Tuesday, December 29, 2015

New MSRB Rule on Duties of Non-Solicitor Advisers Gains SEC Approval

By John Filar Atwood

A Municipal Securities Rulemaking Board (MSRB) rule change initially submitted to the SEC in April has finally received Commission approval after two rounds of amendments. New Rule G-42 establishes core standards of conduct and duties of municipal advisers when engaging in municipal advisory activities other than municipal advisory solicitation activities. The SEC also approved amendments to the books and records requirements under MSRB Rule G-8.

Standards of conduct. In its order approving the rule changes, the SEC noted that the core provisions of Rule G-42 establish certain standards of conduct consistent with the fiduciary duty owed by a municipal adviser to its municipal entity clients, which includes a duty of care and of loyalty. The rule also establishes the standard of care owed by a municipal adviser to its obligated person clients.

The new rule requires the full and fair disclosure, in writing, of all material conflicts of interest and legal or disciplinary events that are material to a client’s evaluation of a municipal adviser. Documentation of the municipal advisory relationship, specifying certain aspects of the relationship that must be included in the documentation also is required. Under the rule, recommendations made by a municipal adviser must be suitable for its clients, or it must determine the suitability of recommendations made by third parties when appropriate.

Prohibitions. Rule G-42 prohibits a municipal adviser from receiving excessive compensation, delivering inaccurate invoices for fees or expenses, and making false or misleading representations about the adviser’s resources, capacity or knowledge. Advisers also are prohibited from participating in certain fee-splitting arrangements with underwriters, and from participating in any undisclosed fee-splitting arrangements with providers of investments or services to a municipal entity or obligated person client of the adviser.

When engaging in municipal advisory activities other than municipal advisory solicitation activities, advisers are prohibited from making payments for the purpose of obtaining or retaining an engagement to perform municipal advisory activities, with limited exceptions. Finally, advisers are prohibited from entering into certain principal transactions with the municipal adviser’s municipal entity clients, within limited exceptions.

Books and records. The amendments to Rule G-8 require each municipal adviser to make and keep a copy of any document created by the adviser that was material to its review of a recommendation by another party or that memorializes its basis for any determination as to suitability.

No comments: