Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Amendments to Rule G-21, on Advertising, Proposed New Rule G-40, on Advertising by Municipal Advisors, and a Technical Amendment to Rule G-42, on Duties of Non-Solicitor Municipal Advisors, 5474-5488 [2018-02398]

Download as PDF 5474 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest. The Commission believes that the proposed rule change may provide the investing public and other market participants more flexibility to closely tailor their investment and hedging decisions in SPY options, thus allowing them to better manage their risk exposure. In approving the proposal, the Commission notes that the Exchange has represented that it has an adequate surveillance program in place to detect manipulative trading in Monday SPY Expirations.13 The Exchange further states that it has the necessary systems capacity to support the new options series.14 IV. Conclusion It is therefore ordered that pursuant to Section 19(b)(2) of the Act 15 that the proposed rule change (SR–Phlx–2017– 103) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–02393 Filed 2–6–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82616; File No. SR–MSRB– 2018–01] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Amendments to Rule G–21, on Advertising, Proposed New Rule G–40, on Advertising by Municipal Advisors, and a Technical Amendment to Rule G–42, on Duties of Non-Solicitor Municipal Advisors sradovich on DSK3GMQ082PROD with NOTICES February 1, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 24, 2018 the Municipal Securities Rulemaking Board 13 See Notice, supra note 3, at 61049. 14 Id. U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. (the ‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (the ‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the MSRB. 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 MSRB filed with the Commission a proposed rule consisting of amendments to MSRB Rule G–21, on advertising (‘‘proposed amended Rule G–21’’), proposed new MSRB Rule G– 40, on advertising by municipal advisors (‘‘proposed Rule G–40’’), and a technical amendment to MSRB Rule G– 42, on duties of non-solicitor municipal advisors (‘‘proposed amended Rule G– 42,’’ together with proposed amended Rule G–21 and proposed Rule G–40, the ‘‘proposed rule change’’). The MSRB requests that the proposed rule change become effective nine months from the date of SEC approval. The text of the proposed rule change is available on the MSRB’s website at www.msrb.org/Rules-andInterpretations/SEC-Filings/2018Filings.aspx, at the MSRB’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background A. Proposed Amended Rule G–21 Rule G–21 is a core fair practice rule of the MSRB. Rule G–21 applies to all advertisements by dealers, as defined by Rule G–21(a)(i).3 Rule G–21 became 15 15 16 17 VerDate Sep<11>2014 18:17 Feb 06, 2018 3 An advertisement, as defined by Rule G–21(a)(i): Means any material (other than listings of offerings) published or used in any electronic or Jkt 244001 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 effective in 1978, and has been amended several times since then as the MSRB has enhanced its rule book. More recently, in 2012, the MSRB issued a request for comment on its entire rule book.4 In response, two market participants requested that the MSRB harmonize its advertising rules with FINRA Rule 2210, on communications with the public.5 Market participants echoed those requests more generally in their latest responses to a 2016 request for comment on the MSRB’s strategic priorities.6 Further, and apart from the MSRB’s requests for comment, the MSRB solicited input about possible amendments to Rule G–21 from market participants, including industry groups that represent dealers.7 After considering the important suggestions made by market participants, the MSRB prepared proposed amended Rule G–21 to, among other things: • Enhance the MSRB’s fair-dealing provisions by promoting regulatory consistency among Rule G–21 and the advertising rules of other financial regulators; and • promote regulatory consistency between Rule G–21(a)(ii), the definition of ‘‘form letter,’’ and FINRA Rule 2210’s definition of ‘‘correspondence.’’ Proposed amended Rule G–21 also makes a technical amendment in paragraph (e) to streamline the rule. other public media, or any written or electronic promotional literature distributed or made generally available to customers or the public, including any notice, circular, report, market letter, form letter, telemarketing script, seminar text, press release concerning the products or services of the broker, dealer or municipal securities dealer, or reprint, or any excerpt of the foregoing or of a published article. As such, Rule G–21 not only applies to print advertisements, but also applies to an advertisement ‘‘published or used in any electronic or other public media,’’ such as a social media post. 4 MSRB Notice 2012–63, Request for Comment on MSRB Rules and Interpretive Guidance (Dec. 18, 2012). 5 See Letter from David L. Cohen, Managing Director, Associate General Counsel, Securities Industry and Financial Markets Association, dated February 19, 2013, to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board; Letter from Gerald K. Mayfield, Senior Counsel, Wells Fargo & Company Law Department, dated February 19, 2013, to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board. 6 MSRB Notice 2016–25, MSRB Seeks Input on Strategic Priorities (Oct. 12, 2016); see Letter from Michael Decker, Managing Director, Securities Industry and Financial Markets Association, dated November 11, 2016, to Ronald W. Smith, Secretary, Municipal Securities Rulemaking Board; Letter from Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors, LLC, dated November 11, 2016, to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board. 7 See MSRB Notice 2017–04, Request for Comment on Draft Amendments to MSRB Rule G– 21, on Advertising, and on Draft Rule G–40, on Advertising by Municipal Advisors (Feb. 16, 2017). E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices Concurrent with its efforts to enhance Rule G–21 and promote regulatory consistency among Rule G–21 and the advertising rules of other financial regulators, the MSRB prepared proposed Rule G–40 to address advertising by municipal advisors. B. Proposed Rule G–40 In August 2011, in the exercise of its new rulemaking authority over municipal advisors,8 the MSRB solicited public comment on a proposal to amend Rule G–21 and Rule G–9, on preservation of records, and to issue an interpretive notice under Rule G–17, on conduct of municipal securities activities, to address advertising by municipal advisors.9 However, the MSRB did not proceed beyond requesting comment. In anticipation of the SEC’s adoption of its rules relating to municipal advisor registration, the MSRB determined to withdraw or otherwise re-examine and revisit its then pending rulemaking proposals, including the 2011 request for comment. On September 20, 2013, the SEC adopted its final rules for municipal advisor registration that the SEC had proposed in 2010 (the ‘‘final rules’’).10 Among other things, the final rules interpreted the statutory definition of the term ‘‘municipal advisor’’ under the Exchange Act and the statutory exclusions from that definition.11 Since September 2013, the MSRB has reexamined and adopted revised proposals addressing many of the issues that were the subject of its previously withdrawn or suspended municipal advisor rulemaking proposals. With the benefit of the final rules and of the MSRB’s development of its core regulatory framework for municipal advisors, the MSRB determined to revisit its approach to advertising by municipal advisors. To inform its approach, the MSRB solicited general input from market participants about the nature of 8 Public Law 111–203, 124 Stat. 1376 (2010). Notice 2011–41, Request for Comment on Draft Amendments to MSRB Rule G–21 (on Advertising) and Draft Interpretive Notice Concerning the Application of MSRB Rule G–17 (on Fair Dealing) to Certain Communications (Aug. 10, 2011) (‘‘2011 request for comment’’). The draft amendments, among other things, would have extended Rule G–21 and its related recordkeeping requirements to municipal advisors. Further, the draft interpretive notice would have reminded dealers and municipal advisors that Rule G–17’s fair practice requirements apply to all communications (written and oral), including the content of advertisements, sales or marketing communications and correspondence. 10 Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 67468 (Nov. 12, 2013). 11 Rule 15Ba1–1(d), 17 CFR 240.15Ba1–1(d), under the Exchange Act. sradovich on DSK3GMQ082PROD with NOTICES 9 MSRB VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 municipal advisor advertising and about how municipal advisors use advertising. That outreach included industry groups that represent non-solicitor and/or solicitor municipal advisors. As a result of that outreach and the valuable input received from market participants, the MSRB developed proposed Rule G–40. Proposed Rule G–40 would apply to advertising by municipal advisors. Similar to proposed amended Rule G– 21, proposed Rule G–40 would: • Provide general provisions that define the terms ‘‘advertisement’’ and ‘‘form letter,’’ and would set forth the general standards and content standards for advertisements; • provide the definition of professional advertisements, and would define the standard for those advertisements; and • would require the approval by a principal, in writing, before the first use of an advertisement. Also, proposed Rule G–40, similar to proposed amended Rule G–21,12 would apply to all advertisements by a municipal advisor, as defined in proposed Rule G–40(a)(i). However, unlike proposed amended Rule G–21, proposed Rule G–40 would contain certain substituted terms that are more relevant to municipal advisors, and proposed Rule G–40 would omit the three provisions in Rule G–21 that concern product advertisements (i.e., product advertisements, new issue product advertisements, and municipal fund securities product advertisements). C. Technical Amendment to Rule G–42 Rule G–42(f)(iv) defines municipal advisory activities as ‘‘those activities that would cause a person to be a municipal advisor as defined in subsection (f)(iv) of this rule.’’ The proposed rule change would provide a technical amendment to Rule G– 42(f)(iv) to correct the cross-reference. Proposed amended Rule G–42 would replace the reference to subsection (f)(iv) in Rule G–42(f)(iv) with the intended reference to subsection (f)(iii). Rule G–42(f)(iii) defines the term ‘‘municipal advisor’’ for purposes of Rule G–42. Proposed Amended Rule G–21 A. Enhancement of Fair Dealing Provisions and Promotion of Regulatory Consistency With Certain Standards of Other Financial Regulators To enhance Rule G–21’s fair dealing requirements, as well as to promote regulatory consistency among Rule G– 21 and the advertising rules of other financial regulators, proposed amended 12 See PO 00000 supra note 3. Frm 00076 Fmt 4703 Sfmt 4703 5475 Rule G–21 would provide more specific content standards. Proposed amended Rule G–21 also would include revisions to the rule’s general standards for advertisements. (i) Content Standards Proposed amended Rule G–21(a)(iii) would add content standards to make explicit many of the MSRB’s fair dealing obligations that follow from the MSRB’s requirements set forth in Rule G–21 and Rule G–17, on conduct of municipal securities and municipal advisory activities, and the interpretive guidance the MSRB has provided under those rules, and to specifically address them to advertising.13 Proposed amended Rule G–21 would enhance Rule G–21’s fair dealing provisions by requiring that: • An advertisement be based on principles of fair dealing and good faith, be fair and balanced and provide a sound basis for evaluating the facts about any particular municipal security or type of municipal security, industry, or service, and that a dealer not omit any material fact or qualification if such omission, in light of the context presented, would cause the advertisement to be misleading; • an advertisement not contain any false, exaggerated, unwarranted, promissory or misleading statement or claim; • a dealer limit the types of information placed in a legend or footnote of an advertisement so as to not inhibit a customer’s or potential customer’s understanding of the advertisement; • an advertisement provide statements that are clear and not misleading within the context that they are made, that the advertisement provide a balanced treatment of the benefits and risks, and that the advertisement is consistent with the risks inherent to the investment; • a dealer consider the audience to which the advertisement will be directed and that the advertisement provide details and explanations appropriate to that audience; • an advertisement not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast; 14 and 13 The proposed rule change would not supplant the MSRB’s regulatory guidance provided under Rule G–17. 14 However, proposed amended Rule G– 21(a)(iii)(F) would permit: (1) A hypothetical illustration of mathematical principles, provided that it does not predict or project the performance of an investment; and (2) An investment analysis tool, or a written report produced by an investment analysis tool. E:\FR\FM\07FEN1.SGM 07FEN1 5476 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES • an advertisement not include a testimonial unless it satisfies certain conditions.15 By so doing, proposed amended Rule G– 21(a)(iii) would promote regulatory consistency with FINRA Rule 2210(d)(1)’s and FINRA Rule 2210(d)(6)’s content standards for advertisements. The other topics and standards addressed by other provisions of FINRA Rule 2210(d) have not been historically addressed by Rule G–21 and/or may not be relevant to the municipal securities market,16 and the MSRB did not include those topics in the MSRB’s request for comment on draft amendments to Rule G–21.17 Proposed amended Rule G–21 also would expand upon the guidance provided by Rule A–12, on registration. Rule A–12(e) permits a dealer to state that it is MSRB registered in its advertising, including on its website. Proposed amended Rule G–21(a)(iii)(H) would continue to permit a dealer to state that it is MSRB registered. However, proposed amended Rule G– 21(a)(iii)(H) would provide that a dealer shall only state in an advertisement that it is MSRB registered as long as, among other things, the advertisement complies with the applicable standards of all other MSRB rules and neither states nor implies that the MSRB endorses, indemnifies, or guarantees the dealer’s business practices, selling methods, the type of security offered, or the security offered. By so doing, the 15 Proposed amended Rule G–21(a)(iii)(G) would provide: (1) If an advertisement contains a testimonial about a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion; (2) If an advertisement contains a testimonial about the investment advice or investment performance of a broker, dealer or municipal securities dealer or its products, that advertisement must prominently disclose the following: (a) The fact that the testimonial may be not be representative of the experience of other customers. (b) The fact that the testimonial is no guarantee of future performance or success. (c) If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. 16 Those other topics and standards addressed by FINRA Rule 2110(d) relate to: comparisons between investments or services (FINRA Rule 2210(d)(2)); disclosure of the member’s name (FINRA Rule 2210(d)(3)); tax considerations (FINRA Rule 2210(d)(4)); disclosure of fees, expenses, and standardized performance relating to non-money market fund open-end investment company performance data (FINRA Rule 2210(d)(5)); recommendations (FINRA Rule 2210(d)(7)); BrokerCheck (FINRA Rule 2210(f)(8)); and prospectuses filed with the SEC (FINRA Rule 2210(d)(9)). 17 See MSRB Notice 2017–04 (Feb. 16, 2017) and discussion of the comments that the MSRB received in response to that request for comment under ‘‘Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others.’’ VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 proposed rule change would promote regulatory consistency with FINRA Rule 2210(e)’s analogous limitations on the use of FINRA’s name and any other corporate name owned by FINRA. (ii) General Standards Proposed amended Rule G–21(a)(iv), (b)(ii), and (c)(ii) would promote regulatory consistency among Rule G– 21’s general standard for advertisements, standard for professional advertisements, and standard for product advertisements (collectively, the ‘‘general standards’’) and the content standards of FINRA Rule 2210(d). Currently, Rule G–21’s general standards prohibit a dealer, in part, from publishing or disseminating material that is ‘‘materially false or misleading.’’ Proposed amended Rule G–21 would replace the phrase ‘‘materially false or misleading’’ with ‘‘any untrue statement of material fact’’ as well as add ‘‘or is otherwise false or misleading.’’ The MSRB believes that this harmonization with FINRA Rule 2210(d) would be consistent with Rule G–21’s current general standards and would ensure consistent regulation between similar regulated entities. B. Reconcile the Definition of Form Letter With FINRA Rule 2210 Definition of Correspondence Currently, Rule G–21(a)(ii) defines a ‘‘form letter,’’ in part, as a written letter distributed to 25 or more persons. The analogous provision in FINRA’s communications with the public rule to Rule G–21(a)(ii) is FINRA Rule 2210’s definition of correspondence. FINRA Rule 2210(a)(2)’s definition of correspondence, however, defines ‘‘correspondence,’’ in part, as written communications distributed to 25 or fewer retail investors. The MSRB understands that the one-person difference between Rule G–21 and FINRA Rule 2210 has created confusion and compliance challenges for dealers. To respond to this concern, proposed amended Rule G–21(a)(ii) would eliminate that one-person difference. Under proposed amended Rule G–21, a form letter, in part, would be defined as a written letter distributed to more than 25 persons.18 Supplementary Material .03 to proposed amended Rule G–21 would explain the term ‘‘person’’ when used in the context of a form letter under Rule G–21(a)(ii). Specifically, Supplementary Material .03 would explain that the number of ‘‘persons’’ is determined for 18 Written letters or electronic mail messages distributed to 25 or fewer persons within any period of 90 consecutive days may be subject to the fundamental fair dealing obligations of Rule G–17. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 the purposes of a response to a request for proposal (‘‘RFP’’), request for qualifications (‘‘RFQ’’) or similar request at the entity level. Therefore, for example, if a dealer were to respond to an RFP from Big City Water Authority, Big City Water Authority would count as one person, no matter how many persons employed by Big City Water Authority reviewed the dealer’s response to the RFP. C. Technical Amendment Proposed amended Rule G–21 would contain a technical amendment to Rule G–21(e). To streamline and clarify the MSRB’s rules, the proposed rule change would delete references to the Financial Industry Regulatory Authority, Inc. in Rule G–21(e)(ii)(F) and Rule G–21(e)(vi) because, for example, reference to any applicable regulatory body is sufficient and no limitation to any more narrow subset is intended. Proposed Rule G–40 Proposed Rule G–40, similar to Rule G–21, would set forth general provisions, address professional advertisements and require principal approval in writing for advertisements by municipal advisors before their first use. However, as discussed below, proposed Rule G–40 would not address product advertisements, as that term is defined in Rule G–21. A. General Provisions Proposed Rule G–40(a) would define the terms advertisement, form letter and municipal advisory client, and would provide content and general standards for advertisements by a non-solicitor or a solicitor municipal advisor. (i) Definitions Advertisement. The term ‘‘advertisement’’ in proposed Rule G– 40(a)(i) would parallel the term ‘‘advertisement’’ in proposed amended Rule G–21(a)(i), but would be tailored for municipal advisors. An advertisement would refer, in part, to any promotional literature distributed or made generally available to municipal entities, obligated persons, municipal advisory clients (discussed below), or the public by a municipal advisor.19 19 An advertisement, as defined by proposed Rule G–40(a)(i) would mean: any material (other than listings of offerings) published or used in any electronic or other public media, or any written or electronic promotional literature distributed or made generally available to municipal entities, obligated persons, municipal advisory clients or the public, including any notice, circular, report, market letter, form letter, telemarketing script, seminar text, press release concerning the services of the municipal advisor or the engagement of a municipal advisory client (as E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Further, an advertisement would include the promotional literature used by a solicitor municipal advisor 20 to solicit a municipal entity or obligated person on behalf of the solicitor municipal advisor’s municipal advisory client. In addition, similar to proposed amended Rule G–21(a)(i), proposed Rule G–40(a)(i) would exclude certain types of documents from the definition of advertisement. The documents that would be excluded would be preliminary official statements, official statements, preliminary prospectuses, prospectuses, summary prospectuses or registration statements. These exclusions recognize the differences between the role of a dealer under Rule G–21 and the role of a solicitor municipal advisor under proposed Rule G–40. Nonetheless, as with Rule G–21, an abstract or summary of those documents or other such similar documents prepared by the municipal advisor would be considered an advertisement. For example, a municipal advisor may assist with the preparation of an official statement. An official statement would be excluded from the definition of an advertisement. As such, under proposed Rule G–40(a)(i), the municipal advisor that assists with the preparation of an official statement generally would not be assisting with an advertisement and the municipal advisor’s work on the official statement generally would not be subject to the requirements of proposed Rule G–40. Form letter. The term ‘‘form letter’’ in proposed Rule G–40 would be identical to the definition of that term set forth in proposed amended Rule G–21(a)(ii). A form letter would be defined as any written letter or electronic mail message distributed to more than 25 persons within any period of 90 consecutive days.21 Similar to proposed amended Rule G– 21, proposed Rule G–40 would include Supplementary Material .01 to clarify the number of ‘‘persons’’ for a response to an RFP, RFQ or similar request, when used in the context of a form letter under proposed Rule G–40(a)(ii), is defined in paragraph (a)(iii)(B)), or reprint, or any excerpt of the foregoing or of a published article. The term does not apply to preliminary official statements, official statements, preliminary prospectuses, prospectuses, summary prospectuses or registration statements, but does apply to abstracts or summaries of the foregoing and other such similar documents prepared by municipal advisors. 20 A ‘‘solicitor municipal advisor,’’ is a municipal advisor that engages in a solicitation of a municipal entity or obligated person, as defined in Rule 15Ba1–1(n) under the Exchange Act. 21 See supra note 18. VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 determined at the entity level. Therefore, for example, if a municipal advisor were to respond to an RFP from Big City Water Authority, Big City Water Authority would count as one person, no matter how many persons employed by Big City Water Authority reviewed the municipal advisor’s response to the RFP. Municipal advisory client. Proposed Rule G–40(a)(iii), unlike Rule G–21, includes the definition of the term ‘‘municipal advisory client.’’ The definition of municipal advisory client would be substantially similar in all material respects to the definition of that term as set forth in the recent amendments to Rule G–8, effective October 13, 2017, to address municipal advisory client complaint recordkeeping.22 The definition of municipal advisory client would account for differences in the activities of non-solicitor and solicitor municipal advisors. (ii) Content Standards Proposed Rule G–40(a)(iv) sets forth content standards for advertisements. Those content standards would be substantially similar in all material respects to the content standards set forth in proposed amended Rule G–21. Nonetheless, proposed Rule G–40 would replace certain terms used in proposed amended Rule G–21 with terms more applicable to municipal advisors. The MSRB believes that incorporating content standards for advertisements into proposed Rule G–40 would ensure consistent regulation between regulated entities in the municipal securities market, as well as promote regulatory consistency between dealer municipal advisors and nondealer municipal advisors. Specifically, proposed Rule G–40 would require that: • An advertisement be based on the principles of fair dealing and good faith, be fair and balanced and provide a sound basis for evaluating the municipal security or type of municipal 22 Exchange Act Release No. 79801 (Jan. 13, 2017), 82 FR 7898 (Jan. 23, 2017) (SR–MSRB–2016– 15). See MSRB Notice 2017–03, SEC Approves Extension of MSRB’s Customer Complaint and Related Recordkeeping Rules to Municipal Advisors and the Modernization of Those Rules (Jan. 18, 2017). Specifically, Rule G–8(e)(ii) defines a municipal advisory client to include either a municipal entity or obligated person for whom the municipal advisor engages in municipal advisory activities as defined in Rule G–42(f)(iv), or a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) on behalf of whom the municipal advisor undertakes a solicitation of a municipal entity or obligated person, as defined in Rule 15Ba1–1(n), 17 CFR 240.15Ba1–1(n), under the Act. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 5477 security, municipal financial product, industry, or service and that a municipal advisor not omit any material fact or qualification if such omission, in light of the context presented, would cause the advertisement to be misleading; • an advertisement not contain any false, exaggerated, unwarranted, promissory or misleading statement or claim; • a municipal advisor limit the types of information placed in a legend or footnote of an advertisement so as to not inhibit a municipal advisory client’s or potential municipal advisory client’s understanding of the advertisement; • an advertisement provide statements that are clear and not misleading within the context that they are made, that the advertisement provides a balanced treatment of risks and potential benefits, and that the advertisement is consistent with the risks inherent to the municipal financial product or the issuance of the municipal security; • a municipal advisor consider the audience to which the advertisement will be directed and that the advertisement provide details and explanations appropriate to that audience; • an advertisement not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast; 23 and • an advertisement not refer, directly or indirectly, to any testimonial of any kind concerning the municipal advisor or concerning the advice, analysis, report or other service of the municipal advisor. By so doing, proposed Rule G–40’s content generally would promote regulatory consistency with proposed amended Rule G–21. However, unlike proposed amended Rule G–21, proposed Rule G–40 would prohibit a municipal advisor from using a testimonial in an advertisement. This prohibition is based in part on the fiduciary duty that a non-solicitor municipal advisor (as opposed to a dealer) owes its municipal entity clients. The MSRB notes that investment advisers also are subject to fiduciary duty standards. Similar to the concerns that the Commission has expressed about an 23 However, proposed amended Rule G– 40(a)(iv)(F) would permit: (1) A hypothetical illustration of mathematical principles, provided that it does not predict or project the performance of a municipal financial product; and (2) An investment analysis tool, or a written report produced by an investment analysis tool. E:\FR\FM\07FEN1.SGM 07FEN1 5478 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices advertisement by an investment adviser that contains a testimonial,24 the MSRB believes that a testimonial in an advertisement by a municipal advisor would present significant issues, including the ability to be misleading. The MSRB notes that in adopting Rule 206(4)–1 under the Investment Advisers Act of 1940, as amended (the ‘‘Advisers Act’’),25 the rule that applies to advertisements by registered investment advisers, the SEC found that the use of testimonials in advertisements by an investment adviser was misleading.26 Thus, Rule 206(4)–1 provides that the use of a testimonial by an investment adviser would constitute a fraudulent, deceptive, or manipulative act, practice, or course of action. To protect municipal entities and obligated persons, to help ensure consistent regulation between analogous regulated entities, and to help ensure a level playing field between municipal advisors/investment advisers and other municipal advisors, proposed Rule G– 40 would prohibit the use of testimonials by a municipal advisor.27 24 See infra note 26. U.S.C. 80b–1. 26 Advisers Act Rule 206(4)–1, 17 CFR 275.206(4)–1, provides, in part, that it would be a fraudulent, deceptive, or manipulative act or course of business for an investment adviser to publish, circulate, or distribute an advertisement that refers to any testimonial concerning the investment adviser. See Advisers Act Release No. 121 (Nov. 2, 1961), 26 FR 10548, 10549 (Nov. 9, 1961) (prohibiting testimonials of any kind and finding that ‘‘such advertisements are misleading; by their very nature they emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable. This is true even when the testimonials are unsolicited and are printed in full’’). However, since the rule’s adoption, the SEC staff has granted no-action relief on multiple occasions to permit certain communications to be used without those communications being considered testimonials. See, e.g., DALBAR, Inc. (publicly avail. Mar. 24, 1998) (providing no-action assurance relating to the use of DALBAR’s ratings of investment advisers in advertisements) and Cambiar Investors, Inc. (publicly avail. Aug. 28, 1997) (providing no-action assurance relating to the investment adviser providing a list that identifies clients). Further, the SEC has announced that the Division of Investment Management is considering recommending to the Commission amendments to Advisers Act Rule 206(4)–1, 17 CFR 275.206(4)–1, to enhance marketing communications and practices by investment advisers as part of the Commission’s long-term regulatory agenda published for the Fall 2017. The regulatory agenda is available at https://resources.regulations.gov/ public/custom/jsp/navigation/main.jsp. The MSRB will monitor the Commission’s action with regard to Advisers Act Rule 206(4)–1. However, at this time, the MSRB is neither providing interpretative guidance relating to the use of testimonials by municipal advisors nor adopting the SEC staff’s guidance. See discussion under ‘‘Self-Regulatory Organization’s Statement on the Proposed Rule Change Received from Members, Participants, or Others—Proposed Rule G–40—Testimonials.’’ 27 See discussion of testimonials in municipal advisor advertisements under ‘‘Self-Regulatory sradovich on DSK3GMQ082PROD with NOTICES 25 15 VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 Apart from the content standards discussed above, proposed Rule G– 40(a)(iv)(H), similar to proposed amended Rule G–21(a)(iii)(H), also would expand upon the guidance provided by Rule A–12, on registration. Rule A–12(e) permits a municipal advisor to state that it is MSRB registered in its advertising, including on its website. Proposed Rule G– 40(a)(iv)(H) would continue to permit a municipal advisor to state that it is MSRB registered. However, proposed Rule G–40(a)(iv)(H) would provide that a municipal advisor shall only state in an advertisement that it is MSRB registered as long as, among other things, the advertisement complies with the applicable standards of all other MSRB rules and neither states nor implies that the MSRB endorses, indemnifies, or guarantees the municipal advisor’s business practices, services, skills, or any specific municipal security or municipal financial product. (iii) General Standard for Advertisements Proposed Rule G–40(a)(v) would set forth a general standard with which a municipal advisor must comply for advertisements. That standard would require, in part, that a municipal advisor not publish or disseminate, or cause to be published or disseminated, any advertisement relating to municipal securities or municipal financial products that the municipal advisor knows or has reason to know contains any untrue statement of material fact or is otherwise false or misleading. The MSRB believes that the knowledge standard as the general standard for advertisements is appropriate. Thus, proposed Rule G–40 is similar to proposed amended Rule G–21(a)(iv) in all material respects, except proposed Rule G–40 substitutes ‘‘municipal advisor’’ for the term ‘‘dealer’’ and, consistent with Section 15B(e)(4) of the Exchange Act,28 applies with regard to municipal financial products in addition to municipal securities. B. Professional Advertisements Proposed Rule G–40(b) would define the term ‘‘professional advertisement,’’ and would provide the standard for such advertisements. As defined in proposed Rule G–40(b)(i), a professional advertisement would be an advertisement ‘‘concerning the facilities, services or skills with respect to the Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others,’’ below. 28 15 U.S.C. 78o–4(e)(4). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 municipal advisory activities of the municipal advisor or of another municipal advisor.’’ Proposed Rule G– 40(b)(ii) would provide, in part, that a municipal advisor shall not publish or disseminate any professional advertisement that contains any untrue statement of material fact or is otherwise false or misleading. The strict liability standard for professional advertisements in proposed Rule G–40(b)(ii) is consistent with the MSRB’s long-standing belief that a regulated entity should be strictly liable for an advertisement about its facilities, skills, or services, and that a knowledge standard is not appropriate.29 The MSRB has held this belief since it developed its advertising rules for dealers over 40 years ago.30 Thus, proposed Rule G–40(b) would be substantially similar in all material respects to proposed amended Rule G– 21(b). C. Principal Approval Proposed Rule G–40(c) would require that each advertisement that is subject to proposed Rule G–40 be approved in writing by a municipal advisor principal before its first use.31 Proposed Rule G– 40(c) also would require that the municipal advisor keep a record of all such advertisements. Proposed Rule G– 40(c) is similar in all material respects to proposed amended Rule G–21(f). If the SEC approves the proposed rule change, municipal advisors should update their supervisory and compliance procedures required by Rule G–44, on supervisory and compliance obligations of municipal advisors, to address compliance with proposed Rule G–40(c). D. Product Advertisements Proposed Rule G–40 would omit the provisions set forth in Rule G–21 regarding product advertisements, new issue product advertisements, and municipal fund security product advertisements. The MSRB believes, at this juncture, that municipal advisors most likely do not prepare such advertisements as the MSRB understands that municipal advisors 29 Notice of Filing of Fair Practice Rules, [1977– 1987 Transfer Binder] Municipal Securities Rulemaking Board Manual (CCH) ¶10,030 at 10,376 (Sept. 20, 1977). 30 Id. 31 MSRB Rule G–3(e)(i), on professional qualifications, defines a municipal advisor principal as: a natural person associated with a municipal advisor who is qualified as a municipal advisor representative and is directly engaged in the management, direction or supervision of the municipal advisory activities of the municipal advisor and its associated persons. E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices generally advertise their municipal advisory services and not products. 