WASHINGTON — The Municipal Securities Rulemaking Board has proposed a supervisory rule for municipal advisors that would subject all MAs to oversight responsibilities similar to those dealers and dealer-affiliated advisors have under existing rules.
Proposed new Rule G-44 on supervisory and compliance obligations of municipal advisors when engaging in municipal advisory activities would require MAs to establish, implement, maintain and enforce written supervisory procedures designed to ensure compliance with the federal securities laws. This would mark the first time non-dealer MAs have been subject to supervisory requirements under MSRB rules, and represents the latest step toward the board's goal of putting in place this year most of the MA regulations mandated by the Dodd-Frank Act.
"Rule G-44 follows a widely accepted model in the securities industry of a reasonable supervisory system complemented by the designation of a chief compliance officer," the MSRB said in its proposal. "The draft rule draws on aspects of existing supervision and compliance regulation under other regimes, including those for broker-dealers under rules of the MSRB and the Financial Industry Regulatory Authority and for investment advisors under the Investment Advisers Act of 1940."
The proposed rule bears resemblance to the board's existing Rule G-27 on supervision, which lays out similar requirements for broker-dealers.
Nathan Howard, an attorney at Affinity Law Group LLC who works with municipal advisors, said aspects of the proposal will need to be carefully examined, such as the requirement that MA firms designate a chief compliance officer. The rule proposal includes language addressing small MA firms, some of which have only a single practicing MA.
"A municipal advisor with few personnel, or even only one associated person, can have a sufficient supervisory system under this rule," according to the proposal. "The rule allows the designation of one person to be responsible for supervision, and allows the tailoring of written supervisory procedures based on, among other things, an advisor's size. In the case of a municipal advisor with a single associated person, the written supervisory procedures must address the manner in which, in the absence of separate supervisory personnel, such procedures are nevertheless reasonably designed to achieve compliance with applicable rules."
The proposal also includes proposed revisions to Rules G-8 on books and records and G-9 on preservation of records, which would require MAs to keep and maintain records of their compliance policies for at least five years and records of those responsible for compliance for at least six years after they are no longer in charge of compliance.
The MSRB is seeking comment on several aspects of the proposal, such as whether it meets the requirements of small MA firms and whether the proposal's current proposition to allow MAs to outsource their compliance officer responsibilities to someone who does not actually work at the firm is appropriate. The MSRB is requesting that comments on the proposal be submitted by April 28.
The proposal follows by one month the MSRB's January rollout of a much longer rule proposal on the conduct of municipal advisors. The Securities and Exchange Commission has delayed the effective date of its MA registration rule until July 1, because many market participants have continued to express confusion or concern over what might or might not require a firm to register as an MA. The SEC has released some additional guidance already, and SEC Muni chief John Cross has said the commission aims to provide more before the effective date.
