MSRB Plans to Address G-20 Complaints

WASHINGTON — The Municipal Securities Rulemaking Board plans to file revised amendments to its Rule G-20 with the Securities and Exchange Commission in June that will clarify proposed restrictions on gifts and gratuities for muni advisers would be virtually the same as those for broker-dealers, MSRB officials said Monday.

Independent financial advisers, particularly Public Financial Management Inc., had complained the amendments, as drafted in February, would be much stricter for muni advisers and could even put them out of business by applying to such expenses as salaries, market data, software, and even rent.

But MSRB chairman Michael Bartolotta told reporters during a telephone call about the results of the board’s meeting here late last week that the amendments have been tweaked and will clarify that the rule’s restrictions for muni advisers will closely parallel those for broker-dealers.

“We tried to make it workable for both parties, said Bartolotta, vice chairman of First Southwest Co.

MSRB deputy general counsel Peg Henry said the board has changed the word “payments” in the amendments to “gifts,” so that it’s clear the restrictions were not meant to apply to advisers’ expenses such as salaries or rent.

The proposed amendments would bar muni advisers from directly or indirectly giving anything of value over $100 in connection to their advisory activities, including the solicitation of potential engagements.

The goal, according to Bartolotta, is to ensure that muni advisory business is awarded on the basis of merit and not because of any gifts or gratuities.

Bartolotta said also that the MSRB plans to file with the SEC in June its proposed Rule G-36 on the fiduciary duty of municipal advisers, as well as separate Rule G-17 interpretative guidance on fair dealing for muni advisers and underwriters.

The board issued a draft Rule G-36 in February that would require municipal advisers to act in good faith and in the best interests of issuer clients.

Advisers would have to disclose in writing any conflicts of interest, including third-party payments related to the engagement or other engagements, or relationships that might impair the adviser’s ability to act in the issuer’s best interests. They would have to obtain informed consent from the issuer regarding any such conflicts.

The rule would not prohibit contingency fees, but would prod advisers to disclose them.

That rule also has drawn complaints from muni advisers who warn that the MSRB is not imposing the same duty on underwriters, even though they sometimes promote themselves to issuers as having advisory as well as underwriting capabilities.

Bartolotta said Rules G-36 and G-23, which will bar dealer-advisers from underwriting the same municipal securities issues, “dovetail” with each other. “The whole intent was [that] how you hold yourself out at the beginning of an engagement to an issuer determines your role.”

However, he said the board did not take action on Rule G-23 at the meeting and is still working on it.

The interpretative guidance would clarify that Rule G-17 prohibits advisers and broker-dealers from engaging in any deceptive, dishonest and unfair practices and would make clear that any adviser that violates G-17 would also be violating Rule G-36.

The MSRB also met with the SEC commissioner Elisse Walter, who is spearheading an SEC review of the municipal market that is expected to result in a report that makes regulatory and legislative recommendations.

During the meeting, the MSRB “offered to be a resource to the commission,” Bartolotta said.

Walter expressed a keen interest in the muni market trade and pricing study that the MSRB has underway, said executive director Lynnette Hotchkiss.

Erik Sirri, a professor of finance at Babson College and former director of the SEC’s trading and markets division, is overseeing that study.

Hotchkiss said she hopes some preliminary results from the study will be available this year. But she declined to specify when the study might be finished, saying Sirri has been given “a very broad mandate to look at market and trading patterns” and that the study “is pretty open-ended at this point.”

The board also met with Richard Ketchum, the chairman and chief executive of the Financial Industry Regulatory Authority.

Bartolotta said the MSRB and FINRA are working on an agreement to establish their relationship and how the board’s rules will be enforced under the regulatory mandates of the Dodd Frank Wall Street Reform and Consumer Protection Act.

He said they discussed “how do we make sure that our rules are enforced fairly and vigorously.”

Hotchkiss said the agreement is “really nothing new,” in that the board has had such agreements in place with many other regulators, including FINRA.

The MSRB provides muni market trade, disclosure and other data feeds to regulators that go beyond what the public sees on the board’s site, she noted. The regulators can run queries of the data to look for abuses or to gain information about certain practices.

Bartolotta said the new agreement will update the current one.

When he was asked about pending proposals and legislation that would postpone implementation of derivatives rules mandated by Dodd-Frank, Bartolotta said: “My view is we’re dealing with the public’s money here. The sooner we can get some transparency and oversight in the muni market with respect to derivatives, I think the issuers would be well served by that.”

Henry said that the board has moved forward to make sure that swap advisers have the necessary qualifications to hold themselves out as swap advisers and that the MSRB’s interpretative guidance on Rule G-17 will make clear that if an underwriter recommends a complex transaction such as one involving a swap, certain disclosures are made to the issuer.

Henry said the board will take up its proposed Rule G-43 on broker’s brokers at its July meeting in Denver.

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