SEC Approves Final G-23 Changes Barring Role Switches

WASHINGTON — The Securities and Exchange Commission on Friday approved final changes to the Municipal Securities Rulemaking Board’s Rule G-23 that would bar dealer-financial advisers from switching roles and becoming underwriters in the same muni transactions.

The final rule and an interpretative notice, which would take effect on Nov. 27, clarify that if a dealer wants to make sure that it is an underwriter, and will not violate the rule by providing certain advice to the issuer, it must make certain disclosures to the issuer in writing. It must disclose that it is an underwriter, that it has an arm’s-length relationship with the issuer, and that its interests differ from those of the issuer. The dealer’s actions must then be consistent with those disclosures.

The rule and notice will make clear that it is possible for the underwriter to engage in certain activities — such as advising the issuer on investments or derivatives transactions — that would not be banned under G-23.

The MSRB does not address whether certain activities would cause an underwriter to become a municipal adviser because the rule only deals with conflicts of interest and does not set standards of behavior.

The board said that it will be up to the SEC to decide when a dealer’s activities go beyond underwriting and make it a municipal adviser.

The SEC said in its approval order that these activities — such as advising the issuer on its investments or derivatives related to the bonds — may cause the underwriter to become a municipal adviser, depending on the commission’s final registration rule or municipal advisers, which will define the scope of the underwriter exception from the definition of a municipal adviser.

The approval order noted that a dealer acting as an underwriter who the SEC determines must also register as a muni adviser may become subject to additional rules, such as having a fiduciary duty to the issuer. A fiduciary duty would mean the adviser would have to put the issuer’s interests first, before its own.

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