MSRB Files Supervisory Rule for Muni Advisors

WASHINGTON — The Municipal Securities Rulemaking Board has filed a proposed rule with the Securities and Exchange Commission that would require muni advisors to establish supervisory systems to ensure they and their "associated persons" comply with SEC and MSRB rules.

The proposed Rule G-44 would not take effect until either the date the SEC approves final registration rules that define the term "municipal advisor," or a later date, if that is when the commission approves G-44.

The SEC must publish the rule for public comments and then take those into account before approving it.

The proposed rule the board filed with the SEC on Monday is very similar to the draft rule the MSRB released for public comment on May 25.

David Cohen, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, said, "We're very disappointed that they're moving forward at this time."

Cohen said SIFMA would like to have the opportunity to comment on the proposed Rule G-44 after the SEC defines the term municipal advisor, rather than having the rule take effect on the date the SEC approves the registration rules and definition.

He added that "there should be a level playing field for broker-dealers and the independent financial advisors who would be covered by this rule."

SIFMA and others had complained, in comments on the draft rule, that G-44 would subject independent muni advisors to less rigorous supervisory requirements than dealer-advisors, which are subject to the MSRB's Rule G-27.

Non-dealer muni advisors came under the boards's regulatory purview under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted July 1, 2010. Since then the board has been modifying its rules or adopting new ones for them.

In addressing the comments, the MSRB told the SEC: "At this time, the most important goal is to make sure that municipal advisors have a supervisory structure in place that is adequate to enable them to achieve compliance with the new MSRB rules and interpretive notices that are applicable to them. The MSRB has decided to defer any consideration of the extension to municipal advisors of some of the more detailed rules to which dealers are subject until municipal advisors have had some experience with this basic structure."

The board also noted that some of the rules that broker-dealers wanted muni advisors to comply with are actually administered by the Financial Industry Regulatory Authority or SEC, not the MSRB.

FINRA, for example, requires broker-dealers to designate a chief compliance officer, while the SEC requires them to maintain certain amounts of net capital.

The rule the MSRB filed with the SEC contains one additional provision from the draft. It would require a muni advisor to keep records of "written and electronic communications received or sent, including interoffice memoranda, of associated persons related to its municipal advisory activities."

The National Association of Independent Financial Advisors had asked the MSRB, in comments on the draft rule, to exempt sole practitioners from G-44.

However, the board declined to do so and instead said in its description of the filed rule that, in the case of sole practitioners or small firms, it may be necessary for an individual that engages in limited muni advisory activities to also supervise them.

The filed rule would require muni advisors to establish and maintain written supervisory procedures; designate one or more muni advisory principal, based on experience or training, to carry out supervisory responsibilities and maintain a written record of these; and conduct annual compliance interviews or meetings to discuss compliance matters.

The MSRB also filed amendments to its Rules G-8 and G-9, which would require muni advisors to maintain books and records and to preserve certain documents at least either three or six years.

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