2. Statutory Basis Section 15B(b)(2) of the Exchange Act 32 provides that: [t]he Board shall propose and adopt rules to effect the purposes of this title 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. Section 15B(b)(2)(C) of the Exchange Act 33 provides that the MSRB’s rules shall: 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 engaged in regulating, clearing, settling, processing information with respect to, and 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. The MSRB believes that the proposed rule change is consistent with Sections 15B(b)(2) 34 and 15B(b)(2)(C) 35 of the Exchange Act. The proposed rule change would help prevent fraudulent and manipulative practices, promote just and equitable principles of trade, and protect investors, municipal entities, obligated persons and the public interest by enhancing the MSRB’s advertising rules that apply to dealers and by establishing advertising rules that apply to municipal advisors.36 Rule G–21 sradovich on DSK3GMQ082PROD with NOTICES The MSRB believes proposed amended Rule G–21, by design, would help prevent fraudulent and manipulative practices. Proposed amended Rule G–21 would require that advertisements be based on the principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts. A 32 15 U.S.C. 78o–4(b)(2). U.S.C. 78o–4(b)(2)(C). 34 15 U.S.C. 78o–4(b)(2). 35 15 U.S.C. 78o–4(b)(2)(C). 36 The MSRB notes that the technical amendment to proposed amended Rule G–42 will assist municipal advisors by providing a clearer rule that addresses the duties of non-solicitor municipal advisors. 33 15 VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 dealer would not be able to omit any material fact or qualification, if the omission, in light of the context of the material presented, would cause the advertisement to be misleading. Furthermore, dealers would be prohibited from making any false, exaggerated, unwarranted, promissory or misleading statement or claim in an advertisement. Dealers would be required to ensure that the statements that they make are clear and not misleading within the context in which they are made and that they provide a balanced treatment of risks and potential benefits. Dealers also would be limited in the types of information that could be placed in a legend or footnote in an advertisement, and dealers only could include a testimonial in an advertisement if certain conditions are met. Dealers would have to consider the nature of the audience to which the advertisement would be directed and would have to provide details and explanations appropriate to the audience. Further, dealers would be prohibited from indicating registration with the MSRB in an advertisement unless the advertisement complies with the applicable standards of all other Board rules and that neither states nor implies that the MSRB endorses dealer’s business practices, selling methods, class or type of security offered or any specific security. The prescriptive nature of proposed amended Rule G–21 would provide clear guidelines for dealers to follow that would help prevent fraudulent and manipulative practices. Moreover, because proposed amended Rule G–21 would promote regulatory consistency with certain of FINRA Rule 2210’s content standards, standards to which many dealers are currently subject as FINRA member firms, dealers may more easily understand and comply with proposed amended Rule G–21. In turn, this compliance would help prevent fraudulent and manipulative practices because the requirements of proposed amended Rule G–21 (noted in the paragraph above) are in and of themselves designed to prevent fraudulent and manipulative practices. Finally, proposed amended Rule G–21 would help prevent fraudulent and manipulative practices because it would promote more efficient inspections of dealer advertisements. Other financial regulators inspect and enforce the MSRB’s rules. Proposed amended Rule G–21 would provide clear guidelines as to the content of what may appear in an advertisement which should facilitate an efficient inspection. Further, because Rule G–21 would help promote PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 5479 regulatory consistency with certain of FINRA Rule 2210’s content standards, inspections staff may be well familiar with the proposed amended Rule G–21’s requirements. See discussion under ‘‘Proposed Amended Rule G–21— Enhancement of Fair Dealing Provisions and Promotion of Regulatory Consistency with Certain Standards of Other Financial Regulators—Content Standards’’ above. This familiarity with standards, as well as having clear advertising standards, might enable inspections staff to conduct a more efficient inspection of dealer advertisements. More efficient inspections of dealer advertisements, in turn, might result in inspections staff being able to determine whether there are any regulatory irregularities earlier during the inspection process. Proposed amended Rule G–21, also would help promote just and equitable principles of trade, and would enhance the MSRB’s fair dealing requirements. For the same reasons that the design of proposed amended Rule G–21 would help prevent fraudulent and manipulative practices, the prescriptive nature of the design of proposed amended Rule G–21 would provide clear guidelines for dealers to follow that would help promote just and equitable principles of trade. Proposed amended Rule G–21 also would help protect investors and the public interest. For the same reasons that the design of proposed amended Rule G–21 would help prevent fraudulent and manipulative practices and promote just and equitable principles of trade, the clear, prescriptive requirements of proposed amended Rule G–21 would help ensure that advertisements would present a fair statement of the services, products, or municipal securities advertised. In turn, investors and the public would be able to have more confidence in the accuracy of the services, products, or municipal securities advertised, and perhaps would be more comfortable making decisions based on an advertisement. For municipal entities, for example, this increased confidence in an advertisement may lead to a more efficient underwriter selection process. Proposed Rule G–40 Proposed Rule G–40, by design, would help prevent fraudulent and manipulative practices. Proposed Rule G–40 would require that advertisements be based on the principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts. No municipal advisor would be able to omit any material fact or qualification if the E:\FR\FM\07FEN1.SGM 07FEN1 sradovich on DSK3GMQ082PROD with NOTICES 5480 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices omission, in light of the context of the material present, would cause the advertisement to be misleading. Furthermore, municipal advisors would be prohibited from making any false, exaggerated, unwarranted, promissory or misleading statement or claim in an advertisement. Municipal advisors would be required to ensure that the statements that they make are clear and not misleading within the context in which they are made and that they provide a balanced treatment of risks and potential benefits. Municipal advisors also would be limited in the types of information that could be placed in a legend or footnote in an advertisement, and would not be able to include a testimonial in an advertisement. Municipal advisors would have to consider the nature of the audience to which the advertisement would be directed and would have to provide details and explanations appropriate to the audience. Further, municipal advisors would be prohibited from indicating registration with the MSRB in an advertisement unless the advertisement complies with the applicable standards of all other Board rules and that neither states nor implies that the MSRB endorses the municipal advisor’s business practices, services, skills or any specific type of municipal security or municipal financial product. The prescriptive nature of proposed Rule G–40 would provide clear guidelines for municipal advisors to follow that would help prevent fraudulent and manipulative practices. Proposed Rule G–40 also would help prevent fraudulent and manipulative practices because proposed Rule G–40 would promote efficient inspections of municipal advisor advertisements. Other financial regulators inspect and enforce the MSRB’s rules. Proposed Rule G–40 would provide clear guidelines as to the content of what may appear in an advertisement which should facilitate an efficient inspection of municipal advisor advertisements. More efficient inspections of municipal advisor advertisements, in turn, might result in inspections staff being able to more easily and readily determine whether there are any regulatory irregularities earlier during the inspection process. Proposed Rule G–40 also would help promote just and equitable principles of trade. Proposed Rule G–40 would enhance the MSRB’s fair dealing requirements by, for the first time, having specific requirements for municipal advisor advertising. As such, proposed Rule G–40 would promote regulatory consistency in the municipal securities market, and thus would help VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 promote just and equitable principles of trade. Further, for the same reasons that the design of proposed Rule G–40 would help prevent fraudulent and manipulative practices, proposed Rule G–40’s prescriptive and clear guidelines would help promote just and equitable principles of trade. Proposed Rule G–40, also would help protect investors, municipal entities, obligated persons and the public interest. For the same reasons that the design of proposed Rule G–40 would help prevent fraudulent and manipulative practices and promote just and equitable principles of trade, the clear, prescriptive requirements of proposed Rule G–40 would help ensure that advertisements would present a fair statement of the municipal security or type of municipal security, municipal financial product, industry or service advertised. This, in turn, would help protect investors, municipal entities, obligated persons and the public interest. Further, investors, municipal entities, obligated persons and the public would be able to have more confidence in the accuracy of the advertisements, and perhaps would be more comfortable making decisions based, in part, on an advertisement. B. Self-Regulatory Organization’s Statement on Burden on Competition Section 15B(b)(2)(C) of the Exchange Act 37 requires that MSRB rules not be designed to impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. In accordance with the Board’s policy on the use of economic analysis in rulemaking, the Board has reviewed proposed amended Rule G–21 and proposed Rule G–40.38 Proposed Amended Rule G–21 The MSRB believes that, through promoting regulatory consistency of certain MSRB advertising standards with those of other financial regulators, proposed amended Rule G–21 may improve efficiency in the form of less unnecessary complexity for dealers and reduced burdens and compliance costs over time since additional regulatory consistency should assist dealers with developing uniform policies and procedures. This may also benefit both 37 15 U.S.C. 78o–4(b)(2)(C). 38 Policy on the Use of Economic Analysis in MSRB Rulemaking is available at https://msrb.org/ Rules-and-Interpretations/Economic-AnalysisPolicy.aspx. In evaluating whether there was a burden on competition, the Board was guided by its principles that required the Board to consider costs and benefits of a rule change, its impact on capital formation and the main reasonable alternative regulatory approaches. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 retail and institutional investors, where transparency, consistency, truthful and accurate information and ease of comparison of different financial services would be highly valued. The alternative of leaving Rule G–21 in its current state would mean that dealers that are registered both with the MSRB and FINRA would continue to face two sets of compliance requirements with additional costs and regulatory burdens.39 Since proposed amended Rule G–21 would establish more stringent and prescriptive advertising standards for dealers than are included in the baseline, which is current existing Rule G–21, the MSRB expects that dealers may experience increased costs because of the new requirements, especially for bank dealers that are not currently registered with FINRA.40 These costs, however, can be mitigated through careful planning because the proposed rule change, if adopted, would have a nine-month implementation period during which the industry could adjust. The MSRB believes that much of the costs associated with proposed amended Rule G–21 would be up-front costs resulting from sunk investments in advertisements previously developed by dealers that would no longer be compliant upon effectiveness of the proposed rule change, as well as costs from initial compliance development such as updating or rewriting policies and procedures. For those dealers that are also registered with FINRA, those costs should not be significant, as much of proposed amended Rule G–21 would align with FINRA Rule 2210, a rule with which those dealers currently must comply. On balance, the MSRB believes that proposed amended Rule G–21 would not impose an unreasonable burden on dealers, and the likely benefits, such as reduced unnecessary complexity and compliance standards that are more closely aligned with those of other financial regulators, would justify the associated costs in both the near and long term. Since dealers currently are subject to advertising standards under the MSRB’s rules, the MSRB believes that proposed amended Rule G–21 is unlikely to hinder capital formation. The MSRB 39 The benefits of alignment with FINRA’s rule, however, will not apply to those firms that are not dual-registrants. 40 In response to comments received by market participants related to the Request for Comment, the MSRB would permit the use of testimonials by dealers in advertisements under the same limitations used in FINRA regulation. See ‘‘SelfRegulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others’’ below. E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices believes that proposed amended Rule G–21 would not harm competition, and may indeed enhance competition by putting all competitors on an equal footing due to a uniform set of advertising standards for dual registrants that is more straightforward for the market and investors. sradovich on DSK3GMQ082PROD with NOTICES Proposed Rule G–40 Similar to Rule G–21, proposed Rule G–40 would be a core fair practice rule governing advertising by municipal advisors. As such, proposed Rule G–40 would help protect investors, municipal entities, obligated persons and the general public. Moreover, proposed Rule G–40 would help ensure consistent regulation between regulated entities in the municipal securities market as well as to promote regulatory consistency among dealer municipal advisors, nondealer municipal advisors and municipal advisors that are also registered as investment advisers with the SEC.41 The MSRB believes that one benefit of proposed Rule G–40 may be more accurate information available to clients through advertising by municipal advisors, which, at the margin, may lead to more informed decision-making related to municipal advisor selection.42 As a result of applying proposed Rule G–40’s advertising standards, municipal entities and obligated persons may be able to more easily establish objective criteria to use in selecting municipal advisors and this may increase the likelihood that municipal advisors are hired because of their qualifications as opposed to other reasons. In addition, transparency, consistency, truthful and accurate information in advertising should benefit municipal entities and obligated persons in general and may lead to increased confidence in the municipal market. The MSRB believes that much of the costs associated with proposed Rule G– 41 For example, under Rule G–21 dealers are required to keep records of their advertisements and are prohibited from using false or misleading information in advertising. 42 Acacia indicated that many issuers hire municipal advisors through some type of competitive process and the provision of materials in response to such a solicitation should not be deemed an advertisement and the existing regulatory framework would govern false and misleading statements in those materials. The MSRB agrees that materials submitted as part of a response to an RFP generally would not be considered as advertising; instead, proposed Rule G–40 focuses on materials provided generally to potential clients and the MSRB believes that accurate and truthful advertising would still be meaningful to decisions on selection and retention of municipal advisors. See ‘‘Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others’’ below. VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 40 would be up-front sunk costs resulting from investments in advertisements previously developed by municipal advisors that would no longer be compliant upon effectiveness of the proposed rule,43 as well as from initial costs to establish compliant policies and procedures, although there would be some ongoing costs associated with principal approval and recordkeeping requirements.44 Since this is the first time that municipal advisors may be subject to such regulation, to ensure compliance with the advertising standards of proposed Rule G–40, municipal advisors may also incur costs by seeking advice from compliance or legal professionals when preparing advertising materials. In particular, regarding proposed Rule G–40’s prohibition of municipal advisors use of testimonials in their advertisements, the MSRB believes firms that rely extensively on testimonials as their form of advertising would likely experience more transition costs than firms that presently either do not use testimonials or use testimonials only occasionally. While the MSRB acknowledges that there would be certain increased costs for municipal advisors that presently use testimonials in advertising, the benefits accrued to municipal entities and obligated persons, including increased likelihood of receiving accurate, non-misleading and objective information from advertisements, should exceed the costs over time. The MSRB believes these costs should not be burdensome for small municipal advisory firms. For some one-time initial compliance costs, the MSRB believes that small municipal advisory firms may incur proportionally larger costs than larger firms. However, for many other ongoing costs, such as costs associated with principal approval and record-keeping requirements, as well as sunk investments in advertisements previously developed but that would no longer be compliant, the costs should be proportionate to the size of the firm, assuming that small firms generally advertise less than larger firms. Thus, it is unlikely that proposed Rule G–40 would have an outsized impact on small firms. 43 As elaborated above, these costs can be mitigated through careful planning during the implementation period for the proposed rule change, if adopted, which would give the industry time to adjust. 44 See 3PM letter at 3–4, which describes potential compliance costs for solicitor municipal advisors associated with having a principal preapprove a form letter prior to allowing their sales professionals to send out the form letter. See ‘‘SelfRegulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others’’ below. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 5481 On balance, the MSRB believes that proposed Rule G–40 would not impose an unreasonable burden on municipal advisors,45 and the potential benefits would justify the associated costs in both the near and long term since the benefits of proposed Rule G–40 should exceed the costs over the long term. The MSRB considered that the costs associated with proposed Rule G–40 may lead some municipal advisors to curtail their advertising expenditures and compete less aggressively through advertising.46 On balance, the MSRB believes that the market for municipal advisory services is likely to remain competitive; 47 any potential negative impact on competition as a result of potential curtailment of advertising expenditures should be counteracted by the potential positive impact from improved advertising standards and more transparent and accurate information on municipal advisors. The MSRB believes that proposed Rule G–40 should not hinder capital formation. As noted above, the betterquality information conveyed by municipal advisors through advertising that meets the standards of proposed Rule G–40 may lead to an improved municipal advisor selection process (as discussed above). One commenter noted that municipal advisors are typically selected through an RFP process rather than via advertising. However, if firms gained no advantage from advertising, it would be irrational and not in their best interest to advertise. Thus, the MSRB expects that advertising can influence the municipal advisor selection process even if only to raise awareness of a firm. If a final municipal advisor selection is determined exclusively via an RFP process, truthful and accurate advertising still could help issuers target 45 Acacia stated that proposed Rule G–40 ‘‘applies a regulatory burden and cost which is not proportional to the MSRB’s stated goal of preventing misleading information to investors, issuers or obligated persons,’’ but did not offer any quantitative information. See ‘‘Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others’’ below. 46 Also, at the margin, some municipal advisors may even determine to consolidate with other municipal advisors to benefit from economies of scale (e.g., by leveraging existing compliance resources of a larger firm) rather than to incur separately the costs associated with proposed Rule G–40. The MSRB, however, is skeptical about this scenario, as the potential costs of compliance with proposed Rule G–40 are not expected to be onerous. 47 3PM stated that proposed Rule G–40 would put solicitor municipal advisors at a disadvantage to solicitors who are not registered with the MSRB or working with municipal entities. However, unregistered solicitors are not within the MSRB’s jurisdiction, and the rule proposal is intended to ensure fairness and accuracy in advertisements from all municipal advisors who render services to or initiate a solicitation from municipal entities. E:\FR\FM\07FEN1.SGM 07FEN1 5482 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices their requests for proposals to firms the issuer expects to be sufficiently qualified thereby enhancing the selection process through gains in efficiency. Finally, transparency, consistency, truthful and accurate information in advertising may increase the willingness of municipal entities and obligated persons to use municipal advisors.48 This, in turn, may contribute to a more efficient capital formation process as municipal entities and obligated persons may make more informed decisions as to the structure, timing, terms and other similar matters, related to issuances of municipal securities and municipal financial products. sradovich on DSK3GMQ082PROD with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The MSRB sought public comment on the draft amendments to Rule G–21 and new draft Rule G–40.49 In response to that Request for Comment, the MSRB received 11 comment letters.50 48 The MSRB is planning to examine the frequency with which issuers use municipal advisors over time in a retrospective analysis of the municipal advisor regulatory framework in the future. 49 MSRB Notice 2017–04 (Feb. 16, 2017) (the ‘‘Request for Comment’’). 50 Letter from Noreen P. White, Co-President, and Kim M. Whelan, Co-President, Acacia Financial Group, Inc., dated April 7, 2017 (‘‘Acacia’’); Letter from Mike Nicholas, Chief Executive Officer, Bond Dealers of America, dated March 24, 2017 (‘‘BDA’’); Letter from Norman L. Ashkenas, Chief Compliance Officer, Fidelity Brokerage Services, LLC, Richard J. O’Brien, Chief Compliance Officer, National Financial Services, LLC, and Jason Linde, Chief Compliance Officer, Fidelity Investments Institutional Services Company, LLC, dated March 24, 2017 (‘‘Fidelity’’); Letter from David T. Bellaire, Esq., Executive Vice President & General Counsel, Financial Services Institute, dated March 24, 2017 (‘‘FSI’’); Letter from Laura D. Lewis, Principal, Lewis Young Robertson & Burningham, Inc., dated March 24, 2017 (‘‘Lewis Young’’); Letter from Susan Gaffney, Executive Director, National Association of Municipal Advisors, dated March 24, 2017 (‘‘NAMA’’); Letter from Leo Karwejna, Chief Compliance Officer, Cheryl Maddox, General Counsel, and Catherine Humphrey-Bennett, Municipal Advisory Compliance Officer, Public Financial Management, Inc. and PFM Financial Advisors LLC, dated March 23, 2017 (‘‘PFM’’); Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated March 24, 2017 (‘‘SIFMA’’); Letter from Paul Curley, Director of College Savings Research, Strategic Insight, dated May 16, 2017 (‘‘SI’’); Letter from Donna DiMaria, Chairman of the Board of Directors and Chair of the 3PM Regulatory Committee, Third Party Marketers Association, dated March 23, 2017 (‘‘3PM’’); and Letter from Robert J. McCarthy, Director, Regulatory Policy, Wells Fargo Advisors, dated March 24, 2017 (‘‘Wells Fargo’’). During the period in which the MSRB considered the comments received in response to the Request for Comment, the Board concluded to separately propose the amendments to Rule G–21(e). The SEC approved those amendments on August 18, 2017, VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 Commenters generally expressed support for the proposed rule change, but also expressed various concerns and suggested certain revisions. Below, the MSRB discusses the comments received relating to proposed amended Rule G–21. Following that discussion, the MSRB discusses the comments received relating to proposed Rule G–40. I. Proposed Amended Rule G–21 The MSRB received five comment letters that focused on the draft amendments to Rule G–21 (other than Rule G–21(e)).51 Commenters focused on harmonization with FINRA Rule 2210, additional exclusions from the definition of an advertisement, hypothetical illustrations, hyperlinks, coordination between self-regulatory organizations (‘‘SROs’’), and jurisdictional guidance under Rule G–21 relating to dealer/municipal advisors. The comments ranged from strong support for the draft amendments as set forth in the Request for Comment 52 to the suggestion that the Board should simply incorporate FINRA Rule 2210 by reference into Rule G–21.53 A. Harmonization With FINRA Rule 2210 Commenters supported the draft amendment’s harmonization with FINRA Rule 2210. In fact, FSI provided its strong support for the draft amendments to Rule G–21, as drafted.54 Nevertheless, some other commenters suggested that the draft amendments to Rule G–21 could be harmonized more with FINRA Rule 2210 by adopting that rule’s (i) definition of communications and the distinctions in FINRA Rule 2210 that follow from that definition 55 and (ii) use of testimonials,56 or by incorporating FINRA Rule 2210 by reference into Rule G–21.57 Further, one commenter suggested that because of and the amendments became effective on November 18, 2017. See Exchange Act Release No. 81432 (Aug. 18, 2017), 82 FR 40199 (Aug. 24, 2017) (SR– MSRB–2017–04). Fidelity, FSI, SIFMA and SI addressed the draft amendments to Rule G–21(e) in their letters to the MSRB. The MSRB discussed those comments in SR–MSRB–2017–04, and generally will not discuss those comments as part of this proposed rule change. 51 See BDA, Fidelity, FSI, SIFMA and Wells Fargo letters. To the extent that the five commenters that focused on draft Rule G–40 provided comments relevant to the draft amendments to Rule G–21, those comments are also included in the discussion below. 52 FSI letter at 2. 53 SIFMA letter at 2. 54 FSI letter at 2. 55 See BDA, SIFMA, and 3PM letters. 56 See BDA, Fidelity, SIFMA, and Wells Fargo letters. 57 SIFMA letter at 2. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 the harmonization with FINRA Rule 2210, the definitions and product advertisement and professional advertisement sections could be deleted from Rule G–21 and Rule G–40.58 (i) Definition of Communications BDA, SIFMA, and 3PM suggested that the MSRB further harmonize Rule G–21 with FINRA Rule 2210 by adopting FINRA Rule 2210’s definition of ‘‘communications’’ and the distinctions in the rule that follow from that definition. In particular, commenters favored the harmonization with FINRA Rule 2210’s communications definition because institutional communications would no longer be subject to preapproval by a principal. BDA, SIFMA, and 3PM submitted that, if the MSRB were to do so, dealers then could apply common approval processes for institutional communications across all asset classes.59 However, FINRA’s regulation of advertising differs significantly from the MSRB’s advertising regulation. FINRA Rule 2210 defines ‘‘communications’’ as consisting of correspondence, retail communications, and institutional communications.60 Based on the type of communication, FINRA Rule 2210 then may require pre-approval by a principal before the communication’s first use and the filing of the communication with FINRA’s advertising regulation department for review either a certain number of days before or within a certain number of days after first use.61 58 BDA letter. BDA letter; SIFMA letter at 5; and 3PM letter at 7–8. See also SIFMA letter at 8 (‘‘SIFMA strongly supports the harmonization of draft Rule G–40 with FINRA Rule 2210 with respect to the categorization of communications’’); 3PM letter at 4 (stating that the MSRB ‘‘should also consider segregating advertisements by investor group as well for solicitor municipal advisors’’); 3PM letter at 4 (‘‘we believe that the MSRB should also consider segregating advertisements by investor group as well for solicitor municipal advisors’’). BDA stated that, if the MSRB has a rule that applies different definitions and different sets of responsibilities and does not differentiate between communications sent to retail and institutional customers, the MSRB will have created an increased regulatory burden along with considerable confusion for broker-dealers. While the MSRB appreciates BDA’s concerns, Rule G–21 currently applies different standards and responsibilities than what is currently required by FINRA Rule 2210. For example, Rule G–21 currently requires pre-approval by a principal of all advertisements, including advertisements that would be considered institutional communications under FINRA Rule 2210. Other than permitting testimonials in advertisements subject to certain conditions, the MSRB has determined not to revise the draft amendments to Rule G–21 to reflect BDA’s suggestion that the MSRB more fully harmonize Rule G–21 with FINRA Rule 2210. 60 See FINRA Rule 2210(a)(1). 61 See FINRA Rule 2210(b) and (c) (generally requiring pre-approval by a principal of the member 59 See E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices Moreover, the MSRB, unlike FINRA, does not require the filing of advertisements with the MSRB before first use and the MSRB does not review advertisements. Rather, and since the MSRB approved its advertising rules in 1978,62 the MSRB has relied upon its core fair dealing principles set forth in its advertising rules and the important supervisory function of principal preapproval to regulate advertisements by dealers.63 The MSRB continues to believe that it is important that a principal pre-approve an advertisement regardless of the intended recipient of the advertisement. Therefore, the Board determined not to revise the draft amendments to Rule G–21 to reflect commenters’ suggestions about adopting FINRA Rule 2210’s definition of communications and the distinctions that result from that definition. sradovich on DSK3GMQ082PROD with NOTICES (ii) Use of Testimonials BDA, Fidelity, SIFMA, and Wells Fargo urged the Board to permit testimonials in dealer advertising to better harmonize Rule G–21 with FINRA Rule 2210.64 Commenters argued that to do otherwise would result in confusion and an inconsistent ‘‘patchwork’’ approach to dealer rules and that regulatory harmonization and consistency between MSRB and FINRA rules are paramount.65 Further, SIFMA, Fidelity, and Wells Fargo believed that the protections set forth in FINRA Rule 2210 relating to testimonials 66 were before the earlier of the retail communication’s first use or the filing of the advertisement with FINRA— correspondence and institutional communications are not subject to member pre-approval and filing with FINRA; however, there must be supervisory policies and procedures in place relating to such communications). 62 The Board originally had three rules that addressed advertising—Rule G–21, Rule G–33 (relating to advertisements for new issues) and Rule G–34 (relating to advertisements for products). In 1980, the Board merged Rules G–33 and G–34 into Rule G–21. See Notice of Approval of Amendments to the Board’s Advertising Rules (Nov. 21, 1980) CCH MSRB Manual ¶ 10,167 at 10,599. 63 See, e.g., supra note 29 at 10,371. 64 BDA letter, Fidelity letter at 5–6, SIFMA letter at 6–7, and Wells Fargo letter at 2–3. 65 See, e.g., BDA letter and SIFMA letter at 6. See also 3PM letter at 6 (the prohibition on the use of testimonial in an advertisement would create an issue for ‘‘municipal advisors that are registered with both the MSRB and FINRA . . . [w]hile we are not necessarily against the notion of adhering to the strictest standard, this approach does require additional compliance and oversight resources to be dedicated to a function and ultimately results in additional cost to the municipal advisor’’). The MSRB does not address 3PM’s interpretation of FINRA rules and the issue of the ability of an associated person to like or recommend items on social media platforms. 66 FINRA Rule 2210(d)(6) provides: (A) If any testimonial in a communication concerns a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion. VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 strong enough for retail communications to investors, including investors who are seniors.67 Fidelity suggested that the MSRB engage with FINRA to determine whether FINRA Rule 2210(d)(6) adequately protects investors who are seniors.68 After carefully considering commenters’ suggestions, as well as consulting with FINRA staff, the Board determined to revise the draft amendments to Rule G–21. The proposed rule change would permit dealer advertisements, but not municipal advisor advertisements (discussed below), to contain testimonials under the same conditions as are currently set forth in FINRA Rule 2210(d)(6). (iii) Incorporation of FINRA Rule 2210 by Reference SIFMA commented that, while it supported the MSRB’s efforts to level the playing field between dealers and municipal advisors, the better way to level that playing field, as well as to promote harmonization with FINRA’s rules, is for the Board to incorporate FINRA Rule 2210 by reference into the MSRB’s rules.69 SIFMA stated that, since Rule G–21 was adopted in 1978, (B) Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: (i) The fact that the testimonial may not be representative of the experience of other customers. (ii) The fact that the testimonial is no guarantee of future performance or success. (iii) If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. 67 See SIFMA letter at 6; Fidelity letter at 7–8; Wells Fargo letter at 2–3. 68 Fidelity letter at 7–8. 69 SIFMA letter at 2–3. SIFMA also stated that the MSRB should consider all the exceptions and guidance in FINRA Rule 2210(d) regarding content standards and that SIFMA and its members feel very strongly about these exceptions, particularly Rule 2210(d)(6), on testimonials, FINRA Rule 2210(d)(7), on recommendations, and FINRA Rule 2210(d)(9), on prospectuses, including private placement memoranda. SIFMA letter at 5. The MSRB’s considerations of testimonials is discussed above under ‘‘Proposed Amended Rule G–21— Harmonization with FINRA Rule 2210—Use of testimonials.’’ The MSRB’s considerations of private placement memoranda are discussed below under ‘‘Potential Additional Exclusions from the Definition of Advertisement—Private Placement Memoranda.’’ SIFMA did not provide further details about its suggestion concerning recommendations. At this time, the MSRB has determined not to include revisions to the draft amendments to Rule G–21 in the proposed rule change to address SIFMA’s suggestion about recommendations. See also BDA letter (‘‘[t]here is no compelling policy reason to have different communication standards for municipal securities and corporate securities’’); and Lewis Young letter (‘‘we suggest you eliminate the current provisions related to advertising of Rule G–21 on broker/dealer activities otherwise governed by both G–17 and G– 42 and that you not impose a Rule G–40 on nonbroker/dealer advisors’’). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 5483 Rule G–21 has not been regularly or uniformly harmonized with what is now FINRA Rule 2210 and that this discordance has led to confusion among all market participants and regulatory risk for dealers.70 Nevertheless, SIFMA did not propose that the MSRB incorporate FINRA Rule 2210 in its entirety by reference into Rule G–21. Rather, SIFMA submitted that certain provisions of FINRA Rule 2210(c) relating to the filing of advertisements with FINRA and the review procedures for those advertisements were unnecessary and burdensome and should not be included. Similarly, SIFMA proposed that provisions in FINRA Rule 2210(e) relating to the limitations on the use of FINRA’s name and any other corporate name owned by FINRA be exempted from the incorporation by reference of FINRA Rule 2210 into Rule G–21. Further, SIFMA recognized that there may be a need for certain MSRB regulation of dealer and municipal advisor advertising. SIFMA stated that ‘‘[w]ith respect to advertising or public communications for most municipal securities products (except for municipal advisory business and municipal fund securities), we feel there is no compelling reason to establish a different rule set than that which exists under FINRA Rule 2210.’’ 