Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Create New MSRB Rule G-46, on Duties of Solicitor Municipal Advisors, and To Amend MSRB Rule G-8, on Books and Records, 9560-9576 [2023-03060]
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Federal Register / Vol. 88, No. 30 / Tuesday, February 14, 2023 / Notices
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approximately 12–13% of the equity
options market share.44 Therefore, no
exchange possesses significant pricing
power in the execution of option order
flow. Participants can readily choose to
send their orders to other exchanges if
they deem fee levels at those other
exchanges to be more favorable.
Moreover, the Commission has
repeatedly expressed its preference for
competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. Specifically, in Regulation
NMS, the Commission highlighted the
importance of market forces in
determining prices and SRO revenues
and, also, recognized that current
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 45 The
fact that this market is competitive has
also long been recognized by the courts.
In NetCoalition v. Securities and
Exchange Commission, the D.C. Circuit
states as follows: ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . As the SEC explained, ‘[i]n the U.S.
national market system, buyers and
sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’ . . .’’ 46 Accordingly, the
Exchange does not believe its proposed
fee change imposes any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
Accordingly, the Exchange believes
that the proposed changes will not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act
because it will continue to encourage
order flow, which provides greater
volume and liquidity, benefiting all
market participants by providing more
trading opportunities and tighter
spreads.
44 See
supra note 28.
Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005).
46 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C.
Cir. 2010) (quoting Securities Exchange Act Release
No. 59039 (December 2, 2008), 73 FR 74770, 74782–
83 (December 9, 2008) (SR–NYSEArca–2006–21)).
45 See
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to section
19(b)(3)(A)(ii) of the Act,47 and Rule
19b–4(f)(2) 48 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or 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 rule-comments@
sec.gov. Please include File Number SR–
MIAX–2023–03 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2023–03. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet 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 such
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–MIAX–2023–03 and should
be submitted on orbefore March 7, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–03055 Filed 2–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96842; File No. SR–MSRB–
2023–02]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed
Rule Change To Create New MSRB
Rule G–46, on Duties of Solicitor
Municipal Advisors, and To Amend
MSRB Rule G–8, on Books and
Records
February 8, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on January 31, 2023, the Municipal
Securities Rulemaking Board (‘‘MSRB’’
or ‘‘Board’’) filed with the Securities
and Exchange Commission (‘‘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.
49 17
47 15
U.S.C. 78s(b)(3)(A)(ii).
48 17 CFR 240.19b–4(f)(2).
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 88, No. 30 / Tuesday, February 14, 2023 / Notices
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 change to create a new
rule, MSRB Rule G–46, on duties of
solicitor municipal advisors (‘‘Proposed
Rule G–46’’) and amend MSRB Rule G–
8, on books and records (‘‘Proposed
Amended Rule G–8’’) (together, the
‘‘proposed rule change’’). The MSRB
requests that the proposed rule change
be approved with an implementation
date to be announced by the MSRB in
a regulatory notice published no later
than one month following the
Commission approval date, which
implementation date shall be no later
than twelve months following the
Commission approval date.
The text of the proposed rule change
is available on the MSRB’s website at
https://msrb.org/2023-SEC-Filings, 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
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Solicitor Municipal Advisor Activity
There are two broad categories of
municipal advisors—those that provide
certain advice to or on behalf of a
municipal entity or obligated person
and those that undertake certain
solicitations of a municipal entity or
obligated person on behalf of certain
third-party financial professionals.3 The
3 Section 15B(e)(4) of the Exchange Act (15 U.S.C.
78o–4(e)(4)) generally defines ‘‘municipal advisor’’
to mean a person (who is not a municipal entity or
an employee of a municipal entity) that (i) provides
advice to or on behalf of a municipal entity or
obligated person with respect to municipal
financial products or the issuance of municipal
securities, including advice with respect to the
structure, timing, terms, and other similar matters
concerning such financial products or issues; or (ii)
undertakes a solicitation of a municipal entity.
Notwithstanding the omission of the term,
‘‘obligated person’’ in connection with the
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first category of municipal advisors is
often referred to as non-solicitor
municipal advisors, while the latter is
sometimes referred to as solicitors.4
Proposed Rule G–46 would govern the
conduct of these solicitors, more
specifically defined as ‘‘solicitor
municipal advisors’’ under Proposed
Rule G–46(a)(vi).
While the Exchange Act 5 permits a
municipal advisor to conduct such
solicitations on behalf of a third-party
broker, dealer or municipal securities
dealer (collectively and individually
‘‘dealers’’),6 MSRB Rule G–38, on
undertaking of a solicitation under Section
15B(e)(4)(A)(ii) of the Exchange Act (15 U.S.C. 78o–
4(e)(4)(A)(ii)), the SEC has interpreted the definition
of ‘‘municipal advisor’’ to include a person who
engages in the solicitation of an obligated person
acting in the capacity of an obligated person. See
Release No. 34–70462 (September 20, 2013), 78 FR
67467, at notes 138 and 408 (November 12, 2013)
(File No. S7–45–10) (‘‘SEC Final MA Rule Adopting
Release’’). See also Exchange Act Rule 15Ba1–
1(d)(1)(i) (17 CFR 240.15Ba1–1(d)(1)(i)).
4 Section 15B(e)(9) of the Exchange Act (15 U.S.C.
78o–4(e)(9)) generally defines ‘‘solicitation of a
municipal entity or obligated person’’ to mean a
direct or indirect communication with a municipal
entity or obligated person made by a person, for
direct or indirect compensation, on behalf of a
broker, dealer, municipal securities dealer,
municipal advisor, or investment adviser . . . that
does not control, is not controlled by, or is not
under common control with the person undertaking
such solicitation for the purpose of obtaining or
retaining an engagement by a municipal entity or
obligated person of a broker, dealer, municipal
securities dealer, or municipal advisor for or in
connection with municipal financial products, the
issuance of municipal securities, or of an
investment adviser to provide investment advisory
services to or on behalf of a municipal entity. The
SEC has interpreted this phrase generally in a
manner similar to the statutory definition. However,
it has also added two exceptions to the statutory
definition for (i) advertising by a dealer, municipal
advisor or investment adviser and (ii) solicitations
of an obligated person where such obligated person
is not acting in the capacity of an obligated person
or the solicitation is not in connection with the
issuance of municipal securities or with respect to
municipal financial products. See Exchange Act
Rule 15Ba1–1(n) (17 CFR 240.15Ba1–1(n)).
Additionally, the SEC has exempted from the
municipal advisor definition a person that
undertakes a solicitation of a municipal entity or
obligated person for the purpose of obtaining or
retaining an engagement by a municipal entity or
by an obligated person of a dealer or a municipal
advisor for or in connection with municipal
financial products that are investment strategies, to
the extent such investment strategies are not plans
or programs for the investment of the proceeds of
municipal securities or the recommendation of and
brokerage of municipal escrow investments. See
Exchange Act Rule 15Ba1–1(d)(1) (17 CFR
240.15Ba1–1(d)(1)) and 15Ba1–1(d)(3)(viii) (17 CFR
240.15Ba1–1(d)(3)(viii)).
5 See Section 15B(e)(4) (15 U.S.C. 78o–4(e)(4))
and Section 15B(e)(9) of the Exchange Act (15
U.S.C. 78o–4(e)(9)).
