WASHINGTON – The Municipal Securities Rulemaking Board’s latest “frequently asked questions” about its core municipal advisor rule is ambiguous and raises questions about past guidance, groups representing MAs, dealers, and conduit issuers said Monday.

The comments came in response to a request for feedback on the MSRB’s February FAQs regarding its Rule G-42 on duties of non-solicitor municipal advisors, particularly on section “d,” which deals with recommendations made to municipal entity clients. The document touched on a variety of issues relating to providing “advice” and “recommendations” to a municipality and provided some hypothetical scenarios as well.

While the groups generally welcomed the opportunity to formally engage with the MSRB on these FAQs, they suggested that MSRB’s answers in many cases only raised new questions.

The groups all suggested streamlining the FAQs, which were 17 pages, and clarifying how they relate to existing guidance issued by both the MSRB and the Securities and Exchange Commission.

Susan Gaffney, executive director of the National Association of Municipal Advisors, pointed out that the information in the MSRB FAQs was by the board’s own admission established from rule filings approved by the SEC. Yet the MSRB stopped short of labeling the FAQs as formal guidance, terming it a “compliance resource.” Gaffney said it should be labeled as more.

“If the principles highlighted in the FAQs were part of the regulatory record considered and approved by the [SEC] when it approved MSRB Rule G-42, then MAs will be able to be assured that compliance with the adopted [Securities Exchange Act of 1934] principles highlighted in the FAQs can be relied on for compliance with at least MSRB Rule G-42(d),” Gaffney wrote. “Market participants should feel secure that principles that were articulated in the regulatory record and approved by action of the SEC (as opposed to SEC staff) – as the MSRB asserts is the case here – can be relied on for compliance.”

NAMA’s letter went on to suggest that a variety of edits to the FAQs, such as combining into on section an FAQ about advice vs. recommendations and one about how to determine when “advice” constitutes a “recommendation.”

Leslie Norwood, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, told the MSRB that SIFMA was concerned about the absence of explanation of the applicable SEC rules in the FAQs. For example, Norwood wrote, the FAQs note that the SEC imposes on MAs recordkeeping obligations that go beyond the requirements of the MSRB’s Rule G-8 on books and records. As such, some advice may trigger the SEC's recordkeeping requirements but not the MSRB's.

SIFMA's Leslie Norwood
Leslie Norwood, SIFMA

“In this instance, the identification of the divergence is appreciated but further guidance should be provided to help ensure that municipal advisors understand the recordkeeping requirements of both SEC and MSRB rules,” Norwood wrote.

SIFMA suggested that the MSRB coordinate with other regulators and with market participants in producing FAQs and “any other types of significant compliance information.”

The National Association of Health and Educational Facilities Finance Authorities, which represents conduit issuers, also raised concern about the interplay between this and previous compliance information.

Under MSRB rules conduit borrowers are not necessarily “municipal entities” and MAs do not have the full fiduciary duty to them.

“Draft FAQ 9 is specifically directed at conduit issuers and notes the different obligations that MA’s have to nongovernmental borrowers (obligated persons) and governmental issuers or borrowers,” NAHEFFA counsel Chuck Samuels wrote. “Yet, surprisingly, there is no mention of the existing guidance, which is still on the MSRB website, either in this FAQ or anywhere else in the document.”

“This raises the question whether that guidance is still considered to be relevant and valid,” Samuels continued. “If it has been withdrawn as a practical or technical matter – which we would support because it is not particularly useful – the MSRB should make this clear in this FAQ. If it is not withdrawn and is still applicable, then surely it should be referenced in FAQ 9 and perhaps elsewhere in the document and its learnings used to answer some of the questions.”

The Bond Dealers of America's detailed comments on the FAQs were not available at press time.

“The BDA appreciates the efforts of the MSRB to provide guidance concerning when advice constitutes a recommendation and we will be providing technical comments to the FAQs," said the group's CEO Michael Nicholas. He added that BDA "thanks the MSRB for reaching out to stakeholders for their input before finalizing the FAQs.”

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