The Municipal Securities Rulemaking Board has operated under a Congressional mandate with oversight by the Securities and Exchange Commission since 1975.
Amended Rule 15B(c)(1) of the Exchange Act states a municipal advisor and any person associated with such municipal advisor shall be deemed to have a fiduciary duty to any municipal entity for whom such municipal advisor acts as a municipal advisor, and no municipal advisor may engage in any act, practice, or course of business which is not consistent with a municipal advisor’s fiduciary duty or that is in contravention of any rule of the MSRB. Accordingly, the SEC directed the MSRB to issue rules for municipal advisors that “prescribe means reasonably designed to prevent acts, practices, and courses of business as are not consistent with a municipal advisor’s fiduciary duty to its clients. As a result, in February 2011 the MSRB issued proposed Rule G-36.
It would require a municipal advisor to make clear, written disclosure of all material conflicts of interest, such as those that might impair its ability to satisfy the duty of loyalty, and to receive the written informed consent of officials of the municipal entity with the authority to bind the municipal entity by contract with the municipal advisor. Such disclosure must be made before the municipal advisor may provide municipal advisory services to the municipal entity or, in the case of conflicts arising after the municipal advisory relationship has commenced, before the municipal advisor my continue to provide such services. In addition, a municipal advisor may not undertake an engagement if certain unmanageable conflicts exists. Including; (i) kickbacks and certain fee-splitting arrangements with the providers of investments or services to municipal entities, (ii) payments by municipal advisors made for the purpose of obtaining or retaining municipal advisory business other than reasonable fees paid to a municipal advisor for solicitation activities regulated by the MSRB, and (iii) acting as a principal in matters concerning the municipal advisory engagement (except when Internal Revenue Service competitive bidding guidelines for establishing fair market value are satisfied). The notice also provides that, in certain cases, the compensation received by a municipal advisor may be so disproportionate to the nature of the municipal advisory services performed that it is inconsistent with the Rule G-36 duty of loyalty and represents an unmanageable conflict, (iv) the notice provides that the Rule G-36 duty of care requires that a municipal advisor act competently and provide advice to the municipal entity after inquiry into reasonably feasible alternatives to the financings or products proposed (unless the engagement is of a limited nature). To date, this proposed rule has not been finalized.
Brokers, dealers, municipal securities dealers (collectively, municipal securities dealers) and municipal advisors must register with the MSRB before engaging in municipal securities and advisory activities. The terms broker, dealer, municipal securities dealer and municipal advisor are defined in the Securities Exchange Act of 1934 in sections 3(a)(4), 3(a)(5), 3(a)(30) and section 15B(e)(4), respectively. To register with the MSRB, all municipal securities dealers and municipal advisors must have an SEC registration number. Nonbank, municipal securities dealers also must have a FINRA registration number. MSRB Rules A-12 and A-14 requires them to pay an initial fee of $100 and an annual fee of $500, respectively. MSRB Rule G-40 requires registered municipal securities dealers and municipal advisors to appoint a primary contact to serve as the official contact person for purposes of electronic mail communications and to provide periodic updates to the MSRB. In the case of municipal securities dealers, the primary contact must be either a Series 53-registered municipal securities principal or a Series 51-registered municipal fund securities limited principal. Currently there are no requirements for municipal advisor primary contacts. Upon completion of its Rule A-12 submissions, the MSRB assigns a registration number. Each broker, dealer, municipal securities dealer, or municipal advisor shall review and, if necessary, update its information and submit such information electronically to the MSRB within 17 business days after the end of each calendar year. Each broker, dealer, municipal securities dealer, or municipal advisor shall promptly comply with any request by the appropriate regulatory agency for required information, but in any event not later than 15 days following any such request, or such longer period that may be agreed to by the appropriate regulatory agency. For municipal advisors, the categories of municipal advisors are derived from Form MA-T. Although, MSRB does not allow solicitation payment to non-affiliated persons of municipal broker dealers and principals, it does allow solicitation for municipal advisors.
In 2010 MSRB announced that they are adopting adopted a comprehensive set of rules for municipal advisors, as directed by the Dodd-Frank Act. As the rulemaking process proceeds, municipal providers will have the opportunity to provide input. Listed below are MSRB rules that currently apply to municipal advisors.
- Rule A-12: Initial Fee
- Rule A-14: Annual Fee
- Rule A-16: Examination Fees
- Rule D-11: Associated Persons
- Rule D-13: Municipal Advisory Activities
- Rule D-14: Appropriate Regulatory Agency
- Rule G-1: Separately Identifiable Department or Division of a Bank
- Rule G-3: Classification of Principals and Reps and Requirements
- Rule G-5: Disciplinary Actions; Remedial Notices
- Rule G-17: Conduct of Municipal Advisory Activities
- Rule G-23: Activities of Financial Advisors
- Rule G-24: Ue of Ownership Obtained in Fiduciary or Agency Capacity
- Rule G-27: Supervision
- Rule G-32: Disclosure in Relation to Private Offerings
- Rule G-34: CUSIP No., New Issue, and Market Information Requirements
- Rule G-37: Political Contributions and Prohibitions on Municipal Securities Business
- Rule G-38: Solicitation of Municipal Securities Business
- Rule G-40: Electronic Mail Contacts
The MSRB maintains the Electronic Municipal Market Access system (“EMMA”), a facility for receiving electronic submissions of municipal securities disclosure and other key documents and related information and for making such documents and information available to the public, at no charge at www.emma.msrb.org or by paid subscription. EMMA replaced the MSRB’s MSIL Facility in 2009, which previously served as the submission venue for official statements and continuing disclosures, and continues to operate in support of certain MSRB internal functions.
The Short-term Obligation Rate Transparency (“SHORT”) System is a facility of the Municipal Securities Rulemaking Board for the collection of information about securities bearing interest at short-term rates. Such information is made available to the public, at no charge, on the MSRB’s Electronic Municipal Market Access website. And the Real-time Transaction Reporting System (“RTRS”) is a facility for the collection and dissemination of information about transactions occurring in the municipal securities market. Most municipal securities transactions effected by brokers and dealers are reported to RTRS and are disseminated within 15 minutes of the time of trade execution. This data can be queried through the free EMMA website. Comprehensive data feeds are available through paid subscription.