By Mark S. Nelson, J.D.
The MSRB announced that it had received SEC approval for its new MSRB Rule G-46, which will govern the relationship between solicitor municipal advisors and solicited entities. The MSRB also has amended its Rule G-8 in order to create recordkeeping requirements that are consistent with the duties established under new Rule G-46. The compliance date for the new and amended rules is March 1, 2024.
Solicitor municipal advisor. The new rule applies to persons acting in the capacity of a “solicitor municipal advisor,” which term is defined largely in terms of the statutory definition of “municipal advisor” contained in Exchange Act Section 15B. That section applies to a person who is neither a municipal entity nor an employee of a municipal entity that provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities or undertakes a solicitation of a municipal entity.
However, Rule G-46 provides that “solicitor municipal advisor” does not include a person who would be a municipal advisor solely based on activities within the meaning of Section 15B(e)(4)(A)(i) of the Act, that is, a person who provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues.
Under the Exchange Act definition, that results in a definition of “solicitor municipal advisor” that means a person who undertakes a solicitation of a municipal entity. The statutory definition of municipal adviser contains additional inclusions and exclusions.
Rule G-46’s reference to the Exchange Act definition, on the surface, may seem awkward, and even tautological, and one must read the statute and Exchange Act Rules 15Ba1-1(d)(1)-(4) to round out the definition. The MSRB, however, explained that the definition can be reduced to this: it means that a solicitor municipal advisor is any municipal advisor that is not a non-solicitor municipal advisor. Moreover, Rule G-46’s Supplementary Material.03 also allows for the possibility that a municipal advisor may simultaneously be a solicitor municipal advisor (Rule G-46) and a non-solicitor municipal advisor (Rule G-42).
Disclosures. The new rule requires that the solicitor relationship be documented in writing. Specifically, such documentation must describe the activities to be performed, the terms and amount of compensation, the date or other event that may trigger the end of the relationship or, alternatively, state that no such date/event is contemplated, and state the terms for withdrawing from the relationship.
The rule also requires numerous other disclosures. These disclosures include the material terms of a solicitor municipal advisor’s compensation along with statements to the effect that: (1) there is no fiduciary duty owed to a solicited entity and that there is not duty to act in the best interest of a solicited entity (but a solicitor municipal advisor is required to deal fairly with all persons); and (2) that the solicitor municipal advisor’s primary role is to solicit the solicited entity on behalf of a third-party and that the solicitor municipal advisor will be compensated by its client. Disclosures also are required about conflicts of interest and how to review the applicable Forms MA and ADV.
In general, these disclosures must be provided upon the first communication and then upon the delivery of the engagement documentation (or promptly afterwards). The latter delivery requirement applies even if the disclosures were previously delivered upon the first communication.
Under the new rule, certain practices are prohibited. These include making materially inaccurate invoices for fees and expenses and the making of certain payments to obtain or retain an engagement. Moreover, the rule prohibits the making of materially false or misleading statements.