PHOENIX – The Municipal Securities Rulemaking Board is asking for public input on draft guidance aimed at clarifying certain aspects of its core requirements for municipal advisors -- the latest step in its goal of providing support for compliance efforts.

The 17-page document, presented in a “frequently asked questions” format, applies to provisions of MSRB Rule G-42 on duties of non-solicitor municipal advisors, related to providing “advice” and “recommendations” and also to provisions of Rule G-8, on books and records.

Rule G-42, which became effective in June 2016, is the backbone of the muni advisor regulatory regime put in place by the Dodd-Frank Act. The draft document covers a variety of questions about the terms and interpretations in the rule, and also includes several hypothetical scenarios with analysis.

MSRB president Lynnette Kelly.
MSRB Executive Director Lynnette Kelly said the MSRB wants public feedback before producing a final set of FAQs.

The first topic addressed is the difference between “advice” and “recommendation” in the rule, which the draft explains are related but distinct ideas.

The Securities and Exchange Commission defines advice as a recommendation that is particularized to the specific needs, objectives, or circumstances of a municipal entity or obligated person with respect to an issuance of municipal securities.

Giving "advice," the draft explains, triggers many aspects of the rule but does not necessarily trigger G-42's suitability requirements. A "recommendation" would subject an MA to the suitability requirements.

“Rule G-42 does not specifically define the term ‘recommendation' or the phrase ‘recommendation of a municipal securities transaction or municipal financial product,’ the draft document said. “However, in order for a communication by a municipal advisor to be a recommendation for purposes of Rule G-42, it must, as a threshold matter, be advice and that advice must exhibit both a call to action and a specificity as to what municipal financial product or issuance of municipal securities the municipal advisor is advising the MA client to proceed with.”

MSRB Executive Director Lynnette Kelly said the board has received questions on this front and is interested in getting feedback in order to create the best possible compliance guidance.

“Through our engagement with the municipal advisor industry, we have received many questions on the topic of advice versus recommendations,” said Kelly. “We are seeking further input from market participants to develop a useful compliance resource that addresses common questions and illustrates the application of the rule in scenarios that municipal advisors may encounter.”

The MSRB is asking for comments on whether the new FAQs: ask and answer appropriate questions; are clear or require more clarification; and help improve understanding of the rule. The board also wants to know what could be added, and whether the hypothetical scenarios included are “practical and helpful.”

The National Association of Municipal Advisors said that it, at least initially, is happy with the MSRB’s effort.

“We appreciate very much that the MSRB is seeking comments on the G-42 FAQs and NAMA looks forward to reviewing the document and submitting comments,” said Susan Gaffney, the group’s executive director.

The responses to the FAQs are “not meant to be interpretive guidance and all proposed answers are derived directly from the rulemaking record,” the MSRB qualified in a release. The MSRB has not typically asked for feedback on such publications, but in this case chose to seek public feedback before creating a final document.

“We have heard from stakeholders that they very much want the opportunity to further engage with the MSRB as we advance our long-term strategic goal to facilitate compliance,” Kelly said. “In this case, given that we are addressing a foundational rule for newly regulated entities, the MSRB believes market participation and public input will provide valuable insight that could improve the usefulness of the FAQs.”

The MSRB is taking comments on the draft FAQs through April 16.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is the Deputy Washington Bureau Chief of The Bond Buyer. He covers securities law, regulation, and enforcement.