Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Consisting of Proposed New Rule G-42, on Duties of Non-Solicitor Municipal Advisors, and Proposed Amendments to Rule G-8, on Books and Records To Be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors, 48355-48365 [2015-19758]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices complete at the time the documents are submitted through the NRC’s E-Filing system. To be timely, an electronic filing must be submitted to the E-Filing system no later than 11:59 p.m. Eastern Time on the due date. Upon receipt of a transmission, the E-Filing system time-stamps the document and sends the submitter an email notice confirming receipt of the document. The E-Filing system also distributes an email notice that provides access to the document to the NRC’s Office of the General Counsel and any others who have advised the Office of the Secretary that they wish to participate in the proceeding, so that the filer need not serve the documents on those participants separately. Therefore, applicants and other participants (or their counsel or representative) must apply for and receive a digital ID certificate before a hearing request/ petition to intervene is filed so that they can obtain access to the document via the E-Filing system. A person filing electronically using the NRC’s adjudicatory E-Filing system may seek assistance by contacting the NRC Meta System Help Desk through the ‘‘Contact Us’’ link located on the NRC’s public Web site at http:// www.nrc.gov/site-help/esubmittals.html, by email to MSHD.Resource@nrc.gov, or by a tollfree call at 1–866–672–7640. The NRC Meta System Help Desk is available between 8 a.m. and 8 p.m., Eastern Time, Monday through Friday, excluding government holidays. Participants who believe that they have a good cause for not submitting documents electronically must file an exemption request, in accordance with 10 CFR 2.302(g), with their initial paper filing requesting authorization to continue to submit documents in paper format. Such filings must be submitted by: (1) First class mail addressed to the Office of the Secretary of the Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555– 0001, Attention: Rulemaking and Adjudications Staff; or (2) courier, express mail, or expedited delivery service to the Office of the Secretary, Sixteenth Floor, One White Flint North, 11555 Rockville Pike, Rockville, Maryland, 20852, Attention: Rulemaking and Adjudications Staff. Participants filing a document in this manner are responsible for serving the document on all other participants. Filing is considered complete by firstclass mail as of the time of deposit in the mail, or by courier, express mail, or expedited delivery service upon depositing the document with the provider of the service. A presiding VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 officer, having granted an exemption request from using E-Filing, may require a participant or party to use E-Filing if the presiding officer subsequently determines that the reason for granting the exemption from use of E-Filing no longer exists. Documents submitted in adjudicatory proceedings will appear in the NRC’s electronic hearing docket which is available to the public at http:// ehd1.nrc.gov/ehd/, unless excluded pursuant to an order of the Commission, or the presiding officer. Participants are requested not to include personal privacy information, such as social security numbers, home addresses, or home phone numbers in their filings, unless an NRC regulation or other law requires submission of such information. However, in some instances, a request to intervene will require including information on local residence in order to demonstrate a proximity assertion of interest in the proceeding. With respect to copyrighted works, except for limited excerpts that serve the purpose of the adjudicatory filings and would constitute a Fair Use application, participants are requested not to include copyrighted materials in their submission. If a person other than Bradley D. Bastow, D. O., requests a hearing, that person shall set forth with particularity the manner in which his interest is adversely affected by this Order and shall address the criteria set forth in 10 CFR 2.309(d) and (f). If a hearing is requested by a licensee or a person whose interest is adversely affected, the Commission will issue an Order designating the time and place of any hearings. If a hearing is held, the issue to be considered at such hearing shall be whether this Order should be sustained. In the absence of any request for hearing, or written approval of an extension of time in which to request a hearing, the provisions specified in Section IV above shall be final 30 days from the date this Order is published in the Federal Register without further order or proceedings. If an extension of time for requesting a hearing has been approved, the provisions specified in Section IV shall be final when the extension expires, if a hearing request has not been received. This Order shall be effective as of the date of signing by the Director, Office of Enforcement. If payment has not been made by the time specified above, the matter may be referred to the Attorney General for collection. Dated at Rockville, Maryland, this 4th day of August 2015. For the Nuclear Regulatory Commission. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 48355 Patricia K. Holahan, Director, Office of Enforcement. [FR Doc. 2015–19808 Filed 8–11–15; 8:45 am] BILLING CODE 7590–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75628; File No. SR–MSRB– 2015–03] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Consisting of Proposed New Rule G–42, on Duties of Non-Solicitor Municipal Advisors, and Proposed Amendments to Rule G–8, on Books and Records To Be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors August 6, 2015. I. Introduction On April 24, 2015, the Municipal Securities Rulemaking Board (‘‘MSRB’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change consisting of proposed new Rule G–42, on duties of non-solicitor municipal advisors, and proposed amendments to Rule G–8, on books and records to be made by brokers, dealers, municipal securities dealers, and municipal advisors. The proposed rule change was published for comment in the Federal Register on May 8, 2015.3 The Commission received fifteen comment letters on the proposal.4 On 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Exchange Act Release No. 74860 (May 4, 2015), 80 FR 26752 (‘‘Notice’’). The comment period closed on May 29, 2015. 4 See Letters to Secretary, Commission, from Dustin McDonald, Director, Federal Liaison Center, Government Finance Officers Association (‘‘GFOA’’), dated May 22, 2015 (the ‘‘GFOA I Letter’’); Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated May 28, 2015 (the ‘‘SIFMA Letter’’); Cristeena Naser, Vice President, Center for Securities, Trust & Investments, American Bankers Association (‘‘ABA’’), dated May 29, 2015 (the ‘‘ABA Letter’’); Terri Heaton, President, National Association of Municipal Advisors (‘‘NAMA’’), dated May 29, 2015 (the ‘‘NAMA Letter’’); Hill A. Feinberg, Chairman and Chief Executive Officer and Michael Bartolotta, Vice Chairman, First Southwest Company (‘‘First Southwest’’), dated May 29, 2015 (the ‘‘First Southwest Letter’’); Guy E. Yandel, EVP and Head of Public Finance, et al., George K. Baum & Company (‘‘GKB’’), dated May 29, 2015 (the 2 17 E:\FR\FM\12AUN1.SGM Continued 12AUN1 48356 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices June 16, 2015, the MSRB granted an extension of time for the Commission to act on the filing until August 6, 2015. This order institutes proceedings under Section 19(b)(2)(B) of the Act 5 to determine whether to approve or disapprove the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to the proposed rule change, nor does it mean that the Commission will ultimately disapprove the proposed rule change. Rather, as described below, the Commission seeks and encourages interested persons to comment on the proposed rule change. II. Description of the Proposed Rule Change As described more fully in the Notice, the MSRB proposed to adopt new Rule G–42, on duties of non-solicitor municipal advisors and proposed amendments to Rule G–8, on books and records to be made by brokers, dealers, municipal securities dealers, and municipal advisors (the ‘‘proposed rule change’’). mstockstill on DSK4VPTVN1PROD with NOTICES Proposed Rule G–42 Proposed Rule G–42 would establish the core standards of conduct and duties of municipal advisors when engaging in municipal advisory activities, other than municipal advisory solicitation activities (‘‘municipal advisors’’). In summary, the core provisions of Proposed Rule G–42 would: • Establish certain standards of conduct consistent with the fiduciary duty owed by a municipal advisor to its municipal entity clients, which includes, without limitation, a duty of care and of loyalty; ‘‘GKB Letter’’); David T. Bellaire, Executive Vice President and General Counsel, Financial Services Institute (‘‘FSI’’), dated May 29, 2015 (the ‘‘FSI Letter’’); Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors LLC, (‘‘Wells Fargo’’), dated May 29, 2015 (the ‘‘Wells Fargo Letter’’); Tamara K. Salmon, Associate General Counsel, Investment Company Institute (‘‘ICI’’), dated May 29, 2015 (the ‘‘ICI Letter’’); W. David Hemingway, Executive Vice President, Zions First National Bank (‘‘Zions’’), dated May 29, 2015 (the ‘‘Zions Letter’’); Lindsey K. Bell, Millar Jiles, LLP (‘‘Millar Jiles’’), dated May 29, 2015 (the ‘‘Millar Jiles Letter’’); Michael Nicholas, Chief Executive Officer, Bond Dealers of America (‘‘BDA’’), dated May 29, 2015 (the ‘‘BDA Letter’’); Joy A. Howard, WM Financial Strategies (‘‘WM Financial’’), dated May 29, 2015 (the ‘‘WM Financial Letter’’); Leo Karwejna, Managing Director, Chief Compliance Officer, The PFM Group (‘‘PFM’’), dated May 29, 2015 (the ‘‘PFM Letter’’); and Dustin T. McDonald, Director, Federal Liaison Center, GFOA, dated June 15, 2015 (the ‘‘GFOA II Letter’’). Staff from the Office of Municipal Securities discussed the proposed rule change with representatives from SIFMA on May 21, 2015, representatives from NAMA on June 3, 2015 and representatives from BDA on June 17, 2015. 5 15 U.S.C. 78s(b)(2)(B). VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 • Establish the standard of care owed by a municipal advisor to its obligated person clients; • Require 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 advisor; • Require the documentation of the municipal advisory relationship, specifying certain aspects of the relationship that must be included in the documentation; • Require that recommendations made by a municipal advisor are suitable for its clients, or that it determine the suitability of recommendations made by third parties when appropriate; and • Specifically prohibit a municipal advisor from engaging in certain activities, including, in summary: Æ Receiving excessive compensation; Æ delivering inaccurate invoices for fees or expenses; Æ making false or misleading representations about the municipal advisor’s resources, capacity or knowledge; Æ participating in certain fee-splitting arrangements with underwriters; Æ participating in any undisclosed fee-splitting arrangements with providers of investments or services to a municipal entity or obligated person client of the municipal advisor; Æ making payments for the purpose of obtaining or retaining an engagement to perform municipal advisory activities, with limited exceptions; and Æ entering into certain principal transactions with the municipal advisor’s municipal entity clients. In addition, the proposed rule change would define key terms used in Proposed Rule G–42 and provide supplementary material. The supplementary material would provide additional guidance on the core concepts in the proposed rule, such as the duty of care, the duty of loyalty, suitability of recommendations and ‘‘Know Your Client’’ obligations; provide context for issues such as the scope of an engagement, conflicts of interest disclosures, excessive compensation, the impact of client action that is independent of or contrary to the advice of a municipal advisor, and the applicability of the proposed rule change to 529 college savings plans (‘‘529 plans’’) and other municipal entities; provide guidance regarding the definition of ‘‘engage in a principal transaction;’’ recognize the continued applicability of state and other laws regarding fiduciary and other duties owed by municipal advisors; and, finally, include information regarding PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 requirements that must be met for a municipal advisor to be relieved of certain provisions of Proposed Rule G– 42 in instances when it inadvertently engages in municipal advisory activities. Standards of Conduct Section (a) of Proposed Rule G–42 would establish the core standards of conduct and duties applicable to municipal advisors. Subsection (a)(i) of Proposed Rule G–42 would provide that each municipal advisor in the conduct of its municipal advisory activities for an obligated person client is subject to a duty of care. Subsection (a)(ii) would provide that each municipal advisor in the conduct of its municipal advisory activities for a municipal entity client is subject to a fiduciary duty, which includes, without limitation, a duty of loyalty and a duty of care. Proposed supplementary material would provide guidance on the duty of care and the duty of loyalty. Paragraph .01 of the Supplementary Material would describe the duty of care to require, without limitation, a municipal advisor to: (1) Exercise due care in performing its municipal advisory activities; (2) possess the degree of knowledge and expertise needed to provide the municipal entity or obligated person client with informed advice; (3) make a reasonable inquiry as to the facts that are relevant to a client’s determination as to whether to proceed with a course of action or that form the basis for any advice provided to the client; and (4) undertake a reasonable investigation to determine that the municipal advisor is not basing any recommendation on materially inaccurate or incomplete information. The duty of care that would be established in section (a) of Proposed Rule G–42 would also require the municipal advisor to have a reasonable basis for: Any advice provided to or on behalf of a client; any representations made in a certificate that it signs that will be reasonably foreseeably relied upon by the client, any other party involved in the municipal securities transaction or municipal financial product, or investors in the municipal entity client’s securities or securities secured by payments from an obligated person client; and, any information provided to the client or other parties involved in the municipal securities transaction in connection with the preparation of an official statement for any issue of municipal securities as to which the advisor is advising. Paragraph .02 of the Supplementary Material would describe the duty of loyalty to require, without limitation, a E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES municipal advisor, when engaging in municipal advisory activities for a municipal entity, to deal honestly and with the utmost good faith with the client and act in the client’s best interests without regard to the financial or other interests of the municipal advisor. Paragraph .02 would also provide that the duty of loyalty would preclude a municipal advisor from engaging in municipal advisory activities with a municipal entity client if it cannot manage or mitigate its conflicts of interest in a manner that will permit it to act in the municipal entity’s best interests. Paragraph .03 of the Supplementary Material would specify that a municipal advisor is not required to disengage from a municipal advisory relationship if a municipal entity client or an obligated person client elects a course of action that is independent of or contrary to advice provided by the municipal advisor. Paragraph .04 of the Supplementary Material would specify that a municipal advisor could limit the scope of the municipal advisory activities to be performed to certain specified activities or services if requested or expressly consented to by the client, but could not alter the standards of conduct or impose limitations on any of the duties prescribed by Proposed Rule G–42. Paragraph .04 would provide that, if a municipal advisor engages in a course of conduct that is inconsistent with the mutually agreed limitations to the scope of the engagement, it may result in negating the effectiveness of the limitations. Paragraph .07 of the Supplementary Material would state, as a general matter, that, municipal advisors may be subject to fiduciary or other duties under state or other laws and nothing in Proposed Rule G–42 would supersede any more restrictive provision of state or other laws applicable to municipal advisory activities. Disclosure of Conflicts of Interest and Other Information Section (b) of Proposed Rule G–42 would require a municipal advisor to fully and fairly disclose to its client in writing all material conflicts of interest, and to do so prior to or upon engaging in municipal advisory activities. The provision would set forth a nonexhaustive list of scenarios under which a material conflict of interest would arise or be deemed to exist and that would require a municipal advisor to provide written disclosures to its client. Subsection (b)(i)(A) would require a municipal advisor to disclose any actual or potential conflicts of interest of VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 which the municipal advisor becomes aware after reasonable inquiry that could reasonably be anticipated to impair the municipal advisor’s ability to provide advice to or on behalf of the client in accordance with the applicable standards of conduct (i.e., a duty of care or a fiduciary duty). Subsections (b)(i)(B) through (F) would provide more specific scenarios that give rise to conflicts of interest that would be deemed to be material and require proper disclosure to a municipal advisor’s client. Under the proposed rule change, a material conflict of interest would always include: any affiliate of the municipal advisor that provides any advice, service or product to or on behalf of the client that is directly related to the municipal advisory activities to be performed by the disclosing municipal advisor; any payments made by the municipal advisor, directly or indirectly, to obtain or retain an engagement to perform municipal advisory activities for the client; any payments received by the municipal advisor from a third party to enlist the municipal advisor’s recommendations to the client of its services, any municipal securities transaction or any municipal financial product; any fee-splitting arrangements involving the municipal advisor and any provider of investments or services to the client; and any conflicts of interest arising from compensation for municipal advisory activities to be performed that is contingent on the size or closing of any transaction as to which the municipal advisor is providing advice. Subsection (b)(i)(G) would require municipal advisors to disclose any other engagements or relationships of the municipal advisor that could reasonably be anticipated to impair its ability to provide advice to or on behalf of its client in accordance with the applicable standards of conduct established by section (a) of the proposed rule. Under subsection (b)(i), if a municipal advisor were to conclude, based on the exercise of reasonable diligence, that it had no known material conflicts of interest, the municipal advisor would be required to provide a written statement to the client to that effect. Subsection (b)(ii) would require disclosure of any legal or disciplinary event that would be material to the client’s evaluation of the municipal advisor or the integrity of its management or advisory personnel. A municipal advisor would be permitted to fulfill this disclosure obligation by identifying the specific type of event and specifically referring the client to the relevant portions of the municipal PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 48357 advisor’s most recent SEC Forms MA or MA–I 6 filed with the Commission, if the municipal advisor provides detailed information specifying where the client could access such forms electronically. Paragraph .05 of the Supplementary Material would provide that the required conflicts of interest disclosures must be sufficiently detailed to inform the client of the nature, implications and potential consequences of each conflict and must include an explanation of how the municipal advisor addresses or intends to manage or mitigate each conflict.7 Paragraph .06 of the Supplementary Material would provide that a municipal advisor that inadvertently engages in municipal advisory activities but does not intend to continue the municipal advisory activities or enter into a municipal advisory relationship 8 would not be required to comply with sections (b) and (c) of Proposed Rule G– 42 (relating to disclosure of conflicts of interest and documentation of the relationship), if the municipal advisor takes the prescribed actions listed under paragraph .06 promptly after it discovers its provision of inadvertent advice. The municipal advisor would be required to provide to the client a dated document that would include: A disclaimer stating that the municipal advisor did not intend to provide advice and that, effective immediately, the municipal advisor has ceased engaging in municipal advisory activities with respect to that client in regard to all transactions and municipal financial products as to which advice was inadvertently provided; a notification that the client should be aware that the municipal advisor has not provided the 6 See 17 CFR 249.1300 (SEC Form MA); 17 CFR 249.1310 (SEC Form MA–I). 7 The MSRB believes that this requirement is analogous to the requirement of Form ADV (17 CFR 279.1) under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) that obligates an investment adviser to describe how it addresses certain conflicts of interest with its clients. See, e.g., Form ADV, Part 2, Item 5.E.1 of Part 2A (requiring an investment adviser to describe how it will address conflicts of interest that arise in regards to fees and compensation it receives, including the investment adviser’s procedures for disclosing the conflicts of interest with its client). See also, Form ADV, Part 2A Items 6, 10, 11, 14 and 17. 8 Under subsection (f)(vi) of Proposed Rule G–42, the MSRB notes that a municipal advisory relationship would be deemed to exist when a municipal advisor enters into an agreement to engage in municipal advisory activities for a municipal entity or obligated person, and would be deemed to have ended on the earlier of (i) the date on which the municipal advisory relationship has terminated pursuant to the terms of the documentation of the municipal advisory relationship required in section (c) of Proposed Rule G–42 or (ii) the date on which the municipal advisor withdraws from the municipal advisory relationship. E:\FR\FM\12AUN1.SGM 12AUN1 48358 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices disclosure of material conflicts of interest and other information required under section (b); an identification of all of the advice that was inadvertently provided, based on a reasonable investigation; and a request that the municipal entity or obligated person acknowledge receipt of the document. The municipal advisor also would be required to conduct a review of its supervisory and compliance policies and procedures to ensure that they are reasonably designed to prevent inadvertently providing advice to municipal entities and obligated persons. The final sentence of paragraph .06 of the Supplementary Material would also clarify that the satisfaction of the requirements of paragraph .06 would have no effect on the applicability of any provisions of Proposed Rule G–42 other than sections (b) and (c), or any other legal requirements applicable to municipal advisory activities. Documentation of the Municipal Advisory Relationship mstockstill on DSK4VPTVN1PROD with NOTICES Section (c) of Proposed Rule G–42 would require each municipal advisor to evidence each of its municipal advisory relationships by a writing, or writings created and delivered to the municipal entity or obligated person client prior to, upon or promptly after the establishment of the municipal advisory relationship. The documentation would be required to be dated and include, at a minimum: 9 • The form and basis of direct or indirect compensation, if any, for the municipal advisory activities to be performed, as provided in proposed subsection (c)(i); • the information required to be disclosed in proposed section (b), including the disclosures of conflicts of interest, as provided in proposed subsection (c)(ii); • a description of the specific type of information regarding legal and disciplinary events requested by the Commission on SEC Form MA and SEC Form MA–I, as provided in proposed subsection (c)(iii), and detailed information specifying where the client may electronically access the municipal advisor’s most recent Form MA and each most recent Form MA–I filed with the Commission; 10 9 While no acknowledgement from the client of its receipt of the documentation would be required, the MSRB notes that a municipal advisor must, as part of the duty of care it owes its client, reasonably believe that the documentation was received by its client. 10 The MSRB notes that compliance with this requirement could be achieved in the same manner, and (so long as done upon or prior to engaging in VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 • the date of the last material change to the legal or disciplinary event disclosures on any SEC Forms MA or MA–I filed with the Commission by the municipal advisor, as provided in proposed subsection (c)(iv); • the scope of the municipal advisory activities to be performed and any limitations on the scope of the engagement, as provided in proposed subsection (c)(v); • the date, triggering event, or means for the termination of the municipal advisory relationship, or, if none, a statement that there is none, as provided in proposed subsection (c)(vi); and • any terms relating to withdrawal from the municipal advisory relationship, as provided in proposed subsection (c)(vii). Proposed Rule G–42(c) also would require municipal advisors to promptly amend or supplement the writing(s) during the term of the municipal advisory relationship as necessary to reflect any material changes or additions in the required information. Recommendations and Review of Recommendations of Other Parties Section (d) of Proposed Rule G–42 would provide that a municipal advisor must not recommend that its client enter into any municipal securities transaction or municipal financial product unless the municipal advisor has determined, based on the information obtained through the reasonable diligence of the municipal advisor, whether the transaction or product is suitable for the client. Proposed section (d) also contemplates that a municipal advisor may be requested by the client to review and determine the suitability of a recommendation made by a third party to the client. If a client were to request this type of review, and such review were within the scope of the engagement, the municipal advisor’s determination regarding the suitability of the third-party’s recommendation regarding a municipal securities transaction or municipal financial product would be subject to the same reasonable diligence standard— requiring the municipal advisor to obtain relevant information through the exercise of reasonable diligence. As to both types of review, the municipal advisor would be required under proposed section (d) to inform its municipal entity or obligated person client of its evaluation of the material municipal advisory activities for the client) concurrently with providing to the client the information required under proposed subsection (b)(ii). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 risks, potential benefits, structure and other characteristics of the recommended municipal securities transaction or municipal financial product; the basis upon which the advisor reasonably believes the recommended transaction or product is, or is not, suitable for the client; and whether the municipal advisor has investigated or considered other reasonably feasible alternatives to the recommended municipal securities transaction or municipal financial product that might also or alternatively serve the client’s objectives. Paragraph .04 of the Supplementary Material would provide that a municipal advisor and its client could limit the scope of the municipal advisory relationship to certain specified activities or services. The MSRB notes that a municipal advisor would not be permitted to alter the standards of conduct or duties imposed by the proposed rule with respect to that limited scope. Paragraph .08 of the Supplementary Material would provide guidance related to a municipal advisor’s suitability obligations. Under this provision, a municipal advisor’s determination of whether a municipal securities transaction or municipal financial product is suitable for its client must be based on numerous factors, as applicable to the particular type of client, including, but not limited to: the client’s financial situation and needs, objectives, tax status, risk tolerance, liquidity needs, experience with municipal securities transactions or municipal financial products generally or of the type and complexity being recommended, financial capacity to withstand changes in market conditions during the term of the municipal financial product or the period that municipal securities to be issued are reasonably expected to be outstanding, and any other material information known by the municipal advisor about the client and the municipal securities transaction or municipal financial product, after the municipal advisor has conducted a reasonable inquiry. In connection with a municipal advisor’s obligation to determine the suitability of a municipal securities transaction or a municipal financial product for a client, which should take into account its knowledge of the client, paragraph .09 of the Supplementary Material would require a municipal advisor to know its client. The obligation to know the client would require a municipal advisor to use reasonable diligence to know and retain essential facts concerning the client and E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices the authority of each person acting on behalf of the client, and is similar to requirements in other regulatory regimes.11 The facts ‘‘essential’’ to knowing one’s client would include those required to effectively service the municipal advisory relationship with the client; act in accordance with any special directions from the client; understand the authority of each person acting on behalf of the client; and comply with applicable laws, rules and regulations. The MSRB notes that a client could at times elect a course of action either independent of or contrary to the advice of its municipal advisor. Paragraph .03 of the Supplementary Material would provide that the municipal advisor would not be required to disengage from the municipal advisory relationship on that basis. Specified Prohibitions mstockstill on DSK4VPTVN1PROD with NOTICES Subsection (e)(i)(A) would prohibit a municipal advisor from receiving compensation from its client that is excessive in relation to the municipal advisory activities actually performed for the client. Paragraph .10 of the Supplementary Material would provide additional guidance on how compensation would be determined to be excessive. Included in paragraph .10 are several factors that would be considered when evaluating the reasonableness of a municipal advisor’s compensation relative to the nature of the municipal advisory activities performed, including, but not limited to: The municipal advisor’s expertise, the complexity of the municipal securities transaction or municipal financial product, whether the fee is contingent upon the closing of the municipal securities transaction or municipal financial product, the length of time spent on the engagement and whether the municipal advisor is paying any other relevant costs related to the municipal securities transaction or municipal financial product. 11 The MSRB notes that similar requirements apply to brokers and dealers under FINRA Rule 2090 (Know Your Customer) and swap dealers under Commodity Futures Trading Commission (‘‘CFTC’’) Rule 402(b) (General Provisions: Know Your Counterparty), 17 CFR 23.402(b), found in CFTC Rules, Ch. I, Pt. 23, Subpt. H (Business Conduct Standards for Swap Dealers and Major Swap Participants Dealing with Counterparties, including Special Entities) (17 CFR 23.400 et. seq.). Notably, the CFTC’s rule applies to dealings with special entity clients, defined to include states, state agencies, cities, counties, municipalities, other political subdivisions of a State, or any instrumentality, department, or a corporation of or established by a State or political subdivision of a State. See CFTC Rule 401(c) (defining ‘‘special entity’’) (17 CFR 23.401(c)). VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 48359 Subsection (e)(i)(B) would prohibit municipal advisors from delivering an invoice for fees or expenses for municipal advisory activities that does not accurately reflect the activities actually performed or the personnel that actually performed those activities. Subsection (e)(i)(C) would prohibit a municipal advisor from making any representation or submitting any information that the municipal advisor knows or should know is either materially false or materially misleading due to the omission of a material fact, about its capacity, resources or knowledge in response to requests for proposals or in oral presentations to a client or prospective client for the purpose of obtaining or retaining an engagement to perform municipal advisory activities. Subsection (e)(i)(D) would prohibit municipal advisors from making or participating in two types of feesplitting arrangements: (1) Any feesplitting arrangement with an underwriter on any municipal securities transaction as to which the municipal advisor has provided or is providing advice; and (2) any undisclosed feesplitting arrangement with providers of investments or services to a municipal entity or obligated person client of the municipal advisor. Subsection (e)(i)(E) would, generally, prohibit a municipal advisor from making payments for the purpose of obtaining or retaining an engagement to perform municipal advisory activities. However, the provision contains three exceptions. The prohibition would not apply to: (1) Payments to an affiliate of the municipal advisor for a direct or indirect communication with a municipal entity or obligated person on behalf of the municipal advisor where such communication is made for the purpose of obtaining or retaining an engagement to perform municipal advisory activities; (2) reasonable fees paid to another municipal advisor registered as such with the Commission and MSRB for making such a communication as described in subsection (e)(i)(E)(1); and (3) payments that are permissible ‘‘normal business dealings’’ as described in MSRB Rule G– 20. provided advice. The ban on principal transactions would apply only with respect to clients that are municipal entities. The ban would not apply to principal transactions between a municipal advisor (or an affiliate of the municipal advisor) and the municipal advisor’s obligated person clients. Although such transactions would not be prohibited, the MSRB notes that all municipal advisors, including those engaging in municipal advisory activities for obligated person clients, are currently subject to the MSRB’s fundamental fair-practice rule, Rule G– 17. Paragraph .07 of the Supplementary Material would provide an exception to the ban on principal transactions in subsection (e)(ii) in order to avoid a possible conflict with existing MSRB Rule G–23, on activities of financial advisors. Specifically, the ban in subsection (e)(ii) would not apply to an acquisition as principal, either alone or as a participant in a syndicate or other similar account formed for the purpose of purchasing, directly or indirectly, from an issuer all or any portion of an issuance of municipal securities on the basis that the municipal advisor provided advice as to the issuance, because such a transaction is the type of transaction that is addressed, and, in certain circumstances, prohibited by Rule G–23. For purposes of the prohibition in proposed subsection (e)(ii), subsection (f)(i) would define the term ‘‘engaging in a principal transaction’’ to mean ‘‘when acting as a principal for one’s own account, selling to or purchasing from the municipal entity client any security or entering into any derivative, guaranteed investment contract, or other similar financial product with the municipal entity client.’’ Further, paragraph .11 of the Supplementary Material would clarify that the term ‘‘other similar financial products,’’ as used in subsection (f)(i), would include a bank loan but only if it is in an aggregate principal amount of $1,000,000 or more and is economically equivalent to the purchase of one or more municipal securities. Principal Transactions Subsection (e)(ii) of Proposed Rule G– 42 would prohibit a municipal advisor to a municipal entity, and any affiliate of such municipal advisor, from engaging in a principal transaction directly related to the same municipal securities transaction or municipal financial product as to which the municipal advisor is providing or has Definitions PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 Section (f) of Proposed Rule G–42 would provide definitions of the terms ‘‘engaging in a principal transaction,’’ ‘‘affiliate of the municipal advisor,’’ 12 12 ‘‘Affiliate of the municipal advisor’’ would mean ‘‘any person directly or indirectly controlling, controlled by, or under common control with such municipal advisor.’’ See Proposed Rule G–42(f)(iii). E:\FR\FM\12AUN1.SGM 12AUN1 48360 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices ‘‘municipal advisory relationship,’’ 13 and ‘‘official statement.’’ 14 Further, for several terms in Proposed Rule G–42 that have been previously defined by federal statute or SEC rules, proposed section (f) would, for purposes of Proposed Rule G–42, adopt the same meanings. These terms would include ‘‘advice;’’ 15 ‘‘municipal advisor;’’ 16 ‘‘municipal advisory activities;’’ 17 ‘‘municipal entity;’’ 18 and ‘‘obligated person.’’ 19 mstockstill on DSK4VPTVN1PROD with NOTICES Applicability of Proposed Rule G–42 to 529 College Savings Plans and Other Municipal Fund Securities Paragraph .12 of the Supplementary Material emphasizes the proposed rule’s application to municipal advisors whose municipal advisory clients are sponsors or trustees of municipal fund securities.20 13 Proposed Rule G–42(f)(vi) provides that a ‘‘municipal advisory relationship’’ would be deemed to exist when a municipal advisor enters into an agreement to engage in municipal advisory activities for a municipal entity or obligated person. The municipal advisory relationship shall be deemed to have ended on the date which is the earlier of (i) the date on which the municipal advisory relationship has terminated pursuant to the terms of the documentation of the municipal advisory relationship required in section (c) of this rule or (ii) the date on which the municipal advisor withdraws from the municipal advisory relationship. 14 ‘‘Official statement’’ would have the same meaning as in MSRB Rule G–32(d)(vii). See Proposed Rule G–42(f)(ix). 15 ‘‘Advice’’ would have the same meaning as in Section 15B(e)(4)(A)(i) of the Exchange Act (15 U.S.C. 78o–4(e)(4)(A)(i)); SEC Rule 15Ba1–1(d)(1)(ii) (17 CFR 240.15Ba1–1(d)(1)(ii)); and other rules and regulations thereunder. See Proposed Rule G– 42(f)(ii). 16 ‘‘Municipal advisor’’ would have the same meaning as in Section 15B(e)(4) of the Act, 17 CFR 240.15Ba1–1(d)(1)–(4) and other rules and regulations thereunder; provided that it shall exclude a person that is otherwise a municipal advisor solely based on activities within the meaning of Section 15B(e)(4)(A)(ii) of the Act and rules and regulations thereunder or any solicitation of a municipal entity or obligated person within the meaning of Section 15B(e)(9) of the Act and rules and regulations thereunder. See Proposed Rule G–42(f)(iv). 17 ‘‘Municipal advisory activities’’ would mean those activities that would cause a person to be a municipal advisor as defined in subsection (f)(iv) (definition of ‘‘municipal advisor’’) of Proposed Rule G–42. See Proposed Rule G–42(f)(v). 18 ‘‘Municipal entity’’ would ‘‘have the same meaning as in Section 15B(e)(8) of the Act, 17 CFR 240.15Ba1–1(g) and other rules and regulations thereunder.’’ See Proposed Rule G–42(f)(vii). 19 ‘‘Obligated person’’ would ‘‘have the same meaning as in Section 15B(e)(10) of the Act, 17 CFR 240.15Ba1–1(k) and other rules and regulations thereunder.’’ See Proposed Rule G–42(f)(viii). 20 ‘‘Municipal fund security’’ is defined in MSRB Rule D–12 to mean ‘‘a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company within the meaning of Section 3 of the Investment Company Act of 1940.’’ The term refers to, among other things, interests in governmentally sponsored 529 VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 Proposed Amendments to Rule G–8 The proposed amendments to Rule G– 8 would require each municipal advisor to make and keep any document created by the municipal advisor that was material to its review of a recommendation by another party or that memorializes its basis for any conclusions as to suitability. III. Summary of Comments Received As noted above, the Commission received fifteen comment letters on the proposed rule change.21 A. Standards of Conduct One commenter stated that the addition of ‘‘without limitation’’ in Proposed Rule G–42(a)(ii) raises significant and unnecessary ambiguities, as a fiduciary duty is generally understood to encompass a duty of care and duty of loyalty.22 The commenter also stated that the language ‘‘includes, but is not limited to’’ in paragraph .02 of the Supplementary Material was vague, and suggested that the MSRB specify what other duties are included.23 B. Disclosure of Conflicts of Interest Three commenters expressed concerns regarding the differing timing of documentation required by sections (b) and (c) of Proposed Rule G–42.24 Each of the commenters recommended that the timing requirement in section (b), on disclosure of conflicts of interest and other information, be changed to match that in section (c), on documentation of the municipal advisory relationship.25 Two of the commenters believe that disclosures of conflicts of interest only matter when municipal advisors enter into municipal advisory relationships.26 One of the commenters stated that the differing timing requirements would lead to ‘‘confusing guidance and duplicative disclosures’’ to clients.27 One commenter suggested merging the two ‘‘catch-all provisions’’ in subsections (b)(i)(A) and (b)(i)(G) because it is not clear what the difference is between the two paragraphs.28 One commenter stated that contingent fees that are based on the completion of a transaction, but not on the size of a college savings plans and local government investment pools. 21 See supra note 4. 22 See SIFMA Letter. 23 Id. 24 See BDA Letter, GKB Letter and NAMA Letter. 25 Id. 26 See BDA Letter and GKB Letter. 27 See NAMA Letter. 28 Id. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 transaction, are not a conflict of interest.29 That commenter argued that contingent fee arrangements benefit municipal entities by insuring their government funds will not be drawn upon for payment of fees if the transaction is not completed.30 Accordingly, the commenter requested that the proposed rule change not require a ‘‘conflict of interest’’ disclosure for contingent fees that do not inherently create conflicts of interest.31 C. Documentation of Municipal Advisory Relationship—Section (c) Two commenters expressed concerns with disclosing information regarding legal or disciplinary events through reference to the municipal advisor’s most recent Form MA and Form MA– I.32 Both commenters stated it was difficult or burdensome for clients to find the relevant Form MA and Form MA–I documents in the SEC’s EDGAR system.33 One of the commenters requested the proposed rule be amended to require municipal advisors to provide copies of Form MA-Is directly to their clients as part of the documentation of the relationship, rather than providing the location of the forms.34 This commenter also suggested that municipal advisors be required to notify clients of changes to Form MA that are material and to provide clients with the updated Form MA with an explanation of how any changes made to the form materially pertain to the nature of the relationship between the municipal advisor and the client.35 One commenter requested the MSRB provide more clarity about the term ‘‘detailed information’’ in the requirement in subsection (c)(iii) that the municipal advisor provide ‘‘detailed information specifying where the client may electronically access the municipal advisor’s most recent Form MA and each most recent Form MA–I filed with the Commission.’’ 36 The commenter suggested the MSRB provide nonexclusive examples; for example, allowing municipal advisors to provide clients with a link to the municipal advisor’s EDGAR page.37 29 See WM Financial Letter. 30 Id. 31 Id. 32 See GFOA II Letter and NAMA Letter. 33 Id. 34 See GFOA II Letter. 35 Id. 36 See NAMA Letter. 37 Id. E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES D. Recommendations and Review of Recommendations of Other Parties One commenter supported section (d)’s requirements to inform clients about reasons for a recommendation, however, it stated that greater clarity through a non-exclusive list of examples of how regulated entities could comply with the regulation was needed.38 Specifically, the commenter suggested the MSRB provide examples of how a municipal advisor should perform its reasonable diligence to satisfy the criteria listed in section (d).39 This commenter also requested guidance on section (d)(iii), regarding informing a client whether the municipal advisor investigated or considered reasonably feasible alternatives because the commenter was concerned that a municipal advisor would be required to provide a list that was exhaustive and non-germane to the client.40 Another commenter requested the MSRB provide a more concise definition of the term ‘‘suitable’’ to enable municipal advisors to comply with the requirements and stated that the ‘‘perfunctory list of generic factors’’ for consideration in paragraph .08 of the Supplementary Material failed to provide municipal advisors with a clear definition of such an important term.41 One commenter expressed concern that the language in subsection (d)(ii) implies that municipal advisors would be permitted to make a recommendation to a client that is unsuitable, which seemed contrary to the proposed rule’s duty of care and loyalty requirements.42 Two commenters expressed concern that documentation requirements for recommendations are too burdensome.43 One of the commenters estimated that municipal advisors may spend between 20% and 30% of their time writing letters to document compliance, providing a laundry list of consequences that would dilute the advice given, ‘‘similar to the way G–17 letters from underwriters have become boiler plate disclosures and have lost significance.’’ 44 The other commenter suggested that the proposed rule should specifically state that such communication to clients under section (d) may be oral and is not required to be in writing.45 The commenter was concerned that informing a client of risks, benefits or other aspects of a 38 Id. 39 Id. 40 Id. 41 See PFM Letter. GFOA Letter. 43 See BDA Letter and First Southwest Letter. 44 See First Southwest Letter. 45 See BDA Letter. 42 See VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 transaction in writing may not be in the client’s best interest because that writing could be obtainable through Freedom of Information Act requests and other means.46 Four commenters expressed concern regarding the duty of care standard, as expressed in paragraph .01 of the Supplementary Material, which requires municipal advisors to undertake ‘‘a reasonable investigation’’ to avoid basing recommendations on ‘‘materially inaccurate or incomplete information.’’ 47 All four commenters argued that a municipal advisor should be permitted to assume that information beyond what is publicly available and is provided by the client is complete and accurate.48 Two commenters argued that this requirement was inconsistent with current regulatory regimes as other financial professionals are not required to investigate information provided by clients.49 One of the commenters expressed concern that this requirement would make a municipal advisor potentially liable to its client for that client’s own misrepresentations.50 One of the commenters argued that in the context of 529 college savings plans, it is not uncommon for the municipal advisor that is acting as a plan sponsor to rely on its state partner to provide the advisor with the information necessary for the advisor to fulfill its obligations and duties to the plan.51 In such circumstances, the commenter argued, municipal advisors should be able to presume the states’ representatives are providing materially accurate and complete information.52 One commenter supported the duty of care provisions generally but expressed concern that requiring a municipal advisor to investigate this information ‘‘may be excessive’’ and could lead to cost increases that could be passed on to the client.53 Finally, one commenter requested the MSRB provide clarity by providing ‘‘non-exclusive explanatory examples of what constitutes a ‘reasonable inquiry as to the facts that are relevant to a client’s determination as to whether to proceed with a course of action.’ ’’ 54 E. Prohibition on Delivering Inaccurate Invoices One commenter expressed support for the prohibition on delivering inaccurate invoices, but requested the addition of materiality and knowledge qualifiers (i.e., a municipal advisor may not intentionally deliver a materially inaccurate invoice), so that immaterial or unintentional errors would not be prohibited.55 F. Prohibited Principal Transactions Ten commenters expressed a variety of concerns (as summarized below) with the prohibition of certain principal transactions in Proposed Rule G– 42(e)(ii).56 1. Comparison with Similar Regulatory Regimes Two commenters expressed concerns that the prohibition on principal transactions is overbroad and inconsistent with existing regulatory regimes regarding financial professionals.57 One commenter argued that investment advisers owe a fiduciary duty but are not subject to a complete prohibition on principal transactions.58 Instead, the commenter noted that investment advisers and their affiliates are permitted to engage in such transactions provided they make relevant disclosures and obtain client consent.59 Another commenter similarly argued that restrictions on principal transactions for municipal advisors and their affiliates should be consistent with those on investment advisers, and that clients should be permitted to waive related conflicts of interest.60 The commenter also argued that principal transactions can lead to more favorable financing terms for clients and cited Commission guidance.61 2. Advice Incidental to Securities Execution Services Three commenters argued for an exemption to the principal transaction prohibition when advice is provided to a municipal entity client that is incidental to or ancillary to a brokerdealer’s execution of securities transactions, including transactions involving municipal bond proceeds or 55 See 46 Id. PO 00000 Frm 00075 SIFMA Letter. SIFMA Letter, Zions Letter, ABA Letter, BDA Letter, GKB Letter, Millar Letter, FSI Letter, GFOA II Letter, Wells Fargo Letter and NAMA Letter. 57 See SIFMA Letter and Zions Letter. 58 See SIFMA Letter. 59 Id. 60 See Zions Letter. 61 See id. (citing Interpretation of Section 206(3) of the Investment Advisers Act of 1940, SEC Release No. IA–1732 (July 20, 1998)). 56 See 47 See ICI Letter, GFOA Letter, SIFMA Letter and WM Financial Letter. 48 Id. 49 See ICI Letter and SIFMA Letter. 50 See SIFMA Letter. 51 See ICI Letter. 52 Id. 53 See GFOA Letter. 54 See NAMA Letter. Fmt 4703 Sfmt 4703 48361 E:\FR\FM\12AUN1.SGM 12AUN1 48362 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices municipal escrow funds.62 One of the commenters proposed excluding from the proposed prohibition sales of fixed income securities by a broker-dealer providing incidental advice, including on bond proceeds, to the transaction, until the Commission and the Department of Labor conclude their consideration of a uniform fiduciary standard for broker-dealers and investment advisors and then harmonize the MSRB’s regulatory approach to the execution of fixed income transactions when a fiduciary duty is owed to the client.63 Another commenter suggested the MSRB modify the ban on principal transactions in the case of brokerage of bond proceed investments.64 The commenter expressed concern that the proposed prohibition could force small governments to establish ‘‘a more expensive fee-based arrangement with an investment adviser in order to receive this very limited type of advice on investments that are not risky.’’ 65 One of the commenters suggested the exception could include certain disclosure and client consent provisions similar to Investment Advisers Act Temporary Rule 206(3)–3T that permits investment advisers that are also brokerdealers to act in a principal capacity in transactions with certain advisory clients.66 The commenter also suggested the proposed exception be limited to certain fixed-income securities as defined by Rule 10b–10(d)(4).67 mstockstill on DSK4VPTVN1PROD with NOTICES 3. Scope: ‘‘Directly Related To’’ Three commenters expressed concern that the language in section (e)(ii) limiting the principal transaction prohibition to transactions ‘‘directly related to the same municipal securities transaction or municipal financial product’’ is vague or overly broad.68 One of the commenters proposed alternative language prohibiting a principal transaction ‘‘if the structure, timing or terms of such principal transaction was established on the advice of the municipal advisor. . . .’’ 69 The commenter also requested clarification regarding the application of the principal transaction ban to several specific scenarios.70 One commenter argued that any prohibition should be more narrowly 62 See FSI Letter, GFOA II Letter and SIFMA Letter. 63 See SIFMA Letter. 64 See GFOA II Letter; see also SIFMA Letter. 65 See GFOA II Letter. 66 See FSI Letter. 67 Id. 68 See BDA Letter, GKB Letter and SIFMA Letter. 69 See BDA Letter; see also GKB Letter. 70 See BDA Letter. VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 tailored to prevent principal transactions directly related to the advice provided by the municipal advisor.71 The commenter believed that, as written, the prohibition would prevent a firm from acting as counterparty on a swap after having advised a municipal entity client on investing proceeds from a connected issuance of municipal securities.72 The commenter proposed alternative language prohibiting principal transactions ‘‘directly related to the advice rendered by such municipal advisor.’’ 73 This commenter also requested clarification regarding when a ban would end because as written, the prohibition would require firms to check for advisory relationships that may have ended long before the proposed principal transaction takes place.74 4. Exception for Affiliates or ‘‘Remote Businesses’’ Two commenters addressed concerns regarding the impact of the principal transaction prohibition on affiliates of municipal advisors.75 One commenter stated that the MSRB should exempt municipal advisor affiliates operating with information barriers, and stated that if an affiliate has no actual knowledge of the municipal advisory relationship between the municipal entity client and the municipal advisor due to information barriers and governance structures, the risk of a conflict of interest is significantly diminished.76 Another commenter proposed the addition of a knowledge standard (i.e., to prohibit a municipal advisor and any affiliate from knowingly engaging in a prohibited principal transaction), arguing that such a knowledge standard is consistent with Section 206(3) of the Investment Advisers Act.77 One commenter suggested that an investment vehicle such as a mutual fund that is advised by a municipal advisor or its affiliate should not itself be an ‘‘affiliate’’ of the municipal advisor solely on the basis of the advisory relationship.78 Otherwise, the commenter argued the investment fund may be unable to invest in a municipal security if an affiliate of the fund’s advisor acted as a municipal advisor on the transaction.79 The commenter stated 71 See SIFMA Letter. that the ban in this type of situation is unnecessary because mutual funds and similar vehicles have independent boards and their affiliates do not have significant equity stakes in the funds they advise.80 5. Bank Loans Several commenters expressed concerns with proposed paragraph .11 of the Supplementary Material under which a bank loan would be subject to the prohibition on principal transactions if the loan was ‘‘in an aggregate principal amount of $1,000,000 or more and economically equivalent to the purchase of one or more municipal securities.’’ 