71 As discussed under ‘‘Background’’ above, Rule G–21 is one of the MSRB’s core fair practice rules that has been in effect since 1978. In proposing those rules, the MSRB stated the purpose of the fair practice rules ‘‘is to codify basic standards of fair and ethical business conduct for municipal securities professionals.’’ 72 After carefully considering SIFMA’s suggestions, including the recognition of the important differences between the corporate and municipal securities markets, the MSRB determined not to incorporate FINRA Rule 2210 by reference into Rule G–21. Further, the MSRB notes that if the MSRB were to incorporate FINRA Rule 2210 by reference and if FINRA or its staff were to provide an interpretation of FINRA Rule 2210, the Board automatically would be adopting that interpretation without considering the interpretation’s 70 SIFMA letter at 2. letter at 9. 3PM had a somewhat analogous view to that of SIFMA’s about the Request for Comment. 3PM noted that most solicitor municipal advisors that are members of 3PM are also members of FINRA. 3PM submitted that the Board should focus on municipal advisor firms that have no regulatory oversight rather than layering additional compliance regulations and costs on solicitor municipal advisors. 3PM letter at 13. 72 See supra note 29 at 10,371. 71 SIFMA E:\FR\FM\07FEN1.SGM 07FEN1 5484 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices ramifications for the unique municipal securities market. In addition, there are municipal securities dealers that are not members of FINRA. Those dealers may not have the necessary notice of FINRA’s rule interpretations. (iv) Definition of Standards for Product and Professional Advertisements BDA suggested that the definitions of standards for product advertisements and professional advertisements were made redundant by the general and content standards in the draft amendments to Rule G–21 and draft Rule G–40, and that the provisions should be deleted to signify that these types of communications are covered by the draft amendments to Rule G–21 and draft Rule G–40.73 Although the provisions in the draft amendments to Rule G–21 and draft Rule G–40 are analogous to the current provisions in Rule G–21, there are differences in those provisions. For example, Rule G–21(b) contains a strict liability standard relating to the publication or dissemination of professional advertisements. Since the MSRB first proposed Rule G–21, the MSRB has believed that ‘‘a strict standard of responsibility for securities professionals [is necessary] to assure that their advertisements are accurate.’’ 74 After careful consideration, the MSRB has determined at this time not to delete the standards for product and professional advertisements. B. Potential Additional Exclusions From the Definition of Advertisement Commenters suggested additional exclusions from the definition of an advertisement. Those exclusions related to private placement memoranda 75 and responses to RFPs or RFQs.76 sradovich on DSK3GMQ082PROD with NOTICES (i) Private Placement Memoranda BDA and SIFMA suggested that as part of its harmonization effort, the MSRB should exclude private placement memoranda from the definition of advertisement.77 BDA 73 BDA letter. See also SIFMA letter at 4 (strongly supporting the removal of the definition of ‘‘advertisement,’’ ‘‘form letter,’’ and ‘‘professional advertisement’’ in favor of harmonizing with FINRA Rule 2210’s three categories of communications, and stating that ‘‘[h]armonization of the MSRB and FINRA rules would also necessitate the removal of the confusing and duplicative definition of ‘product advertisement’’’). 74 See supra note 29 at 10,376. 75 See BDA letter and SIFMA letter at 5. 76 See, e.g., BDA letter and SIFMA letter at 5–6. 77 Similarly, 3PM stated that, ‘‘[g]iven the nature of a private placement memorandum for private issuers, we do not believe these documents should be classified as an advertisement and should be excepted from the rule as are preliminary official statements, official statements, preliminary VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 noted those materials are frequently used as offering memoranda and thus should be excluded from the definition of advertisement alongside preliminary offering statements.78 The MSRB believes, however, that such an exclusion would cause disharmonization with FINRA Rule 2210. FINRA Rule 2210 does not provide a similar exclusion from the definition of a communication. After careful consideration, the Board determined not to revise the draft amendments to Rule G–21 to reflect commenters’ suggestion. (ii) Response to an RFP or RFQ BDA and SIFMA commented that the Board should amend Rule G–21 (Acacia, BDA, SIFMA, NAMA and PFM also made similar comments with respect to draft Rule G–40) to exclude a response to an RFP or RFQ from the definition of advertisement.79 Commenters submitted that it was not appropriate for the MSRB to regulate responses to requests for proposals or qualifications the same way that the MSRB regulates ‘‘retail communications’’—i.e., possibly requiring principal approval in writing before sending the response to the RFP or RFQ to an issuer. The MSRB agrees. In the Request for Comment, the MSRB noted that a response to an RFP or RFQ would be excluded from regulation under the draft amendments to Rule G– 21 and draft Rule G–40 because the response would be excluded from the definition of a form letter. Nevertheless, commenters stated that they did not believe that exclusion was sufficient, and stated that such responses to RFPs and RFQs should be explicitly excluded from the definition of advertisement.80 In particular, SIFMA expressed concern about the number of employees at a municipal securities issuer who may review an RFP or RFQ, and stated that it should not matter how many employees at such an issuer review the responses to an RFP and RFQ. To ensure that the definition of form letter is interpreted as intended, the proposed rule change includes Supplementary Material .03 to Rule G– 21 and Supplementary Material .01 to proposed Rule G–40. This supplementary material explains that an entity that receives a response to an RFP, RFQ or similar request would count as one ‘‘person’’ for the purposes of the definition of a form letter no matter the number of employees of the prospectuses, summary prospectuses or registration statements.’’ See 3PM letter at 11. 78 See BDA letter. 79 See Acacia letter, BDA letter, SIFMA letter at 6, NAMA letter at 2, and PFM letter at 2. 80 Id. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 entity who may review the response. Other than the supplementary material, the Board determined that no other revisions to the draft amendments to Rule G–21 or to draft Rule G–40 were necessary to address commenters’ concerns about RFPs and RFQs. C. Hypothetical Illustrations The Request for Comment noted that FINRA had recently requested comment on draft amendments to FINRA Rule 2210 to create an exception to the rule’s prohibition on projecting performance to permit a firm to distribute a customized hypothetical investment planning illustration that includes the projected performance of an investment strategy. In part, in the interest of potential harmonization, the MSRB asked whether it should consider a similar proposal. Fidelity, SIFMA, and Wells Fargo commented that the MSRB should include a similar exception in the draft amendments to Rule G–21 and in draft Rule G–40.81 The comment period on FINRA’s draft amendments to FINRA Rule 2210 closed March 27, 2017, and FINRA is still considering the comments that it received.82 The Board determined that it would be premature to include provisions to address FINRA’s draft amendments to Rule 2210 in the proposed rule change before FINRA determines how to proceed with those draft amendments. The MSRB will continue to monitor the FINRA initiative. D. Hyperlinks The amendments to Rule G–21(e), effective November 18, 2017, clarify that a hyperlink can be used for an investor to obtain more current municipal fund security performance information. Fidelity suggested that the MSRB expand the use of hyperlinks more broadly and in other advertising contexts outside of municipal fund security performance advertisements.83 The MSRB appreciates Fidelity’s suggestion, but at this time, has determined to not expand the use of hyperlinks in other types of advertisements. 81 See Fidelity letter at 4, SIFMA letter at 7, and Wells Fargo letter at 3. See also 3PM letter at 5 (stating that institutional investors should be permitted to receive materials with projected or targeted returns). 82 FINRA received 21 comment letters in response to Regulatory Notice 17–06, FINRA Requests Comment on Proposed Amendments to Rules Governing Communications with the Public. 83 See Fidelity letter at 3. E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices E. Coordination Between SelfRegulatory Organizations Fidelity encouraged the MSRB to review existing and upcoming FINRA guidance concerning communications with the public and to engage with FINRA directly during the rulemaking process.84 The MSRB agrees with this approach and notes that it has directly engaged with FINRA during this particular rulemaking process, and regularly coordinates with FINRA as well as other financial regulators on rulemaking and other matters. As noted in the Request for Comment, the MSRB reviews the rulemaking proposals of FINRA as well as those of other financial regulators.85 F. Dealer/Municipal Advisor Jurisdictional Guidance Commenters suggested that the MSRB provide guidance and/or exemptions from Rule G–21 for dealer/municipal advisors. Specifically, SIFMA suggested that the MSRB amend Rule G–21 to clarify that the activities of dealer/ municipal advisors are governed by draft Rule G–40 when those dealer/ municipal advisors are engaging in municipal advisor advertising.86 Lewis Young had a somewhat analogous comment. Lewis Young suggested that the MSRB ‘‘eliminate the current provisions related to advertising of Rule G–21 on broker/dealer activities otherwise governed by both G–17 and G–42 and that you not impose a Rule G– 40 on non-broker/dealer advisors.’’ 87 Although such clarifications relating to dealer/municipal advisors under Rule G–21 may be beneficial in the future, the MSRB’s regulatory scheme relating to municipal advisors is not yet complete. The MSRB believes that its regulation of financial advisory activities (as an element of municipal securities activity) should remain in place at least until a more complete regulatory framework for municipal advisors is in effect.88 Thus, after careful consideration of commenters’ suggestions, the Board determined not to further revise the draft amendments 84 Id. at 2–3. for Comment at 21. 86 SIFMA letter at 8. 87 Lewis Young letter. 88 The MSRB has long regulated the activities of financial advisors. See, e.g., Rule G–23, on activities of financial advisors. Rule G–23 was adopted as part of the Board’s fair practice rules to codify basic standards of fair and ethical business conduct for dealers. Rule G–23 does not prescribe normative standards for dealer/municipal advisor conduct. Rather, as a conflicts of interest rule, it prohibits activities that would be in conflict with the ethical duties the dealer owes in its capacity as a financial advisor to its municipal issuer client. This approach to Rule G–23 has remained unchanged. sradovich on DSK3GMQ082PROD with NOTICES 85 Request VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 to Rule G–21 to reflect commenters’ suggestions. II. Proposed Rule G–40 The MSRB received five comment letters that focused on draft Rule G– 40.89 The comments concerned (i) the ability of the MSRB to regulate advertising by municipal advisors through other MSRB rules without draft Rule G–40, (ii) the definition of municipal advisory client, (iii) revisions to draft Rule G–40’s content standards, (iv) the adoption of the relief that SEC staff provided to investment advisers relating to testimonials in advertisements, (v) principal preapproval, and (vi) guidance relating to municipal advisor websites and the use of social media. The comments ranged from strong support for draft Rule G–40 as set forth in the Request for Comment 90 to the view that there is no need for draft Rule G–40 because of other MSRB rules.91 A. Ability To Regulate Municipal Advisor Advertising Through Other Rules Seeming to rely on the fiduciary duty requirements imposed on certain municipal advisors as well as the fair dealing requirements imposed on all municipal advisors, Acacia, Lewis Young, and NAMA submitted that the protections offered by Rule G–17 provide sufficient investor protection from misleading statements such that draft Rule G–40 is not necessary.92 Further, Lewis Young explained that Rule G–42 ‘‘imposes a high level of probity and care upon advisors’’ and that ‘‘in cases (rare) in which unsophisticated municipal issuers may be duped or deceived by an unscrupulous municipal advisor’s ‘advertising’ communication, we suggest 89 See Acacia, Lewis Young, NAMA, PFM and 3PM letters. 90 FSI letter at 3 (‘‘FSI strongly supports further harmonization of regulatory requirements through the adoption of Rule G–40’’). 91 See Acacia letter at 1; Lewis Young letter; NAMA letter at 1. 92 Acacia letter at 1 (‘‘we agree with other commenters that this rule is unnecessary . . .[t]he core rules of G–17 coupled with G–42 and the fiduciary duty required under Dodd-Frank provides ample regulation to prevent false or misleading statements by municipal advisors’’); Lewis Young letter (further suggesting that the MSRB should eliminate the ‘‘current provisions related to advertising of Rule G–21 on broker/dealer activities otherwise governed by both Rule G–17 and Rule G– 42 and that you [the MSRB] not impose a Rule G– 40 on non-broker/dealer advisors’’); NAMA letter at 1 (‘‘we respectfully request that the Proposed Rule G–40 be withdrawn as the same results of ensuring falsehood or misleading statements are not used in advertising for MA professional services can already be found in Rule G–17’’). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 5485 that Rule G–17 and Rule G–42 provide ample scope for enforcement.’’ 93 To rely on Rule G–17 to regulate municipal advisor advertising would create an unlevel playing field. This unlevel playing field would be between municipal advisors (subject to Rule G– 17, but not Rule G–21) and dealers (subject to both Rules G–17 and G–21) and among municipal advisors that are not registered as dealers and municipal advisors that are also registered as dealers or investment advisers (subject to Rule G–21 and FINRA Rule 2210 or Advisers Act Rule 206(4)–1, as relevant).94 Advertisements by dealers and investment advisers are regulated by advertising regulations that are separate from the other regulations to which dealers or investment advisers are subject. Further, Rule G–42 applies only to non-solicitor municipal advisors; Rule G–42 excludes solicitor municipal advisors from the rule’s scope. Lewis Young’s comments fail to address how reliance on Rule G–42 would address advertising by solicitor municipal advisors that are not subject to Rule G– 42. Moreover, other commenters submitted that having a separate rule to address advertising by municipal advisors would be helpful.95 After careful consideration, the MSRB determined to address advertising by municipal advisors through proposed Rule G–40. B. Definition of Municipal Advisory Client 3PM provided a ‘‘technical interpretation of the definition of ‘municipal advisory client’’’ and suggested that the protections that would be provided by draft Rule G–40 may not be broad enough to protect municipal entities and obligated persons when they are solicited on behalf of third-parties by municipal 93 Lewis Young letter; see Acacia letter at 1. Lewis Young also suggested that ‘‘an alternative would be a principles based ‘truth in advertising’ version of G–40 which could be written in one or two sentences. Rule G–21 could be correspondingly simplified.’’ 94 17 CFR 275.206(4)–1. Registered investment advisers, like non-solicitor municipal advisors, are subject to fiduciary standards, and also are subject to advertising rules under the Advisers Act. 95 See, e.g., SIFMA letter at 1 (‘‘[w]e agree that the MSRB should have two rules on public communications, and we believe the rules should be divided based on activity, not by registration category’’); and 3PM letter at 8–9 (‘‘[i]n 3PM’s opinion, the rules for municipal advisors are already confusing enough given different requirements for solicitor and non-solicitor municipal advisors. Including municipal advisor advertising within the body of G–21 would only complicate the issue further. We believe the municipal advisor rules should remain as Rule G– 40, separate from G–21’’). E:\FR\FM\07FEN1.SGM 07FEN1 5486 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices advisors (‘‘solicitor municipal advisors’’).96 In particular, 3PM suggested that the definition of municipal advisory client was too narrow, and that the definition should be expanded to include the municipal entity or obligated person that is the subject of the solicitation by a solicitor municipal advisor.97 The MSRB agrees in substance with the comment and has intended throughout that the protections of draft Rule G–40 would apply to municipal entities and obligated persons under the definition of an advertisement. For clarification, the MSRB has revised the definition of an advertisement to ensure that the definition will be interpreted as intended. Under proposed Rule G– 40(a)(i), an advertisement would explicitly include promotional literature distributed to municipal entities or obligated persons by a solicitor municipal advisor on behalf of the solicitor municipal advisor’s municipal advisory client. C. Definition of Advertisement Rule 15Ba1–1(d)(1)(ii) under the Exchange Act excludes the provision of general information from the type of advice that would require a municipal advisor to register with the SEC.98 SEC staff, in its Responses to Frequently Asked Questions, provided further information about those exclusions in its answer to ‘‘Question 1.1: The General Information Exclusion from Advice versus Recommendations.’’ 99 NAMA 96 3PM letter at 2. 97 Id. 98 17 CFR 240.15Ba1–(d)(1)(ii). to the SEC staff, examples of that general information include: (a) Information regarding a person’s professional qualifications and prior experience (e.g., lists, descriptions, terms, or other information regarding prior experience on completed transactions involving municipal financial products or issuances of municipal securities); (b) general market and financial information (e.g., market statistics regarding issuance activity for municipal securities or current market interest rates or index rates for different types of bonds or categories of credits); (c) information regarding a financial institution’s currently-available investments (e.g., the terms, maturities, and interest rates at which the financial institution offers these investments) or price quotes for investments available for purchase or sale in the market that meet criteria specified by a municipal entity or obligated person; (d) factual information describing various types of debt financing structures (e.g., fixed rate debt, variable rate debt, general obligation debt, debt secured by various types of revenues, or insured debt), including a comparison of the general characteristics, risks, advantages, and disadvantages of these debt financing structures; and (e) factual and educational information regarding various government financing programs and incentives (e.g., programs that promote energy conservation and the use of renewable energy). Registration of Municipal Advisors Frequently Asked Questions, Office of Municipal Securities, sradovich on DSK3GMQ082PROD with NOTICES 99 According VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 and PFM submitted that those general exclusions from the term ‘‘advice’’ that would permit a municipal advisor to not register with the SEC should equally apply as exclusions to the MSRB’s draft municipal advisor advertising rule.100 The purpose of draft Rule G–40, in part, is to ensure that municipal advisor advertising does not contain any untrue statement of material fact and is not otherwise false or misleading. Regardless of whether certain information rises to the level of advice, that information may be advertising used to market to potential clients, which the MSRB believes should be covered by draft Rule G–40. Further, as noted by FSI, maintaining regulatory consistency between draft Rule G–40 and the draft amendments to Rule G–21 is important.101 Among other things, FSI noted that regulatory consistency enhances the potential for compliance with draft Rule G–40 because dually regulated entities will comply with consistent standards, and can reduce regulatory arbitrage.102 After considering commenters’ suggestions, the Board determined not to include additional exceptions from the definition of an advertisement in proposed Rule G–40. addition, PFM stated that Sections (D), (E), and (F) of draft Rule G–40 should not be included in draft Rule G–40 as ‘‘these provisions are more directly related to advertisements for products distributed by brokers, dealers, or municipal securities dealers, and should not be construed as necessary to administer to the types of services that municipal advisors may provide.’’ 105 The Board appreciates and considered commenters’ suggestions. With regard to the suggestions about refining draft Rule G–40’s content standards, the MSRB believes that those content standards are clear as drafted. Moreover, as the MSRB’s regulatory regime relating to municipal advisors is not yet complete, the MSRB believes that, at this point, having different content standards based on the type of advertisement by the municipal advisor would not be warranted.106 Further, having content standards in proposed Rule G–40 that are similar to those in proposed amended Rule G–21 may enhance the ability of dually registered dealers and municipal advisors to comply with MSRB rules.107 After careful consideration, the Board determined not to revise draft Rule G–40 in response to commenters’ suggestions. D. Draft Rule G–40’s Content Standards ii. Content Standard About NonSecurity Product Advertisements The MSRB sought comment about whether the MSRB should provide guidance about municipal advisors that market non-security products, such as software programs, to their municipal advisory clients. Commenters generally responded that such guidance may be helpful, but generally either did not provide further information or cautioned that there should be a nexus between the product advertisement and municipal advisory activity for draft Rule G–40 to apply.108 i. Content Standards, in General NAMA, PFM and 3PM generally requested that draft Rule G–40 be revised to provide more definitive content standards.103 In particular, NAMA and PFM stated that the content standards in draft Rule G–40 should reflect a clearer separation between the content standards applicable to product advertisements and the content standards applicable to professional advertisements. NAMA and PFM suggested that this separation was important because the clear majority of municipal advisors only engage in professional services advertising.104 In U.S. Securities and Exchange Commission, last updated on May 19, 2014, available at https:// www.sec.gov/info/municipal/mun-advisorsfaqs.shtml. 100 NAMA letter at 2; PFM letter at 2. 101 FSI letter at 3. 102 Id. 103 See NAMA letter at 3; PFM letter at 3; and 3PM letter at 4–5. 104 See NAMA letter at 3; PFM letter at 3 (‘‘we believe that the MSRB should provide a clearer demarcation between the content standards for advertising products within the regulatory conventions set for broker-dealers . . . and the standards for advertising municipal advisory services more akin to regulatory conventions set for registered investment advisors [sic] who are also subject to a fiduciary standard (generally ‘professional advertising’) because our experience clearly shows that the vast majority of municipal PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 advisors predominately engage in the latter type of advertising’’). 105 PFM letter at 4. 106 The MSRB generally believes that regulation of financial advisory activity (as an element of municipal securities activity) should remain in place until a more complete regulatory framework for municipal advisory activity is in effect. Also, there may be some areas of financial advisory activity that are not clearly within the scope of SECdefined municipal advisory activity. See supra note 88. 107 The MSRB notes that approximately a quarter of municipal advisory firms are also registered as broker-dealers. 108 See NAMA letter at 2 (submitting that ‘‘[i]f the MSRB has identified any meaningful subset of MAs that advertise products, then a separate section should apply solely to product advertisements’’); SIFMA letter at 8–9 (submitting that the MSRB should address content standards for municipal advisor product advertisements only to the extent such advertisements relate to municipal advisory activities such as the sale of software by a E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices The MSRB agrees that there should be a nexus between the product advertisement and the municipal advisory activity for proposed Rule G– 40 to apply. The MSRB believes that when a municipal advisor publishes an advertisement about its municipal advisory services and that advertisement also markets a nonmunicipal security product that is related to the municipal advisory services, the municipal advisor should consider whether the entire advertisement and not just the portion of the advertisement addressing municipal advisory services, is consistent with all MSRB rules, including Rule G–17, proposed Rule G– 40, Rule G–42 and Rule G–8, on books and records to be made by brokers, dealers, municipal securities dealers and municipal advisors. E. Testimonials sradovich on DSK3GMQ082PROD with NOTICES BDA, NAMA, PFM, SIFMA, 3PM and Wells Fargo commented on draft Rule G–40(iv)(G) that would prohibit a municipal advisor from using testimonials in its advertisements.109 Their comments ranged from the view that the MSRB’s prohibition on the use of testimonials in municipal advisor advertisements is not warranted 110 to the view that, while the prohibition on the use of testimonials may be warranted, the MSRB should consider either the narrowing of that prohibition 111 or the potential costs that would be associated with that prohibition.112 Specifically, BDA stated that the ‘‘MSRB’s prohibition on testimonials in municipal advisor to assist its clients with municipal securities transactions); 3PM letter at 10 (‘‘[w]e believe that guidance regarding advertisements of non-security products should only be put in place for firms who are also conducting a security business and who have ‘municipal advisory clients’ that they plan to send non-security advertisements to. Firms who have ‘‘municipal advisory clients [sic] that they are also soliciting on behalf of non-security products should be required to advise the buyers in the municipal entity of the arrangements that already exist with a municipal advisor’’); but see Acacia letter at 2 (‘‘[t]he MSRB would be over reaching if it attempted to regulate the use of non-security products. While there may be a subset of advisors who engage in this activity, we can see no nexus for the MSRB to become involved in non-security related regulations’’). In response to Acacia’s concerns, the MSRB notes that it is not suggesting that the MSRB regulate the use of non-security products by a municipal advisor. Rather, the MSRB was seeking comment about municipal advisors that may market non-security products along with their municipal advisory services. 109 BDA letter; NAMA letter at 3; PFM letter at 4– 5; SIFMA letter at 6–7; 3PM letter at 6; and Wells Fargo letter at 3. 110 See, e.g., BDA letter. 111 See, e.g., PFM letter at 4–5. 112 3PM letter at 6. VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 . . . Rule G–40 is [not] warranted.’’ 113 SIFMA, while appearing to agree with BDA’s comment, also suggested that draft Rule G–40 be harmonized with FINRA Rule 2210(d)(6) which permits testimonials in advertisements by dealers, subject to certain conditions (see discussion above under Rule G–21 comments). NAMA, PFM and Wells Fargo stated that, if draft Rule G–40 were to prohibit testimonials by municipal advisors, the MSRB should provide relief from that prohibition. Commenters suggested that the MSRB narrow that prohibition either by adopting the SEC staff’s definition of a testimonial that is applicable to investment advisers,114 by adopting certain SEC staff no-action guidance relating to the use of testimonials by investment advisers,115 or by completely adopting the substantial SEC staff guidance that relates to use of testimonials by investment advisers 116 that was set forth in an SEC Division of Investment Management guidance update.117 The Board considered commenters’ suggestions, and recognizes the interpretive guidance provided by the SEC staff relating to testimonials.118 Nevertheless, as discussed in the Request for Comment, the MSRB believes that a testimonial presents significant issues, including the ability to be misleading. Also noted in the Request for Comment, the MSRB recognizes that other comparable financial regulations, such as Rule 206(4)-1 under the Advisers Act, also prohibit advisers from including testimonials in advertisements (investment advisers, like non-solicitor municipal advisors, are subject to fiduciary standards). Further, although the MSRB appreciates commenters’ suggestions, the guidance related to the testimonial ban under the Advisers Act rule is SEC staff guidance, not guidance issued by the Commission.119 The MSRB, however, will monitor developments relating to the testimonial ban under Rule 206(4)–1. In addition, as noted under ‘‘Self-Regulatory Organization’s Statement on Burden on Competition’’ 113 BDA letter. NAMA letter at 3; PFM letter at 4–5. 115 See PFM letter at 4–5. 116 See Wells Fargo letter at 3. 117 IM Guidance Update No. 2014–04 (March 2014). 118 See supra note 26. 119 The MSRB notes that there are additional challenges if the MSRB were to adopt SEC staff guidance. Those challenges include monitoring SEC staff guidance and ensuring municipal advisors that are not also registered as investment advisers have notice of any changes to the SEC staff guidance. See supra note 26. 5487 above, while the MSRB acknowledges that there will be certain increased costs for municipal advisors relating to compliance and supervision, the MSRB believes the benefits accrued to municipal entities and obligated persons from more accurate and objective information should exceed the costs over time. After careful consideration, the Board determined not to revise draft Rule G–40 to reflect commenters’ suggestions. F. Principal Pre-Approval BDA argued that principal preapproval was not needed or could be limited to certain types of advertisements.120 BDA stated that clients of municipal advisors are institutions, and that as institutions, they do not need many of the ‘‘mechanistic protections applicable to dealer relationships with retail investors.’’ 121 BDA submitted that it ‘‘does not believe that a principal needs to approve every advertisement.’’ 122 BDA, however, did not discuss the types of advertisements that a principal would need to approve. An important part of the MSRB’s mission is to protect state and local governments and other municipal entities. It is, in part, because of that mission that the MSRB developed draft Rule G–40. The MSRB has long believed that principal pre-approval of advertisements is an essential part of an effective supervisory process. See discussion under ‘‘Harmonization with FINRA Rule 2210’’ above. After careful consideration, the MSRB determined not to revise draft Rule G–40 in response to BDA’s suggestion. G. Guidance Relating to Municipal Advisor Websites and the Use of Social Media Commenters requested more specific guidance about the content posted on a municipal advisor’s website and about the use of social media by a municipal advisor. In particular, Acacia, NAMA, and PFM requested guidance about whether material posted on a municipal advisor’s website would constitute an advertisement under proposed Rule G– 40.123 In response, the MSRB notes that 114 See PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 120 BDA letter. 121 Id. 122 Id. 123 Acacia letter; NAMA letter at 3; PFM letter at 5; but see SIFMA letter at 6 (‘‘[t]he amendments to Rule G–21 and draft Rule G–40(c) apply to advertisements, regardless of whether electronic or other public media is used with those advertisements. As such, we feel no additional guidance by the MSRB is needed regarding the use of social media by a dealer or municipal advisor at this time’’). E:\FR\FM\07FEN1.SGM 07FEN1 5488 Federal Register / Vol. 83, No. 26 / Wednesday, February 7, 2018 / Notices proposed Rule G–40(a)(i) defines an advertisement, in part, as any ‘‘material . . . published or used in any electronic or other public media . . . .’’ As such, proposed Rule G–40 would apply to any material posted on a municipal advisor’s website or more generally, on any website, if that material comes within the definition of an advertisement as set forth in proposed Rule G–40(a)(i). In addition, NAMA and PFM requested guidance on the use of social media.124 The MSRB appreciates commenters’ requests, and currently is studying whether to provide such guidance. As part of that consideration, the MSRB is reviewing the guidance concerning the use of social media provided by other financial regulators.125 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period of up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. sradovich on DSK3GMQ082PROD with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. 124 NAMA letter at 3; PFM letter at 5; but see Fidelity letter at 4 (‘‘MSRB Rule G–21 applies to advertisements, regardless of whether electronic or other public media, including social media, is used with those advertisements’’) and SIFMA letter at 6 (‘‘[t]he amendments to Rule G–21 and draft Rule G– 40(c) apply to advertisements, regardless of whether electronic or other public media is used with those advertisements. As such, we feel no additional guidance by the MSRB is needed regarding the use of social media by a dealer or municipal advisor at this time’’). 125 See Fidelity letter at 5 (‘‘[o]n the topic of social media, FINRA has provided guidance on the application of its rules governing communications with the public to social media sites . . . . For example, we understand that FINRA is currently working on a new social media Q&A . . . .); SIFMA letter at 6 (‘‘[w]e believe that FINRA is currently working on guidance regarding social media. In line with our earlier comments, we feel the MSRB should ascribe to this guidance or clearly articulate why it is not appropriate in this market’’). The MSRB believes that SIFMA’s comments relate to FINRA Regulatory Notice 17–18, Guidance on Social Networking websites and Business Communications (Apr. 2017). VerDate Sep<11>2014 18:17 Feb 06, 2018 Jkt 244001 Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MSRB–2018–01 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–2018–01. 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 website (https://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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MSRB–2018–01 and should be submitted on or before February 28, 2018. For the Commission, pursuant to delegated authority.126 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–02398 Filed 2–6–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82620; File No. SR–NYSE– 2018–05] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide Users With Access to Two Additional Third Party Systems and Connectivity to One Additional Third Party Data Feed February 1, 2018. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on January 19, 2018, New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. 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 proposes to provide Users with access to two additional third party systems and connectivity to one additional third party data feed. In addition, the Exchange proposes to change its Price List related to these colocation services, and to update its Price List to eliminate obsolete text. The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 126 17 PO 00000 CFR 200.30–3(a)(12). Frm 00089 Fmt 4703 Sfmt 4703 E:\FR\FM\07FEN1.SGM 07FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 26 (Wednesday, February 7, 2018)]
[Notices]
[Pages 5474-5488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02398]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82616; File No. SR-MSRB-2018-01]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Amendments to Rule G-21, on Advertising, Proposed New Rule G-40, on 
Advertising by Municipal Advisors, and a Technical Amendment to Rule G-
42, on Duties of Non-Solicitor Municipal Advisors