6 See 15 U.S.C. 78c(a)(4)(a) defining the term
‘‘broker’’ to mean ‘‘any person engaged in the
business of effecting transactions in securities for
the account of others;’’ see also 15 U.S.C. 78c(a)(5)
defining the term ‘‘dealer’’ to mean ‘‘any person
engaged in the business of buying and selling
securities (not including security-based swaps,
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9561
solicitation of municipal securities
business, prohibits a dealer from
providing or agreeing to provide
payment to third parties for solicitations
of municipal securities business made
on behalf of the dealer.7 Additionally, as
discussed in the MSRB’s Statement on
Burden on Competition below,
according to MSRB data, it appears that
a substantial number of solicitations
that would be subject to Proposed Rule
G–46 involve a solicitation on behalf of
a third-party investment adviser to
provide investment advisory services to
a municipal entity. Anecdotally, the
MSRB understands that such
solicitations often occur in connection
with the solicitation of a public pension
plan.8 For example, if a person
communicates with a public pension
plan for the purpose of getting a
particular investment advisory firm
hired by the plan to provide investment
advisory services to such plan, that
person may be a solicitor municipal
advisor if such person is paid by the
investment advisory firm for the
communication and if such person and
the investment advisory firm are not
affiliated.
As discussed below, MSRB data
suggests that the number of municipal
advisors that engage in solicitations that
may subject them to Proposed Rule G–
46 comprise a relatively small
percentage of the municipal advisors
that are registered with the MSRB.
However, notwithstanding the relatively
small size of such solicitation market,
the MSRB believes that it is important
that the fundamental protections
extended to the municipal entity and
obligated person clients of other MSRB
regulated entities are also extended to
the municipal entities and obligated
persons with whom solicitor municipal
advisors interact. For example, as noted
in the SEC Final MA Rule Adopting
Release, the solicitation of public
pension plans in connection with
investment advisory services has been
subject to multiple SEC enforcement
other than security-based swaps with or for persons
that are not eligible contract participants) for such
person’s own account through a broker or
otherwise’’ and 15 U.S.C. 78c(a)(30) generally
defining the term ‘‘municipal securities dealer’’ to
mean any person (including a separately
identifiable department or division of a bank)
engaged in the business of buying and selling
municipal securities for his own account, through
a broker or otherwise, subject to certain exclusions.
7 The prohibition in Rule G–38 predates the
regulation of municipal advisors.
8 See e.g., Third-Party Marketers Association:
Letter from Donna DiMaria, Chairman of the Board
of Directors and Chair of the 3PM Regulatory
Committee to the MSRB, dated June 16, 2021 (‘‘3PM
I’’).
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actions.9 The MSRB believes that the
proposed rule change would serve as an
important bulwark against potential
improper practices in the municipal
market and also would provide greater
certainty and transparency to solicitor
municipal advisors regarding regulatory
expectations.
From a practical perspective, any
registered municipal advisor is
permitted to act as both a solicitor
municipal advisor and a non-solicitor
municipal advisor. However,
anecdotally, the MSRB understands that
relatively few non-solicitor municipal
advisors also act as solicitor municipal
advisors.10 With respect to solicitations
on behalf of third parties to provide
investment advisory services,
commenters have informed the MSRB
that there are two ways in which a
solicitor municipal advisor typically
may solicit a municipal entity: (1)
directly or (2) through an
intermediary.11 They are discussed
below.
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Direct Solicitations
A solicitor municipal advisor often
first communicates with a staff member
of the solicited entity (i.e., the
municipal entity or obligated person)
who handles investment manager
research for the entity. This individual
generally is responsible for evaluating
the solicitor client’s product/services to
ensure they are appropriate for the
entity given the entity’s investment
policy statement guidelines and
restrictions. This first communication
potentially is one of many that may
span years. Additionally, the solicitor
municipal advisor’s client likely will
have its own communications with the
solicited entity, which may include
board presentations, meetings and
9 See SEC Final MA Rule Adopting Release, 78 FR
at 67482.
10 According to MSRB data shown in Table 1
below, 69 municipal advisors indicated that they
engage in both solicitation and non-solicitation
municipal advisory activity. However, it is unclear
the extent to which these municipal advisors
actively engage in both types of activity.
11 See e.g., ‘‘3PM I’’. While these comments
pertained primarily to the solicitation of municipal
entities, the MSRB does not have reason to believe
that the practice of soliciting obligated persons, to
the extent that such solicitations occur, would be
substantially different. The MSRB notes that the
intermediary itself may be a solicitor municipal
advisor to the extent that the intermediary makes
a communication with an unaffiliated municipal
entity or obligated person, for compensation, on
behalf of a third-party dealer, municipal advisor, or
investment adviser for the purpose of obtaining or
retaining an engagement by such municipal entity
or obligated person of a dealer or municipal advisor
for or in connection with municipal financial
products or the issuance of municipal securities, or
of an investment adviser to provide investment
advisory services. See Section 15B(e)(9) of the
Exchange Act (15 U.S.C. 78o–4(e)(9)).
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discussions during which the solicitor
municipal advisor may or may not be
present.
Indirect Solicitations Through an
Intermediary
A solicitor municipal advisor
typically initially will solicit a financial
intermediary or an investment
consultant (collectively ‘‘intermediary’’)
who is hired by the solicited entity to
conduct searches and identify
appropriate investment managers to
meet a municipal entity’s specific
need.12 Such intermediary itself may be
a solicitor municipal advisor.13 When a
solicitor municipal advisor first solicits
the intermediary, the solicitor
municipal advisor may not necessarily
know who the intermediary represents
(i.e., whether the intermediary
represents municipal entities, obligated
persons, other private entities, or all of
the above). Additionally, the solicitor
municipal advisor generally will not
know whether the intermediary will
recommend the solicitor municipal
advisor’s client to the intermediary’s
municipal entity client(s) (if any). As a
result, at the time of the first
solicitation, a solicitor municipal
advisor may not know if it is indirectly
soliciting a municipal entity. Moreover,
the solicitor municipal advisor’s client
(e.g., the investment adviser) may
engage in multiple subsequent
communications with either the
intermediary and/or the intermediary’s
client (e.g., the municipal entity or
obligated person), during which the
solicitor municipal advisor may or may
not be present. In some instances, the
solicitor municipal advisor may never
meet or directly communicate with an
intermediary’s municipal entity or
obligated person client.
Proposed Rule G–46
Summary of Proposed Rule G–46
Proposed Rule G–46 would establish
the core standards of conduct and duties
of ‘‘solicitor municipal advisors’’ (as
defined below) when engaging in
solicitation activities that would require
them to register with the SEC and the
MSRB as municipal advisors. The
proposed rule also would codify certain
statements in an MSRB notice issued in
2017 pertaining to the application of
MSRB rules to solicitor municipal
advisors.14 Those statements relate to
the obligation of solicitor municipal
12 In the most common scenario, an intermediary
will be an investment consultant or will perform
similar functions.
13 See supra note 11.
14 See MSRB Notice 2017–08, Application of
MSRB Rules to Solicitor Municipal Advisors (May
4, 2017).