81 One of the commenters expressed general concern that banking organizations that are required to operate through a variety of affiliates and subsidiaries would fall within the scope of the ‘‘common control’’ definition in the statute and the prohibition would prevent a banking organization from providing ordinary bank services to a municipal entity.82 The commenter also requested the prohibition be amended to exclude bank loans made by an affiliate from the definition of ‘‘other similar financial products’’ if the bank enters into the loan after the municipal entity solicits bidders for such loan using a request for proposal and the bank intends to hold the loan on its books until maturity.83 The commenter believed that there should be few concerns regarding conflicts if a loan is entered into by an affiliate of a municipal advisor and a municipal entity would be free to choose its lender based on factors most appropriate for the municipality and its taxpayers.84 In addition, the commenter stated that the potential conflicts of interest should be substantially mitigated if a bank holds a loan on its books to maturity because in such cases, the commenter believes the interest of the municipal entity and the bank are aligned in that each party wants funding that serves the particular needs of the municipal entity and both parties must be satisfied that the loan can be repaid and desire that it be repaid.85 Similarly, another commenter suggested that a municipal advisor should be able to satisfy its fiduciary obligation to a municipal entity by procuring bids for the proposed financing (and thus make a principal 72 Id. 73 Id. 80 Id. 74 Id. 75 See SIFMA Letter and Wells Fargo Letter. 76 See Wells Fargo Letter. 77 See SIFMA Letter. 78 See SIFMA Letter. 79 Id. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 81 See ABA Letter, Millar Jiles Letter, BDA Letter, Zions Letter. 82 See ABA Letter. 83 Id. 84 Id. 85 Id.; see also Zions Letter. E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices bank loan through an affiliated entity permissible), stating that if the affiliate of the municipal advisor were the lowest bidder, the municipality would be penalized by being forced to borrow at a higher rate under the proposed rule change.86 One commenter argued that bank loans ‘‘should be excluded in their entirety from Proposed Rule G–42.’’ 87 The commenter believed that it would be paradoxical to allow individuals and private businesses to borrow money from banks that are fiduciaries, but to prevent municipal entities from doing the same.88 Alternatively, the commenter requested that MSRB increase the threshold loan amount in paragraph .11 of the Supplementary Material to align with the bank qualified exemption amount in the Internal Revenue Code, which it states is currently $10,000,000.89 One commenter commented on the language of paragraph .11 of the Supplementary Material, arguing that the phrase ‘‘economically equivalent’’ is ‘‘too ambiguous and does not provide clarity.’’ 90 The commenter acknowledged this phrase appeared intended to develop a standard that does not require the determination of when a bank loan constitutes a security, and acknowledged difficulties applying the Reves 91 test to make such a determination.92 However, the commenter argued that this language will ‘‘compound the confusion’’ and requested that the MSRB be clear about which structural components of a direct purchase structure would cause it to fall within the scope of the transaction ban.93 Another commenter expressed confusion regarding the ‘‘economically equivalent’’ language.94 The commenter requested clarity regarding the time period over which bank loans should be aggregated in order to determine whether a series of loans meets the ‘‘aggregate principal amount’’ threshold specified in paragraph .11 of the Supplementary Material.95 The commenter also noted that the typical bank loan to a municipal entity is for the purchase of equipment and is payable over a term of less than five years, while the typical municipal security is secured by a pledge of mstockstill on DSK4VPTVN1PROD with NOTICES 86 See 87 See Millar Jiles Letter. Zions Letter. revenues and is payable over a much longer term.96 The commenter asked whether a bank loan of $1,500,000 which is secured by real or personal property and which is payable over a term of five years or less would be ‘‘economically equivalent to the purchase of one or more municipal securities.’’ 97 6. Exception if Represented by Separate Registered Municipal Advisor One commenter suggested the proposed subsection (e)(ii) be revised to permit an otherwise prohibited principal transaction where the municipal entity is represented by more than one municipal advisor, including a separate registered municipal advisor with respect to the principal transaction.98 The commenter argued this exemption would be comparable to the independent registered municipal advisor exemption, and would permit municipal entities to contract with a counterparty of their choice.99 The commenter also noted this would be especially beneficial to municipal entities who may hire several municipal advisors for different elements of the same transaction.100 prohibition on principal transactions.104 That commenter argued that firms would be unlikely to rely on the safe harbor unless it also provided an exemption for inadvertent advice triggering the prohibition on principal transactions.105 One commenter argued that the inadvertent advice provision in paragraph .06 of the Supplementary Material creates a loophole that would allow broker dealers to serve as financial advisors (without a fiduciary duty) and then switch to serving as an underwriter by claiming that such advice was inadvertent.106 H. Sophisticated Municipal Issuers One commenter requested an exemption to the suitability standard in proposed section (d) and paragraph .08 of the Supplementary Material for ‘‘sophisticated municipal issuers.’’ 107 This commenter stated that certain issuers are capable of independently evaluating risks in issuing municipal securities, and exercising independent judgment in evaluating recommendations of a municipal advisor.108 7. Relationship Between MSRB Rule G– 23 and the Prohibition on Principal Transactions Two commenters stated that the reference to MSRB Rule G–23 in paragraph .07 of the Supplementary Material was unnecessary or enhances the possible conflict between Proposed Rule G–42 and Rule G–23.101 One of the commenters interpreted the prohibition in Rule G–23 as subsumed by the more stringent provisions of Proposed Rule G–42.102 The other commenter believed the additional activities or principal transactions that should be prohibited under Proposed Rule G–42 (namely advice with respect to municipal derivatives or the investment of proceeds) don’t conflict with Rule G–23, but merely supplement the prohibitions in Rule G–23 by extending the list of prohibitions found in Rule G–23.103 I. Request for Prospective Application of Proposed Rule G–42 Requirements Two commenters requested the proposed rule change only apply prospectively to municipal advisory relationships entered into, or recommendations of municipal securities transactions or municipal financial products to an existing municipal entity or obligated person client made, after the effective date of the proposed rule change.109 One of the commenters noted this was relevant with respect to 529 plans ‘‘due to the nature of the advisor’s relationship with the plan and duration of existing 529 plan contracts.’’ 110 The other commenter argued that reviewing and likely supplementing the documentation for all existing municipal advisory relationships will be overly burdensome for both municipal advisors and their clients.111 G. Inadvertent Advice—Supplementary Material .06 One commenter suggested that the safe harbor in paragraph .06 of the Supplementary Material for inadvertent advice be expanded to include the J. Use of Supplementary Material in Proposed Rule G–42 One commenter suggested that all supplementary material be removed and moved to separate written interpretative guidance to afford the subjects more 88 Id. 96 Id. 104 See 89 Id. 97 Id. 105 Id. 90 See 98 See 91 Reves 99 Id. 107 See 100 Id. 108 Id. 101 See 109 See BDA Letter. v. Ernst & Young, 494 U.S. 56 (1990). 92 See BDA Letter. 93 Id. 94 See Millar Jiles Letter. 95 Id. VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 48363 SIFMA Letter. 106 See BDA Letter and NAMA Letter. 102 See BDA Letter. 103 See NAMA Letter. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 SIFMA Letter. WM Financial Letter. First Southwest Letter. ICI Letter and SIFMA Letter. ICI Letter. 111 See SIFMA Letter. 110 See E:\FR\FM\12AUN1.SGM 12AUN1 48364 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices ‘‘fittingly robust regulatory guidance.’’ 112 The commenter was concerned that the supplementary material which does not allow for ‘‘more succinct definitional direction’’ would lead to inconsistent application by registrants and ‘‘the potential for unintended consequences as a matter of the statute itself.’’ 113 K. Other Comments One commenter expressed concerns with the lack of a pay-to-play rule for non-dealer municipal advisors, arguing that non-dealer municipal advisors should be subject to a rule based on the framework of MSRB Rule G–37 limiting municipal advisors to a limit of $250 per election to a candidate for whom the contributor is eligible to vote.114 mstockstill on DSK4VPTVN1PROD with NOTICES IV. Proceedings To Determine Whether To Approve or Disapprove SR–MSRB– 2015–03 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 115 to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposal, as discussed below. As noted above, institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to comment on the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,116 the Commission is providing notice of the grounds for disapproval under consideration. In particular, Section 15B(b)(2) of the Act 117 requires that the MSRB propose and adopt rules to effect the purposes of the Act with respect to transactions in municipal securities effected by brokers, dealers, and municipal securities dealers and advice provided to or on behalf of municipal entities or obligated persons by brokers, dealers, municipal securities dealers, and municipal advisors with respect to municipal financial products, the issuance of municipal securities, and solicitations of municipal entities or obligated persons undertaken by brokers, dealers, municipal securities dealers, and municipal advisors. In addition, Section 15B(b)(2)(C) of the 112 See PFM Letter. 113 Id. 114 See 115 15 First Southwest Letter. U.S.C. 78s(b)(2)(B). 116 Id. 117 15 U.S.C. 78o–4(b)(2). VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 Act 118 requires, among other things, that the MSRB’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons facilitating transactions in municipal securities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, and, in general, to protect investors, municipal entities, obligated persons, and the public interest. In addition, Section 15B(b)(2)(L)(i) of the Act 119 requires, with respect to municipal advisors, the MSRB to adopt rules to 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. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Sections 15B(b)(2),120 15B(b)(2)(C),121 and 15B(b)(2)(L)(i) 122 of the Act. V. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any others they may have with the proposed rule change. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is inconsistent with Section 15B(b)(2)(C) or any other provision of the Act, or the rules and regulation thereunder. Although there do not appear to be any issues relevant to approval or disapproval which would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.123 Interested persons are invited to submit written data, views, and 118 15 U.S.C. 78o–4(b)(2)(C). U.S.C. 78o–4(b)(2)(L)(i). 120 15 U.S.C. 78o–4(b)(2). 121 15 U.S.C. 78o–4(b)(2)(C). 122 15 U.S.C. 78o–4(b)(2)(L)(i). 123 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 119 15 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 arguments regarding whether the proposed rule change should be approved or disapproved by September 11, 2015. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by September 28, 2015. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MSRB- 2015–03 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number SR–MSRB–2015–03. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the MSRB. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MSRB–2015–03 and should be submitted on or before September 11, 2015. Rebuttal comments should be submitted by September 28, 2015. E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices For the Commission, pursuant to delegated authority.124 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–19758 Filed 8–11–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75623; File No. SR–CBOE– 2015–061] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Related to Equipment and Communication on the Exchange’s Trading Floor August 6, 2015. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 23, 2015, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange seeks to amend its rules related to equipment and communication on the Exchange’s trading floor. The text of the proposed rule change is provided below. mstockstill on DSK4VPTVN1PROD with NOTICES (additions are italicized; deletions are [bracketed]) * * * * * Chicago Board Options Exchange, Incorporated Rules * * * * * 124 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 1 15 VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 Rule 6.23. [Trading Permit Holder Wires From Floor] Equipment and Communications on the Trading Floor (a) Subject to the requirements of this Rule Trading Permit Holders may use any communication device (e.g., any hardware or software related to a phone, system or other device, including an instant messaging system, email system or similar device) on the floor of the Exchange and in any trading crowd of the Exchange. Prior to using a communications device for business purposes on the floor of the Exchange, Trading Permit Holders must register the communications device by identifying (in a form and manner prescribed by the Exchange) the hardware (i.e., headset; cellular telephone; tablet; or other similar hardware). The Exchange reserves the right to designate certain portions of this rule (except for the registration requirement of paragraph (a) or paragraphs (f) and (g)) as not applicable to certain classes on a class by class basis. (b) The Exchange may deny, limit or revoke the use of any communication device whenever it determines that use of such communication device: (1) Interferes with the normal operation of the Exchange’s own systems or facilities or with the Exchange’s regulatory duties, (2) is inconsistent with the public interest, the protection of investors or just and equitable principles of trade, or (3) interferes with the obligations of a Trading Permit Holder to fulfill its duties under, or is used to facilitate any violation of, the Securities Exchange Act or rules thereunder, or Exchange rules. (c) Any communication device may be used on the floor of the Exchange and in any trading crowd of the Exchange to receive orders, provided that audit trail and record retention requirements of the Exchange are met; however, no person in a trading crowd or on the floor of the Exchange may use any communication device for the purpose of recording activities in the trading crowd or maintaining an open line of continuous communication whereby a nonassociated person not located in the trading crowd may continuously monitor the activities in the trading crowd. This prohibition covers digital recorders, intercoms, walkie-talkies and any similar devices. (d) After providing notice to an affected Trading Permit Holder and complying with applicable laws, the Exchange may provide for the recording of any telephone line on the floor of the Exchange or may require Trading Permit Holders at any time to provide for the PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 48365 recording of a fixed phone line on the floor of the Exchange. Trading Permit Holders, and their clerks, using the telephones consent to the Exchange recording any telephone or line. (e) Trading Permit Holders may not use communication devices to disseminate quotes and/or last sale reports originating on the floor of the Exchange in any manner that would serve to provide a continuous or running state of the market for any particular series or class of options over any period of time; provided, however, that an associated person of a Trading Permit Holder on the floor of the Exchange may use a communication device to communicate quotes that have been disseminated pursuant to Rule 6.43 and/or last sale reports to other associated persons of the same Trading Permit Holder business unit. An associated person of a Trading Permit Holder may also use a communications device to communicate an occasional, specific quote that has been disseminated pursuant to Rule 6.43 or last sale report to a person who is not an associated person of the same Trading Permit Holder. (f) Use of any communications device for order routing or handling must comply with all applicable laws, rules, policies and procedures of the Securities and Exchange Commission and the Exchange including related to record retention and audit trail requirements. Orders must be systemized using Exchange systems or proprietary systems approved by the Exchange in accordance with Rule 6.24. (g) Trading Permit Holders must maintain records of the use of communication devices, including, but not limited to, logs of calls placed; emails; and chats, for a period of not less than three years, the first two years in an easily accessible place. The Exchange reserves the right to inspect such records pursuant to Rule 17.2. (h) The Exchange may designate, via circular, specific communication devices that will not be permitted on the floor of the Exchange or Exchange trading crowds. In addition, the Exchange may designate other operational requirements regarding the installation of any communication devices via circular. [(a) No Trading Permit Holder shall establish or maintain any telephone or other wire communications between his or its office and the Exchange without prior approval by the Exchange. The Exchange may direct discontinuance of any communication facility terminating on the floor of the Exchange. (b) Equity Option Telephone Policy. Persons in the equity option trading E:\FR\FM\12AUN1.SGM 12AUN1

