SEC Approves Extension of Gift Rule to Non-Dealer MAs

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WASHINGTON – The Securities and Exchange Commission has approved a Municipal Securities Rulemaking Board rule that addresses potential conflicts of interest by restricting the gifts and non-cash benefits that non-dealer municipal advisors can give to issuers and others in their professional capacities.

The MSRB's amendments to Rule G-20 on gifts, gratuities, and non-cash compensation will become effective on May 6, 2016 -- six months from the approval date of Nov. 6. It is part of the MSRB's larger effort to develop a regulatory regime for municipal advisors as mandated by the Dodd-Frank Act. The rule was first proposed in October 2014 and went through comment periods with the MSRB and SEC before approval.

The rule change "would help ensure that engagements of municipal advisors, as well as engagements of dealers, are awarded on the basis of merit and not as a result of gifts made to employees controlling the award of such business," the SEC said in its notice approving the rule changes.

Lynnette Kelly, the MSRB's executive director, echoed the SEC and said the changes "establish common standards for all municipal financial professionals and, together with MSRB's rules on fair dealing, help preserve the integrity of the municipal market."

Under the previous rule, dealers were prohibited from giving any thing or service of value, including gratuities, that exceed $100 per year to a person if the payments or services are related to municipal securities activities of the employer of the recipient.

The recently approved changes extend that prohibition to non-dealer MAs.

The approved proposal provides several exemptions to the $100 limit that apply to gifts that do not "give rise to any apparent or actual material conflict of interest." The $100 limit would not apply to "normal business dealings," like gifts of meals or tickets to entertainment such as sporting and theatrical events if the regulated entity or associated persons host the event and the number of gifts is not "so frequent or so extensive as to raise any question of impropriety," the MSRB said.

The MSRB added other exemptions for gifts commemorating a business transaction, as well as those that are de minimis like pens and notepads and promotional that bear an entity's corporate or other business logo and are substantially below the $100 limit.

The approved rule also prohibits MAs and dealers from getting reimbursed through bond proceeds for certain entertainment expenses related to a muni offering if the expenses were not "ordinary and reasonable."

The MSRB additionally codified Financial Industry Regulatory Authority interpretive guidance into G-20 and revised its Rule G-8 on books and records to align the requirements for maintaining records documenting compliance with G-20 for MAs as part of the filing with the SEC.

Susan Gaffney, executive director of National Association of Municipal Advisors, said NAMA has always supported applying G-20 to municipal advisors and is pleased the SEC finalized the rule. But she reiterated concerns NAMA's president, Terri Heaton, had expressed in comment letters that the MSRB standards are not strong enough to prevent abuses.

Heaton had proposed eliminating the exemption for normal business dealings and raising the allowable gift amount to $250.

"We continue to believe that greater gift standards should be in place to prevent abuses by all regulated parties," Gaffney said.

Leslie Norwood, associate general counsel and co-head of municipal securities for the Securities Industry and Financial Markets Association, said SIFMA is very pleased that independent municipal advisors are now covered by the same gift limitations as dealers.

However, she also said SIFMA is still concerned about a discrepancy in MSRB Rule G-9, on preservation of records. The rule requires dealers to keep records for six years but non-dealer MAs for only five.

"We are disappointed that the recordkeeping isn't similar but that is an issue that we will just keep our eye out for in the future to try to level the playing field between the non-dealers who operate in the space and the fully regulated dealers that operate in the space," Norwood said.

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