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advisors under MSRB Rule G–17, on
conduct of municipal securities and
municipal advisory activities (the ‘‘G–17
Excerpt for Solicitor Municipal
Advisors’’).15 In addition to codifying
much of the substance of the G–17
Excerpt for Solicitor Municipal
Advisors, Proposed Rule G–46 also
would add additional requirements that
would better align some of the
obligations imposed on solicitor
municipal advisors with those
applicable to: non-solicitor municipal
advisors under Rule G–42, on duties of
non-solicitor municipal advisors;
underwriters under Rule G–17, on fair
dealing, and; certain solicitations
undertaken on behalf of third-party
investment advisers under the SEC’s
marketing rule for investment advisers
(the ‘‘IA Marketing Rule’’ or ‘‘IA Rule
206(4)–1’’).16
In summary, the core provisions of
Proposed Rule G–46 generally would:
• Set forth definitions for terms used
in the proposed rule;
• Require solicitor municipal
advisors to provide to their solicitor
clients full and fair disclosure in writing
of all of their material conflicts of
interest and material legal or
disciplinary events;
• Require solicitor municipal
advisors to document their relationships
in writing(s), deliver such writing(s) to
their solicitor clients, and set forth
certain minimum content that must be
included in such writing(s);
• Prohibit solicitor municipal
advisors from making a representation
that the solicitor municipal advisor
knows or should know is either
materially false or misleading regarding
the capacity, resources or knowledge of
the solicitor client and require solicitor
municipal advisors to have a reasonable
basis for any material representations it
makes to a solicited entity regarding the
capacity, resources or knowledge of the
solicitor client;
• Require solicitor municipal
advisors to disclose to solicited entities
material facts about the solicitation,
including but not limited to an
obligation to disclose:
Æ Information about the solicitor
municipal advisor’s role and
compensation;
Æ The solicitor municipal advisor’s
material conflicts of interest;
Æ Information regarding the solicitor
client (i.e., the type of information that
is generally on Form MA or Form ADV,
Part 2 and a description of how the
solicited entity can obtain a copy of the
15 See
16 17
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id. at 17–18.
CFR 275.206(4)–1.
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solicitor client’s Form MA or Form
ADV, Part 2, as applicable);
• Set forth a dual disclosure standard
with respect to required disclosures to
solicited entities:
Æ Generally, disclosures would be
required to be made in writing and
delivered:
D At the time of the first
communication to a solicited entity (or
in the case of an indirect solicitation,
the first communication to an
intermediary of the solicited entity) on
behalf of a specific solicitor client; and
D If the solicitation results in a
solicited entity engaging a solicitor
client for investment advisory services
or municipal advisory services, again at
the time that engagement
documentation between the solicitor
client and the solicited entity is
delivered to the solicited entity or
promptly thereafter. Such disclosures
may be provided by either the solicitor
client or the solicitor municipal advisor,
but must be made to an official of the
solicited entity that, among other things,
the solicitor municipal advisor (or, the
solicitor client if the solicitor client
provides such disclosures) reasonably
believes has the authority to bind the
solicited entity by contract; and
• Expressly prohibit solicitor
municipal advisors from: delivering an
inaccurate invoice for fees or expenses
and making payments for the purpose of
obtaining or retaining an engagement to
perform municipal advisory activities
subject to exceptions specified in the
rule.
Supplementary material to Proposed
Rule G–46 generally would:
• Provide additional explanation
regarding the MSRB’s expectations with
respect to the reasonable basis a
solicitor municipal advisor must have
for certain of its representations;
• Explain the relationship between a
solicitor municipal advisor’s fair dealing
obligations and a federal fiduciary duty
for municipal advisors;
• Explain the relationship between a
municipal advisor’s obligations under
Proposed Rule G–46 and Rule G–42; and
• Provide additional explanation
applicable to a solicitor municipal
advisor’s obligation to document its
compensation arrangement and make
related disclosures.
Provided below is a more detailed
description of Proposed Rule G–46.
Definitions
Proposed Rule G–46(a) would set
forth a set of definitions for terms used
in the rule. It would define the terms
‘‘compensation,’’ 17 ‘‘excluded
17 Proposed Rule G–46(a)(i) generally would
provide that ‘‘compensation’’ means any cash, in-
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communications,’’ 18 ‘‘solicitation,’’
‘‘solicited entity,’’ ‘‘solicitor client,’’
‘‘solicitor municipal advisor,’’ and
‘‘solicitor relationship.’’ 19 The most
important of these definitions, which
are integral to understanding nearly all
of the provisions of Proposed Rule G–
46 are discussed below.
Proposed Rule G–46(a)(iii) generally
would define the term ‘‘solicitation’’ to
mean a direct or indirect
communication with a municipal entity
or obligated person made by a solicitor
municipal advisor, for direct or indirect
compensation, on behalf of a municipal
advisor or investment adviser that does
not control, is not controlled by, or is
not under common control with the
solicitor municipal advisor for the
purpose of obtaining or retaining an
engagement by a municipal entity or
obligated person of a municipal advisor
for or in connection with municipal
financial products or the issuance of
municipal securities or of an investment
adviser to provide investment advisory
services to or on behalf of a municipal
entity; provided, however, that it does
not include excluded communications,
as defined in Proposed Rule G–46(a)(ii).
This definition is consistent with the
defined term ‘‘solicitation of a
municipal entity or obligated person’’
under Section 15B(e)(9) of the Exchange
kind or non-cash remuneration, including but not
limited to merchandise, gifts, travel expenses, meals
and lodging.
18 Proposed Rule G–46(a)(ii) generally would
provide that ‘‘excluded communications’’ means
(A) advertising by a dealer, municipal advisor, or
investment adviser; (B) direct or indirect
communications with an obligated person if such
obligated person is not acting in the capacity of an
obligated person; (C) direct or indirect
communications with an obligated person made for
the purpose of obtaining or retaining an engagement
that is not in connection with the issuance of
municipal securities or with respect to municipal
financial products; and (D) direct or indirect
communications made for the purpose of obtaining
or retaining an engagement for or in connection
with municipal financial products that are
investment strategies to the extent that those
investment strategies are not plans or programs for
the investment of the proceeds of municipal
securities or the recommendation of and brokerage
of municipal escrow investments. The term
‘‘excluded communications’’ is used in the term
‘‘solicitation,’’ which would be defined in Proposed
Rule G–46(a)(iii).
19 Proposed Rule G–46(a)(vii) generally would
provide that, for purposes of the rule, a ‘‘solicitor
relationship’’ is deemed to exist when a municipal
advisor enters into an agreement to undertake a
solicitation of a municipal entity or obligated
person within the meaning of Section 15B(e)(9) of
the Act, 15 U.S.C. 78o–4(e)(9), and the rules and
regulations thereunder. The solicitor relationship
shall be deemed to have ended on the date which
is the earlier of (i) the date on which the solicitor
relationship has terminated pursuant to the terms
of the documentation of the solicitor relationship
required by Proposed Rule G–46(c) or (ii) the date
on which the solicitor municipal advisor withdraws
from the solicitor relationship.
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Act,20 except to the extent that the term
‘‘solicitation’’ under Proposed Rule G–
46(a)(iii) does not address solicitations
undertaken on behalf of a third-party
dealer. As noted above, MSRB Rule G–
38 generally prohibits a dealer from
providing or agreeing to provide
payment to third parties for solicitations
of municipal securities business made
on behalf of the dealer. As a result,
Proposed Rule G–46 assumes that such
solicitations do not occur.