Agencies

[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Notices]
[Pages 48355-48365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19758]


=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75628; File No. SR-MSRB-2015-03]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change Consisting of Proposed New Rule G-42, 
on Duties of Non-Solicitor Municipal Advisors, and Proposed Amendments 
to Rule G-8, on Books and Records To Be Made by Brokers, Dealers, 
Municipal Securities Dealers, and Municipal Advisors

August 6, 2015.

I. Introduction

    On April 24, 2015, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change consisting of proposed new Rule 
G-42, on duties of non-solicitor municipal advisors, and proposed 
amendments to Rule G-8, on books and records to be made by brokers, 
dealers, municipal securities dealers, and municipal advisors. The 
proposed rule change was published for comment in the Federal Register 
on May 8, 2015.\3\ The Commission received fifteen comment letters on 
the proposal.\4\ On

[[Page 48356]]

June 16, 2015, the MSRB granted an extension of time for the Commission 
to act on the filing until August 6, 2015. This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \5\ to determine 
whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 74860 (May 4, 2015), 80 FR 26752 
(``Notice''). The comment period closed on May 29, 2015.
    \4\ See Letters to Secretary, Commission, from Dustin McDonald, 
Director, Federal Liaison Center, Government Finance Officers 
Association (``GFOA''), dated May 22, 2015 (the ``GFOA I Letter''); 
Leslie M. Norwood, Managing Director and Associate General Counsel, 
Securities Industry and Financial Markets Association (``SIFMA''), 
dated May 28, 2015 (the ``SIFMA Letter''); Cristeena Naser, Vice 
President, Center for Securities, Trust & Investments, American 
Bankers Association (``ABA''), dated May 29, 2015 (the ``ABA 
Letter''); Terri Heaton, President, National Association of 
Municipal Advisors (``NAMA''), dated May 29, 2015 (the ``NAMA 
Letter''); Hill A. Feinberg, Chairman and Chief Executive Officer 
and Michael Bartolotta, Vice Chairman, First Southwest Company 
(``First Southwest''), dated May 29, 2015 (the ``First Southwest 
Letter''); Guy E. Yandel, EVP and Head of Public Finance, et al., 
George K. Baum & Company (``GKB''), dated May 29, 2015 (the ``GKB 
Letter''); David T. Bellaire, Executive Vice President and General 
Counsel, Financial Services Institute (``FSI''), dated May 29, 2015 
(the ``FSI Letter''); Robert J. McCarthy, Director of Regulatory 
Policy, Wells Fargo Advisors LLC, (``Wells Fargo''), dated May 29, 
2015 (the ``Wells Fargo Letter''); Tamara K. Salmon, Associate 
General Counsel, Investment Company Institute (``ICI''), dated May 
29, 2015 (the ``ICI Letter''); W. David Hemingway, Executive Vice 
President, Zions First National Bank (``Zions''), dated May 29, 2015 
(the ``Zions Letter''); Lindsey K. Bell, Millar Jiles, LLP (``Millar 
Jiles''), dated May 29, 2015 (the ``Millar Jiles Letter''); Michael 
Nicholas, Chief Executive Officer, Bond Dealers of America 
(``BDA''), dated May 29, 2015 (the ``BDA Letter''); Joy A. Howard, 
WM Financial Strategies (``WM Financial''), dated May 29, 2015 (the 
``WM Financial Letter''); Leo Karwejna, Managing Director, Chief 
Compliance Officer, The PFM Group (``PFM''), dated May 29, 2015 (the 
``PFM Letter''); and Dustin T. McDonald, Director, Federal Liaison 
Center, GFOA, dated June 15, 2015 (the ``GFOA II Letter''). Staff 
from the Office of Municipal Securities discussed the proposed rule 
change with representatives from SIFMA on May 21, 2015, 
representatives from NAMA on June 3, 2015 and representatives from 
BDA on June 17, 2015.
    \5\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Institution of proceedings does not indicate that the Commission 
has reached any conclusions with respect to the proposed rule change, 
nor does it mean that the Commission will ultimately disapprove the 
proposed rule change. Rather, as described below, the Commission seeks 
and encourages interested persons to comment on the proposed rule 
change.

II. Description of the Proposed Rule Change

    As described more fully in the Notice, the MSRB proposed to adopt 
new Rule G-42, on duties of non-solicitor municipal advisors and 
proposed amendments to Rule G-8, on books and records to be made by 
brokers, dealers, municipal securities dealers, and municipal advisors 
(the ``proposed rule change'').

Proposed Rule G-42

    Proposed Rule G-42 would establish the core standards of conduct 
and duties of municipal advisors when engaging in municipal advisory 
activities, other than municipal advisory solicitation activities 
(``municipal advisors''). In summary, the core provisions of Proposed 
Rule G-42 would:
     Establish certain standards of conduct consistent with the 
fiduciary duty owed by a municipal advisor to its municipal entity 
clients, which includes, without limitation, a duty of care and of 
loyalty;
     Establish the standard of care owed by a municipal advisor 
to its obligated person clients;
     Require 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 advisor;
     Require the documentation of the municipal advisory 
relationship, specifying certain aspects of the relationship that must 
be included in the documentation;
     Require that recommendations made by a municipal advisor 
are suitable for its clients, or that it determine the suitability of 
recommendations made by third parties when appropriate; and
     Specifically prohibit a municipal advisor from engaging in 
certain activities, including, in summary:
    [cir] Receiving excessive compensation;
    [cir] delivering inaccurate invoices for fees or expenses;
    [cir] making false or misleading representations about the 
municipal advisor's resources, capacity or knowledge;
    [cir] participating in certain fee-splitting arrangements with 
underwriters;
    [cir] participating in any undisclosed fee-splitting arrangements 
with providers of investments or services to a municipal entity or 
obligated person client of the municipal advisor;
    [cir] making payments for the purpose of obtaining or retaining an 
engagement to perform municipal advisory activities, with limited 
exceptions; and
    [cir] entering into certain principal transactions with the 
municipal advisor's municipal entity clients.
    In addition, the proposed rule change would define key terms used 
in Proposed Rule G-42 and provide supplementary material. The 
supplementary material would provide additional guidance on the core 
concepts in the proposed rule, such as the duty of care, the duty of 
loyalty, suitability of recommendations and ``Know Your Client'' 
obligations; provide context for issues such as the scope of an 
engagement, conflicts of interest disclosures, excessive compensation, 
the impact of client action that is independent of or contrary to the 
advice of a municipal advisor, and the applicability of the proposed 
rule change to 529 college savings plans (``529 plans'') and other 
municipal entities; provide guidance regarding the definition of 
``engage in a principal transaction;'' recognize the continued 
applicability of state and other laws regarding fiduciary and other 
duties owed by municipal advisors; and, finally, include information 
regarding requirements that must be met for a municipal advisor to be 
relieved of certain provisions of Proposed Rule G-42 in instances when 
it inadvertently engages in municipal advisory activities.

Standards of Conduct

    Section (a) of Proposed Rule G-42 would establish the core 
standards of conduct and duties applicable to municipal advisors. 
Subsection (a)(i) of Proposed Rule G-42 would provide that each 
municipal advisor in the conduct of its municipal advisory activities 
for an obligated person client is subject to a duty of care. Subsection 
(a)(ii) would provide that each municipal advisor in the conduct of its 
municipal advisory activities for a municipal entity client is subject 
to a fiduciary duty, which includes, without limitation, a duty of 
loyalty and a duty of care.
    Proposed supplementary material would provide guidance on the duty 
of care and the duty of loyalty. Paragraph .01 of the Supplementary 
Material would describe the duty of care to require, without 
limitation, a municipal advisor to: (1) Exercise due care in performing 
its municipal advisory activities; (2) possess the degree of knowledge 
and expertise needed to provide the municipal entity or obligated 
person client with informed advice; (3) make a reasonable inquiry as to 
the facts that are relevant to a client's determination as to whether 
to proceed with a course of action or that form the basis for any 
advice provided to the client; and (4) undertake a reasonable 
investigation to determine that the municipal advisor is not basing any 
recommendation on materially inaccurate or incomplete information. The 
duty of care that would be established in section (a) of Proposed Rule 
G-42 would also require the municipal advisor to have a reasonable 
basis for: Any advice provided to or on behalf of a client; any 
representations made in a certificate that it signs that will be 
reasonably foreseeably relied upon by the client, any other party 
involved in the municipal securities transaction or municipal financial 
product, or investors in the municipal entity client's securities or 
securities secured by payments from an obligated person client; and, 
any information provided to the client or other parties involved in the 
municipal securities transaction in connection with the preparation of 
an official statement for any issue of municipal securities as to which 
the advisor is advising.
    Paragraph .02 of the Supplementary Material would describe the duty 
of loyalty to require, without limitation, a

[[Page 48357]]

municipal advisor, when engaging in municipal advisory activities for a 
municipal entity, to deal honestly and with the utmost good faith with 
the client and act in the client's best interests without regard to the 
financial or other interests of the municipal advisor. Paragraph .02 
would also provide that the duty of loyalty would preclude a municipal 
advisor from engaging in municipal advisory activities with a municipal 
entity client if it cannot manage or mitigate its conflicts of interest 
in a manner that will permit it to act in the municipal entity's best 
interests.
    Paragraph .03 of the Supplementary Material would specify that a 
municipal advisor is not required to disengage from a municipal 
advisory relationship if a municipal entity client or an obligated 
person client elects a course of action that is independent of or 
contrary to advice provided by the municipal advisor.
    Paragraph .04 of the Supplementary Material would specify that a 
municipal advisor could limit the scope of the municipal advisory 
activities to be performed to certain specified activities or services 
if requested or expressly consented to by the client, but could not 
alter the standards of conduct or impose limitations on any of the 
duties prescribed by Proposed Rule G-42. Paragraph .04 would provide 
that, if a municipal advisor engages in a course of conduct that is 
inconsistent with the mutually agreed limitations to the scope of the 
engagement, it may result in negating the effectiveness of the 
limitations.
    Paragraph .07 of the Supplementary Material would state, as a 
general matter, that, municipal advisors may be subject to fiduciary or 
other duties under state or other laws and nothing in Proposed Rule G-
42 would supersede any more restrictive provision of state or other 
laws applicable to municipal advisory activities.

Disclosure of Conflicts of Interest and Other Information

    Section (b) of Proposed Rule G-42 would require a municipal advisor 
to fully and fairly disclose to its client in writing all material 
conflicts of interest, and to do so prior to or upon engaging in 
municipal advisory activities. The provision would set forth a non-
exhaustive list of scenarios under which a material conflict of 
interest would arise or be deemed to exist and that would require a 
municipal advisor to provide written disclosures to its client.
    Subsection (b)(i)(A) would require a municipal advisor to disclose 
any actual or potential conflicts of interest of which the municipal 
advisor becomes aware after reasonable inquiry that could reasonably be 
anticipated to impair the municipal advisor's ability to provide advice 
to or on behalf of the client in accordance with the applicable 
standards of conduct (i.e., a duty of care or a fiduciary duty). 
Subsections (b)(i)(B) through (F) would provide more specific scenarios 
that give rise to conflicts of interest that would be deemed to be 
material and require proper disclosure to a municipal advisor's client. 
Under the proposed rule change, a material conflict of interest would 
always include: any affiliate of the municipal advisor that provides 
any advice, service or product to or on behalf of the client that is 
directly related to the municipal advisory activities to be performed 
by the disclosing municipal advisor; any payments made by the municipal 
advisor, directly or indirectly, to obtain or retain an engagement to 
perform municipal advisory activities for the client; any payments 
received by the municipal advisor from a third party to enlist the 
municipal advisor's recommendations to the client of its services, any 
municipal securities transaction or any municipal financial product; 
any fee-splitting arrangements involving the municipal advisor and any 
provider of investments or services to the client; and any conflicts of 
interest arising from compensation for municipal advisory activities to 
be performed that is contingent on the size or closing of any 
transaction as to which the municipal advisor is providing advice. 
Subsection (b)(i)(G) would require municipal advisors to disclose any 
other engagements or relationships of the municipal advisor that could 
reasonably be anticipated to impair its ability to provide advice to or 
on behalf of its client in accordance with the applicable standards of 
conduct established by section (a) of the proposed rule.
    Under subsection (b)(i), if a municipal advisor were to conclude, 
based on the exercise of reasonable diligence, that it had no known 
material conflicts of interest, the municipal advisor would be required 
to provide a written statement to the client to that effect.
    Subsection (b)(ii) would require disclosure of any legal or 
disciplinary event that would be material to the client's evaluation of 
the municipal advisor or the integrity of its management or advisory 
personnel. A municipal advisor would be permitted to fulfill this 
disclosure obligation by identifying the specific type of event and 
specifically referring the client to the relevant portions of the 
municipal advisor's most recent SEC Forms MA or MA-I \6\ filed with the 
Commission, if the municipal advisor provides detailed information 
specifying where the client could access such forms electronically.
---------------------------------------------------------------------------

    \6\ See 17 CFR 249.1300 (SEC Form MA); 17 CFR 249.1310 (SEC Form 
MA-I).
---------------------------------------------------------------------------

    Paragraph .05 of the Supplementary Material would provide that the 
required conflicts of interest disclosures must be sufficiently 
detailed to inform the client of the nature, implications and potential 
consequences of each conflict and must include an explanation of how 
the municipal advisor addresses or intends to manage or mitigate each 
conflict.\7\
---------------------------------------------------------------------------

    \7\ The MSRB believes that this requirement is analogous to the 
requirement of Form ADV (17 CFR 279.1) under the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-1 et seq.) that obligates an investment 
adviser to describe how it addresses certain conflicts of interest 
with its clients. See, e.g., Form ADV, Part 2, Item 5.E.1 of Part 2A 
(requiring an investment adviser to describe how it will address 
conflicts of interest that arise in regards to fees and compensation 
it receives, including the investment adviser's procedures for 
disclosing the conflicts of interest with its client). See also, 
Form ADV, Part 2A Items 6, 10, 11, 14 and 17.
---------------------------------------------------------------------------

