The Municipal Securities Rulemaking Board is seeking comments on the future of its Rule G-23 on activities of financial advisors in light of the municipal advisory regulatory regime put in place in the years since that rule was last amended in 2011.
Rule G-23 governs the behavior of "financial advisors" on a transaction, and since 2011 has included a prohibition on dealer firms serving as both financial advisor and underwriter on a transaction. But the behavior of financial advisors is now also governed by new rules regulating "municipal advisors."
The MSRB is looking to see if Rule G-23 is still relevant and whether it helps the MSRB achieve its objectives of protecting issuers and investors, said Lanny Schwartz, MSRB's chief regulatory officer.
The MSRB is asking for data from the market and posed questions on whether the rule has been effective in addressing conflicts of interest. It also asked if small, infrequent issuers experienced limited choices among financial advisors, underwriters or placement agents because G-23's prohibition of role switching.
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Issuers have said that role-switching could be harmful, especially for issuers with less experience and is overall bad practice.
The MSRB also asked if Rule G-23 could be eliminated and address other requirements in other rules, such as Rule G-42 on the duties of non-solicitor municipal advisors. Rule G-42, adopted in 2015, establishes standards of conduct for municipal advisors, who under federal law and MSRB rules owe municipal entity clients a fiduciary duty to put their clients’ interests ahead of their own.
Schwartz said there is overlap between what Rule G-23 would require of a dealer acting as a financial advisor and Rule G-42 of what would be required for a municipal advisor acting as a financial advisor.
“Some in the marketplace may have some questions about whether we need two separate rules or whether there is any conflict or confusion caused by that,” Schwartz said of the overlap.
The Bond Dealers of America have recently proposed eliminating Rule G-23 altogether.
BDA CEO Mike Nicholas writes that Rule G-23 was finalized less that a year after the enactment of the Dodd-Frank Act, which brought non-dealer financial advisors under federal oversight for the first time.
“The operative provisions of Rule G-23 were adopted to address regulatory concerns that were dealt with much more comprehensively in Rule G-42, finalized in 2016,” Nicholas wrote in his
He added that if elements of G-23 need to be kept, they could be folded into Rule G-42.
Rule G-17, a fair dealing rule, also has overlap with Rule G-42.
“Because both Rule G-23 and the Rule G-17 Interpretive Notice provide disclosure, documentation and other requirements concerning the activities of dealers, as part of its retrospective review of Rule G-23, the MSRB is interested in ensuring that there are no inconsistencies or unwarranted burdens associated with the operation of those requirements,” the MSRB said in its request for comment..
“It’s more about clarifying and making sure that there aren’t more burdens than there need to be and making sure that people know what the rules of the road are,” Schwartz said of the overlaps.
Comments are due by August 19, 2019.