Proposed Rule G–46(a)(iv) generally
would define the term ‘‘solicited entity’’
to mean any municipal entity or
obligated person (as those terms are
defined in Section 15B(e)(8) and (e)(10)
of the Exchange Act 21 and the rules and
regulations thereunder) that the solicitor
municipal advisor has solicited, is
soliciting or intends to solicit within the
meaning of Sections 15B(e)(4)(A)(ii) and
(e)(9) of the Act 22 and the rules and
regulations thereunder.
Proposed Rule G–46(a)(v) generally
would define the term ‘‘solicitor client’’
to mean the municipal advisor or
investment adviser on behalf of whom
the solicitor municipal advisor
undertakes a solicitation within the
meaning of Sections 15B(e)(4)(A)(ii) and
(e)(9) of the Act 23 and the rules and
regulations thereunder. As noted above,
because of the prohibition set forth in
MSRB Rule G–38, Proposed Rule G–46
presumes that solicitors do not conduct
paid solicitations on behalf of thirdparty dealers. As a result, the term
‘‘solicitor client’’ as defined in Proposed
Rule G–46(a)(v) does not include dealers
as solicitor clients.
Proposed Rule G–46(a)(vi) generally
would define the term ‘‘solicitor
municipal advisor’’ to mean, for
purposes of the rule, a municipal
advisor within the meaning of Section
15B(e)(4) of the Act 24 and other rules
and regulations thereunder; provided,
that it shall exclude a person that is
otherwise a municipal advisor solely
based on activities within the meaning
of Section 15B(e)(4)(A)(i) of the Act 25
and the rules and regulations
thereunder. Generally, this means that a
solicitor municipal advisor is any
municipal advisor that is not a nonsolicitor municipal advisor.
Disclosure to Solicitor Clients
Proposed Rule G–46(b) would require
a solicitor municipal advisor to provide
20 15
U.S.C. 78o–4(e)(9).
U.S.C. 78o–4(e)(8) and 15 U.S.C. 78o–
4(e)(10).
22 15 U.S.C. 78o–4(e)(4)(A)(ii) and 15 U.S.C. 78o–
4(e)(9).
23 Id.
24 15 U.S.C. 78o–4(e)(4).
25 15 U.S.C. 78o–4(e)(4)(A)(i).
21 15
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to a client full and fair disclosure in
writing of all material conflicts of
interest and any legal or disciplinary
event that would be material to a
reasonable solicitor client’s evaluation
of the solicitor municipal advisor or the
integrity of its management or advisory
personnel. The disclosures must be
provided prior to or upon engaging in
municipal advisory activities.
The proposed rule sets forth an
alternative to providing a narrative
description of any such legal or
disciplinary events by permitting
solicitor municipal advisors to reference
such information in certain other
publicly available information if the
conditions specified in the rule are met.
As a result, solicitor municipal advisors
that are also registered broker-dealers or
investment advisers would be permitted
to identify the specific type of event and
make specific reference to the relevant
portions of the solicitor municipal
advisor’s Form BD or Form ADV if the
solicitor municipal advisor provides
detailed information specifying where
the client may electronically access
such forms.26 All other municipal
advisors would be permitted to identify
the specific type of event and make
specific reference to the relevant
portions of the solicitor municipal
advisor’s most recent Forms MA or MA–
I filed with the Commission if the
solicitor municipal advisor provides
detailed information specifying where
the client may electronically access
such forms.27
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Documentation of the Solicitor
Relationship
Proposed Rule G–46(c) would require
a solicitor municipal advisor to
evidence each of its solicitor
relationships by a writing or writings
created and delivered to the solicitor
client prior to, upon or promptly after
the establishment of the solicitor
relationship. The writing(s) would be
required to be dated and include, at a
minimum:
• A description of the solicitation
activities to be engaged in by the
solicitor municipal advisor on behalf of
the solicitor client (including the scope
26 For example, a solicitor municipal advisor
could direct a solicitor client to FINRA’s
BrokerCheck system or the Investment Adviser
Public Disclosure website, as applicable; provided,
that the direction is accompanied by information as
to how to retrieve the firm’s specific Form BD or
Form ADV and specific reference to the relevant
portions of the applicable form.
27 For example, a solicitor municipal advisor
could direct a solicitor client to the SEC’s EDGAR
system; provided, that the direction is accompanied
by information as to how to retrieve the firm’s
specific form(s) and specific reference to the
relevant portions of the applicable form(s).
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of the agreed-upon activities and a
statement that the scope of the
solicitation is anticipated to include the
solicitation of municipal entities and/or
obligated persons);
• The terms and amount of the
compensation to be received by the
solicitor municipal advisor for such
activities;
• The date, triggering event, or means
for the termination of the relationship,
or, if none, a statement that there is
none; and
• Any terms relating to withdrawal
from the relationship.
The proposed obligation to document
the relationship is generally consistent
with a non-solicitor municipal advisor’s
obligation to document its municipal
advisory relationship with a client
under Rule G–42(c).28 The MSRB
believes that this documentation
obligation will help ensure that the
solicitor client has certain basic material
information about the engagement
including the scope of agreed-upon
activities and information pertaining to
compensation for such activities. The
MSRB also believes that this
documentation obligation will assist
examining authorities in understanding
the solicitation arrangement and will
provide them with necessary
information to assist in evaluating a
solicitor municipal advisor’s
compliance with relevant obligations.
The MSRB understands that a
solicitor may be asked to solicit a broad
range of entities on behalf of a client of
the solicitor. These entities may include
municipal entities, obligated persons
and corporate entities that are not
obligated persons. While the solicitation
of municipal entities and obligated
persons generally would require
compliance with Proposed Rule G–46
(to the extent the solicitation would
make the solicitor a ‘‘municipal
advisor’’), the solicitation of an entity
that is not a municipal entity or an
obligated person would not require such
compliance. In order to promote
certainty as to the applicable regulatory
scheme for any engagement, the MSRB
believes that it is imperative for any
engagement to be documented in a
writing that clearly indicates whether
the solicitation of municipal entities
and/or obligated persons is anticipated.
Information pertaining to termination of
the relationship or withdrawal from the
relationship will similarly assist both
28 Rule G–42(c) generally requires a municipal
advisor to evidence each of its municipal advisory
relationships by a writing or writings created and
delivered to the municipal entity or obligated
person client prior to, upon or promptly after the
establishment of the municipal advisory
relationship.
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solicitor clients and examination and
enforcement authorities in
understanding the scope of an
engagement.
Supplementary Material .04 would
provide additional guidance with
respect to the obligation to document
the terms and the amount of
compensation to be received.
Specifically, it provides that the
documentation(s) must clearly describe
the structure of the compensation
arrangement and the amount of
compensation paid or to be paid. For
example, a solicitor municipal advisor
that will be paid on the basis of a flat
or fixed fee would be required to
disclose the amount of the flat fee, if
known and/or calculable at the time of
the documentation. If the precise dollar
amount is not known at the time, the
documentation should disclose how
such compensation will be calculated.
As another example, if the
compensation arrangement calls for a
percentage of fees collected from the
referred clients, then the documentation
should state so and describe what that
percentage is.