February 1, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on January 24, 2018 the Municipal 
Securities Rulemaking Board (the ``MSRB'' or ``Board'') filed with the 
Securities and Exchange Commission (the ``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the MSRB. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule consisting of 
amendments to MSRB Rule G-21, on advertising (``proposed amended Rule 
G-21''), proposed new MSRB Rule G-40, on advertising by municipal 
advisors (``proposed Rule G-40''), and a technical amendment to MSRB 
Rule G-42, on duties of non-solicitor municipal advisors (``proposed 
amended Rule G-42,'' together with proposed amended Rule G-21 and 
proposed Rule G-40, the ``proposed rule change''). The MSRB requests 
that the proposed rule change become effective nine months from the 
date of SEC approval.
    The text of the proposed rule change is available on the MSRB's 
website at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2018-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
A. Proposed Amended Rule G-21
    Rule G-21 is a core fair practice rule of the MSRB. Rule G-21 
applies to all advertisements by dealers, as defined by Rule G-
21(a)(i).\3\ Rule G-21 became effective in 1978, and has been amended 
several times since then as the MSRB has enhanced its rule book. More 
recently, in 2012, the MSRB issued a request for comment on its entire 
rule book.\4\ In response, two market participants requested that the 
MSRB harmonize its advertising rules with FINRA Rule 2210, on 
communications with the public.\5\ Market participants echoed those 
requests more generally in their latest responses to a 2016 request for 
comment on the MSRB's strategic priorities.\6\ Further, and apart from 
the MSRB's requests for comment, the MSRB solicited input about 
possible amendments to Rule G-21 from market participants, including 
industry groups that represent dealers.\7\
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    \3\ An advertisement, as defined by Rule G-21(a)(i):
    Means any material (other than listings of offerings) published 
or used in any electronic or other public media, or any written or 
electronic promotional literature distributed or made generally 
available to customers or the public, including any notice, 
circular, report, market letter, form letter, telemarketing script, 
seminar text, press release concerning the products or services of 
the broker, dealer or municipal securities dealer, or reprint, or 
any excerpt of the foregoing or of a published article.
    As such, Rule G-21 not only applies to print advertisements, but 
also applies to an advertisement ``published or used in any 
electronic or other public media,'' such as a social media post.
    \4\ MSRB Notice 2012-63, Request for Comment on MSRB Rules and 
Interpretive Guidance (Dec. 18, 2012).
    \5\ See Letter from David L. Cohen, Managing Director, Associate 
General Counsel, Securities Industry and Financial Markets 
Association, dated February 19, 2013, to Ronald W. Smith, Corporate 
Secretary, Municipal Securities Rulemaking Board; Letter from Gerald 
K. Mayfield, Senior Counsel, Wells Fargo & Company Law Department, 
dated February 19, 2013, to Ronald W. Smith, Corporate Secretary, 
Municipal Securities Rulemaking Board.
    \6\ MSRB Notice 2016-25, MSRB Seeks Input on Strategic 
Priorities (Oct. 12, 2016); see Letter from Michael Decker, Managing 
Director, Securities Industry and Financial Markets Association, 
dated November 11, 2016, to Ronald W. Smith, Secretary, Municipal 
Securities Rulemaking Board; Letter from Robert J. McCarthy, 
Director of Regulatory Policy, Wells Fargo Advisors, LLC, dated 
November 11, 2016, to Ronald W. Smith, Corporate Secretary, 
Municipal Securities Rulemaking Board.
    \7\ See MSRB Notice 2017-04, Request for Comment on Draft 
Amendments to MSRB Rule G-21, on Advertising, and on Draft Rule G-
40, on Advertising by Municipal Advisors (Feb. 16, 2017).
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    After considering the important suggestions made by market 
participants, the MSRB prepared proposed amended Rule G-21 to, among 
other things:
     Enhance the MSRB's fair-dealing provisions by promoting 
regulatory consistency among Rule G-21 and the advertising rules of 
other financial regulators; and
     promote regulatory consistency between Rule G-21(a)(ii), 
the definition of ``form letter,'' and FINRA Rule 2210's definition of 
``correspondence.''
    Proposed amended Rule G-21 also makes a technical amendment in 
paragraph (e) to streamline the rule.

