedures, municipal advisors should review the types of municipal advisory activities they conduct to customize their written supervisory procedures and systems.
In an effort to assist municipal advisors in complying with Rule G-44, the MSRB appended a “Checklist for Written Supervisory Procedures” to the Notice. The MSRB indicated that the Checklist was a sample of the MSRB rules it expects to be addressed in a municipal advisor’s written supervisory procedures and to be established and maintained by the municipal advisor in accordance with G-44. Importantly, the MSRB states that the Checklist is not all-inclusive, nor is it a safe harbor with respect to potential deficiencies in a municipal advisor’s supervisory procedures.
Conclusion
Rather than subjecting municipal advisors to all of the supervisory requirements of Rule G-27, MSRB has proposed G-44 as an attempt to tailor and streamline a set of supervisory requirements designed to reflect the more limited scope of activities performed by municipal advisors. To that end, in the Notice, the MSRB recognizes that in complying with Rule G-44 there will be a number of factors that municipal advisors will need to take into consideration as they establish their written supervisory procedures and systems. For example, in the case of a small municipal advisor or a firm that engages in limited municipal advisory activities, it may be necessary for an individual who engages in municipal advisory activities to also supervise those activities. However, the municipal advisor’s procedures will vary depending on certain factors, “such as the size of the firm, number of offices, type of municipal advisory activities engaged in.”6 As municipal advisors establish supervisory systems and procedures to comply with proposed Rule G-44, they should use the Checklist provided in the Notice as a guide to assist in developing those procedures and supervisory systems but they should tailor their supervision to those municipal advisory activities in which the firm is actually engaged.
For additional information concerning this alert, please contact the following lawyers:
Amy Natterson Kroll, Partner, Broker-Dealer
amy.kroll@bingham.com, 202.373.6118
David Boch, Partner, Broker-Dealer Group
david.boch@bingham.com, 617.951.8485
Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Financial Services Area
roger.joseph@bingham.com, 617.951.8247
Edwin E. Smith, Partner, Financial Restructuring; Co-chair, Financial Services Area
edwin.smith@bingham.com, 617.951.8615
Tim Burke, Practice Group Leader, Broker-Dealer Group; Co-chair, Financial Services Area
timothy.burke@bingham.com, 617.951.8620
1 See Bingham Alerts: Summary of the Dodd Frank Wall Street Reform and Consumer Protection Act, dated October 12, 2010 (available at www.bingham.com); and Regulators’ Focus on ‘Pay-to-Play’ Issues Remains Robust Going Into the New Year — MSRB Seeks Comment on the New Draft Rule G-42 (‘Pay-to-Play Rule’) for Municipal Advisors,” dated Feb. 3, 2011 (available at www.bingham.com).
2 Section 15B(e)(4) of the Securities Exchange Act of 1934, as amended by the Dodd-Frank Act, defines “municipal advisor” as “a person (who is not a municipal entity or an employee of a municipal entity) that (i) 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 (ii) undertakes a solicitation of a municipal entity. The following are not deemed advisors: municipal entities and their employees, dealers serving as underwriters, SEC-registered investment advisers, and their associated persons so long as such advisers and associated persons are providing investment advice, registered commodity trading advisers and their associated persons providing advice on swaps, attorneys offering legal advice or traditional legal services, and engineers providing engineering services.
3 For a list of the MSRB’s current rules regulating municipal advisors, see www.msrb.org/MSRB-For/Municipal-Advisors/MSRB-Rules.aspx (last visited May 26, 2011).
4 MSRB also proposed associated amendments to MSRB Rules G-8 (books and records) and G-9 (preservation of records). Specifically, the G-8 amendments seek to identify those records which each municipal advisor shall maintain concerning compliance with proposed Rule G-44, including (1) the firm’s designation of its municipal advisory principals and their responsibilities, (2) the firm’s written supervisory procedures, and (3) the results of the firm’s annual review of its municipal advisory activities. The Rule G-9 amendments identify the timeframe associated with the preservation of certain municipal advisor records (six or three years depending upon the record) as well as the need to have such records readily accessible.
5 Notice at 1.
6 Id.
This article was originally published by Bingham McCutchen LLP.