Representations to Solicited Entities
Proposed Rule G–46(d)(i) expressly
would prohibit a solicitor municipal
advisor from making a representation
that the solicitor municipal advisor
knows or should know is either
materially false or materially misleading
due to the omission of a material fact
about the capacity, resources or
knowledge of the solicitor client. This
prohibition is similar to a prohibition
applicable to non-solicitor municipal
advisors under Rule G–42 except that,
unlike with Rule G–42, the prohibition
for solicitor municipal advisors would
not be limited to representations that
occur in response to requests for
proposals or qualifications or in oral
presentations to a client or prospective
client for the purpose of obtaining or
retaining an engagement for the solicitor
client.29 This is because the MSRB
believes that all of the solicitor
municipal advisor’s communications
regarding the capacity, resources or
knowledge of the solicitor’s clients are
expected to be for the purpose of
29 See Rule G–42(e)(i)(C) which prohibits nonsolicitor municipal advisors from making any
representation or the submission of any information
that the municipal advisor knows or should know
is either materially false or materially misleading
due to the omission of a material fact about the
capacity, resources or knowledge of the municipal
advisor, in response to requests for proposals or
qualifications or in oral presentations to a client or
prospective client, for the purpose of obtaining or
retaining an engagement to perform municipal
advisory activities.
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obtaining or retaining an engagement for
their clients.
Proposed Rule G–46(d)(ii) would
require a solicitor municipal advisor to
have a reasonable basis for any material
representations it makes to a solicited
entity regarding the capacity, resources
or knowledge of the solicitor client. The
MSRB believes that solicited entities
should be entitled to rely on the
material representations made by
solicitor municipal advisors, as
regulated financial professionals hired
for the purpose of soliciting business on
behalf of their clients, with respect to
the qualifications of their clients. The
MSRB further believes that such
representations should have some
reasonable basis.30
Supplementary Material .01 would
provide guidance on compliance with
the reasonable-basis standard.
Specifically, this supplementary
material would state that while a
solicitor municipal advisor must have a
reasonable basis for the representations
described in Proposed Rule G–46(d), the
solicitor municipal advisor is not
required to actively seek out every piece
of information that may be relevant to
such representations. It further provides
an example to help illustrate this point.
Disclosures to Solicited Entities
ddrumheller on DSK120RN23PROD with NOTICES
Proposed Rule G–46(e) would require
a solicitor municipal advisor to disclose
to any solicited entity all material facts
about the solicitation in the manner
specified in section (f) of the proposed
rule. This would include an obligation
to disclose certain information
pertaining to the solicitor municipal
advisor’s: (i) role and compensation; (ii)
conflicts of interest; and (iii) client.
Role and Compensation Disclosures.
Proposed Rule G–46(e)(i) would require
a solicitor municipal advisor to disclose
to any solicited entity:
• The solicitor municipal advisor’s
name;
• The solicitor client’s name;
• The type of business being solicited
(i.e., municipal advisory business or
investment advisory services);
• The material terms of the solicitor
municipal advisor’s compensation
30 The MSRB notes that this obligation bears some
analogy to a non-solicitor municipal advisor’s duty
of care obligation to have a reasonable basis for any
advice provided to or on behalf of a client pursuant
to Rule G–42, Supplementary Material .01. While a
non-solicitor municipal advisor provides advice to
or on behalf of its municipal entity and obligated
person clients, a solicitor municipal advisor solicits
municipal entities and obligated persons on behalf
of its clients. In both cases, the municipal advisor
would be required to have a reasonable basis for
what are likely to be the core material statements
the municipal advisor was hired to provide to
municipal entities and obligated persons.
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arrangement, including a description of
the compensation provided or to be
provided, directly or indirectly, to the
solicitor municipal advisor for such
solicitation; and
• Payments made by the solicitor
municipal advisor to another solicitor
municipal advisor to facilitate the
solicitation.
Supplementary Material .04 would
provide additional guidance with
respect to the obligation to disclose the
material terms of the solicitor municipal
advisor’s compensation arrangement.
Specifically, it would provide that
Proposed Rule G–46(e)(i)(D) would
require disclosure of at least the same
information as that required by
Proposed Rule G–46(c)(ii), to the extent
material. However, Proposed Rule G–
46(e)(i)(D) also may require the
disclosure of additional information,
depending on the facts and
circumstances. For example, if the
solicitor municipal advisor receives
indirect compensation for the
solicitation, information pertaining to
the indirect compensation also must be
disclosed.
Additionally, the solicitor municipal
advisor would be required to disclose
the following statements:
• In connection with its solicitation
activities as a municipal advisor, a
solicitor municipal advisor does not
owe a fiduciary duty under Section
15B(c)(i) of the Exchange Act or MSRB
rules to the entities that it solicits and
is not required by those provisions to
act in the best interests of such entities
without regard to the solicitor
municipal advisor’s own financial or
other interests. However, in connection
with such solicitation activities, a
solicitor municipal advisor is required
to deal fairly with all persons, including
both solicited entities and the solicitor
municipal advisor’s clients; and
• A solicitor municipal advisor’s
primary role is to solicit the solicited
entity on behalf of certain third-party
regulated entities and the solicitor
municipal advisor will be compensated
for its solicitation services by the
solicitor municipal advisor’s client.31
These statements draw from
analogous disclosures that underwriters
must make to their issuer clients
pursuant to Rule G–17 32 but are tailored
31 While the proposed rule text uses the defined
term ‘‘solicitor municipal advisor,’’ to facilitate a
more plain-language disclosure, the MSRB expects
that solicitor municipal advisors would insert their
name in place of the term ‘‘solicitor municipal
advisor.’’
32 These disclosures include an obligation to
disclose that: Rule G–17 requires an underwriter to
deal fairly at all times with both issuers and
investors; unlike a municipal advisor, the
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to reflect the existence of a federal
fiduciary duty for non-solicitor
municipal advisors and to make clear
that a solicitor municipal advisor’s fair
dealing obligations apply in connection
with its solicitation activities.33
Supplementary Material .02 would
expound on the relationship between
Proposed Rule G–46 and the fair dealing
obligation under Rule G–17 and
includes similar discussion regarding
application of the federal fiduciary duty
to a solicitor municipal advisor’s
solicitations of solicited entities.
However, it specifies that solicitor
municipal advisors may be subject to
fiduciary or other duties under state or
other laws and that nothing in Proposed
Rule G–46 shall be deemed to supersede
any more restrictive provision of state or
other laws applicable to municipal
advisory activities. Finally,
Supplementary Material .02 includes a
cross reference to Supplementary
Material .03 and would remind solicitor
municipal advisors that, to the extent
they also engage in non-solicitor
municipal advisory activity, the
requirements of Rule G–42 will apply
with respect to such activity and a
federal fiduciary duty will apply with
respect to the municipal entity clients of
the municipal advisor.
Conflicts Disclosures. Proposed Rule
G–46(e)(ii) would require a solicitor
municipal advisor to disclose any
underwriter does not have a fiduciary duty to the
issuer under the federal securities laws and is,
therefore, not required by federal law to act in the
best interests of the issuer without regard to its own
financial or other interests; and the underwriter’s
primary role is to purchase securities with a view
to distribution in an arm’s-length commercial
transaction with the issuer and it has financial and
other interests that differ from those of the issuer.