[[Page 5475]]

    Concurrent with its efforts to enhance Rule G-21 and promote 
regulatory consistency among Rule G-21 and the advertising rules of 
other financial regulators, the MSRB prepared proposed Rule G-40 to 
address advertising by municipal advisors.
B. Proposed Rule G-40
    In August 2011, in the exercise of its new rulemaking authority 
over municipal advisors,\8\ the MSRB solicited public comment on a 
proposal to amend Rule G-21 and Rule G-9, on preservation of records, 
and to issue an interpretive notice under Rule G-17, on conduct of 
municipal securities activities, to address advertising by municipal 
advisors.\9\ However, the MSRB did not proceed beyond requesting 
comment. In anticipation of the SEC's adoption of its rules relating to 
municipal advisor registration, the MSRB determined to withdraw or 
otherwise re-examine and revisit its then pending rulemaking proposals, 
including the 2011 request for comment.
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    \8\ Public Law 111-203, 124 Stat. 1376 (2010).
    \9\ MSRB Notice 2011-41, Request for Comment on Draft Amendments 
to MSRB Rule G-21 (on Advertising) and Draft Interpretive Notice 
Concerning the Application of MSRB Rule G-17 (on Fair Dealing) to 
Certain Communications (Aug. 10, 2011) (``2011 request for 
comment''). The draft amendments, among other things, would have 
extended Rule G-21 and its related recordkeeping requirements to 
municipal advisors. Further, the draft interpretive notice would 
have reminded dealers and municipal advisors that Rule G-17's fair 
practice requirements apply to all communications (written and 
oral), including the content of advertisements, sales or marketing 
communications and correspondence.
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    On September 20, 2013, the SEC adopted its final rules for 
municipal advisor registration that the SEC had proposed in 2010 (the 
``final rules'').\10\ Among other things, the final rules interpreted 
the statutory definition of the term ``municipal advisor'' under the 
Exchange Act and the statutory exclusions from that definition.\11\ 
Since September 2013, the MSRB has re-examined and adopted revised 
proposals addressing many of the issues that were the subject of its 
previously withdrawn or suspended municipal advisor rulemaking 
proposals. With the benefit of the final rules and of the MSRB's 
development of its core regulatory framework for municipal advisors, 
the MSRB determined to revisit its approach to advertising by municipal 
advisors.
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    \10\ Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 
67468 (Nov. 12, 2013).
    \11\ Rule 15Ba1-1(d), 17 CFR 240.15Ba1-1(d), under the Exchange 
Act.
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    To inform its approach, the MSRB solicited general input from 
market participants about the nature of municipal advisor advertising 
and about how municipal advisors use advertising. That outreach 
included industry groups that represent non-solicitor and/or solicitor 
municipal advisors. As a result of that outreach and the valuable input 
received from market participants, the MSRB developed proposed Rule G-
40.
    Proposed Rule G-40 would apply to advertising by municipal 
advisors. Similar to proposed amended Rule G-21, proposed Rule G-40 
would:
     Provide general provisions that define the terms 
``advertisement'' and ``form letter,'' and would set forth the general 
standards and content standards for advertisements;
     provide the definition of professional advertisements, and 
would define the standard for those advertisements; and
     would require the approval by a principal, in writing, 
before the first use of an advertisement.
    Also, proposed Rule G-40, similar to proposed amended Rule G-
21,\12\ would apply to all advertisements by a municipal advisor, as 
defined in proposed Rule G-40(a)(i). However, unlike proposed amended 
Rule G-21, proposed Rule G-40 would contain certain substituted terms 
that are more relevant to municipal advisors, and proposed Rule G-40 
would omit the three provisions in Rule G-21 that concern product 
advertisements (i.e., product advertisements, new issue product 
advertisements, and municipal fund securities product advertisements).
---------------------------------------------------------------------------

    \12\ See supra note 3.
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C. Technical Amendment to Rule G-42
    Rule G-42(f)(iv) defines municipal advisory activities as ``those 
activities that would cause a person to be a municipal advisor as 
defined in subsection (f)(iv) of this rule.'' The proposed rule change 
would provide a technical amendment to Rule G-42(f)(iv) to correct the 
cross-reference. Proposed amended Rule G-42 would replace the reference 
to subsection (f)(iv) in Rule G-42(f)(iv) with the intended reference 
to subsection (f)(iii). Rule G-42(f)(iii) defines the term ``municipal 
advisor'' for purposes of Rule G-42.
Proposed Amended Rule G-21
A. Enhancement of Fair Dealing Provisions and Promotion of Regulatory 
Consistency With Certain Standards of Other Financial Regulators
    To enhance Rule G-21's fair dealing requirements, as well as to 
promote regulatory consistency among Rule G-21 and the advertising 
rules of other financial regulators, proposed amended Rule G-21 would 
provide more specific content standards. Proposed amended Rule G-21 
also would include revisions to the rule's general standards for 
advertisements.
(i) Content Standards
    Proposed amended Rule G-21(a)(iii) would add content standards to 
make explicit many of the MSRB's fair dealing obligations that follow 
from the MSRB's requirements set forth in Rule G-21 and Rule G-17, on 
conduct of municipal securities and municipal advisory activities, and 
the interpretive guidance the MSRB has provided under those rules, and 
to specifically address them to advertising.\13\ Proposed amended Rule 
G-21 would enhance Rule G-21's fair dealing provisions by requiring 
that:
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    \13\ The proposed rule change would not supplant the MSRB's 
regulatory guidance provided under Rule G-17.
---------------------------------------------------------------------------

     An advertisement be based on principles of fair dealing 
and good faith, be fair and balanced and provide a sound basis for 
evaluating the facts about any particular municipal security or type of 
municipal security, industry, or service, and that a dealer not omit 
any material fact or qualification if such omission, in light of the 
context presented, would cause the advertisement to be misleading;
     an advertisement not contain any false, exaggerated, 
unwarranted, promissory or misleading statement or claim;
     a dealer limit the types of information placed in a legend 
or footnote of an advertisement so as to not inhibit a customer's or 
potential customer's understanding of the advertisement;
     an advertisement provide statements that are clear and not 
misleading within the context that they are made, that the 
advertisement provide a balanced treatment of the benefits and risks, 
and that the advertisement is consistent with the risks inherent to the 
investment;
     a dealer consider the audience to which the advertisement 
will be directed and that the advertisement provide details and 
explanations appropriate to that audience;
     an advertisement not predict or project performance, imply 
that past performance will recur or make any exaggerated or unwarranted 
claim, opinion or forecast; \14\ and
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    \14\ However, proposed amended Rule G-21(a)(iii)(F) would 
permit:
    (1) A hypothetical illustration of mathematical principles, 
provided that it does not predict or project the performance of an 
investment; and
    (2) An investment analysis tool, or a written report produced by 
an investment analysis tool.

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[[Page 5476]]

     an advertisement not include a testimonial unless it 
satisfies certain conditions.\15\
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    \15\ Proposed amended Rule G-21(a)(iii)(G) would provide:
    (1) If an advertisement contains a testimonial about a technical 
aspect of investing, the person making the testimonial must have the 
knowledge and experience to form a valid opinion;
    (2) If an advertisement contains a testimonial about the 
investment advice or investment performance of a broker, dealer or 
municipal securities dealer or its products, that advertisement must 
prominently disclose the following:
    (a) The fact that the testimonial may be not be representative 
of the experience of other customers.
    (b) The fact that the testimonial is no guarantee of future 
performance or success.
    (c) If more than $100 in value is paid for the testimonial, the 
fact that it is a paid testimonial.

By so doing, proposed amended Rule G-21(a)(iii) would promote 
regulatory consistency with FINRA Rule 2210(d)(1)'s and FINRA Rule 
2210(d)(6)'s content standards for advertisements. The other topics and 
standards addressed by other provisions of FINRA Rule 2210(d) have not 
been historically addressed by Rule G-21 and/or may not be relevant to 
the municipal securities market,\16\ and the MSRB did not include those 
topics in the MSRB's request for comment on draft amendments to Rule G-
21.\17\
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    \16\ Those other topics and standards addressed by FINRA Rule 
2110(d) relate to: comparisons between investments or services 
(FINRA Rule 2210(d)(2)); disclosure of the member's name (FINRA Rule 
2210(d)(3)); tax considerations (FINRA Rule 2210(d)(4)); disclosure 
of fees, expenses, and standardized performance relating to non-
money market fund open-end investment company performance data 
(FINRA Rule 2210(d)(5)); recommendations (FINRA Rule 2210(d)(7)); 
BrokerCheck (FINRA Rule 2210(f)(8)); and prospectuses filed with the 
SEC (FINRA Rule 2210(d)(9)).
    \17\ See MSRB Notice 2017-04 (Feb. 16, 2017) and discussion of 
the comments that the MSRB received in response to that request for 
comment under ``Self-Regulatory Organization's Statement on Comments 
on the Proposed Rule Change Received from Members, Participants, or 
Others.''
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    Proposed amended Rule G-21 also would expand upon the guidance 
provided by Rule A-12, on registration. Rule A-12(e) permits a dealer 
to state that it is MSRB registered in its advertising, including on 
its website. Proposed amended Rule G-21(a)(iii)(H) would continue to 
permit a dealer to state that it is MSRB registered. However, proposed 
amended Rule G-21(a)(iii)(H) would provide that a dealer shall only 
state in an advertisement that it is MSRB registered as long as, among 
other things, the advertisement complies with the applicable standards 
of all other MSRB rules and neither states nor implies that the MSRB 
endorses, indemnifies, or guarantees the dealer's business practices, 
selling methods, the type of security offered, or the security offered. 
By so doing, the proposed rule change would promote regulatory 
consistency with FINRA Rule 2210(e)'s analogous limitations on the use 
of FINRA's name and any other corporate name owned by FINRA.
(ii) General Standards
    Proposed amended Rule G-21(a)(iv), (b)(ii), and (c)(ii) would 
promote regulatory consistency among Rule G-21's general standard for 
advertisements, standard for professional advertisements, and standard 
for product advertisements (collectively, the ``general standards'') 
and the content standards of FINRA Rule 2210(d). Currently, Rule G-21's 
general standards prohibit a dealer, in part, from publishing or 
disseminating material that is ``materially false or misleading.'' 
Proposed amended Rule G-21 would replace the phrase ``materially false 
or misleading'' with ``any untrue statement of material fact'' as well 
as add ``or is otherwise false or misleading.'' The MSRB believes that 
this harmonization with FINRA Rule 2210(d) would be consistent with 
Rule G-21's current general standards and would ensure consistent 
regulation between similar regulated entities.
B. Reconcile the Definition of Form Letter With FINRA Rule 2210 
Definition of Correspondence
    Currently, Rule G-21(a)(ii) defines a ``form letter,'' in part, as 
a written letter distributed to 25 or more persons. The analogous 
provision in FINRA's communications with the public rule to Rule G-
21(a)(ii) is FINRA Rule 2210's definition of correspondence. FINRA Rule 
2210(a)(2)'s definition of correspondence, however, defines 
``correspondence,'' in part, as written communications distributed to 
25 or fewer retail investors. The MSRB understands that the one-person 
difference between Rule G-21 and FINRA Rule 2210 has created confusion 
and compliance challenges for dealers. To respond to this concern, 
proposed amended Rule G-21(a)(ii) would eliminate that one-person 
difference. Under proposed amended Rule G-21, a form letter, in part, 
would be defined as a written letter distributed to more than 25 
persons.\18\
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    \18\ Written letters or electronic mail messages distributed to 
25 or fewer persons within any period of 90 consecutive days may be 
subject to the fundamental fair dealing obligations of Rule G-17.
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    Supplementary Material .03 to proposed amended Rule G-21 would 
explain the term ``person'' when used in the context of a form letter 
under Rule G-21(a)(ii). Specifically, Supplementary Material .03 would 
explain that the number of ``persons'' is determined for the purposes 
of a response to a request for proposal (``RFP''), request for 
qualifications (``RFQ'') or similar request at the entity level. 
Therefore, for example, if a dealer were to respond to an RFP from Big 
City Water Authority, Big City Water Authority would count as one 
person, no matter how many persons employed by Big City Water Authority 
reviewed the dealer's response to the RFP.
C. Technical Amendment
    Proposed amended Rule G-21 would contain a technical amendment to 
Rule G-21(e). To streamline and clarify the MSRB's rules, the proposed 
rule change would delete references to the Financial Industry 
Regulatory Authority, Inc. in Rule G-21(e)(ii)(F) and Rule G-21(e)(vi) 
because, for example, reference to any applicable regulatory body is 
sufficient and no limitation to any more narrow subset is intended.
Proposed Rule G-40
    Proposed Rule G-40, similar to Rule G-21, would set forth general 
provisions, address professional advertisements and require principal 
approval in writing for advertisements by municipal advisors before 
their first use. However, as discussed below, proposed Rule G-40 would 
not address product advertisements, as that term is defined in Rule G-
21.
A. General Provisions
    Proposed Rule G-40(a) would define the terms advertisement, form 
letter and municipal advisory client, and would provide content and 
general standards for advertisements by a non-solicitor or a solicitor 
municipal advisor.
(i) Definitions
    Advertisement. The term ``advertisement'' in proposed Rule G-
40(a)(i) would parallel the term ``advertisement'' in proposed amended 
Rule G-21(a)(i), but would be tailored for municipal advisors. An 
advertisement would refer, in part, to any promotional literature 
distributed or made generally available to municipal entities, 
obligated persons, municipal advisory clients (discussed below), or the 
public by a municipal advisor.\19\

[[Page 5477]]

Further, an advertisement would include the promotional literature used 
by a solicitor municipal advisor \20\ to solicit a municipal entity or 
obligated person on behalf of the solicitor municipal advisor's 
municipal advisory client.
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    \19\ An advertisement, as defined by proposed Rule G-40(a)(i) 
would mean:
     any material (other than listings of offerings) published or 
used in any electronic or other public media, or any written or 
electronic promotional literature distributed or made generally 
available to municipal entities, obligated persons, municipal 
advisory clients or the public, including any notice, circular, 
report, market letter, form letter, telemarketing script, seminar 
text, press release concerning the services of the municipal advisor 
or the engagement of a municipal advisory client (as defined in 
paragraph (a)(iii)(B)), or reprint, or any excerpt of the foregoing 
or of a published article. The term does not apply to preliminary 
official statements, official statements, preliminary prospectuses, 
prospectuses, summary prospectuses or registration statements, but 
does apply to abstracts or summaries of the foregoing and other such 
similar documents prepared by municipal advisors.
    \20\ A ``solicitor municipal advisor,'' is a municipal advisor 
that engages in a solicitation of a municipal entity or obligated 
person, as defined in Rule 15Ba1-1(n) under the Exchange Act.
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    In addition, similar to proposed amended Rule G-21(a)(i), proposed 
Rule G-40(a)(i) would exclude certain types of documents from the 
definition of advertisement. The documents that would be excluded would 
be preliminary official statements, official statements, preliminary 
prospectuses, prospectuses, summary prospectuses or registration 
statements. These exclusions recognize the differences between the role 
of a dealer under Rule G-21 and the role of a solicitor municipal 
advisor under proposed Rule G-40. Nonetheless, as with Rule G-21, an 
abstract or summary of those documents or other such similar documents 
prepared by the municipal advisor would be considered an advertisement.
    For example, a municipal advisor may assist with the preparation of 
an official statement. An official statement would be excluded from the 
definition of an advertisement. As such, under proposed Rule G-
40(a)(i), the municipal advisor that assists with the preparation of an 
official statement generally would not be assisting with an 
advertisement and the municipal advisor's work on the official 
statement generally would not be subject to the requirements of 
proposed Rule G-40.
    Form letter. The term ``form letter'' in proposed Rule G-40 would 
be identical to the definition of that term set forth in proposed 
amended Rule G-21(a)(ii). A form letter would be defined as any written 
letter or electronic mail message distributed to more than 25 persons 
within any period of 90 consecutive days.\21\
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    \21\ See supra note 18.
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    Similar to proposed amended Rule G-21, proposed Rule G-40 would 
include Supplementary Material .01 to clarify the number of ``persons'' 
for a response to an RFP, RFQ or similar request, when used in the 
context of a form letter under proposed Rule G-40(a)(ii), is determined 
at the entity level. Therefore, for example, if a municipal advisor 
were to respond to an RFP from Big City Water Authority, Big City Water 
Authority would count as one person, no matter how many persons 
employed by Big City Water Authority reviewed the municipal advisor's 
response to the RFP.
    Municipal advisory client. Proposed Rule G-40(a)(iii), unlike Rule 
G-21, includes the definition of the term ``municipal advisory 
client.'' The definition of municipal advisory client would be 
substantially similar in all material respects to the definition of 
that term as set forth in the recent amendments to Rule G-8, effective 
October 13, 2017, to address municipal advisory client complaint 
recordkeeping.\22\ The definition of municipal advisory client would 
account for differences in the activities of non-solicitor and 
solicitor municipal advisors.
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    \22\ Exchange Act Release No. 79801 (Jan. 13, 2017), 82 FR 7898 
(Jan. 23, 2017) (SR-MSRB-2016-15). See MSRB Notice 2017-03, SEC 
Approves Extension of MSRB's Customer Complaint and Related 
Recordkeeping Rules to Municipal Advisors and the Modernization of 
Those Rules (Jan. 18, 2017). Specifically, Rule G-8(e)(ii) defines a 
municipal advisory client to include either a municipal entity or 
obligated person for whom the municipal advisor engages in municipal 
advisory activities as defined in Rule G-42(f)(iv), or a broker, 
dealer, municipal securities dealer, municipal advisor, or 
investment adviser (as defined in section 202 of the Investment 
Advisers Act of 1940) on behalf of whom the municipal advisor 
undertakes a solicitation of a municipal entity or obligated person, 
as defined in Rule 15Ba1-1(n), 17 CFR 240.15Ba1-1(n), under the Act.
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(ii) Content Standards
    Proposed Rule G-40(a)(iv) sets forth content standards for 
advertisements. Those content standards would be substantially similar 
in all material respects to the content standards set forth in proposed 
amended Rule G-21. Nonetheless, proposed Rule G-40 would replace 
certain terms used in proposed amended Rule G-21 with terms more 
applicable to municipal advisors. The MSRB believes that incorporating 
content standards for advertisements into proposed Rule G-40 would 
ensure consistent regulation between regulated entities in the 
municipal securities market, as well as promote regulatory consistency 
between dealer municipal advisors and non-dealer municipal advisors.
    Specifically, proposed Rule G-40 would require that:
     An advertisement be based on the principles of fair 
dealing and good faith, be fair and balanced and provide a sound basis 
for evaluating the municipal security or type of municipal security, 
municipal financial product, industry, or service and that a municipal 
advisor not omit any material fact or qualification if such omission, 
in light of the context presented, would cause the advertisement to be 
misleading;
     an advertisement not contain any false, exaggerated, 
unwarranted, promissory or misleading statement or claim;
     a municipal advisor limit the types of information placed 
in a legend or footnote of an advertisement so as to not inhibit a 
municipal advisory client's or potential municipal advisory client's 
understanding of the advertisement;
     an advertisement provide statements that are clear and not 
misleading within the context that they are made, that the 
advertisement provides a balanced treatment of risks and potential 
benefits, and that the advertisement is consistent with the risks 
inherent to the municipal financial product or the issuance of the 
municipal security;
     a municipal advisor consider the audience to which the 
advertisement will be directed and that the advertisement provide 
details and explanations appropriate to that audience;
     an advertisement not predict or project performance, imply 
that past performance will recur or make any exaggerated or unwarranted 
claim, opinion or forecast; \23\ and
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    \23\ However, proposed amended Rule G-40(a)(iv)(F) would permit:
    (1) A hypothetical illustration of mathematical principles, 
provided that it does not predict or project the performance of a 
municipal financial product; and
    (2) An investment analysis tool, or a written report produced by 
an investment analysis tool.
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     an advertisement not refer, directly or indirectly, to any 
testimonial of any kind concerning the municipal advisor or concerning 
the advice, analysis, report or other service of the municipal advisor.

By so doing, proposed Rule G-40's content generally would promote 
regulatory consistency with proposed amended Rule G-21.
    However, unlike proposed amended Rule G-21, proposed Rule G-40 
would prohibit a municipal advisor from using a testimonial in an 
advertisement. This prohibition is based in part on the fiduciary duty 
that a non-solicitor municipal advisor (as opposed to a dealer) owes 
its municipal entity clients. The MSRB notes that investment advisers 
also are subject to fiduciary duty standards.
    Similar to the concerns that the Commission has expressed about an

[[Page 5478]]

advertisement by an investment adviser that contains a testimonial,\24\ 
the MSRB believes that a testimonial in an advertisement by a municipal 
advisor would present significant issues, including the ability to be 
misleading. The MSRB notes that in adopting Rule 206(4)-1 under the 
Investment Advisers Act of 1940, as amended (the ``Advisers Act''),\25\ 
the rule that applies to advertisements by registered investment 
advisers, the SEC found that the use of testimonials in advertisements 
by an investment adviser was misleading.\26\ Thus, Rule 206(4)-1 
provides that the use of a testimonial by an investment adviser would 
constitute a fraudulent, deceptive, or manipulative act, practice, or 
course of action. To protect municipal entities and obligated persons, 
to help ensure consistent regulation between analogous regulated 
entities, and to help ensure a level playing field between municipal 
advisors/investment advisers and other municipal advisors, proposed 
Rule G-40 would prohibit the use of testimonials by a municipal 
advisor.\27\
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    \24\ See infra note 26.
    \25\ 15 U.S.C. 80b-1.
    \26\ Advisers Act Rule 206(4)-1, 17 CFR 275.206(4)-1, provides, 
in part, that it would be a fraudulent, deceptive, or manipulative 
act or course of business for an investment adviser to publish, 
circulate, or distribute an advertisement that refers to any 
testimonial concerning the investment adviser. See Advisers Act 
Release No. 121 (Nov. 2, 1961), 26 FR 10548, 10549 (Nov. 9, 1961) 
(prohibiting testimonials of any kind and finding that ``such 
advertisements are misleading; by their very nature they emphasize 
the comments and activities favorable to the investment adviser and 
ignore those which are unfavorable. This is true even when the 
testimonials are unsolicited and are printed in full'').
    However, since the rule's adoption, the SEC staff has granted 
no-action relief on multiple occasions to permit certain 
communications to be used without those communications being 
considered testimonials. See, e.g., DALBAR, Inc. (publicly avail. 
Mar. 24, 1998) (providing no-action assurance relating to the use of 
DALBAR's ratings of investment advisers in advertisements) and 
Cambiar Investors, Inc. (publicly avail. Aug. 28, 1997) (providing 
no-action assurance relating to the investment adviser providing a 
list that identifies clients). Further, the SEC has announced that 
the Division of Investment Management is considering recommending to 
the Commission amendments to Advisers Act Rule 206(4)-1, 17 CFR 
275.206(4)-1, to enhance marketing communications and practices by 
investment advisers as part of the Commission's long-term regulatory 
agenda published for the Fall 2017. The regulatory agenda is 
available at https://resources.regulations.gov/public/custom/jsp/navigation/main.jsp. The MSRB will monitor the Commission's action 
with regard to Advisers Act Rule 206(4)-1. However, at this time, 
the MSRB is neither providing interpretative guidance relating to 
the use of testimonials by municipal advisors nor adopting the SEC 
staff's guidance. See discussion under ``Self-Regulatory 
Organization's Statement on the Proposed Rule Change Received from 
Members, Participants, or Others--Proposed Rule G-40--
Testimonials.''
    \27\ See discussion of testimonials in municipal advisor 
advertisements under ``Self-Regulatory Organization's Statement on 
Comments on the Proposed Rule Change Received from Members, 
Participants, or Others,'' below.
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    Apart from the content standards discussed above, proposed Rule G-
40(a)(iv)(H), similar to proposed amended Rule G-21(a)(iii)(H), also 
would expand upon the guidance provided by Rule A-12, on registration. 
Rule A-12(e) permits a municipal advisor to state that it is MSRB 
registered in its advertising, including on its website. Proposed Rule 
G-40(a)(iv)(H) would continue to permit a municipal advisor to state 
that it is MSRB registered. However, proposed Rule G-40(a)(iv)(H) would 
provide that a municipal advisor shall only state in an advertisement 
that it is MSRB registered as long as, among other things, the 
advertisement complies with the applicable standards of all other MSRB 
rules and neither states nor implies that the MSRB endorses, 
indemnifies, or guarantees the municipal advisor's business practices, 
services, skills, or any specific municipal security or municipal 
financial product.
(iii) General Standard for Advertisements
    Proposed Rule G-40(a)(v) would set forth a general standard with 
which a municipal advisor must comply for advertisements. That standard 
would require, in part, that a municipal advisor not publish or 
disseminate, or cause to be published or disseminated, any 
advertisement relating to municipal securities or municipal financial 
products that the municipal advisor knows or has reason to know 
contains any untrue statement of material fact or is otherwise false or 
misleading. The MSRB believes that the knowledge standard as the 
general standard for advertisements is appropriate. Thus, proposed Rule 
G-40 is similar to proposed amended Rule G-21(a)(iv) in all material 
respects, except proposed Rule G-40 substitutes ``municipal advisor'' 
for the term ``dealer'' and, consistent with Section 15B(e)(4) of the 
Exchange Act,\28\ applies with regard to municipal financial products 
in addition to municipal securities.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78o-4(e)(4).
---------------------------------------------------------------------------

