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Securities Law

NABL Suggests Updates to MSRB's Rule Book

WASHINGTON — The Municipal Securities Rulemaking Board should update its rule book to include training materials written for enforcement agents and references to related enforcement actions, and should clarify rules on fair dealing and financial advisors, according to the National Association of Bond Lawyers.

In a comment letter filed with the MSRB Friday, the group also said the board should reorganize rules so that each rule’s code relates to its category.

The letter, signed by NABL president Scott Lilienthal, responds to the MSRB’s December request for feedback on the burdens and benefits of its rules, as well as ideas for improvement. NABL’s letter, filed three days after the MSRB’s Feb. 19 deadline, is among roughly a dozen letters received.

The recommendations, compiled by a committee of NABL’s members, requested clarification to language in Rule G-34, which requires CUSIPs for munis be obtained by dealers who plan to distribute the securities. NABL said the rule implies that lending institutions, by obtaining a CUSIP for a bank loan, satisfy criteria for a “municipal security.”

That raises concerns that some bank loans, which are not subject to disclosure requirements, might be considered munis. Issuers of bank loans also do not need to write initial offering documents. Bank loans have increased in popularity recently as letters of credit and bond insurance have become increasingly difficult to secure, sources have said.

NABL also noted that interpretive guidance in Rule G-17 on fair dealing does not include standards for meeting the “general duty of fairness.” It suggested the MSRB create a “negligence standard” that must be met in order for regulators to find a violation.

Rule G-23 on the activities of financial advisors also does not expressly prohibit a dealer who is serving as a financial advisor from “disengaging” and serving as an underwriter for the same deal, NABL said.

That raises questions about when a dealer can disengage. NABL asked if there is a waiting period. Or, if an individual leaves a firm that serves as an advisor, can the firm that the individual then joins serve as an underwriter on the same deal, NABL asked.

The group also suggested that the MSRB add to its rule book training materials provided to examination and enforcement staff at FINRA and other agencies.

“NABL believes that these suggestions will promote more efficient compliance ... and will allow for a greater understanding by municipal entities and investors of the responsibilities and duties owed to them,” the group said.

NABL asked the MSRB to include a list of enforcement actions that are relevant to each rule. The actions could be by the Securities and Exchange Commission, the Financial Industry Regulatory Authority or bank regulators, NABL said.

Such information could help market participants “learn from others’ mistakes and provide additional context,” said the group.

NABL also recommended that rules be re-coded so that each rule’s code reflects its category. Currently, rules are in one of five categories: professional qualifications, fair practice, uniform practice, market transparency, and regulated entity administration.

Rules in each category are not sequential, NABL noted. For instance, the fair practice category includes rules G-10, G-11 and G-13, but not G-12, which is in the uniform practice category.

NABL suggested all rules in the fair practice category, for instance, be re-coded to “GFP,” and start with the number 1. Rule G-10 would become Rule GFP-1, and G-11 would become GFP-2.

The change would make researching easier and any new rules would become the last rule in the category, not the last rule overall, NABL said.

The group also requested that interpretive notices be numbered rather than referred to by date.

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