See MSRB Interpretive Notice Concerning the
Application of MSRB Rule G–17 to Underwriters of
Municipal Securities (March 31, 2021) (the ‘‘G–17
Underwriter’s Guidance’’).
33 See SEC MA Final Rule Adopting Release, 78
FR 67467 at note 100 (stating that ‘‘. . . the
fiduciary duty of a municipal advisor, as set forth
in Exchange Act Section 15B(c)(1), extends only to
its municipal entity clients’’) (emphasis added); see
also text accompanying note 100 (stating that ‘‘. . .
the Exchange Act, as amended by the Dodd-Frank
Act, grants the MSRB regulatory authority over
municipal advisors and imposes a fiduciary duty on
municipal advisors when advising municipal
entities’’) (emphasis added); Exchange Act Section
15B(b)(2)(L)(i) (15 U.S.C. 78o–4(b)(2)(L)(i)) (granting
the MSRB authority to ‘‘prescribe means reasonably
designed to prevent acts, practices, and courses of
business as are not consistent with a municipal
advisor’s fiduciary duty to its clients’’) (emphasis
added). Because a solicitor municipal advisor’s
clients are not the municipal entities that they
solicit, but rather the third parties that retain or
engage the solicitor municipal advisor to solicit
such municipal entities, solicitor municipal
advisors do not owe a fiduciary duty under the
Exchange Act or MSRB rules to their clients (or the
municipal entity) in connection with such activity.
See MSRB Notice 2017–08, at 10.
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material conflicts of interest,34
including but not limited to the fact
that, because the solicitor municipal
advisor is compensated for its
solicitation efforts, it has an incentive to
recommend its clients, resulting in a
material conflict of interest. The
solicitor municipal advisor also would
be required to disclose any material
conflicts of interest, of which the
solicitor municipal advisor is aware
after reasonable inquiry, that could
reasonably be anticipated to impair the
solicitor municipal advisor’s ability to
solicit the solicited entity in accordance
with its duty of fair dealing. This
obligation is comparable to a nonsolicitor municipal advisor’s obligation
under Rule G–42 to disclose to its
clients all material conflicts of interest,
including any conflicts, of which the
municipal advisor is aware after
reasonable inquiry, that could
reasonably be anticipated to impair the
municipal advisor’s ability to provide
advice to or on behalf of the client in
accordance with the standards set forth
in the rule.35 It also is comparable to the
obligation under the IA Marketing Rule
to disclose that a promoter, due to the
fact that it is compensated, has an
incentive to recommend the investment
adviser it promotes, resulting in a
material conflict of interest.36 The
MSRB believes that disclosure of such
conflict-of-interest information is key to
assisting a solicited entity in evaluating
the solicitor municipal advisor’s
statements and in determining whether
to retain the solicitor’s client. For
example, without a specific disclosure
about a solicitor municipal advisor’s
incentives, a solicitation creates a risk
that the solicited entity would
mistakenly view the solicitor municipal
advisor’s recommendation as being an
unbiased opinion about the solicitor
client’s ability to, for example, manage
the solicited entity’s assets, and would
rely on that recommendation more than
the solicited entity otherwise would if
the solicited entity knew of the solicitor
municipal advisor’s incentive.
Solicitor Client Disclosures. Proposed
Rule G–46(e)(iii) would require a
solicitor municipal advisor to provide to
the solicited entity the following
information regarding the solicitor
client:
34 If a reasonable solicited entity would consider
a particular conflict of interest on the part of the
solicitor municipal advisor to be material to the
decision to choose the solicitor municipal adviser’s
client, then such conflict of interest should be
disclosed.
35 See Rule G–42(b)(i)(F).
36 See Investment Adviser Marketing, Release No.
IA–5653 at 101 (Dec. 22, 2020), 86 FR 13024 (March
5, 2021) available at: https://
www.federalregister.gov/d/2020-28868/p-618.
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• The type of information that is
generally available on Form MA (in the
case of a municipal advisor client) or
Form ADV, Part 2 (in the case of an
investment adviser client); and
• A description of how the solicited
entity can obtain a copy of the solicitor
client’s Form MA or Form ADV, Part 2,
as applicable.
These requirements are designed to
help ensure that, at any early stage,
solicited entities are directed to
important written information about the
entities the solicitor municipal advisor
represents—including, but not limited
to, information about the disciplinary
history of the solicitor municipal
advisor’s clients. However, it does not
require solicitor municipal advisors to
obtain a copy of these documents and
provide them to their solicited entities,
nor does it require a solicitor municipal
advisor to disclose any specific
information about the client that is
included in such forms.37
Timing and Manner of Disclosures to
Solicited Entities
Proposed Rule G–46(f) would provide
that any disclosures required under
section (e) of the proposed rule
(pertaining to disclosures to solicited
entities) must be made in writing. The
proposed rule also would provide for a
dual-disclosure requirement, such that
solicitations that result in a solicited
entity engaging a solicitor client would
receive the requisite disclosures twice.
Specifically, they would receive the
disclosures once at the time of the first
communication giving rise to the
solicitation and again at the time that
engagement documentation pertaining
to the solicited entity’s engagement of
the solicitor client is delivered (or
promptly thereafter).
Initial Disclosure at the Time of the
First Communication. The disclosures
would be required to be delivered at the
time of the first communication (as that
term is used in the definition of
‘‘solicitation’’) with a solicited entity on
behalf of a specific solicitor client.38
37 However, solicitor municipal advisors should
be mindful of their general fair dealing obligations
under Rule G–17 and of their obligations related to
certain of their representations under Proposed
Rule G–46(d). If a solicitor municipal advisor were
to make a representation regarding the capacity,
resources or knowledge of the solicitor’s client that
the solicitor municipal advisor knows or should
know is inaccurate based on a review of its client’s
Form MA or Form ADV, that solicitor municipal
advisor could be in violation of Proposed Rule G–
46.
38 A solicitor municipal advisor would be
expected to provide separate disclosures for each of
its engagements. For example, assume that a
solicitor municipal advisor solicits a municipal
entity on behalf of a municipal advisor client to
provide municipal advisory services to the
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Specifically, the disclosures would be
required to be provided to the solicitor
client representative with whom such
communication is made. In the case of
an indirect solicitation—a solicitation of
an intermediary who represents a
municipal entity or obligated person—
the disclosures must be provided to the
intermediary with whom such
communication is made.39
Second Disclosure at the Time of the
Solicitor Client’s Engagement with the
Solicited Entity. If the solicitation
results in a solicited entity engaging a
solicitor client for investment advisory
services or municipal advisory services,
all disclosures required by Proposed
Rule G–46(e) would be required to be
provided at the time that such
engagement documentation is delivered
to the solicited entity or promptly
thereafter. This is the case even if there
are no changes between the initial set of
disclosures and the second set of
disclosures.
The second set of disclosures may be
provided by either the solicitor client or
the solicitor municipal advisor. The
MSRB believes that this flexibility
would permit, for example, a solicitor
municipal advisor’s investment adviser
client to provide the solicitor’s
disclosures to the solicited entity at the
time that the investment adviser enters
into an engagement with the solicited
entity.40 These disclosures would be
required to be made to an official of the
solicited entity that: (1) the solicitor
municipal advisor (or, the solicitor
client, if the solicitor client provides
such disclosures) reasonably believes
municipal entity. One week later, the solicitor
municipal advisor solicits the municipal entity
again—this time to obtain an engagement for the
solicitor municipal advisor’s investment advisory
client to provide investment advisory services to
the municipal entity. The solicitor municipal
advisor would be expected to provide its
disclosures to the municipal entity again in
connection with the second solicitation.