B. Professional Advertisements
    Proposed Rule G-40(b) would define the term ``professional 
advertisement,'' and would provide the standard for such 
advertisements. As defined in proposed Rule G-40(b)(i), a professional 
advertisement would be an advertisement ``concerning the facilities, 
services or skills with respect to the municipal advisory activities of 
the municipal advisor or of another municipal advisor.'' Proposed Rule 
G-40(b)(ii) would provide, in part, that a municipal advisor shall not 
publish or disseminate any professional advertisement that contains any 
untrue statement of material fact or is otherwise false or misleading.
    The strict liability standard for professional advertisements in 
proposed Rule G-40(b)(ii) is consistent with the MSRB's long-standing 
belief that a regulated entity should be strictly liable for an 
advertisement about its facilities, skills, or services, and that a 
knowledge standard is not appropriate.\29\ The MSRB has held this 
belief since it developed its advertising rules for dealers over 40 
years ago.\30\ Thus, proposed Rule G-40(b) would be substantially 
similar in all material respects to proposed amended Rule G-21(b).
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    \29\ Notice of Filing of Fair Practice Rules, [1977-1987 
Transfer Binder] Municipal Securities Rulemaking Board Manual (CCH) 
]10,030 at 10,376 (Sept. 20, 1977).
    \30\ Id.
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C. Principal Approval
    Proposed Rule G-40(c) would require that each advertisement that is 
subject to proposed Rule G-40 be approved in writing by a municipal 
advisor principal before its first use.\31\ Proposed Rule G-40(c) also 
would require that the municipal advisor keep a record of all such 
advertisements. Proposed Rule G-40(c) is similar in all material 
respects to proposed amended Rule G-21(f). If the SEC approves the 
proposed rule change, municipal advisors should update their 
supervisory and compliance procedures required by Rule G-44, on 
supervisory and compliance obligations of municipal advisors, to 
address compliance with proposed Rule G-40(c).
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    \31\ MSRB Rule G-3(e)(i), on professional qualifications, 
defines a municipal advisor principal as:
    a natural person associated with a municipal advisor who is 
qualified as a municipal advisor representative and is directly 
engaged in the management, direction or supervision of the municipal 
advisory activities of the municipal advisor and its associated 
persons.
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D. Product Advertisements
    Proposed Rule G-40 would omit the provisions set forth in Rule G-21 
regarding product advertisements, new issue product advertisements, and 
municipal fund security product advertisements. The MSRB believes, at 
this juncture, that municipal advisors most likely do not prepare such 
advertisements as the MSRB understands that municipal advisors

[[Page 5479]]

generally advertise their municipal advisory services and not products.
2. Statutory Basis
    Section 15B(b)(2) of the Exchange Act \32\ provides that:
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78o-4(b)(2).

    [t]he Board shall propose and adopt rules to effect the purposes 
of this title 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.

    Section 15B(b)(2)(C) of the Exchange Act \33\ provides that the 
MSRB's rules shall:
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78o-4(b)(2)(C).

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 engaged in 
regulating, clearing, settling, processing information with respect 
to, and 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.

    The MSRB believes that the proposed rule change is consistent with 
Sections 15B(b)(2) \34\ and 15B(b)(2)(C) \35\ of the Exchange Act. The 
proposed rule change would help prevent fraudulent and manipulative 
practices, promote just and equitable principles of trade, and protect 
investors, municipal entities, obligated persons and the public 
interest by enhancing the MSRB's advertising rules that apply to 
dealers and by establishing advertising rules that apply to municipal 
advisors.\36\
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    \34\ 15 U.S.C. 78o-4(b)(2).
    \35\ 15 U.S.C. 78o-4(b)(2)(C).
    \36\ The MSRB notes that the technical amendment to proposed 
amended Rule G-42 will assist municipal advisors by providing a 
clearer rule that addresses the duties of non-solicitor municipal 
advisors.
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Rule G-21
    The MSRB believes proposed amended Rule G-21, by design, would help 
prevent fraudulent and manipulative practices. Proposed amended Rule G-
21 would require that advertisements be based on the principles of fair 
dealing and good faith, be fair and balanced, and provide a sound basis 
for evaluating the facts. A dealer would not be able to omit any 
material fact or qualification, if the omission, in light of the 
context of the material presented, would cause the advertisement to be 
misleading. Furthermore, dealers would be prohibited from making any 
false, exaggerated, unwarranted, promissory or misleading statement or 
claim in an advertisement. Dealers would be required to ensure that the 
statements that they make are clear and not misleading within the 
context in which they are made and that they provide a balanced 
treatment of risks and potential benefits. Dealers also would be 
limited in the types of information that could be placed in a legend or 
footnote in an advertisement, and dealers only could include a 
testimonial in an advertisement if certain conditions are met. Dealers 
would have to consider the nature of the audience to which the 
advertisement would be directed and would have to provide details and 
explanations appropriate to the audience. Further, dealers would be 
prohibited from indicating registration with the MSRB in an 
advertisement unless the advertisement complies with the applicable 
standards of all other Board rules and that neither states nor implies 
that the MSRB endorses dealer's business practices, selling methods, 
class or type of security offered or any specific security. The 
prescriptive nature of proposed amended Rule G-21 would provide clear 
guidelines for dealers to follow that would help prevent fraudulent and 
manipulative practices.
    Moreover, because proposed amended Rule G-21 would promote 
regulatory consistency with certain of FINRA Rule 2210's content 
standards, standards to which many dealers are currently subject as 
FINRA member firms, dealers may more easily understand and comply with 
proposed amended Rule G-21. In turn, this compliance would help prevent 
fraudulent and manipulative practices because the requirements of 
proposed amended Rule G-21 (noted in the paragraph above) are in and of 
themselves designed to prevent fraudulent and manipulative practices.
    Finally, proposed amended Rule G-21 would help prevent fraudulent 
and manipulative practices because it would promote more efficient 
inspections of dealer advertisements. Other financial regulators 
inspect and enforce the MSRB's rules. Proposed amended Rule G-21 would 
provide clear guidelines as to the content of what may appear in an 
advertisement which should facilitate an efficient inspection. Further, 
because Rule G-21 would help promote regulatory consistency with 
certain of FINRA Rule 2210's content standards, inspections staff may 
be well familiar with the proposed amended Rule G-21's requirements. 
See discussion under ``Proposed Amended Rule G-21--Enhancement of Fair 
Dealing Provisions and Promotion of Regulatory Consistency with Certain 
Standards of Other Financial Regulators--Content Standards'' above. 
This familiarity with standards, as well as having clear advertising 
standards, might enable inspections staff to conduct a more efficient 
inspection of dealer advertisements. More efficient inspections of 
dealer advertisements, in turn, might result in inspections staff being 
able to determine whether there are any regulatory irregularities 
earlier during the inspection process.
    Proposed amended Rule G-21, also would help promote just and 
equitable principles of trade, and would enhance the MSRB's fair 
dealing requirements. For the same reasons that the design of proposed 
amended Rule G-21 would help prevent fraudulent and manipulative 
practices, the prescriptive nature of the design of proposed amended 
Rule G-21 would provide clear guidelines for dealers to follow that 
would help promote just and equitable principles of trade.
    Proposed amended Rule G-21 also would help protect investors and 
the public interest. For the same reasons that the design of proposed 
amended Rule G-21 would help prevent fraudulent and manipulative 
practices and promote just and equitable principles of trade, the 
clear, prescriptive requirements of proposed amended Rule G-21 would 
help ensure that advertisements would present a fair statement of the 
services, products, or municipal securities advertised. In turn, 
investors and the public would be able to have more confidence in the 
accuracy of the services, products, or municipal securities advertised, 
and perhaps would be more comfortable making decisions based on an 
advertisement. For municipal entities, for example, this increased 
confidence in an advertisement may lead to a more efficient underwriter 
selection process.
Proposed Rule G-40
    Proposed Rule G-40, by design, would help prevent fraudulent and 
manipulative practices. Proposed Rule G-40 would require that 
advertisements be based on the principles of fair dealing and good 
faith, be fair and balanced, and provide a sound basis for evaluating 
the facts. No municipal advisor would be able to omit any material fact 
or qualification if the

[[Page 5480]]

omission, in light of the context of the material present, would cause 
the advertisement to be misleading. Furthermore, municipal advisors 
would be prohibited from making any false, exaggerated, unwarranted, 
promissory or misleading statement or claim in an advertisement. 
Municipal advisors would be required to ensure that the statements that 
they make are clear and not misleading within the context in which they 
are made and that they provide a balanced treatment of risks and 
potential benefits. Municipal advisors also would be limited in the 
types of information that could be placed in a legend or footnote in an 
advertisement, and would not be able to include a testimonial in an 
advertisement. Municipal advisors would have to consider the nature of 
the audience to which the advertisement would be directed and would 
have to provide details and explanations appropriate to the audience. 
Further, municipal advisors would be prohibited from indicating 
registration with the MSRB in an advertisement unless the advertisement 
complies with the applicable standards of all other Board rules and 
that neither states nor implies that the MSRB endorses the municipal 
advisor's business practices, services, skills or any specific type of 
municipal security or municipal financial product. The prescriptive 
nature of proposed Rule G-40 would provide clear guidelines for 
municipal advisors to follow that would help prevent fraudulent and 
manipulative practices.
    Proposed Rule G-40 also would help prevent fraudulent and 
manipulative practices because proposed Rule G-40 would promote 
efficient inspections of municipal advisor advertisements. Other 
financial regulators inspect and enforce the MSRB's rules. Proposed 
Rule G-40 would provide clear guidelines as to the content of what may 
appear in an advertisement which should facilitate an efficient 
inspection of municipal advisor advertisements. More efficient 
inspections of municipal advisor advertisements, in turn, might result 
in inspections staff being able to more easily and readily determine 
whether there are any regulatory irregularities earlier during the 
inspection process.
    Proposed Rule G-40 also would help promote just and equitable 
principles of trade. Proposed Rule G-40 would enhance the MSRB's fair 
dealing requirements by, for the first time, having specific 
requirements for municipal advisor advertising. As such, proposed Rule 
G-40 would promote regulatory consistency in the municipal securities 
market, and thus would help promote just and equitable principles of 
trade. Further, for the same reasons that the design of proposed Rule 
G-40 would help prevent fraudulent and manipulative practices, proposed 
Rule G-40's prescriptive and clear guidelines would help promote just 
and equitable principles of trade.
    Proposed Rule G-40, also would help protect investors, municipal 
entities, obligated persons and the public interest. For the same 
reasons that the design of proposed Rule G-40 would help prevent 
fraudulent and manipulative practices and promote just and equitable 
principles of trade, the clear, prescriptive requirements of proposed 
Rule G-40 would help ensure that advertisements would present a fair 
statement of the municipal security or type of municipal security, 
municipal financial product, industry or service advertised. This, in 
turn, would help protect investors, municipal entities, obligated 
persons and the public interest. Further, investors, municipal 
entities, obligated persons and the public would be able to have more 
confidence in the accuracy of the advertisements, and perhaps would be 
more comfortable making decisions based, in part, on an advertisement.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 15B(b)(2)(C) of the Exchange Act \37\ requires that MSRB 
rules not be designed to impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Exchange Act. In 
accordance with the Board's policy on the use of economic analysis in 
rulemaking, the Board has reviewed proposed amended Rule G-21 and 
proposed Rule G-40.\38\
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    \37\ 15 U.S.C. 78o-4(b)(2)(C).
    \38\ Policy on the Use of Economic Analysis in MSRB Rulemaking 
is available at https://msrb.org/Rules-and-Interpretations/Economic-Analysis-Policy.aspx. In evaluating whether there was a burden on 
competition, the Board was guided by its principles that required 
the Board to consider costs and benefits of a rule change, its 
impact on capital formation and the main reasonable alternative 
regulatory approaches.
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Proposed Amended Rule G-21
    The MSRB believes that, through promoting regulatory consistency of 
certain MSRB advertising standards with those of other financial 
regulators, proposed amended Rule G-21 may improve efficiency in the 
form of less unnecessary complexity for dealers and reduced burdens and 
compliance costs over time since additional regulatory consistency 
should assist dealers with developing uniform policies and procedures. 
This may also benefit both retail and institutional investors, where 
transparency, consistency, truthful and accurate information and ease 
of comparison of different financial services would be highly valued. 
The alternative of leaving Rule G-21 in its current state would mean 
that dealers that are registered both with the MSRB and FINRA would 
continue to face two sets of compliance requirements with additional 
costs and regulatory burdens.\39\
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    \39\ The benefits of alignment with FINRA's rule, however, will 
not apply to those firms that are not dual-registrants.
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    Since proposed amended Rule G-21 would establish more stringent and 
prescriptive advertising standards for dealers than are included in the 
baseline, which is current existing Rule G-21, the MSRB expects that 
dealers may experience increased costs because of the new requirements, 
especially for bank dealers that are not currently registered with 
FINRA.\40\ These costs, however, can be mitigated through careful 
planning because the proposed rule change, if adopted, would have a 
nine-month implementation period during which the industry could 
adjust. The MSRB believes that much of the costs associated with 
proposed amended Rule G-21 would be up-front costs resulting from sunk 
investments in advertisements previously developed by dealers that 
would no longer be compliant upon effectiveness of the proposed rule 
change, as well as costs from initial compliance development such as 
updating or rewriting policies and procedures. For those dealers that 
are also registered with FINRA, those costs should not be significant, 
as much of proposed amended Rule G-21 would align with FINRA Rule 2210, 
a rule with which those dealers currently must comply.
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    \40\ In response to comments received by market participants 
related to the Request for Comment, the MSRB would permit the use of 
testimonials by dealers in advertisements under the same limitations 
used in FINRA regulation. See ``Self-Regulatory Organization's 
Statement on Comments on the Proposed Rule Change Received from 
Members, Participants, or Others'' below.
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    On balance, the MSRB believes that proposed amended Rule G-21 would 
not impose an unreasonable burden on dealers, and the likely benefits, 
such as reduced unnecessary complexity and compliance standards that 
are more closely aligned with those of other financial regulators, 
would justify the associated costs in both the near and long term.
    Since dealers currently are subject to advertising standards under 
the MSRB's rules, the MSRB believes that proposed amended Rule G-21 is 
unlikely to hinder capital formation. The MSRB

[[Page 5481]]

believes that proposed amended Rule G-21 would not harm competition, 
and may indeed enhance competition by putting all competitors on an 
equal footing due to a uniform set of advertising standards for dual 
registrants that is more straightforward for the market and investors.
Proposed Rule G-40
    Similar to Rule G-21, proposed Rule G-40 would be a core fair 
practice rule governing advertising by municipal advisors. As such, 
proposed Rule G-40 would help protect investors, municipal entities, 
obligated persons and the general public. Moreover, proposed Rule G-40 
would help ensure consistent regulation between regulated entities in 
the municipal securities market as well as to promote regulatory 
consistency among dealer municipal advisors, non-dealer municipal 
advisors and municipal advisors that are also registered as investment 
advisers with the SEC.\41\
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    \41\ For example, under Rule G-21 dealers are required to keep 
records of their advertisements and are prohibited from using false 
or misleading information in advertising.
---------------------------------------------------------------------------

    The MSRB believes that one benefit of proposed Rule G-40 may be 
more accurate information available to clients through advertising by 
municipal advisors, which, at the margin, may lead to more informed 
decision-making related to municipal advisor selection.\42\ As a result 
of applying proposed Rule G-40's advertising standards, municipal 
entities and obligated persons may be able to more easily establish 
objective criteria to use in selecting municipal advisors and this may 
increase the likelihood that municipal advisors are hired because of 
their qualifications as opposed to other reasons. In addition, 
transparency, consistency, truthful and accurate information in 
advertising should benefit municipal entities and obligated persons in 
general and may lead to increased confidence in the municipal market.
---------------------------------------------------------------------------

    \42\ Acacia indicated that many issuers hire municipal advisors 
through some type of competitive process and the provision of 
materials in response to such a solicitation should not be deemed an 
advertisement and the existing regulatory framework would govern 
false and misleading statements in those materials. The MSRB agrees 
that materials submitted as part of a response to an RFP generally 
would not be considered as advertising; instead, proposed Rule G-40 
focuses on materials provided generally to potential clients and the 
MSRB believes that accurate and truthful advertising would still be 
meaningful to decisions on selection and retention of municipal 
advisors. See ``Self-Regulatory Organization's Statement on Comments 
on the Proposed Rule Change Received from Members, Participants, or 
Others'' below.
---------------------------------------------------------------------------

    The MSRB believes that much of the costs associated with proposed 
Rule G-40 would be up-front sunk costs resulting from investments in 
advertisements previously developed by municipal advisors that would no 
longer be compliant upon effectiveness of the proposed rule,\43\ as 
well as from initial costs to establish compliant policies and 
procedures, although there would be some ongoing costs associated with 
principal approval and record-keeping requirements.\44\ Since this is 
the first time that municipal advisors may be subject to such 
regulation, to ensure compliance with the advertising standards of 
proposed Rule G-40, municipal advisors may also incur costs by seeking 
advice from compliance or legal professionals when preparing 
advertising materials. In particular, regarding proposed Rule G-40's 
prohibition of municipal advisors use of testimonials in their 
advertisements, the MSRB believes firms that rely extensively on 
testimonials as their form of advertising would likely experience more 
transition costs than firms that presently either do not use 
testimonials or use testimonials only occasionally. While the MSRB 
acknowledges that there would be certain increased costs for municipal 
advisors that presently use testimonials in advertising, the benefits 
accrued to municipal entities and obligated persons, including 
increased likelihood of receiving accurate, non-misleading and 
objective information from advertisements, should exceed the costs over 
time.
---------------------------------------------------------------------------

    \43\ As elaborated above, these costs can be mitigated through 
careful planning during the implementation period for the proposed 
rule change, if adopted, which would give the industry time to 
adjust.
    \44\ See 3PM letter at 3-4, which describes potential compliance 
costs for solicitor municipal advisors associated with having a 
principal pre-approve a form letter prior to allowing their sales 
professionals to send out the form letter. See ``Self-Regulatory 
Organization's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants, or Others'' below.
---------------------------------------------------------------------------

    The MSRB believes these costs should not be burdensome for small 
municipal advisory firms. For some one-time initial compliance costs, 
the MSRB believes that small municipal advisory firms may incur 
proportionally larger costs than larger firms. However, for many other 
ongoing costs, such as costs associated with principal approval and 
record-keeping requirements, as well as sunk investments in 
advertisements previously developed but that would no longer be 
compliant, the costs should be proportionate to the size of the firm, 
assuming that small firms generally advertise less than larger firms. 
Thus, it is unlikely that proposed Rule G-40 would have an outsized 
impact on small firms.
    On balance, the MSRB believes that proposed Rule G-40 would not 
impose an unreasonable burden on municipal advisors,\45\ and the 
potential benefits would justify the associated costs in both the near 
and long term since the benefits of proposed Rule G-40 should exceed 
the costs over the long term.
---------------------------------------------------------------------------

    \45\ Acacia stated that proposed Rule G-40 ``applies a 
regulatory burden and cost which is not proportional to the MSRB's 
stated goal of preventing misleading information to investors, 
issuers or obligated persons,'' but did not offer any quantitative 
information. See ``Self-Regulatory Organization's Statement on 
Comments on the Proposed Rule Change Received from Members, 
Participants, or Others'' below.
---------------------------------------------------------------------------

    The MSRB considered that the costs associated with proposed Rule G-
40 may lead some municipal advisors to curtail their advertising 
expenditures and compete less aggressively through advertising.\46\ On 
balance, the MSRB believes that the market for municipal advisory 
services is likely to remain competitive; \47\ any potential negative 
impact on competition as a result of potential curtailment of 
advertising expenditures should be counteracted by the potential 
positive impact from improved advertising standards and more 
transparent and accurate information on municipal advisors.
---------------------------------------------------------------------------

    \46\ Also, at the margin, some municipal advisors may even 
determine to consolidate with other municipal advisors to benefit 
from economies of scale (e.g., by leveraging existing compliance 
resources of a larger firm) rather than to incur separately the 
costs associated with proposed Rule G-40. The MSRB, however, is 
skeptical about this scenario, as the potential costs of compliance 
with proposed Rule G-40 are not expected to be onerous.
    \47\ 3PM stated that proposed Rule G-40 would put solicitor 
municipal advisors at a disadvantage to solicitors who are not 
registered with the MSRB or working with municipal entities. 
However, unregistered solicitors are not within the MSRB's 
jurisdiction, and the rule proposal is intended to ensure fairness 
and accuracy in advertisements from all municipal advisors who 
render services to or initiate a solicitation from municipal 
entities.
---------------------------------------------------------------------------

    The MSRB believes that proposed Rule G-40 should not hinder capital 
formation. As noted above, the better-quality information conveyed by 
municipal advisors through advertising that meets the standards of 
proposed Rule G-40 may lead to an improved municipal advisor selection 
process (as discussed above). One commenter noted that municipal 
advisors are typically selected through an RFP process rather than via 
advertising. However, if firms gained no advantage from advertising, it 
would be irrational and not in their best interest to advertise. Thus, 
the MSRB expects that advertising can influence the municipal advisor 
selection process even if only to raise awareness of a firm. If a final 
municipal advisor selection is determined exclusively via an RFP 
process, truthful and accurate advertising still could help issuers 
target

[[Page 5482]]

their requests for proposals to firms the issuer expects to be 
sufficiently qualified thereby enhancing the selection process through 
gains in efficiency.
    Finally, transparency, consistency, truthful and accurate 
information in advertising may increase the willingness of municipal 
entities and obligated persons to use municipal advisors.\48\ This, in 
turn, may contribute to a more efficient capital formation process as 
municipal entities and obligated persons may make more informed 
decisions as to the structure, timing, terms and other similar matters, 
related to issuances of municipal securities and municipal financial 
products.
---------------------------------------------------------------------------

    \48\ The MSRB is planning to examine the frequency with which 
issuers use municipal advisors over time in a retrospective analysis 
of the municipal advisor regulatory framework in the future.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The MSRB sought public comment on the draft amendments to Rule G-21 
and new draft Rule G-40.\49\ In response to that Request for Comment, 
the MSRB received 11 comment letters.\50\ Commenters generally 
expressed support for the proposed rule change, but also expressed 
various concerns and suggested certain revisions.
---------------------------------------------------------------------------

    \49\ MSRB Notice 2017-04 (Feb. 16, 2017) (the ``Request for 
Comment'').
    \50\ Letter from Noreen P. White, Co-President, and Kim M. 
Whelan, Co-President, Acacia Financial Group, Inc., dated April 7, 
2017 (``Acacia''); Letter from Mike Nicholas, Chief Executive 
Officer, Bond Dealers of America, dated March 24, 2017 (``BDA''); 
Letter from Norman L. Ashkenas, Chief Compliance Officer, Fidelity 
Brokerage Services, LLC, Richard J. O'Brien, Chief Compliance 
Officer, National Financial Services, LLC, and Jason Linde, Chief 
Compliance Officer, Fidelity Investments Institutional Services 
Company, LLC, dated March 24, 2017 (``Fidelity''); Letter from David 
T. Bellaire, Esq., Executive Vice President & General Counsel, 
Financial Services Institute, dated March 24, 2017 (``FSI''); Letter 
from Laura D. Lewis, Principal, Lewis Young Robertson & Burningham, 
Inc., dated March 24, 2017 (``Lewis Young''); Letter from Susan 
Gaffney, Executive Director, National Association of Municipal 
Advisors, dated March 24, 2017 (``NAMA''); Letter from Leo Karwejna, 
Chief Compliance Officer, Cheryl Maddox, General Counsel, and 
Catherine Humphrey-Bennett, Municipal Advisory Compliance Officer, 
Public Financial Management, Inc. and PFM Financial Advisors LLC, 
dated March 23, 2017 (``PFM''); Letter from Leslie M. Norwood, 
Managing Director and Associate General Counsel, Securities Industry 
and Financial Markets Association, dated March 24, 2017 (``SIFMA''); 
Letter from Paul Curley, Director of College Savings Research, 
Strategic Insight, dated May 16, 2017 (``SI''); Letter from Donna 
DiMaria, Chairman of the Board of Directors and Chair of the 3PM 
Regulatory Committee, Third Party Marketers Association, dated March 
23, 2017 (``3PM''); and Letter from Robert J. McCarthy, Director, 
Regulatory Policy, Wells Fargo Advisors, dated March 24, 2017 
(``Wells Fargo'').
    During the period in which the MSRB considered the comments 
received in response to the Request for Comment, the Board concluded 
to separately propose the amendments to Rule G-21(e). The SEC 
approved those amendments on August 18, 2017, and the amendments 
became effective on November 18, 2017. See Exchange Act Release No. 
81432 (Aug. 18, 2017), 82 FR 40199 (Aug. 24, 2017) (SR-MSRB-2017-
04). Fidelity, FSI, SIFMA and SI addressed the draft amendments to 
Rule G-21(e) in their letters to the MSRB. The MSRB discussed those 
comments in SR-MSRB-2017-04, and generally will not discuss those 
comments as part of this proposed rule change.
---------------------------------------------------------------------------

    Below, the MSRB discusses the comments received relating to 
proposed amended Rule G-21. Following that discussion, the MSRB 
discusses the comments received relating to proposed Rule G-40.