    Paragraph .06 of the Supplementary Material would provide that a 
municipal advisor that inadvertently engages in municipal advisory 
activities but does not intend to continue the municipal advisory 
activities or enter into a municipal advisory relationship \8\ would 
not be required to comply with sections (b) and (c) of Proposed Rule G-
42 (relating to disclosure of conflicts of interest and documentation 
of the relationship), if the municipal advisor takes the prescribed 
actions listed under paragraph .06 promptly after it discovers its 
provision of inadvertent advice. The municipal advisor would be 
required to provide to the client a dated document that would include: 
A disclaimer stating that the municipal advisor did not intend to 
provide advice and that, effective immediately, the municipal advisor 
has ceased engaging in municipal advisory activities with respect to 
that client in regard to all transactions and municipal financial 
products as to which advice was inadvertently provided; a notification 
that the client should be aware that the municipal advisor has not 
provided the

[[Page 48358]]

disclosure of material conflicts of interest and other information 
required under section (b); an identification of all of the advice that 
was inadvertently provided, based on a reasonable investigation; and a 
request that the municipal entity or obligated person acknowledge 
receipt of the document. The municipal advisor also would be required 
to conduct a review of its supervisory and compliance policies and 
procedures to ensure that they are reasonably designed to prevent 
inadvertently providing advice to municipal entities and obligated 
persons. The final sentence of paragraph .06 of the Supplementary 
Material would also clarify that the satisfaction of the requirements 
of paragraph .06 would have no effect on the applicability of any 
provisions of Proposed Rule G-42 other than sections (b) and (c), or 
any other legal requirements applicable to municipal advisory 
activities.
---------------------------------------------------------------------------

    \8\ Under subsection (f)(vi) of Proposed Rule G-42, the MSRB 
notes that a municipal advisory relationship would be deemed to 
exist when a municipal advisor enters into an agreement to engage in 
municipal advisory activities for a municipal entity or obligated 
person, and would be deemed to have ended on the earlier of (i) the 
date on which the municipal advisory relationship has terminated 
pursuant to the terms of the documentation of the municipal advisory 
relationship required in section (c) of Proposed Rule G-42 or (ii) 
the date on which the municipal advisor withdraws from the municipal 
advisory relationship.
---------------------------------------------------------------------------

Documentation of the Municipal Advisory Relationship

    Section (c) of Proposed Rule G-42 would require each municipal 
advisor to evidence each of its municipal advisory relationships by a 
writing, or writings created and delivered to the municipal entity or 
obligated person client prior to, upon or promptly after the 
establishment of the municipal advisory relationship. The documentation 
would be required to be dated and include, at a minimum: \9\
---------------------------------------------------------------------------

    \9\ While no acknowledgement from the client of its receipt of 
the documentation would be required, the MSRB notes that a municipal 
advisor must, as part of the duty of care it owes its client, 
reasonably believe that the documentation was received by its 
client.
---------------------------------------------------------------------------

     The form and basis of direct or indirect compensation, if 
any, for the municipal advisory activities to be performed, as provided 
in proposed subsection (c)(i);
     the information required to be disclosed in proposed 
section (b), including the disclosures of conflicts of interest, as 
provided in proposed subsection (c)(ii);
     a description of the specific type of information 
regarding legal and disciplinary events requested by the Commission on 
SEC Form MA and SEC Form MA-I, as provided in proposed subsection 
(c)(iii), and detailed information specifying where the client may 
electronically access the municipal advisor's most recent Form MA and 
each most recent Form MA-I filed with the Commission; \10\
---------------------------------------------------------------------------

    \10\ The MSRB notes that compliance with this requirement could 
be achieved in the same manner, and (so long as done upon or prior 
to engaging in municipal advisory activities for the client) 
concurrently with providing to the client the information required 
under proposed subsection (b)(ii).
---------------------------------------------------------------------------

     the date of the last material change to the legal or 
disciplinary event disclosures on any SEC Forms MA or MA-I filed with 
the Commission by the municipal advisor, as provided in proposed 
subsection (c)(iv);
     the scope of the municipal advisory activities to be 
performed and any limitations on the scope of the engagement, as 
provided in proposed subsection (c)(v);
     the date, triggering event, or means for the termination 
of the municipal advisory relationship, or, if none, a statement that 
there is none, as provided in proposed subsection (c)(vi); and
     any terms relating to withdrawal from the municipal 
advisory relationship, as provided in proposed subsection (c)(vii).
    Proposed Rule G-42(c) also would require municipal advisors to 
promptly amend or supplement the writing(s) during the term of the 
municipal advisory relationship as necessary to reflect any material 
changes or additions in the required information.

Recommendations and Review of Recommendations of Other Parties

    Section (d) of Proposed Rule G-42 would provide that a municipal 
advisor must not recommend that its client enter into any municipal 
securities transaction or municipal financial product unless the 
municipal advisor has determined, based on the information obtained 
through the reasonable diligence of the municipal advisor, whether the 
transaction or product is suitable for the client. Proposed section (d) 
also contemplates that a municipal advisor may be requested by the 
client to review and determine the suitability of a recommendation made 
by a third party to the client. If a client were to request this type 
of review, and such review were within the scope of the engagement, the 
municipal advisor's determination regarding the suitability of the 
third-party's recommendation regarding a municipal securities 
transaction or municipal financial product would be subject to the same 
reasonable diligence standard--requiring the municipal advisor to 
obtain relevant information through the exercise of reasonable 
diligence.
    As to both types of review, the municipal advisor would be required 
under proposed section (d) to inform its municipal entity or obligated 
person client of its evaluation of the material risks, potential 
benefits, structure and other characteristics of the recommended 
municipal securities transaction or municipal financial product; the 
basis upon which the advisor reasonably believes the recommended 
transaction or product is, or is not, suitable for the client; and 
whether the municipal advisor has investigated or considered other 
reasonably feasible alternatives to the recommended municipal 
securities transaction or municipal financial product that might also 
or alternatively serve the client's objectives.
    Paragraph .04 of the Supplementary Material would provide that a 
municipal advisor and its client could limit the scope of the municipal 
advisory relationship to certain specified activities or services. The 
MSRB notes that a municipal advisor would not be permitted to alter the 
standards of conduct or duties imposed by the proposed rule with 
respect to that limited scope.
    Paragraph .08 of the Supplementary Material would provide guidance 
related to a municipal advisor's suitability obligations. Under this 
provision, a municipal advisor's determination of whether a municipal 
securities transaction or municipal financial product is suitable for 
its client must be based on numerous factors, as applicable to the 
particular type of client, including, but not limited to: the client's 
financial situation and needs, objectives, tax status, risk tolerance, 
liquidity needs, experience with municipal securities transactions or 
municipal financial products generally or of the type and complexity 
being recommended, financial capacity to withstand changes in market 
conditions during the term of the municipal financial product or the 
period that municipal securities to be issued are reasonably expected 
to be outstanding, and any other material information known by the 
municipal advisor about the client and the municipal securities 
transaction or municipal financial product, after the municipal advisor 
has conducted a reasonable inquiry.
    In connection with a municipal advisor's obligation to determine 
the suitability of a municipal securities transaction or a municipal 
financial product for a client, which should take into account its 
knowledge of the client, paragraph .09 of the Supplementary Material 
would require a municipal advisor to know its client. The obligation to 
know the client would require a municipal advisor to use reasonable 
diligence to know and retain essential facts concerning the client and

[[Page 48359]]

the authority of each person acting on behalf of the client, and is 
similar to requirements in other regulatory regimes.\11\ The facts 
``essential'' to knowing one's client would include those required to 
effectively service the municipal advisory relationship with the 
client; act in accordance with any special directions from the client; 
understand the authority of each person acting on behalf of the client; 
and comply with applicable laws, rules and regulations.
---------------------------------------------------------------------------

    \11\ The MSRB notes that similar requirements apply to brokers 
and dealers under FINRA Rule 2090 (Know Your Customer) and swap 
dealers under Commodity Futures Trading Commission (``CFTC'') Rule 
402(b) (General Provisions: Know Your Counterparty), 17 CFR 
23.402(b), found in CFTC Rules, Ch. I, Pt. 23, Subpt. H (Business 
Conduct Standards for Swap Dealers and Major Swap Participants 
Dealing with Counterparties, including Special Entities) (17 CFR 
23.400 et. seq.). Notably, the CFTC's rule applies to dealings with 
special entity clients, defined to include states, state agencies, 
cities, counties, municipalities, other political subdivisions of a 
State, or any instrumentality, department, or a corporation of or 
established by a State or political subdivision of a State. See CFTC 
Rule 401(c) (defining ``special entity'') (17 CFR 23.401(c)).
---------------------------------------------------------------------------

    The MSRB notes that a client could at times elect a course of 
action either independent of or contrary to the advice of its municipal 
advisor. Paragraph .03 of the Supplementary Material would provide that 
the municipal advisor would not be required to disengage from the 
municipal advisory relationship on that basis.

Specified Prohibitions

    Subsection (e)(i)(A) would prohibit a municipal advisor from 
receiving compensation from its client that is excessive in relation to 
the municipal advisory activities actually performed for the client. 
Paragraph .10 of the Supplementary Material would provide additional 
guidance on how compensation would be determined to be excessive. 
Included in paragraph .10 are several factors that would be considered 
when evaluating the reasonableness of a municipal advisor's 
compensation relative to the nature of the municipal advisory 
activities performed, including, but not limited to: The municipal 
advisor's expertise, the complexity of the municipal securities 
transaction or municipal financial product, whether the fee is 
contingent upon the closing of the municipal securities transaction or 
municipal financial product, the length of time spent on the engagement 
and whether the municipal advisor is paying any other relevant costs 
related to the municipal securities transaction or municipal financial 
product.
    Subsection (e)(i)(B) would prohibit municipal advisors from 
delivering an invoice for fees or expenses for municipal advisory 
activities that does not accurately reflect the activities actually 
performed or the personnel that actually performed those activities.
    Subsection (e)(i)(C) would prohibit a municipal advisor from making 
any representation or submitting any information that the municipal 
advisor knows or should know is either materially false or materially 
misleading due to the omission of a material fact, about its capacity, 
resources or knowledge in response to requests for proposals or in oral 
presentations to a client or prospective client for the purpose of 
obtaining or retaining an engagement to perform municipal advisory 
activities.
    Subsection (e)(i)(D) would prohibit municipal advisors from making 
or participating in two types of fee-splitting arrangements: (1) Any 
fee-splitting arrangement with an underwriter on any municipal 
securities transaction as to which the municipal advisor has provided 
or is providing advice; and (2) any undisclosed fee-splitting 
arrangement with providers of investments or services to a municipal 
entity or obligated person client of the municipal advisor.
    Subsection (e)(i)(E) would, generally, prohibit a municipal advisor 
from making payments for the purpose of obtaining or retaining an 
engagement to perform municipal advisory activities. However, the 
provision contains three exceptions. The prohibition would not apply 
to: (1) Payments to an affiliate of the municipal advisor for a direct 
or indirect communication with a municipal entity or obligated person 
on behalf of the municipal advisor where such communication is made for 
the purpose of obtaining or retaining an engagement to perform 
municipal advisory activities; (2) reasonable fees paid to another 
municipal advisor registered as such with the Commission and MSRB for 
making such a communication as described in subsection (e)(i)(E)(1); 
and (3) payments that are permissible ``normal business dealings'' as 
described in MSRB Rule G-20.

Principal Transactions

    Subsection (e)(ii) of Proposed Rule G-42 would prohibit a municipal 
advisor to a municipal entity, and any affiliate of such municipal 
advisor, from engaging in a principal transaction directly related to 
the same municipal securities transaction or municipal financial 
product as to which the municipal advisor is providing or has provided 
advice. The ban on principal transactions would apply only with respect 
to clients that are municipal entities. The ban would not apply to 
principal transactions between a municipal advisor (or an affiliate of 
the municipal advisor) and the municipal advisor's obligated person 
clients. Although such transactions would not be prohibited, the MSRB 
notes that all municipal advisors, including those engaging in 
municipal advisory activities for obligated person clients, are 
currently subject to the MSRB's fundamental fair-practice rule, Rule G-
17.
    Paragraph .07 of the Supplementary Material would provide an 
exception to the ban on principal transactions in subsection (e)(ii) in 
order to avoid a possible conflict with existing MSRB Rule G-23, on 
activities of financial advisors. Specifically, the ban in subsection 
(e)(ii) would not apply to an acquisition as principal, either alone or 
as a participant in a syndicate or other similar account formed for the 
purpose of purchasing, directly or indirectly, from an issuer all or 
any portion of an issuance of municipal securities on the basis that 
the municipal advisor provided advice as to the issuance, because such 
a transaction is the type of transaction that is addressed, and, in 
certain circumstances, prohibited by Rule G-23.
    For purposes of the prohibition in proposed subsection (e)(ii), 
subsection (f)(i) would define the term ``engaging in a principal 
transaction'' to mean ``when acting as a principal for one's own 
account, selling to or purchasing from the municipal entity client any 
security or entering into any derivative, guaranteed investment 
contract, or other similar financial product with the municipal entity 
client.'' Further, paragraph .11 of the Supplementary Material would 
clarify that the term ``other similar financial products,'' as used in 
subsection (f)(i), would include a bank loan but only if it is in an 
aggregate principal amount of $1,000,000 or more and is economically 
equivalent to the purchase of one or more municipal securities.

