Thursday, November 12, 2015

Adviser Rules to Clarify Gift-Giving, Aid Market Integrity

By Mark S. Nelson, J.D.

The Commission approved a bundle of rule changes urged by the Municipal Securities Rulemaking Board to update existing bans and exclusions for some types of gifts common in municipal securities markets. The rules are designed to clarify the dealings of municipal advisers and their associated persons who were brought into a new regulatory regime by the Dodd-Frank Act. The changes are set to take hold on May 6, 2016 (Release No. 34-76381, November 6, 2015).

MSRB Executive Director Lynnette Kelly emphasized that the rules are designed to promote the integrity of municipal markets. “Applying the MSRB’s existing gifts rule for dealers to municipal advisors will help ensure that municipal advisory business is awarded on the basis of merit and not special favors,” said Kelly.

Gift rules extended. The new rules extend to municipal advisers the general dealer ban on making gifts of over $100 per person per year. Exclusions from the $100 limit also apply to municipal advisers, including an existing one for employment contracts and compensation for services, a new one for bereavement gifts, and other items covered by guidance in the MSRB’s gifts notice and a FINRA notice to members.

Moreover, the rules bar a regulated entity from being reimbursed for entertainment expenses from the proceeds of a municipal offering. But the revisions will not subject municipal advisers to limits for non-cash compensation in primary offerings.

Lucite souvenirs. The Commission asked for public comments on the MSRB’s proposal in September. While the agency’s latest release noted general industry support for the MSRB’s new rules, only three industry players offered public comments.

The National Association of Municipal Advisors said that it was unclear if the MSRB’s proposal applied to some employees of municipal entities or obligated persons given the definition of “municipal advisory activities.” NAMA also pressed for a $250 aggregate gifts limit.

A letter from the Securities Industry and Financial Markets Association urged reconsideration of the records mandate. Specifically, SIFMA noted that the record retention requirement for brokers, dealers and municipal securities dealers is a year longer than for municipal advisers. But SIFMA otherwise backed the MSRB’s proposal.

According to the Investment Company Institute’s comment, the MSRB should go further in referencing older FINRA guidance, including provisions permitting the Lucite tombstones that often are given to celebrate business deals.

The Commission found that the MSRB had replied to the commenters’ worries, and the commenters’ letters sometimes noted the rules would likely address their views. The MSRB’s reply letter said it had already addressed NAMA’s concerns, but the Commission observed that the MSRB also explained that the $100 limit was lower than the limit in a different MSRB rule because the other rule is directed at pay-to-play political corruption and had to be narrowly tailored for constitutional purposes.

Lastly, the MSRB said SIFMA’s records issue could be addressed in another proposal. As for the Lucite blocks, the MSRB said the description of decorative items covered them without imposing a dollar cap.

Small municipal advisers. Although the Commission said the overall goal of the MSRB’s rules amendments is to foster merit- and price-based competition in municipal markets as a whole, the new rules may impact smaller advisers differently. Still, the Commission found the benefits of the rules to investors compelling and the burden to smaller advisers worth bearing in order to ensure the integrity of municipal securities markets.

The release is No. 34-76381.

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