I. Proposed Amended Rule G-21

    The MSRB received five comment letters that focused on the draft 
amendments to Rule G-21 (other than Rule G-21(e)).\51\ Commenters 
focused on harmonization with FINRA Rule 2210, additional exclusions 
from the definition of an advertisement, hypothetical illustrations, 
hyperlinks, coordination between self-regulatory organizations 
(``SROs''), and jurisdictional guidance under Rule G-21 relating to 
dealer/municipal advisors. The comments ranged from strong support for 
the draft amendments as set forth in the Request for Comment \52\ to 
the suggestion that the Board should simply incorporate FINRA Rule 2210 
by reference into Rule G-21.\53\
---------------------------------------------------------------------------

    \51\ See BDA, Fidelity, FSI, SIFMA and Wells Fargo letters. To 
the extent that the five commenters that focused on draft Rule G-40 
provided comments relevant to the draft amendments to Rule G-21, 
those comments are also included in the discussion below.
    \52\ FSI letter at 2.
    \53\ SIFMA letter at 2.
---------------------------------------------------------------------------

A. Harmonization With FINRA Rule 2210

    Commenters supported the draft amendment's harmonization with FINRA 
Rule 2210. In fact, FSI provided its strong support for the draft 
amendments to Rule G-21, as drafted.\54\ Nevertheless, some other 
commenters suggested that the draft amendments to Rule G-21 could be 
harmonized more with FINRA Rule 2210 by adopting that rule's (i) 
definition of communications and the distinctions in FINRA Rule 2210 
that follow from that definition \55\ and (ii) use of testimonials,\56\ 
or by incorporating FINRA Rule 2210 by reference into Rule G-21.\57\ 
Further, one commenter suggested that because of the harmonization with 
FINRA Rule 2210, the definitions and product advertisement and 
professional advertisement sections could be deleted from Rule G-21 and 
Rule G-40.\58\
---------------------------------------------------------------------------

    \54\ FSI letter at 2.
    \55\ See BDA, SIFMA, and 3PM letters.
    \56\ See BDA, Fidelity, SIFMA, and Wells Fargo letters.
    \57\ SIFMA letter at 2.
    \58\ BDA letter.
---------------------------------------------------------------------------

(i) Definition of Communications
    BDA, SIFMA, and 3PM suggested that the MSRB further harmonize Rule 
G-21 with FINRA Rule 2210 by adopting FINRA Rule 2210's definition of 
``communications'' and the distinctions in the rule that follow from 
that definition. In particular, commenters favored the harmonization 
with FINRA Rule 2210's communications definition because institutional 
communications would no longer be subject to pre-approval by a 
principal. BDA, SIFMA, and 3PM submitted that, if the MSRB were to do 
so, dealers then could apply common approval processes for 
institutional communications across all asset classes.\59\
---------------------------------------------------------------------------

    \59\ See BDA letter; SIFMA letter at 5; and 3PM letter at 7-8. 
See also SIFMA letter at 8 (``SIFMA strongly supports the 
harmonization of draft Rule G-40 with FINRA Rule 2210 with respect 
to the categorization of communications''); 3PM letter at 4 (stating 
that the MSRB ``should also consider segregating advertisements by 
investor group as well for solicitor municipal advisors''); 3PM 
letter at 4 (``we believe that the MSRB should also consider 
segregating advertisements by investor group as well for solicitor 
municipal advisors'').
    BDA stated that, if the MSRB has a rule that applies different 
definitions and different sets of responsibilities and does not 
differentiate between communications sent to retail and 
institutional customers, the MSRB will have created an increased 
regulatory burden along with considerable confusion for broker-
dealers. While the MSRB appreciates BDA's concerns, Rule G-21 
currently applies different standards and responsibilities than what 
is currently required by FINRA Rule 2210. For example, Rule G-21 
currently requires pre-approval by a principal of all 
advertisements, including advertisements that would be considered 
institutional communications under FINRA Rule 2210. Other than 
permitting testimonials in advertisements subject to certain 
conditions, the MSRB has determined not to revise the draft 
amendments to Rule G-21 to reflect BDA's suggestion that the MSRB 
more fully harmonize Rule G-21 with FINRA Rule 2210.
---------------------------------------------------------------------------

    However, FINRA's regulation of advertising differs significantly 
from the MSRB's advertising regulation. FINRA Rule 2210 defines 
``communications'' as consisting of correspondence, retail 
communications, and institutional communications.\60\ Based on the type 
of communication, FINRA Rule 2210 then may require pre-approval by a 
principal before the communication's first use and the filing of the 
communication with FINRA's advertising regulation department for review 
either a certain number of days before or within a certain number of 
days after first use.\61\
---------------------------------------------------------------------------

    \60\ See FINRA Rule 2210(a)(1).
    \61\ See FINRA Rule 2210(b) and (c) (generally requiring pre-
approval by a principal of the member before the earlier of the 
retail communication's first use or the filing of the advertisement 
with FINRA--correspondence and institutional communications are not 
subject to member pre-approval and filing with FINRA; however, there 
must be supervisory policies and procedures in place relating to 
such communications).

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

[[Page 5483]]

    Moreover, the MSRB, unlike FINRA, does not require the filing of 
advertisements with the MSRB before first use and the MSRB does not 
review advertisements. Rather, and since the MSRB approved its 
advertising rules in 1978,\62\ the MSRB has relied upon its core fair 
dealing principles set forth in its advertising rules and the important 
supervisory function of principal pre-approval to regulate 
advertisements by dealers.\63\ The MSRB continues to believe that it is 
important that a principal pre-approve an advertisement regardless of 
the intended recipient of the advertisement. Therefore, the Board 
determined not to revise the draft amendments to Rule G-21 to reflect 
commenters' suggestions about adopting FINRA Rule 2210's definition of 
communications and the distinctions that result from that definition.
---------------------------------------------------------------------------

    \62\ The Board originally had three rules that addressed 
advertising--Rule G-21, Rule G-33 (relating to advertisements for 
new issues) and Rule G-34 (relating to advertisements for products). 
In 1980, the Board merged Rules G-33 and G-34 into Rule G-21. See 
Notice of Approval of Amendments to the Board's Advertising Rules 
(Nov. 21, 1980) CCH MSRB Manual ] 10,167 at 10,599.
    \63\ See, e.g., supra note 29 at 10,371.
---------------------------------------------------------------------------

(ii) Use of Testimonials
    BDA, Fidelity, SIFMA, and Wells Fargo urged the Board to permit 
testimonials in dealer advertising to better harmonize Rule G-21 with 
FINRA Rule 2210.\64\ Commenters argued that to do otherwise would 
result in confusion and an inconsistent ``patchwork'' approach to 
dealer rules and that regulatory harmonization and consistency between 
MSRB and FINRA rules are paramount.\65\ Further, SIFMA, Fidelity, and 
Wells Fargo believed that the protections set forth in FINRA Rule 2210 
relating to testimonials \66\ were strong enough for retail 
communications to investors, including investors who are seniors.\67\ 
Fidelity suggested that the MSRB engage with FINRA to determine whether 
FINRA Rule 2210(d)(6) adequately protects investors who are 
seniors.\68\ After carefully considering commenters' suggestions, as 
well as consulting with FINRA staff, the Board determined to revise the 
draft amendments to Rule G-21. The proposed rule change would permit 
dealer advertisements, but not municipal advisor advertisements 
(discussed below), to contain testimonials under the same conditions as 
are currently set forth in FINRA Rule 2210(d)(6).
---------------------------------------------------------------------------

    \64\ BDA letter, Fidelity letter at 5-6, SIFMA letter at 6-7, 
and Wells Fargo letter at 2-3.
    \65\ See, e.g., BDA letter and SIFMA letter at 6. See also 3PM 
letter at 6 (the prohibition on the use of testimonial in an 
advertisement would create an issue for ``municipal advisors that 
are registered with both the MSRB and FINRA . . . [w]hile we are not 
necessarily against the notion of adhering to the strictest 
standard, this approach does require additional compliance and 
oversight resources to be dedicated to a function and ultimately 
results in additional cost to the municipal advisor''). The MSRB 
does not address 3PM's interpretation of FINRA rules and the issue 
of the ability of an associated person to like or recommend items on 
social media platforms.
    \66\ FINRA Rule 2210(d)(6) provides:
    (A) If any testimonial in a communication concerns a technical 
aspect of investing, the person making the testimonial must have the 
knowledge and experience to form a valid opinion.
    (B) Retail communications or correspondence providing any 
testimonial concerning the investment advice or investment 
performance of a member or its products must prominently disclose 
the following:
    (i) The fact that the testimonial may not be representative of 
the experience of other customers.
    (ii) The fact that the testimonial is no guarantee of future 
performance or success.
    (iii) If more than $100 in value is paid for the testimonial, 
the fact that it is a paid testimonial.
    \67\ See SIFMA letter at 6; Fidelity letter at 7-8; Wells Fargo 
letter at 2-3.
    \68\ Fidelity letter at 7-8.
---------------------------------------------------------------------------

(iii) Incorporation of FINRA Rule 2210 by Reference
    SIFMA commented that, while it supported the MSRB's efforts to 
level the playing field between dealers and municipal advisors, the 
better way to level that playing field, as well as to promote 
harmonization with FINRA's rules, is for the Board to incorporate FINRA 
Rule 2210 by reference into the MSRB's rules.\69\ SIFMA stated that, 
since Rule G-21 was adopted in 1978, Rule G-21 has not been regularly 
or uniformly harmonized with what is now FINRA Rule 2210 and that this 
discordance has led to confusion among all market participants and 
regulatory risk for dealers.\70\
---------------------------------------------------------------------------

    \69\ SIFMA letter at 2-3. SIFMA also stated that the MSRB should 
consider all the exceptions and guidance in FINRA Rule 2210(d) 
regarding content standards and that SIFMA and its members feel very 
strongly about these exceptions, particularly Rule 2210(d)(6), on 
testimonials, FINRA Rule 2210(d)(7), on recommendations, and FINRA 
Rule 2210(d)(9), on prospectuses, including private placement 
memoranda. SIFMA letter at 5. The MSRB's considerations of 
testimonials is discussed above under ``Proposed Amended Rule G-21--
Harmonization with FINRA Rule 2210--Use of testimonials.'' The 
MSRB's considerations of private placement memoranda are discussed 
below under ``Potential Additional Exclusions from the Definition of 
Advertisement--Private Placement Memoranda.'' SIFMA did not provide 
further details about its suggestion concerning recommendations. At 
this time, the MSRB has determined not to include revisions to the 
draft amendments to Rule G-21 in the proposed rule change to address 
SIFMA's suggestion about recommendations. See also BDA letter 
(``[t]here is no compelling policy reason to have different 
communication standards for municipal securities and corporate 
securities''); and Lewis Young letter (``we suggest you eliminate 
the current provisions related to advertising of Rule G-21 on 
broker/dealer activities otherwise governed by both G-17 and G-42 
and that you not impose a Rule G-40 on non-broker/dealer 
advisors'').
    \70\ SIFMA letter at 2.
---------------------------------------------------------------------------

    Nevertheless, SIFMA did not propose that the MSRB incorporate FINRA 
Rule 2210 in its entirety by reference into Rule G-21. Rather, SIFMA 
submitted that certain provisions of FINRA Rule 2210(c) relating to the 
filing of advertisements with FINRA and the review procedures for those 
advertisements were unnecessary and burdensome and should not be 
included. Similarly, SIFMA proposed that provisions in FINRA Rule 
2210(e) relating to the limitations on the use of FINRA's name and any 
other corporate name owned by FINRA be exempted from the incorporation 
by reference of FINRA Rule 2210 into Rule G-21.
    Further, SIFMA recognized that there may be a need for certain MSRB 
regulation of dealer and municipal advisor advertising. SIFMA stated 
that ``[w]ith respect to advertising or public communications for most 
municipal securities products (except for municipal advisory business 
and municipal fund securities), we feel there is no compelling reason 
to establish a different rule set than that which exists under FINRA 
Rule 2210.'' \71\
---------------------------------------------------------------------------

    \71\ SIFMA letter at 9. 3PM had a somewhat analogous view to 
that of SIFMA's about the Request for Comment. 3PM noted that most 
solicitor municipal advisors that are members of 3PM are also 
members of FINRA. 3PM submitted that the Board should focus on 
municipal advisor firms that have no regulatory oversight rather 
than layering additional compliance regulations and costs on 
solicitor municipal advisors. 3PM letter at 13.
---------------------------------------------------------------------------

    As discussed under ``Background'' above, Rule G-21 is one of the 
MSRB's core fair practice rules that has been in effect since 1978. In 
proposing those rules, the MSRB stated the purpose of the fair practice 
rules ``is to codify basic standards of fair and ethical business 
conduct for municipal securities professionals.'' \72\ After carefully 
considering SIFMA's suggestions, including the recognition of the 
important differences between the corporate and municipal securities 
markets, the MSRB determined not to incorporate FINRA Rule 2210 by 
reference into Rule G-21. Further, the MSRB notes that if the MSRB were 
to incorporate FINRA Rule 2210 by reference and if FINRA or its staff 
were to provide an interpretation of FINRA Rule 2210, the Board 
automatically would be adopting that interpretation without considering 
the interpretation's

[[Page 5484]]

ramifications for the unique municipal securities market. In addition, 
there are municipal securities dealers that are not members of FINRA. 
Those dealers may not have the necessary notice of FINRA's rule 
interpretations.
---------------------------------------------------------------------------

    \72\ See supra note 29 at 10,371.
---------------------------------------------------------------------------

(iv) Definition of Standards for Product and Professional 
Advertisements
    BDA suggested that the definitions of standards for product 
advertisements and professional advertisements were made redundant by 
the general and content standards in the draft amendments to Rule G-21 
and draft Rule G-40, and that the provisions should be deleted to 
signify that these types of communications are covered by the draft 
amendments to Rule G-21 and draft Rule G-40.\73\ Although the 
provisions in the draft amendments to Rule G-21 and draft Rule G-40 are 
analogous to the current provisions in Rule G-21, there are differences 
in those provisions. For example, Rule G-21(b) contains a strict 
liability standard relating to the publication or dissemination of 
professional advertisements. Since the MSRB first proposed Rule G-21, 
the MSRB has believed that ``a strict standard of responsibility for 
securities professionals [is necessary] to assure that their 
advertisements are accurate.'' \74\ After careful consideration, the 
MSRB has determined at this time not to delete the standards for 
product and professional advertisements.
---------------------------------------------------------------------------

    \73\ BDA letter. See also SIFMA letter at 4 (strongly supporting 
the removal of the definition of ``advertisement,'' ``form letter,'' 
and ``professional advertisement'' in favor of harmonizing with 
FINRA Rule 2210's three categories of communications, and stating 
that ``[h]armonization of the MSRB and FINRA rules would also 
necessitate the removal of the confusing and duplicative definition 
of `product advertisement''').
    \74\ See supra note 29 at 10,376.
---------------------------------------------------------------------------

B. Potential Additional Exclusions From the Definition of Advertisement

    Commenters suggested additional exclusions from the definition of 
an advertisement. Those exclusions related to private placement 
memoranda \75\ and responses to RFPs or RFQs.\76\
---------------------------------------------------------------------------

    \75\ See BDA letter and SIFMA letter at 5.
    \76\ See, e.g., BDA letter and SIFMA letter at 5-6.
---------------------------------------------------------------------------

(i) Private Placement Memoranda
    BDA and SIFMA suggested that as part of its harmonization effort, 
the MSRB should exclude private placement memoranda from the definition 
of advertisement.\77\ BDA noted those materials are frequently used as 
offering memoranda and thus should be excluded from the definition of 
advertisement alongside preliminary offering statements.\78\
---------------------------------------------------------------------------

    \77\ Similarly, 3PM stated that, ``[g]iven the nature of a 
private placement memorandum for private issuers, we do not believe 
these documents should be classified as an advertisement and should 
be excepted from the rule as are preliminary official statements, 
official statements, preliminary prospectuses, summary prospectuses 
or registration statements.'' See 3PM letter at 11.
    \78\ See BDA letter.
---------------------------------------------------------------------------

    The MSRB believes, however, that such an exclusion would cause 
disharmonization with FINRA Rule 2210. FINRA Rule 2210 does not provide 
a similar exclusion from the definition of a communication. After 
careful consideration, the Board determined not to revise the draft 
amendments to Rule G-21 to reflect commenters' suggestion.
(ii) Response to an RFP or RFQ
    BDA and SIFMA commented that the Board should amend Rule G-21 
(Acacia, BDA, SIFMA, NAMA and PFM also made similar comments with 
respect to draft Rule G-40) to exclude a response to an RFP or RFQ from 
the definition of advertisement.\79\ Commenters submitted that it was 
not appropriate for the MSRB to regulate responses to requests for 
proposals or qualifications the same way that the MSRB regulates 
``retail communications''--i.e., possibly requiring principal approval 
in writing before sending the response to the RFP or RFQ to an issuer. 
The MSRB agrees. In the Request for Comment, the MSRB noted that a 
response to an RFP or RFQ would be excluded from regulation under the 
draft amendments to Rule G-21 and draft Rule G-40 because the response 
would be excluded from the definition of a form letter. Nevertheless, 
commenters stated that they did not believe that exclusion was 
sufficient, and stated that such responses to RFPs and RFQs should be 
explicitly excluded from the definition of advertisement.\80\ In 
particular, SIFMA expressed concern about the number of employees at a 
municipal securities issuer who may review an RFP or RFQ, and stated 
that it should not matter how many employees at such an issuer review 
the responses to an RFP and RFQ.
---------------------------------------------------------------------------

    \79\ See Acacia letter, BDA letter, SIFMA letter at 6, NAMA 
letter at 2, and PFM letter at 2.
    \80\ Id.
---------------------------------------------------------------------------

    To ensure that the definition of form letter is interpreted as 
intended, the proposed rule change includes Supplementary Material .03 
to Rule G-21 and Supplementary Material .01 to proposed Rule G-40. This 
supplementary material explains that an entity that receives a response 
to an RFP, RFQ or similar request would count as one ``person'' for the 
purposes of the definition of a form letter no matter the number of 
employees of the entity who may review the response. Other than the 
supplementary material, the Board determined that no other revisions to 
the draft amendments to Rule G-21 or to draft Rule G-40 were necessary 
to address commenters' concerns about RFPs and RFQs.

C. Hypothetical Illustrations

    The Request for Comment noted that FINRA had recently requested 
comment on draft amendments to FINRA Rule 2210 to create an exception 
to the rule's prohibition on projecting performance to permit a firm to 
distribute a customized hypothetical investment planning illustration 
that includes the projected performance of an investment strategy. In 
part, in the interest of potential harmonization, the MSRB asked 
whether it should consider a similar proposal. Fidelity, SIFMA, and 
Wells Fargo commented that the MSRB should include a similar exception 
in the draft amendments to Rule G-21 and in draft Rule G-40.\81\
---------------------------------------------------------------------------

    \81\ See Fidelity letter at 4, SIFMA letter at 7, and Wells 
Fargo letter at 3. See also 3PM letter at 5 (stating that 
institutional investors should be permitted to receive materials 
with projected or targeted returns).
---------------------------------------------------------------------------

    The comment period on FINRA's draft amendments to FINRA Rule 2210 
closed March 27, 2017, and FINRA is still considering the comments that 
it received.\82\ The Board determined that it would be premature to 
include provisions to address FINRA's draft amendments to Rule 2210 in 
the proposed rule change before FINRA determines how to proceed with 
those draft amendments. The MSRB will continue to monitor the FINRA 
initiative.
---------------------------------------------------------------------------

    \82\ FINRA received 21 comment letters in response to Regulatory 
Notice 17-06, FINRA Requests Comment on Proposed Amendments to Rules 
Governing Communications with the Public.
---------------------------------------------------------------------------

D. Hyperlinks

    The amendments to Rule G-21(e), effective November 18, 2017, 
clarify that a hyperlink can be used for an investor to obtain more 
current municipal fund security performance information. Fidelity 
suggested that the MSRB expand the use of hyperlinks more broadly and 
in other advertising contexts outside of municipal fund security 
performance advertisements.\83\ The MSRB appreciates Fidelity's 
suggestion, but at this time, has determined to not expand the use of 
hyperlinks in other types of advertisements.
---------------------------------------------------------------------------

    \83\ See Fidelity letter at 3.