Definitions

    Section (f) of Proposed Rule G-42 would provide definitions of the 
terms ``engaging in a principal transaction,'' ``affiliate of the 
municipal advisor,'' \12\

[[Page 48360]]

``municipal advisory relationship,'' \13\ and ``official statement.'' 
\14\ Further, for several terms in Proposed Rule G-42 that have been 
previously defined by federal statute or SEC rules, proposed section 
(f) would, for purposes of Proposed Rule G-42, adopt the same meanings. 
These terms would include ``advice;'' \15\ ``municipal advisor;'' \16\ 
``municipal advisory activities;'' \17\ ``municipal entity;'' \18\ and 
``obligated person.'' \19\
---------------------------------------------------------------------------

    \12\ ``Affiliate of the municipal advisor'' would mean ``any 
person directly or indirectly controlling, controlled by, or under 
common control with such municipal advisor.'' See Proposed Rule G-
42(f)(iii).
    \13\ Proposed Rule G-42(f)(vi) provides that a ``municipal 
advisory relationship'' would be deemed to exist when a municipal 
advisor enters into an agreement to engage in municipal advisory 
activities for a municipal entity or obligated person. The municipal 
advisory relationship shall be deemed to have ended on the date 
which is the earlier of (i) the date on which the municipal advisory 
relationship has terminated pursuant to the terms of the 
documentation of the municipal advisory relationship required in 
section (c) of this rule or (ii) the date on which the municipal 
advisor withdraws from the municipal advisory relationship.
    \14\ ``Official statement'' would have the same meaning as in 
MSRB Rule G-32(d)(vii). See Proposed Rule G-42(f)(ix).
    \15\ ``Advice'' would have the same meaning as in Section 
15B(e)(4)(A)(i) of the Exchange Act (15 U.S.C. 78o-4(e)(4)(A)(i)); 
SEC Rule 15Ba1-1(d)(1)(ii) (17 CFR 240.15Ba1-1(d)(1)(ii)); and other 
rules and regulations thereunder. See Proposed Rule G-42(f)(ii).
    \16\ ``Municipal advisor'' would have the same meaning as in 
Section 15B(e)(4) of the Act, 17 CFR 240.15Ba1-1(d)(1)-(4) and other 
rules and regulations thereunder; provided that it shall exclude a 
person that is otherwise a municipal advisor solely based on 
activities within the meaning of Section 15B(e)(4)(A)(ii) of the Act 
and rules and regulations thereunder or any solicitation of a 
municipal entity or obligated person within the meaning of Section 
15B(e)(9) of the Act and rules and regulations thereunder.
    See Proposed Rule G-42(f)(iv).
    \17\ ``Municipal advisory activities'' would mean those 
activities that would cause a person to be a municipal advisor as 
defined in subsection (f)(iv) (definition of ``municipal advisor'') 
of Proposed Rule G-42. See Proposed Rule G-42(f)(v).
    \18\ ``Municipal entity'' would ``have the same meaning as in 
Section 15B(e)(8) of the Act, 17 CFR 240.15Ba1-1(g) and other rules 
and regulations thereunder.'' See Proposed Rule G-42(f)(vii).
    \19\ ``Obligated person'' would ``have the same meaning as in 
Section 15B(e)(10) of the Act, 17 CFR 240.15Ba1-1(k) and other rules 
and regulations thereunder.'' See Proposed Rule G-42(f)(viii).
---------------------------------------------------------------------------

Applicability of Proposed Rule G-42 to 529 College Savings Plans and 
Other Municipal Fund Securities

    Paragraph .12 of the Supplementary Material emphasizes the proposed 
rule's application to municipal advisors whose municipal advisory 
clients are sponsors or trustees of municipal fund securities.\20\
---------------------------------------------------------------------------

    \20\ ``Municipal fund security'' is defined in MSRB Rule D-12 to 
mean ``a municipal security issued by an issuer that, but for the 
application of Section 2(b) of the Investment Company Act of 1940, 
would constitute an investment company within the meaning of Section 
3 of the Investment Company Act of 1940.'' The term refers to, among 
other things, interests in governmentally sponsored 529 college 
savings plans and local government investment pools.
---------------------------------------------------------------------------

Proposed Amendments to Rule G-8

    The proposed amendments to Rule G-8 would require each municipal 
advisor to make and keep any document created by the municipal advisor 
that was material to its review of a recommendation by another party or 
that memorializes its basis for any conclusions as to suitability.

III. Summary of Comments Received

    As noted above, the Commission received fifteen comment letters on 
the proposed rule change.\21\
---------------------------------------------------------------------------

    \21\ See supra note 4.
---------------------------------------------------------------------------

A. Standards of Conduct

    One commenter stated that the addition of ``without limitation'' in 
Proposed Rule G-42(a)(ii) raises significant and unnecessary 
ambiguities, as a fiduciary duty is generally understood to encompass a 
duty of care and duty of loyalty.\22\ The commenter also stated that 
the language ``includes, but is not limited to'' in paragraph .02 of 
the Supplementary Material was vague, and suggested that the MSRB 
specify what other duties are included.\23\
---------------------------------------------------------------------------

    \22\ See SIFMA Letter.
    \23\ Id.
---------------------------------------------------------------------------

B. Disclosure of Conflicts of Interest

    Three commenters expressed concerns regarding the differing timing 
of documentation required by sections (b) and (c) of Proposed Rule G-
42.\24\ Each of the commenters recommended that the timing requirement 
in section (b), on disclosure of conflicts of interest and other 
information, be changed to match that in section (c), on documentation 
of the municipal advisory relationship.\25\ Two of the commenters 
believe that disclosures of conflicts of interest only matter when 
municipal advisors enter into municipal advisory relationships.\26\ One 
of the commenters stated that the differing timing requirements would 
lead to ``confusing guidance and duplicative disclosures'' to 
clients.\27\
---------------------------------------------------------------------------

    \24\ See BDA Letter, GKB Letter and NAMA Letter.
    \25\ Id.
    \26\ See BDA Letter and GKB Letter.
    \27\ See NAMA Letter.
---------------------------------------------------------------------------

    One commenter suggested merging the two ``catch-all provisions'' in 
subsections (b)(i)(A) and (b)(i)(G) because it is not clear what the 
difference is between the two paragraphs.\28\
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

    One commenter stated that contingent fees that are based on the 
completion of a transaction, but not on the size of a transaction, are 
not a conflict of interest.\29\ That commenter argued that contingent 
fee arrangements benefit municipal entities by insuring their 
government funds will not be drawn upon for payment of fees if the 
transaction is not completed.\30\ Accordingly, the commenter requested 
that the proposed rule change not require a ``conflict of interest'' 
disclosure for contingent fees that do not inherently create conflicts 
of interest.\31\
---------------------------------------------------------------------------

    \29\ See WM Financial Letter.
    \30\ Id.
    \31\ Id.
---------------------------------------------------------------------------

C. Documentation of Municipal Advisory Relationship--Section (c)

    Two commenters expressed concerns with disclosing information 
regarding legal or disciplinary events through reference to the 
municipal advisor's most recent Form MA and Form MA-I.\32\ Both 
commenters stated it was difficult or burdensome for clients to find 
the relevant Form MA and Form MA-I documents in the SEC's EDGAR 
system.\33\ One of the commenters requested the proposed rule be 
amended to require municipal advisors to provide copies of Form MA-Is 
directly to their clients as part of the documentation of the 
relationship, rather than providing the location of the forms.\34\ This 
commenter also suggested that municipal advisors be required to notify 
clients of changes to Form MA that are material and to provide clients 
with the updated Form MA with an explanation of how any changes made to 
the form materially pertain to the nature of the relationship between 
the municipal advisor and the client.\35\
---------------------------------------------------------------------------

    \32\ See GFOA II Letter and NAMA Letter.
    \33\ Id.
    \34\ See GFOA II Letter.
    \35\ Id.
---------------------------------------------------------------------------

    One commenter requested the MSRB provide more clarity about the 
term ``detailed information'' in the requirement in subsection (c)(iii) 
that the municipal advisor provide ``detailed information specifying 
where the client may electronically access the municipal advisor's most 
recent Form MA and each most recent Form MA-I filed with the 
Commission.'' \36\ The commenter suggested the MSRB provide non-
exclusive examples; for example, allowing municipal advisors to provide 
clients with a link to the municipal advisor's EDGAR page.\37\
---------------------------------------------------------------------------

    \36\ See NAMA Letter.
    \37\ Id.

---------------------------------------------------------------------------

[[Page 48361]]

D. Recommendations and Review of Recommendations of Other Parties

    One commenter supported section (d)'s requirements to inform 
clients about reasons for a recommendation, however, it stated that 
greater clarity through a non-exclusive list of examples of how 
regulated entities could comply with the regulation was needed.\38\ 
Specifically, the commenter suggested the MSRB provide examples of how 
a municipal advisor should perform its reasonable diligence to satisfy 
the criteria listed in section (d).\39\ This commenter also requested 
guidance on section (d)(iii), regarding informing a client whether the 
municipal advisor investigated or considered reasonably feasible 
alternatives because the commenter was concerned that a municipal 
advisor would be required to provide a list that was exhaustive and 
non-germane to the client.\40\
---------------------------------------------------------------------------

    \38\ Id.
    \39\ Id.
    \40\ Id.
---------------------------------------------------------------------------

    Another commenter requested the MSRB provide a more concise 
definition of the term ``suitable'' to enable municipal advisors to 
comply with the requirements and stated that the ``perfunctory list of 
generic factors'' for consideration in paragraph .08 of the 
Supplementary Material failed to provide municipal advisors with a 
clear definition of such an important term.\41\
---------------------------------------------------------------------------

    \41\ See PFM Letter.
---------------------------------------------------------------------------

    One commenter expressed concern that the language in subsection 
(d)(ii) implies that municipal advisors would be permitted to make a 
recommendation to a client that is unsuitable, which seemed contrary to 
the proposed rule's duty of care and loyalty requirements.\42\
---------------------------------------------------------------------------

    \42\ See GFOA Letter.
---------------------------------------------------------------------------

    Two commenters expressed concern that documentation requirements 
for recommendations are too burdensome.\43\ One of the commenters 
estimated that municipal advisors may spend between 20% and 30% of 
their time writing letters to document compliance, providing a laundry 
list of consequences that would dilute the advice given, ``similar to 
the way G-17 letters from underwriters have become boiler plate 
disclosures and have lost significance.'' \44\ The other commenter 
suggested that the proposed rule should specifically state that such 
communication to clients under section (d) may be oral and is not 
required to be in writing.\45\ The commenter was concerned that 
informing a client of risks, benefits or other aspects of a transaction 
in writing may not be in the client's best interest because that 
writing could be obtainable through Freedom of Information Act requests 
and other means.\46\
---------------------------------------------------------------------------

    \43\ See BDA Letter and First Southwest Letter.
    \44\ See First Southwest Letter.
    \45\ See BDA Letter.
    \46\ Id.
---------------------------------------------------------------------------

    Four commenters expressed concern regarding the duty of care 
standard, as expressed in paragraph .01 of the Supplementary Material, 
which requires municipal advisors to undertake ``a reasonable 
investigation'' to avoid basing recommendations on ``materially 
inaccurate or incomplete information.'' \47\ All four commenters argued 
that a municipal advisor should be permitted to assume that information 
beyond what is publicly available and is provided by the client is 
complete and accurate.\48\ Two commenters argued that this requirement 
was inconsistent with current regulatory regimes as other financial 
professionals are not required to investigate information provided by 
clients.\49\ One of the commenters expressed concern that this 
requirement would make a municipal advisor potentially liable to its 
client for that client's own misrepresentations.\50\ One of the 
commenters argued that in the context of 529 college savings plans, it 
is not uncommon for the municipal advisor that is acting as a plan 
sponsor to rely on its state partner to provide the advisor with the 
information necessary for the advisor to fulfill its obligations and 
duties to the plan.\51\ In such circumstances, the commenter argued, 
municipal advisors should be able to presume the states' 
representatives are providing materially accurate and complete 
information.\52\ One commenter supported the duty of care provisions 
generally but expressed concern that requiring a municipal advisor to 
investigate this information ``may be excessive'' and could lead to 
cost increases that could be passed on to the client.\53\ Finally, one 
commenter requested the MSRB provide clarity by providing ``non-
exclusive explanatory examples of what constitutes a `reasonable 
inquiry as to the facts that are relevant to a client's determination 
as to whether to proceed with a course of action.' '' \54\
---------------------------------------------------------------------------

    \47\ See ICI Letter, GFOA Letter, SIFMA Letter and WM Financial 
Letter.
    \48\ Id.
    \49\ See ICI Letter and SIFMA Letter.
    \50\ See SIFMA Letter.
    \51\ See ICI Letter.
    \52\ Id.
    \53\ See GFOA Letter.
    \54\ See NAMA Letter.
---------------------------------------------------------------------------

E. Prohibition on Delivering Inaccurate Invoices

    One commenter expressed support for the prohibition on delivering 
inaccurate invoices, but requested the addition of materiality and 
knowledge qualifiers (i.e., a municipal advisor may not intentionally 
deliver a materially inaccurate invoice), so that immaterial or 
unintentional errors would not be prohibited.\55\
---------------------------------------------------------------------------

    \55\ See SIFMA Letter.
---------------------------------------------------------------------------

F. Prohibited Principal Transactions

    Ten commenters expressed a variety of concerns (as summarized 
below) with the prohibition of certain principal transactions in 
Proposed Rule G-42(e)(ii).\56\
---------------------------------------------------------------------------

    \56\ See SIFMA Letter, Zions Letter, ABA Letter, BDA Letter, GKB 
Letter, Millar Letter, FSI Letter, GFOA II Letter, Wells Fargo 
Letter and NAMA Letter.
---------------------------------------------------------------------------

1. Comparison with Similar Regulatory Regimes
    Two commenters expressed concerns that the prohibition on principal 
transactions is overbroad and inconsistent with existing regulatory 
regimes regarding financial professionals.\57\ One commenter argued 
that investment advisers owe a fiduciary duty but are not subject to a 
complete prohibition on principal transactions.\58\ Instead, the 
commenter noted that investment advisers and their affiliates are 
permitted to engage in such transactions provided they make relevant 
disclosures and obtain client consent.\59\ Another commenter similarly 
argued that restrictions on principal transactions for municipal 
advisors and their affiliates should be consistent with those on 
investment advisers, and that clients should be permitted to waive 
related conflicts of interest.\60\ The commenter also argued that 
principal transactions can lead to more favorable financing terms for 
clients and cited Commission guidance.\61\
---------------------------------------------------------------------------

    \57\ See SIFMA Letter and Zions Letter.
    \58\ See SIFMA Letter.
    \59\ Id.
    \60\ See Zions Letter.
    \61\ See id. (citing Interpretation of Section 206(3) of the 
Investment Advisers Act of 1940, SEC Release No. IA-1732 (July 20, 
1998)).
---------------------------------------------------------------------------

2. Advice Incidental to Securities Execution Services
    Three commenters argued for an exemption to the principal 
transaction prohibition when advice is provided to a municipal entity 
client that is incidental to or ancillary to a broker-dealer's 
execution of securities transactions, including transactions involving 
municipal bond proceeds or

[[Page 48362]]

municipal escrow funds.\62\ One of the commenters proposed excluding 
from the proposed prohibition sales of fixed income securities by a 
broker-dealer providing incidental advice, including on bond proceeds, 
to the transaction, until the Commission and the Department of Labor 
conclude their consideration of a uniform fiduciary standard for 
broker-dealers and investment advisors and then harmonize the MSRB's 
regulatory approach to the execution of fixed income transactions when 
a fiduciary duty is owed to the client.\63\
---------------------------------------------------------------------------

    \62\ See FSI Letter, GFOA II Letter and SIFMA Letter.
    \63\ See SIFMA Letter.
---------------------------------------------------------------------------

    Another commenter suggested the MSRB modify the ban on principal 
transactions in the case of brokerage of bond proceed investments.\64\ 
The commenter expressed concern that the proposed prohibition could 
force small governments to establish ``a more expensive fee-based 
arrangement with an investment adviser in order to receive this very 
limited type of advice on investments that are not risky.'' \65\
---------------------------------------------------------------------------

    \64\ See GFOA II Letter; see also SIFMA Letter.
    \65\ See GFOA II Letter.
---------------------------------------------------------------------------

    One of the commenters suggested the exception could include certain 
disclosure and client consent provisions similar to Investment Advisers 
Act Temporary Rule 206(3)-3T that permits investment advisers that are 
also broker-dealers to act in a principal capacity in transactions with 
certain advisory clients.\66\ The commenter also suggested the proposed 
exception be limited to certain fixed-income securities as defined by 
Rule 10b-10(d)(4).\67\
---------------------------------------------------------------------------