39 For example, a solicitor municipal advisor
presentation to an investment consultant hired by
a public pension plan may be an indirect
solicitation of that public pension plan. In such a
case, the disclosure would be provided to the
investment consultant.
40 The MSRB does not propose to require the
engagement documentation between the solicitor
municipal advisor and its solicitor clients to
include an affirmative undertaking on the part of
the solicitor client to provide the solicitor’s
disclosures to a solicited entity. However, a
solicitor municipal advisor might seek the inclusion
of such language in its engagement documentation
as one means of seeking to comply with Proposed
Rule G–46. As one additional alternative, a solicitor
municipal advisor might seek to include in its
engagement documentation with its solicitor clients
a requirement that the solicitor client provide to the
solicitor municipal advisor prompt notice that the
solicitor client has been engaged by the solicited
entity. Proposed Rule G–46 would provide solicitor
municipal advisors flexibility in determining how
to deliver the second set of disclosures.
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has the authority to bind the solicited
entity by contract; 41 and (2) is not a
party to a disclosed conflict.42 These
two conditions would not apply to the
initial delivery of disclosures.
The MSRB believes that this dual or
bifurcated approach would help ensure
that the person that is initially solicited
receives this key information in time to
consider it in connection with the initial
solicitation. However, because such
person(s) may not have the authority to
bind the solicited entity by contract
(particularly where such person is an
intermediary between the solicitor and
the solicited entity), the MSRB would
require that the disclosures are provided
again at the time of the engagement
between the solicited entity and the
solicitor client (or promptly thereafter).
The MSRB believes that any risk
associated with the first disclosures not
being passed on to a knowledgeable
person with the authority to bind the
solicited entity in contract would be
mitigated by requiring that the
disclosures are provided again at the
time of the engagement—this time, to
someone who does have such authority.
Additionally, the MSRB understands
that solicitations may sometimes span
years. Particularly in such instances, the
MSRB believes that it is important that
the solicited entity receives the
disclosures again at the time of the
solicitor client’s engagement with the
solicited entity.
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Specified Prohibitions
Proposed Rule G–46(g) expressly
would prohibit a solicitor municipal
advisor from:
• Delivering an invoice for fees or
expenses for municipal advisory
activities that is materially inaccurate in
its reflection of the activities actually
performed or the personnel that actually
performed those activities; and
41 Solicitor municipal advisors would be
expected to adopt reasonable policies and
procedures to support the reasonable belief that the
solicited entity representative has the authority to
bind the solicited entity. However, consistent with
the flexible approach to supervision under Rule G–
44, on supervisory and compliance obligations of
municipal advisors, the reasonable policies and
procedures of one firm may reasonably differ from
that of another’s. As one example only, solicitor
municipal advisors could seek to incorporate into
their written agreements with their solicitor clients
a condition that such disclosures provided on
behalf of the solicitor municipal advisor must be
provided to a solicited entity representative that the
solicitor client reasonably believes has the authority
to bind the solicited entity.
42 To the extent a solicitor municipal advisor
relies on its client to pass on its second set of
disclosures, the solicitor municipal advisor may
wish to provide its clients with a list of persons
associated with the solicited entity who are a party
to a conflict to help ensure that the solicitor client
does not pass on the disclosures to such persons.
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• Making payments for the purpose of
obtaining or retaining an engagement to
perform municipal advisory activities,
subject to three specified exceptions
discussed further below.
Exceptions for Payments to Obtain or
Retain an Engagement. Solicitor
municipal advisors would be prohibited
from making payments for the purpose
of obtaining or retaining an engagement
to perform municipal advisory activities
other than:
• Payments to an affiliate for a direct
or indirect communication with a
municipal entity or obligated person on
behalf of the solicitor municipal advisor
where such communication is made for
the purpose of obtaining or retaining an
engagement to perform municipal
advisory activities;
• Reasonable fees paid to another
municipal advisor registered as such
with the Commission and the MSRB for
making a communication for the
purpose of obtaining or retaining an
engagement to perform municipal
advisory activities; and
• Payments that are permissible
‘‘normal business dealings’’ as described
in Rule G–20, on gifts, gratuities, noncash compensation and expenses of
issuance.
These specified prohibitions are
modeled on similar prohibitions
applicable to non-solicitors under
MSRB Rule G–42(e)(i) and to a lesser
degree would align with certain
prohibitions applicable to underwriters
under the G–17 Underwriter’s
Guidance.43
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compensation documentation and
disclosure obligations.46
Supplementary Material .03 explains
that municipal advisors should be
mindful that one may be,
simultaneously, both a solicitor
municipal advisor for purposes of
Proposed Rule G–46 and a non-solicitor
municipal advisor for purposes of Rule
G–42. For example, a municipal advisor
may provide ‘‘advice’’ as defined in
Rule G–42 to a municipal entity (the
‘‘advisory engagement’’) and separately
may act as a solicitor municipal advisor
with respect to that same municipal
entity or another municipal entity as
contemplated in Proposed Rule G–46
(the ‘‘solicitor municipal advisor
engagement’’). As a result, the
municipal advisor would be subject to
Rule G–42 with respect to the advisory
engagement and would be subject to
Proposed Rule G–46 with respect to the
solicitor municipal advisor engagement.
Municipal advisors should evaluate the
activity undertaken with respect to each
engagement to determine which rule
governs and ensure the written
supervisory procedures required under
Rule G–44 reflect such.
Proposed Amendments to MSRB Rule
G–8
Proposed amendments to Rule G–8
would add specific recordkeeping
obligations designed to help facilitate
and document compliance with
Proposed Rule G–46. Specifically, they
would add new subsection (viii) 47
requiring solicitor municipal advisors to
make and keep the following books and
Supplementary Material
records:
Proposed Rule G–46 would set forth
• Evidence that the disclosures
four supplementary material sections:
required by Proposed Rule G–46(b) were
• Providing additional explanation
made in the manner required by that
regarding the MSRB’s expectations with section;
respect to the reasonable basis a
• A copy of each writing or writings
solicitor municipal advisor must have
required
by Proposed Rule G–46(c);
for the representations described in
• Documentation substantiating the
Proposed Rule G–46(d); 44
• Explaining the relationship between solicitor municipal advisor’s reasonable
basis for believing its representations as
a solicitor municipal advisor’s fair
dealing obligations and the applicability described in Proposed Rule G–46(d)
of a federal fiduciary duty for municipal (e.g., a checklist confirming that an
investment adviser client’s Form ADV
advisors; 45
• Explaining the relationship between was reviewed); and
• Evidence that the disclosures
a municipal advisor’s obligations under
Proposed Rule G–46 and Rule G–42; and required by Proposed Rule G–46(e) were
made in the manner described in
• Providing additional detail
regarding a solicitor municipal advisor’s Proposed Rule G–46(f) (e.g., automatic
email delivery receipt).
43 See Rule G–42(e)(i); see also G–17
Underwriter’s Guidance at section titled,
‘‘Underwriter Compensation and New Issue
Pricing.’’