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[[Page 5485]]

E. Coordination Between Self-Regulatory Organizations

    Fidelity encouraged the MSRB to review existing and upcoming FINRA 
guidance concerning communications with the public and to engage with 
FINRA directly during the rulemaking process.\84\ The MSRB agrees with 
this approach and notes that it has directly engaged with FINRA during 
this particular rulemaking process, and regularly coordinates with 
FINRA as well as other financial regulators on rulemaking and other 
matters. As noted in the Request for Comment, the MSRB reviews the 
rulemaking proposals of FINRA as well as those of other financial 
regulators.\85\
---------------------------------------------------------------------------

    \84\ Id. at 2-3.
    \85\ Request for Comment at 21.
---------------------------------------------------------------------------

F. Dealer/Municipal Advisor Jurisdictional Guidance

    Commenters suggested that the MSRB provide guidance and/or 
exemptions from Rule G-21 for dealer/municipal advisors. Specifically, 
SIFMA suggested that the MSRB amend Rule G-21 to clarify that the 
activities of dealer/municipal advisors are governed by draft Rule G-40 
when those dealer/municipal advisors are engaging in municipal advisor 
advertising.\86\ Lewis Young had a somewhat analogous comment. Lewis 
Young suggested that the MSRB ``eliminate the current provisions 
related to advertising of Rule G-21 on broker/dealer activities 
otherwise governed by both G-17 and G-42 and that you not impose a Rule 
G-40 on non-broker/dealer advisors.'' \87\ Although such clarifications 
relating to dealer/municipal advisors under Rule G-21 may be beneficial 
in the future, the MSRB's regulatory scheme relating to municipal 
advisors is not yet complete. The MSRB believes that its regulation of 
financial advisory activities (as an element of municipal securities 
activity) should remain in place at least until a more complete 
regulatory framework for municipal advisors is in effect.\88\ Thus, 
after careful consideration of commenters' suggestions, the Board 
determined not to further revise the draft amendments to Rule G-21 to 
reflect commenters' suggestions.
---------------------------------------------------------------------------

    \86\ SIFMA letter at 8.
    \87\ Lewis Young letter.
    \88\ The MSRB has long regulated the activities of financial 
advisors. See, e.g., Rule G-23, on activities of financial advisors. 
Rule G-23 was adopted as part of the Board's fair practice rules to 
codify basic standards of fair and ethical business conduct for 
dealers. Rule G-23 does not prescribe normative standards for 
dealer/municipal advisor conduct. Rather, as a conflicts of interest 
rule, it prohibits activities that would be in conflict with the 
ethical duties the dealer owes in its capacity as a financial 
advisor to its municipal issuer client. This approach to Rule G-23 
has remained unchanged.
---------------------------------------------------------------------------

II. Proposed Rule G-40

    The MSRB received five comment letters that focused on draft Rule 
G-40.\89\ The comments concerned (i) the ability of the MSRB to 
regulate advertising by municipal advisors through other MSRB rules 
without draft Rule G-40, (ii) the definition of municipal advisory 
client, (iii) revisions to draft Rule G-40's content standards, (iv) 
the adoption of the relief that SEC staff provided to investment 
advisers relating to testimonials in advertisements, (v) principal pre-
approval, and (vi) guidance relating to municipal advisor websites and 
the use of social media. The comments ranged from strong support for 
draft Rule G-40 as set forth in the Request for Comment \90\ to the 
view that there is no need for draft Rule G-40 because of other MSRB 
rules.\91\
---------------------------------------------------------------------------

    \89\ See Acacia, Lewis Young, NAMA, PFM and 3PM letters.
    \90\ FSI letter at 3 (``FSI strongly supports further 
harmonization of regulatory requirements through the adoption of 
Rule G-40'').
    \91\ See Acacia letter at 1; Lewis Young letter; NAMA letter at 
1.
---------------------------------------------------------------------------

A. Ability To Regulate Municipal Advisor Advertising Through Other 
Rules

    Seeming to rely on the fiduciary duty requirements imposed on 
certain municipal advisors as well as the fair dealing requirements 
imposed on all municipal advisors, Acacia, Lewis Young, and NAMA 
submitted that the protections offered by Rule G-17 provide sufficient 
investor protection from misleading statements such that draft Rule G-
40 is not necessary.\92\ Further, Lewis Young explained that Rule G-42 
``imposes a high level of probity and care upon advisors'' and that 
``in cases (rare) in which unsophisticated municipal issuers may be 
duped or deceived by an unscrupulous municipal advisor's `advertising' 
communication, we suggest that Rule G-17 and Rule G-42 provide ample 
scope for enforcement.'' \93\
---------------------------------------------------------------------------

    \92\ Acacia letter at 1 (``we agree with other commenters that 
this rule is unnecessary . . .[t]he core rules of G-17 coupled with 
G-42 and the fiduciary duty required under Dodd-Frank provides ample 
regulation to prevent false or misleading statements by municipal 
advisors''); Lewis Young letter (further suggesting that the MSRB 
should eliminate the ``current provisions related to advertising of 
Rule G-21 on broker/dealer activities otherwise governed by both 
Rule G-17 and Rule G-42 and that you [the MSRB] not impose a Rule G-
40 on non-broker/dealer advisors''); NAMA letter at 1 (``we 
respectfully request that the Proposed Rule G-40 be withdrawn as the 
same results of ensuring falsehood or misleading statements are not 
used in advertising for MA professional services can already be 
found in Rule G-17'').
    \93\ Lewis Young letter; see Acacia letter at 1.
    Lewis Young also suggested that ``an alternative would be a 
principles based `truth in advertising' version of G-40 which could 
be written in one or two sentences. Rule G-21 could be 
correspondingly simplified.''
---------------------------------------------------------------------------

    To rely on Rule G-17 to regulate municipal advisor advertising 
would create an unlevel playing field. This unlevel playing field would 
be between municipal advisors (subject to Rule G-17, but not Rule G-21) 
and dealers (subject to both Rules G-17 and G-21) and among municipal 
advisors that are not registered as dealers and municipal advisors that 
are also registered as dealers or investment advisers (subject to Rule 
G-21 and FINRA Rule 2210 or Advisers Act Rule 206(4)-1, as 
relevant).\94\ Advertisements by dealers and investment advisers are 
regulated by advertising regulations that are separate from the other 
regulations to which dealers or investment advisers are subject.
---------------------------------------------------------------------------

    \94\ 17 CFR 275.206(4)-1. Registered investment advisers, like 
non-solicitor municipal advisors, are subject to fiduciary 
standards, and also are subject to advertising rules under the 
Advisers Act.
---------------------------------------------------------------------------

    Further, Rule G-42 applies only to non-solicitor municipal 
advisors; Rule G-42 excludes solicitor municipal advisors from the 
rule's scope. Lewis Young's comments fail to address how reliance on 
Rule G-42 would address advertising by solicitor municipal advisors 
that are not subject to Rule G-42. Moreover, other commenters submitted 
that having a separate rule to address advertising by municipal 
advisors would be helpful.\95\
---------------------------------------------------------------------------

    \95\ See, e.g., SIFMA letter at 1 (``[w]e agree that the MSRB 
should have two rules on public communications, and we believe the 
rules should be divided based on activity, not by registration 
category''); and 3PM letter at 8-9 (``[i]n 3PM's opinion, the rules 
for municipal advisors are already confusing enough given different 
requirements for solicitor and non-solicitor municipal advisors. 
Including municipal advisor advertising within the body of G-21 
would only complicate the issue further. We believe the municipal 
advisor rules should remain as Rule G-40, separate from G-21'').
---------------------------------------------------------------------------

    After careful consideration, the MSRB determined to address 
advertising by municipal advisors through proposed Rule G-40.

B. Definition of Municipal Advisory Client

    3PM provided a ``technical interpretation of the definition of 
`municipal advisory client''' and suggested that the protections that 
would be provided by draft Rule G-40 may not be broad enough to protect 
municipal entities and obligated persons when they are solicited on 
behalf of third-parties by municipal

[[Page 5486]]

advisors (``solicitor municipal advisors'').\96\ In particular, 3PM 
suggested that the definition of municipal advisory client was too 
narrow, and that the definition should be expanded to include the 
municipal entity or obligated person that is the subject of the 
solicitation by a solicitor municipal advisor.\97\ The MSRB agrees in 
substance with the comment and has intended throughout that the 
protections of draft Rule G-40 would apply to municipal entities and 
obligated persons under the definition of an advertisement. For 
clarification, the MSRB has revised the definition of an advertisement 
to ensure that the definition will be interpreted as intended. Under 
proposed Rule G-40(a)(i), an advertisement would explicitly include 
promotional literature distributed to municipal entities or obligated 
persons by a solicitor municipal advisor on behalf of the solicitor 
municipal advisor's municipal advisory client.
---------------------------------------------------------------------------

    \96\ 3PM letter at 2.
    \97\ Id.
---------------------------------------------------------------------------

C. Definition of Advertisement

    Rule 15Ba1-1(d)(1)(ii) under the Exchange Act excludes the 
provision of general information from the type of advice that would 
require a municipal advisor to register with the SEC.\98\ SEC staff, in 
its Responses to Frequently Asked Questions, provided further 
information about those exclusions in its answer to ``Question 1.1: The 
General Information Exclusion from Advice versus Recommendations.'' 
\99\ NAMA and PFM submitted that those general exclusions from the term 
``advice'' that would permit a municipal advisor to not register with 
the SEC should equally apply as exclusions to the MSRB's draft 
municipal advisor advertising rule.\100\
---------------------------------------------------------------------------

    \98\ 17 CFR 240.15Ba1-(d)(1)(ii).
    \99\ According to the SEC staff, examples of that general 
information include:
    (a) Information regarding a person's professional qualifications 
and prior experience (e.g., lists, descriptions, terms, or other 
information regarding prior experience on completed transactions 
involving municipal financial products or issuances of municipal 
securities); (b) general market and financial information (e.g., 
market statistics regarding issuance activity for municipal 
securities or current market interest rates or index rates for 
different types of bonds or categories of credits); (c) information 
regarding a financial institution's currently-available investments 
(e.g., the terms, maturities, and interest rates at which the 
financial institution offers these investments) or price quotes for 
investments available for purchase or sale in the market that meet 
criteria specified by a municipal entity or obligated person; (d) 
factual information describing various types of debt financing 
structures (e.g., fixed rate debt, variable rate debt, general 
obligation debt, debt secured by various types of revenues, or 
insured debt), including a comparison of the general 
characteristics, risks, advantages, and disadvantages of these debt 
financing structures; and (e) factual and educational information 
regarding various government financing programs and incentives 
(e.g., programs that promote energy conservation and the use of 
renewable energy).
    Registration of Municipal Advisors Frequently Asked Questions, 
Office of Municipal Securities, U.S. Securities and Exchange 
Commission, last updated on May 19, 2014, available at https://www.sec.gov/info/municipal/mun-advisors-faqs.shtml.
    \100\ NAMA letter at 2; PFM letter at 2.
---------------------------------------------------------------------------

    The purpose of draft Rule G-40, in part, is to ensure that 
municipal advisor advertising does not contain any untrue statement of 
material fact and is not otherwise false or misleading. Regardless of 
whether certain information rises to the level of advice, that 
information may be advertising used to market to potential clients, 
which the MSRB believes should be covered by draft Rule G-40. Further, 
as noted by FSI, maintaining regulatory consistency between draft Rule 
G-40 and the draft amendments to Rule G-21 is important.\101\ Among 
other things, FSI noted that regulatory consistency enhances the 
potential for compliance with draft Rule G-40 because dually regulated 
entities will comply with consistent standards, and can reduce 
regulatory arbitrage.\102\ After considering commenters' suggestions, 
the Board determined not to include additional exceptions from the 
definition of an advertisement in proposed Rule G-40.
---------------------------------------------------------------------------

    \101\ FSI letter at 3.
    \102\ Id.
---------------------------------------------------------------------------

D. Draft Rule G-40's Content Standards

i. Content Standards, in General
    NAMA, PFM and 3PM generally requested that draft Rule G-40 be 
revised to provide more definitive content standards.\103\ In 
particular, NAMA and PFM stated that the content standards in draft 
Rule G-40 should reflect a clearer separation between the content 
standards applicable to product advertisements and the content 
standards applicable to professional advertisements. NAMA and PFM 
suggested that this separation was important because the clear majority 
of municipal advisors only engage in professional services 
advertising.\104\ In addition, PFM stated that Sections (D), (E), and 
(F) of draft Rule G-40 should not be included in draft Rule G-40 as 
``these provisions are more directly related to advertisements for 
products distributed by brokers, dealers, or municipal securities 
dealers, and should not be construed as necessary to administer to the 
types of services that municipal advisors may provide.'' \105\
---------------------------------------------------------------------------

    \103\ See NAMA letter at 3; PFM letter at 3; and 3PM letter at 
4-5.
    \104\ See NAMA letter at 3; PFM letter at 3 (``we believe that 
the MSRB should provide a clearer demarcation between the content 
standards for advertising products within the regulatory conventions 
set for broker-dealers . . . and the standards for advertising 
municipal advisory services more akin to regulatory conventions set 
for registered investment advisors [sic] who are also subject to a 
fiduciary standard (generally `professional advertising') because 
our experience clearly shows that the vast majority of municipal 
advisors predominately engage in the latter type of advertising'').
    \105\ PFM letter at 4.
---------------------------------------------------------------------------

    The Board appreciates and considered commenters' suggestions. With 
regard to the suggestions about refining draft Rule G-40's content 
standards, the MSRB believes that those content standards are clear as 
drafted. Moreover, as the MSRB's regulatory regime relating to 
municipal advisors is not yet complete, the MSRB believes that, at this 
point, having different content standards based on the type of 
advertisement by the municipal advisor would not be warranted.\106\ 
Further, having content standards in proposed Rule G-40 that are 
similar to those in proposed amended Rule G-21 may enhance the ability 
of dually registered dealers and municipal advisors to comply with MSRB 
rules.\107\ After careful consideration, the Board determined not to 
revise draft Rule G-40 in response to commenters' suggestions.
---------------------------------------------------------------------------

    \106\ The MSRB generally believes that regulation of financial 
advisory activity (as an element of municipal securities activity) 
should remain in place until a more complete regulatory framework 
for municipal advisory activity is in effect. Also, there may be 
some areas of financial advisory activity that are not clearly 
within the scope of SEC-defined municipal advisory activity. See 
supra note 88.
    \107\ The MSRB notes that approximately a quarter of municipal 
advisory firms are also registered as broker-dealers.
---------------------------------------------------------------------------

ii. Content Standard About Non-Security Product Advertisements
    The MSRB sought comment about whether the MSRB should provide 
guidance about municipal advisors that market non-security products, 
such as software programs, to their municipal advisory clients. 
Commenters generally responded that such guidance may be helpful, but 
generally either did not provide further information or cautioned that 
there should be a nexus between the product advertisement and municipal 
advisory activity for draft Rule G-40 to apply.\108\
---------------------------------------------------------------------------

    \108\ See NAMA letter at 2 (submitting that ``[i]f the MSRB has 
identified any meaningful subset of MAs that advertise products, 
then a separate section should apply solely to product 
advertisements''); SIFMA letter at 8-9 (submitting that the MSRB 
should address content standards for municipal advisor product 
advertisements only to the extent such advertisements relate to 
municipal advisory activities such as the sale of software by a 
municipal advisor to assist its clients with municipal securities 
transactions); 3PM letter at 10 (``[w]e believe that guidance 
regarding advertisements of non[hyphen]security products should only 
be put in place for firms who are also conducting a security 
business and who have `municipal advisory clients' that they plan to 
send non[hyphen]security advertisements to. Firms who have 
``municipal advisory clients [sic] that they are also soliciting on 
behalf of non[hyphen]security products should be required to advise 
the buyers in the municipal entity of the arrangements that already 
exist with a municipal advisor''); but see Acacia letter at 2 
(``[t]he MSRB would be over reaching if it attempted to regulate the 
use of non-security products. While there may be a subset of 
advisors who engage in this activity, we can see no nexus for the 
MSRB to become involved in non-security related regulations''). In 
response to Acacia's concerns, the MSRB notes that it is not 
suggesting that the MSRB regulate the use of non-security products 
by a municipal advisor. Rather, the MSRB was seeking comment about 
municipal advisors that may market non-security products along with 
their municipal advisory services.

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

[[Page 5487]]

    The MSRB agrees that there should be a nexus between the product 
advertisement and the municipal advisory activity for proposed Rule G-
40 to apply. The MSRB believes that when a municipal advisor publishes 
an advertisement about its municipal advisory services and that 
advertisement also markets a non-municipal security product that is 
related to the municipal advisory services, the municipal advisor 
should consider whether the entire advertisement and not just the 
portion of the advertisement addressing municipal advisory services, is 
consistent with all MSRB rules, including Rule G-17, proposed Rule G-
40, Rule G-42 and Rule G-8, on books and records to be made by brokers, 
dealers, municipal securities dealers and municipal advisors.

E. Testimonials

    BDA, NAMA, PFM, SIFMA, 3PM and Wells Fargo commented on draft Rule 
G-40(iv)(G) that would prohibit a municipal advisor from using 
testimonials in its advertisements.\109\ Their comments ranged from the 
view that the MSRB's prohibition on the use of testimonials in 
municipal advisor advertisements is not warranted \110\ to the view 
that, while the prohibition on the use of testimonials may be 
warranted, the MSRB should consider either the narrowing of that 
prohibition \111\ or the potential costs that would be associated with 
that prohibition.\112\
---------------------------------------------------------------------------

    \109\ BDA letter; NAMA letter at 3; PFM letter at 4-5; SIFMA 
letter at 6-7; 3PM letter at 6; and Wells Fargo letter at 3.
    \110\ See, e.g., BDA letter.
    \111\ See, e.g., PFM letter at 4-5.
    \112\ 3PM letter at 6.
---------------------------------------------------------------------------

    Specifically, BDA stated that the ``MSRB's prohibition on 
testimonials in . . . Rule G-40 is [not] warranted.'' \113\ SIFMA, 
while appearing to agree with BDA's comment, also suggested that draft 
Rule G-40 be harmonized with FINRA Rule 2210(d)(6) which permits 
testimonials in advertisements by dealers, subject to certain 
conditions (see discussion above under Rule G-21 comments).
---------------------------------------------------------------------------

    \113\ BDA letter.
---------------------------------------------------------------------------

    NAMA, PFM and Wells Fargo stated that, if draft Rule G-40 were to 
prohibit testimonials by municipal advisors, the MSRB should provide 
relief from that prohibition. Commenters suggested that the MSRB narrow 
that prohibition either by adopting the SEC staff's definition of a 
testimonial that is applicable to investment advisers,\114\ by adopting 
certain SEC staff no-action guidance relating to the use of 
testimonials by investment advisers,\115\ or by completely adopting the 
substantial SEC staff guidance that relates to use of testimonials by 
investment advisers \116\ that was set forth in an SEC Division of 
Investment Management guidance update.\117\
---------------------------------------------------------------------------

    \114\ See NAMA letter at 3; PFM letter at 4-5.
    \115\ See PFM letter at 4-5.
    \116\ See Wells Fargo letter at 3.
    \117\ IM Guidance Update No. 2014-04 (March 2014).
---------------------------------------------------------------------------

    The Board considered commenters' suggestions, and recognizes the 
interpretive guidance provided by the SEC staff relating to 
testimonials.\118\ Nevertheless, as discussed in the Request for 
Comment, the MSRB believes that a testimonial presents significant 
issues, including the ability to be misleading. Also noted in the 
Request for Comment, the MSRB recognizes that other comparable 
financial regulations, such as Rule 206(4)-1 under the Advisers Act, 
also prohibit advisers from including testimonials in advertisements 
(investment advisers, like non-solicitor municipal advisors, are 
subject to fiduciary standards).
---------------------------------------------------------------------------

    \118\ See supra note 26.
---------------------------------------------------------------------------

    Further, although the MSRB appreciates commenters' suggestions, the 
guidance related to the testimonial ban under the Advisers Act rule is 
SEC staff guidance, not guidance issued by the Commission.\119\ The 
MSRB, however, will monitor developments relating to the testimonial 
ban under Rule 206(4)-1. In addition, as noted under ``Self-Regulatory 
Organization's Statement on Burden on Competition'' above, while the 
MSRB acknowledges that there will be certain increased costs for 
municipal advisors relating to compliance and supervision, the MSRB 
believes the benefits accrued to municipal entities and obligated 
persons from more accurate and objective information should exceed the 
costs over time. After careful consideration, the Board determined not 
to revise draft Rule G-40 to reflect commenters' suggestions.
---------------------------------------------------------------------------

    \119\ The MSRB notes that there are additional challenges if the 
MSRB were to adopt SEC staff guidance. Those challenges include 
monitoring SEC staff guidance and ensuring municipal advisors that 
are not also registered as investment advisers have notice of any 
changes to the SEC staff guidance. See supra note 26.
---------------------------------------------------------------------------

F. Principal Pre-Approval

    BDA argued that principal pre-approval was not needed or could be 
limited to certain types of advertisements.\120\ BDA stated that 
clients of municipal advisors are institutions, and that as 
institutions, they do not need many of the ``mechanistic protections 
applicable to dealer relationships with retail investors.'' \121\ BDA 
submitted that it ``does not believe that a principal needs to approve 
every advertisement.'' \122\ BDA, however, did not discuss the types of 
advertisements that a principal would need to approve.
---------------------------------------------------------------------------

    \120\ BDA letter.
    \121\ Id.
    \122\ Id.
---------------------------------------------------------------------------

    An important part of the MSRB's mission is to protect state and 
local governments and other municipal entities. It is, in part, because 
of that mission that the MSRB developed draft Rule G-40. The MSRB has 
long believed that principal pre-approval of advertisements is an 
essential part of an effective supervisory process. See discussion 
under ``Harmonization with FINRA Rule 2210'' above. After careful 
consideration, the MSRB determined not to revise draft Rule G-40 in 
response to BDA's suggestion.

G. Guidance Relating to Municipal Advisor Websites and the Use of 
Social Media

    Commenters requested more specific guidance about the content 
posted on a municipal advisor's website and about the use of social 
media by a municipal advisor. In particular, Acacia, NAMA, and PFM 
requested guidance about whether material posted on a municipal 
advisor's website would constitute an advertisement under proposed Rule 
G-40.\123\ In response, the MSRB notes that

[[Page 5488]]

proposed Rule G-40(a)(i) defines an advertisement, in part, as any 
``material . . . published or used in any electronic or other public 
media . . . .'' As such, proposed Rule G-40 would apply to any material 
posted on a municipal advisor's website or more generally, on any 
website, if that material comes within the definition of an 
advertisement as set forth in proposed Rule G-40(a)(i).
---------------------------------------------------------------------------

    \123\ Acacia letter; NAMA letter at 3; PFM letter at 5; but see 
SIFMA letter at 6 (``[t]he amendments to Rule G-21 and draft Rule G-
40(c) apply to advertisements, regardless of whether electronic or 
other public media is used with those advertisements. As such, we 
feel no additional guidance by the MSRB is needed regarding the use 
of social media by a dealer or municipal advisor at this time'').
---------------------------------------------------------------------------

    In addition, NAMA and PFM requested guidance on the use of social 
media.\124\ The MSRB appreciates commenters' requests, and currently is 
studying whether to provide such guidance. As part of that 
consideration, the MSRB is reviewing the guidance concerning the use of 
social media provided by other financial regulators.\125\
---------------------------------------------------------------------------

    \124\ NAMA letter at 3; PFM letter at 5; but see Fidelity letter 
at 4 (``MSRB Rule G-21 applies to advertisements, regardless of 
whether electronic or other public media, including social media, is 
used with those advertisements'') and SIFMA letter at 6 (``[t]he 
amendments to Rule G-21 and draft Rule G-40(c) apply to 
advertisements, regardless of whether electronic or other public 
media is used with those advertisements. As such, we feel no 
additional guidance by the MSRB is needed regarding the use of 
social media by a dealer or municipal advisor at this time'').
    \125\ See Fidelity letter at 5 (``[o]n the topic of social 
media, FINRA has provided guidance on the application of its rules 
governing communications with the public to social media sites . . . 
. For example, we understand that FINRA is currently working on a 
new social media Q&A . . . .); SIFMA letter at 6 (``[w]e believe 
that FINRA is currently working on guidance regarding social media. 
In line with our earlier comments, we feel the MSRB should ascribe 
to this guidance or clearly articulate why it is not appropriate in 
this market''). The MSRB believes that SIFMA's comments relate to 
FINRA Regulatory Notice 17-18, Guidance on Social Networking 
websites and Business Communications (Apr. 2017).
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period of up to 90 days (i) as 
the Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MSRB-2018-01 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-2018-01. 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 website (https://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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2018-01 and should be submitted on 
or before February 28, 2018.

    For the Commission, pursuant to delegated authority.\126\
---------------------------------------------------------------------------

    \126\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02398 Filed 2-6-18; 8:45 am]
 BILLING CODE 8011-01-P

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