WASHINGTON - A proposed municipal advisor advertising rule and amendments to a dealer advertising rule should be approved despite opposition from market groups, The Municipal Securities Rulemaking Board told the Securities and Exchange Commission.
The MSRB’s comment letter, authored by associate general counsel Pam Ellis and filed late Monday, addresses the concerns that market groups raised in their own letters to the SEC in late February regarding amendments to Rule G-21 for dealers and new Rule G-40 for MAs. The MSRB isn't recommending any changes to its proposals, which both dealers and municipal advisors told the SEC should be rejected. The Board did tell the commission it would release guidance prior to the effective date, if the new requirements are approved.
The MSRB’s response goes through the comments submitted by the Securities Industry and Financial Markets Association, Bond Dealers of America, and National Association of Municipal Advisors and explains the reasoning behind the board's disagreement with those groups.
Both of the dealer groups raised objections to what they viewed as shortcomings in the MSRB’s efforts to harmonize its rules with Financial Industry Regulatory Authority Rule 2210, which governs dealers’ communications with the public.
In particular, dealers wanted the MSRB to use FINRA’s definition of “communication” in its rule, because institutional communications would then not require pre-approval by a designated principal. Failure to harmonize the rules would create an undue burden on dealers, the groups argued.
The MSRB saw it differently. The board told the SEC that because the MSRB relies on FINRA and the SEC to enforce its rules and the MSRB does not get to review advertisements the way FINRA does, the distinction is appropriate. The board also cited differences in the two regulators' Congressional mandates and the nature of the markets and securities that are regulated by them.
Further, the MSRB said, dealer firms are already subject to this requirement under G-21.
“Rule G-21 currently requires that a municipal securities principal or general securities principal approve each advertisement in writing prior to first use,” the MSRB letter said.
Another sticking point for industry commenters was the use of customer testimonials in advertising. Under the rules dealers would be allowed to use them and MAs would not. The use of testimonials, which are endorsements of a firm’s products and services by a past customer, is inappropriate for a firm that owes a fiduciary duty, as MAs do when dealing with municipal entity clients, the MSRB said.
“The board considered commenters’ suggestions, and the board continues to believe that a testimonial presents significant issues, including the ability of the testimonial to be misleading,” Ellis wrote for the MSRB. “Dealers and municipal advisors have different types of relationships and roles with their customers or municipal advisory clients and have different models for providing advice.”
MSRB said if the new requirments are approved, it will release guidance on three subjects prior to the effective date, currently requested to be nine months after approval. That guidance would cover proposed Rule G-40 and focus on content standards, use of “case studies” and client lists in muni advisor advertising, and use of social media by municipal advisors. Guidance on the last item was specifically requested by NAMA.
The SEC now must decide what to do with the MSRB’s proposals. The commission could approve the rules as submitted, or could require the MSRB to make changes before signing off on them.