    \66\ See FSI Letter.
    \67\ Id.
---------------------------------------------------------------------------

3. Scope: ``Directly Related To''
    Three commenters expressed concern that the language in section 
(e)(ii) limiting the principal transaction prohibition to transactions 
``directly related to the same municipal securities transaction or 
municipal financial product'' is vague or overly broad.\68\ One of the 
commenters proposed alternative language prohibiting a principal 
transaction ``if the structure, timing or terms of such principal 
transaction was established on the advice of the municipal advisor. . . 
.'' \69\ The commenter also requested clarification regarding the 
application of the principal transaction ban to several specific 
scenarios.\70\
---------------------------------------------------------------------------

    \68\ See BDA Letter, GKB Letter and SIFMA Letter.
    \69\ See BDA Letter; see also GKB Letter.
    \70\ See BDA Letter.
---------------------------------------------------------------------------

    One commenter argued that any prohibition should be more narrowly 
tailored to prevent principal transactions directly related to the 
advice provided by the municipal advisor.\71\ The commenter believed 
that, as written, the prohibition would prevent a firm from acting as 
counterparty on a swap after having advised a municipal entity client 
on investing proceeds from a connected issuance of municipal 
securities.\72\ The commenter proposed alternative language prohibiting 
principal transactions ``directly related to the advice rendered by 
such municipal advisor.'' \73\ This commenter also requested 
clarification regarding when a ban would end because as written, the 
prohibition would require firms to check for advisory relationships 
that may have ended long before the proposed principal transaction 
takes place.\74\
---------------------------------------------------------------------------

    \71\ See SIFMA Letter.
    \72\ Id.
    \73\ Id.
    \74\ Id.
---------------------------------------------------------------------------

4. Exception for Affiliates or ``Remote Businesses''
    Two commenters addressed concerns regarding the impact of the 
principal transaction prohibition on affiliates of municipal 
advisors.\75\ One commenter stated that the MSRB should exempt 
municipal advisor affiliates operating with information barriers, and 
stated that if an affiliate has no actual knowledge of the municipal 
advisory relationship between the municipal entity client and the 
municipal advisor due to information barriers and governance 
structures, the risk of a conflict of interest is significantly 
diminished.\76\ Another commenter proposed the addition of a knowledge 
standard (i.e., to prohibit a municipal advisor and any affiliate from 
knowingly engaging in a prohibited principal transaction), arguing that 
such a knowledge standard is consistent with Section 206(3) of the 
Investment Advisers Act.\77\
---------------------------------------------------------------------------

    \75\ See SIFMA Letter and Wells Fargo Letter.
    \76\ See Wells Fargo Letter.
    \77\ See SIFMA Letter.
---------------------------------------------------------------------------

    One commenter suggested that an investment vehicle such as a mutual 
fund that is advised by a municipal advisor or its affiliate should not 
itself be an ``affiliate'' of the municipal advisor solely on the basis 
of the advisory relationship.\78\ Otherwise, the commenter argued the 
investment fund may be unable to invest in a municipal security if an 
affiliate of the fund's advisor acted as a municipal advisor on the 
transaction.\79\ The commenter stated that the ban in this type of 
situation is unnecessary because mutual funds and similar vehicles have 
independent boards and their affiliates do not have significant equity 
stakes in the funds they advise.\80\
---------------------------------------------------------------------------

    \78\ See SIFMA Letter.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

5. Bank Loans
    Several commenters expressed concerns with proposed paragraph .11 
of the Supplementary Material under which a bank loan would be subject 
to the prohibition on principal transactions if the loan was ``in an 
aggregate principal amount of $1,000,000 or more and economically 
equivalent to the purchase of one or more municipal securities.'' \81\
---------------------------------------------------------------------------

    \81\ See ABA Letter, Millar Jiles Letter, BDA Letter, Zions 
Letter.
---------------------------------------------------------------------------

    One of the commenters expressed general concern that banking 
organizations that are required to operate through a variety of 
affiliates and subsidiaries would fall within the scope of the ``common 
control'' definition in the statute and the prohibition would prevent a 
banking organization from providing ordinary bank services to a 
municipal entity.\82\ The commenter also requested the prohibition be 
amended to exclude bank loans made by an affiliate from the definition 
of ``other similar financial products'' if the bank enters into the 
loan after the municipal entity solicits bidders for such loan using a 
request for proposal and the bank intends to hold the loan on its books 
until maturity.\83\ The commenter believed that there should be few 
concerns regarding conflicts if a loan is entered into by an affiliate 
of a municipal advisor and a municipal entity would be free to choose 
its lender based on factors most appropriate for the municipality and 
its taxpayers.\84\ In addition, the commenter stated that the potential 
conflicts of interest should be substantially mitigated if a bank holds 
a loan on its books to maturity because in such cases, the commenter 
believes the interest of the municipal entity and the bank are aligned 
in that each party wants funding that serves the particular needs of 
the municipal entity and both parties must be satisfied that the loan 
can be repaid and desire that it be repaid.\85\
---------------------------------------------------------------------------

    \82\ See ABA Letter.
    \83\ Id.
    \84\ Id.
    \85\ Id.; see also Zions Letter.
---------------------------------------------------------------------------

    Similarly, another commenter suggested that a municipal advisor 
should be able to satisfy its fiduciary obligation to a municipal 
entity by procuring bids for the proposed financing (and thus make a 
principal

[[Page 48363]]

bank loan through an affiliated entity permissible), stating that if 
the affiliate of the municipal advisor were the lowest bidder, the 
municipality would be penalized by being forced to borrow at a higher 
rate under the proposed rule change.\86\
---------------------------------------------------------------------------

    \86\ See Millar Jiles Letter.
---------------------------------------------------------------------------

    One commenter argued that bank loans ``should be excluded in their 
entirety from Proposed Rule G-42.'' \87\ The commenter believed that it 
would be paradoxical to allow individuals and private businesses to 
borrow money from banks that are fiduciaries, but to prevent municipal 
entities from doing the same.\88\ Alternatively, the commenter 
requested that MSRB increase the threshold loan amount in paragraph .11 
of the Supplementary Material to align with the bank qualified 
exemption amount in the Internal Revenue Code, which it states is 
currently $10,000,000.\89\
---------------------------------------------------------------------------

    \87\ See Zions Letter.
    \88\ Id.
    \89\ Id.
---------------------------------------------------------------------------

    One commenter commented on the language of paragraph .11 of the 
Supplementary Material, arguing that the phrase ``economically 
equivalent'' is ``too ambiguous and does not provide clarity.'' \90\ 
The commenter acknowledged this phrase appeared intended to develop a 
standard that does not require the determination of when a bank loan 
constitutes a security, and acknowledged difficulties applying the 
Reves \91\ test to make such a determination.\92\ However, the 
commenter argued that this language will ``compound the confusion'' and 
requested that the MSRB be clear about which structural components of a 
direct purchase structure would cause it to fall within the scope of 
the transaction ban.\93\
---------------------------------------------------------------------------

    \90\ See BDA Letter.
    \91\ Reves v. Ernst & Young, 494 U.S. 56 (1990).
    \92\ See BDA Letter.
    \93\ Id.
---------------------------------------------------------------------------

    Another commenter expressed confusion regarding the ``economically 
equivalent'' language.\94\ The commenter requested clarity regarding 
the time period over which bank loans should be aggregated in order to 
determine whether a series of loans meets the ``aggregate principal 
amount'' threshold specified in paragraph .11 of the Supplementary 
Material.\95\ The commenter also noted that the typical bank loan to a 
municipal entity is for the purchase of equipment and is payable over a 
term of less than five years, while the typical municipal security is 
secured by a pledge of revenues and is payable over a much longer 
term.\96\ The commenter asked whether a bank loan of $1,500,000 which 
is secured by real or personal property and which is payable over a 
term of five years or less would be ``economically equivalent to the 
purchase of one or more municipal securities.'' \97\
---------------------------------------------------------------------------

    \94\ See Millar Jiles Letter.
    \95\ Id.
    \96\ Id.
    \97\ Id.
---------------------------------------------------------------------------

6. Exception if Represented by Separate Registered Municipal Advisor
    One commenter suggested the proposed subsection (e)(ii) be revised 
to permit an otherwise prohibited principal transaction where the 
municipal entity is represented by more than one municipal advisor, 
including a separate registered municipal advisor with respect to the 
principal transaction.\98\ The commenter argued this exemption would be 
comparable to the independent registered municipal advisor exemption, 
and would permit municipal entities to contract with a counterparty of 
their choice.\99\ The commenter also noted this would be especially 
beneficial to municipal entities who may hire several municipal 
advisors for different elements of the same transaction.\100\
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    \98\ See SIFMA Letter.
    \99\ Id.
    \100\ Id.
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7. Relationship Between MSRB Rule G-23 and the Prohibition on Principal 
Transactions
    Two commenters stated that the reference to MSRB Rule G-23 in 
paragraph .07 of the Supplementary Material was unnecessary or enhances 
the possible conflict between Proposed Rule G-42 and Rule G-23.\101\ 
One of the commenters interpreted the prohibition in Rule G-23 as 
subsumed by the more stringent provisions of Proposed Rule G-42.\102\ 
The other commenter believed the additional activities or principal 
transactions that should be prohibited under Proposed Rule G-42 (namely 
advice with respect to municipal derivatives or the investment of 
proceeds) don't conflict with Rule G-23, but merely supplement the 
prohibitions in Rule G-23 by extending the list of prohibitions found 
in Rule G-23.\103\
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    \101\ See BDA Letter and NAMA Letter.
    \102\ See BDA Letter.
    \103\ See NAMA Letter.
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G. Inadvertent Advice--Supplementary Material .06

    One commenter suggested that the safe harbor in paragraph .06 of 
the Supplementary Material for inadvertent advice be expanded to 
include the prohibition on principal transactions.\104\ That commenter 
argued that firms would be unlikely to rely on the safe harbor unless 
it also provided an exemption for inadvertent advice triggering the 
prohibition on principal transactions.\105\
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    \104\ See SIFMA Letter.
    \105\ Id.
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    One commenter argued that the inadvertent advice provision in 
paragraph .06 of the Supplementary Material creates a loophole that 
would allow broker dealers to serve as financial advisors (without a 
fiduciary duty) and then switch to serving as an underwriter by 
claiming that such advice was inadvertent.\106\
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    \106\ See WM Financial Letter.
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H. Sophisticated Municipal Issuers

    One commenter requested an exemption to the suitability standard in 
proposed section (d) and paragraph .08 of the Supplementary Material 
for ``sophisticated municipal issuers.'' \107\ This commenter stated 
that certain issuers are capable of independently evaluating risks in 
issuing municipal securities, and exercising independent judgment in 
evaluating recommendations of a municipal advisor.\108\
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    \107\ See First Southwest Letter.
    \108\ Id.
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I. Request for Prospective Application of Proposed Rule G-42 
Requirements

    Two commenters requested the proposed rule change only apply 
prospectively to municipal advisory relationships entered into, or 
recommendations of municipal securities transactions or municipal 
financial products to an existing municipal entity or obligated person 
client made, after the effective date of the proposed rule change.\109\ 
One of the commenters noted this was relevant with respect to 529 plans 
``due to the nature of the advisor's relationship with the plan and 
duration of existing 529 plan contracts.'' \110\ The other commenter 
argued that reviewing and likely supplementing the documentation for 
all existing municipal advisory relationships will be overly burdensome 
for both municipal advisors and their clients.\111\
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    \109\ See ICI Letter and SIFMA Letter.
    \110\ See ICI Letter.
    \111\ See SIFMA Letter.
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J. Use of Supplementary Material in Proposed Rule G-42

    One commenter suggested that all supplementary material be removed 
and moved to separate written interpretative guidance to afford the 
subjects more

[[Page 48364]]

``fittingly robust regulatory guidance.'' \112\ The commenter was 
concerned that the supplementary material which does not allow for 
``more succinct definitional direction'' would lead to inconsistent 
application by registrants and ``the potential for unintended 
consequences as a matter of the statute itself.'' \113\
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    \112\ See PFM Letter.
    \113\ Id.
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K. Other Comments

    One commenter expressed concerns with the lack of a pay-to-play 
rule for non-dealer municipal advisors, arguing that non-dealer 
municipal advisors should be subject to a rule based on the framework 
of MSRB Rule G-37 limiting municipal advisors to a limit of $250 per 
election to a candidate for whom the contributor is eligible to 
vote.\114\
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    \114\ See First Southwest Letter.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-MSRB-
2015-03 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \115\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposal, as discussed below. As noted above, 
institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, the Commission seeks and encourages interested persons to 
comment on the proposed rule change.
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    \115\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\116\ the Commission is 
providing notice of the grounds for disapproval under consideration. In 
particular, Section 15B(b)(2) of the Act \117\ requires that the MSRB 
propose and adopt rules to effect the purposes of the Act with respect 
to transactions in municipal securities effected by brokers, dealers, 
and municipal securities dealers and advice provided to or on behalf of 
municipal entities or obligated persons by brokers, dealers, municipal 
securities dealers, and municipal advisors with respect to municipal 
financial products, the issuance of municipal securities, and 
solicitations of municipal entities or obligated persons undertaken by 
brokers, dealers, municipal securities dealers, and municipal advisors. 
In addition, Section 15B(b)(2)(C) of the Act \118\ requires, among 
other things, that the MSRB's rules be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons facilitating transactions in municipal securities and municipal 
financial products, to remove impediments to and perfect the mechanism 
of a free and open market in municipal securities and municipal 
financial products, and, in general, to protect investors, municipal 
entities, obligated persons, and the public interest. In addition, 
Section 15B(b)(2)(L)(i) of the Act \119\ requires, with respect to 
municipal advisors, the MSRB to adopt rules to 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.
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    \116\ Id.
    \117\ 15 U.S.C. 78o-4(b)(2).
    \118\ 15 U.S.C. 78o-4(b)(2)(C).
    \119\ 15 U.S.C. 78o-4(b)(2)(L)(i).
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    The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Sections 
15B(b)(2),\120\ 15B(b)(2)(C),\121\ and 15B(b)(2)(L)(i) \122\ of the 
Act.
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    \120\ 15 U.S.C. 78o-4(b)(2).
    \121\ 15 U.S.C. 78o-4(b)(2)(C).
    \122\ 15 U.S.C. 78o-4(b)(2)(L)(i).
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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
proposed rule change. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is inconsistent with Section 15B(b)(2)(C) or any other provision of the 
Act, or the rules and regulation thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\123\
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    \123\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by September 11, 2015. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 28, 2015.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MSRB- 2015-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2015-03. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the
    MSRB. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
MSRB-2015-03 and should be submitted on or before September 11, 2015. 
Rebuttal comments should be submitted by September 28, 2015.


[[Page 48365]]


    For the Commission, pursuant to delegated authority.\124\
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    \124\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19758 Filed 8-11-15; 8:45 am]
 BILLING CODE 8011-01-P