44 See supra discussion titled ‘‘Representations to
Solicited Entities.’’
45 See supra discussion titled ‘‘Disclosures to
Solicited Entities.’’
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46 See supra discussion titled ‘‘Documentation of
the Solicitor Relationship’’ and ‘‘Disclosures to
Solicited Entities.’’
47 Today the MSRB also filed a proposed rule
change to amend MSRB Rule G–40, on advertising
by municipal advisors, and amend MSRB Rule G–
8 by adding subparagraph (h)(viii) to the rule.
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2. Statutory Basis
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2) of the Exchange Act,48 which
provides that the 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 49 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.
Prevention of Fraudulent and
Manipulative Acts and Practices
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(C) of the Exchange Act 50
because the proposed rule change
would help prevent fraudulent and
manipulative acts and practices. It
would do so by expressly prohibiting
solicitor municipal advisors from
making a representation that the
solicitor municipal advisor knows or
should know is either materially false or
misleading regarding the capacity,
resources or knowledge of the solicitor
client. It also would require solicitor
municipal advisors to have a reasonable
basis for any material representations
the solicitor municipal advisor makes to
a solicited entity regarding the capacity,
resources or knowledge of the solicitor
client. The proposed rule change also
expressly would prohibit solicitor
municipal advisors from delivering an
inaccurate invoice for fees or expenses.
The MSRB believes that the express
48 15
49 15
U.S.C. 78o–4(b)(2).
U.S.C. 78o–4(b)(2)(C).
50 Id.
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prohibition of such conduct—all of
which could be forms of fraudulent and
manipulative acts and practices
themselves—would help prevent
fraudulent and manipulative acts and
practices. Finally, the proposed rule
change would provide that solicitor
municipal advisors would be prohibited
from making payments for the purpose
of obtaining or retaining an engagement
to perform municipal advisory activities
subject to specified exceptions. Among
other things, this would effectively
require solicitor municipal advisors to
use only associated persons or other
regulated solicitor municipal advisors to
obtain business on their behalf. This
would help ensure that only regulated
persons—who are subject to rules
designed to prevent fraudulent and
manipulative acts and practices—may
engage in solicitation activities on
behalf of a solicitor municipal advisor.
Fostering Cooperation and Coordination
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(C) of the Exchange Act 51
because it would foster cooperation and
coordination with persons engaged in
regulating transactions in municipal
securities and municipal financial
products. It would do so by requiring
solicitor municipal advisors to
document their relationships in writing
that includes certain minimum content
that is vital to the solicitor municipal
advisor, its clients and applicable
regulators in understanding the material
terms of an engagement—including the
scope of agreed-upon activities,
information pertaining to compensation
for such activities and whether the
solicitation of municipal entities and/or
obligated persons is anticipated. This
documentation obligation would help
promote certainty as to the applicable
regulatory scheme for any engagement
since only solicitations of municipal
entities and obligated persons would be
subject to Proposed Rule G–46, whereas
other solicitations may fall within the
jurisdiction of the rules of other
regulators (e.g., the Commission or the
Financial Industry Regulatory
Authority). The MSRB believes that this
documentation obligation (and related
books and records obligations stemming
from the proposed amendments to Rule
G–8) would assist examining authorities
in understanding the solicitation
arrangement and would provide them
with necessary information to assist in
evaluating a solicitor municipal
advisor’s compliance with relevant
obligations. The MSRB further believes
that the proposed amendments to Rule
51 15
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U.S.C. 78o–4(b)(2)(C).
Frm 00143
Fmt 4703
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G–8 (with the ensuing application of
existing Rule G–9 on records
preservation) would help create an audit
trail to assist examination and
enforcement authorities in their
examination for compliance with these
prohibitions, fostering cooperation and
coordination between regulatory
authorities.
Protection of Municipal Entities,
Obligated Persons, and the Public
Interest
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(C) of the Exchange Act 52
because it would protect municipal
entities, obligated persons, and the
public interest. It would do so by
requiring solicitor municipal advisors to
disclose in writing all of their material
conflicts of interest and material legal or
disciplinary events to the entities that
determine whether to hire such solicitor
municipal advisors. The MSRB believes
that this requirement would increase
solicitor municipal advisor
accountability and discourage conduct
inconsistent with a solicitor municipal
advisor’s obligations because such
conduct would be required to be
disclosed in information provided to
clients, thereby incentivizing firms to
refrain from such conduct or risk not
retaining an engagement. The MSRB
also believes that such requirement
would simultaneously provide
prospective clients with valuable
information that is directly relevant to
their solicitor municipal advisor hiring
decisions.
The proposed rule change also would
protect municipal entities and obligated
persons by better aligning the
obligations owed by solicitor municipal
advisors to their clients with those
applicable to non-solicitor municipal
advisors to their clients under Rule G–
42. Like non-solicitor municipal
advisors, solicitor municipal advisors
would be required to: disclose their
material conflicts of interest; 53
document their relationships in
writing; 54 and refrain from certain
conduct such as making certain
materially false or misleading
representations,55 delivering a
materially inaccurate invoice,56 and
making certain payments for the
purpose of obtaining or retaining an
52 15
U.S.C. 78o–4(b)(2)(C).
Rule G–42(b)(i)(F).
54 See Rule G–42(c) and Proposed Rule G–46(c).
55 See Rule G–42(e)(i)(C) and Proposed Rule G–
46(d)(i).
56 See Rule G–42(e)(i)(B) and Proposed Rule G–
46(g)(i).
53 See
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engagement.57 These Rule G–42
provisions protect municipal entities by
assisting non-solicitor municipal
advisors in complying with, or helping
prevent breaches of, applicable
obligations such as the duty of fair
dealing, which is owed under Rule G–
17 by all municipal advisors to all
persons. These protections also would
be provided to municipal entities and
obligated persons solicited by solicitor
municipal advisors. Additionally, as
municipal advisors are permitted to
engage in both solicitor municipal
advisor activity and non-solicitor
municipal advisor activity, the MSRB
believes that the promotion of
consistent standards among these
municipal advisors, where applicable, is
appropriate since the municipal entities
and obligated persons solicited by
solicitor municipal advisors and the
municipal entity and obligated person
clients of non-solicitor municipal
advisors may reasonably expect a
certain baseline level of conduct from
all municipal advisors. More
specifically, the MSRB believes that the
proposed rule change would protect
municipal entities and obligated
persons by requiring solicitor municipal
advisors to disclose to solicited entities
all material facts about the solicitation
including certain information pertaining
to the solicitor municipal advisor’s: (i)
role and compensation; (ii) conflicts of
interest; and (iii) client. The MSRB
believes that the role disclosures would
help ensure that solicited entities
(which are municipal entities and
obligated persons) understand the role
of a solicitor municipal advisor. The
MSRB also believes that such
disclosures would help to clarify
potential confusion about the difference
between a solicitor municipal advisor
and other municipal advisors since they
owe very different obligations to
municipal entities. The proposed
compensation disclosures are designed
to help ensure that solicited entities
have important information about how
a solicitor municipal advisor is
compensated to help inform the
solicited entity’s analysis of the nature
and extent of a solicitor municipal
advisor’s incentive to recommend that a
solicited entity hire a specific solicitor
client. Finally, the MSRB believes that
disclosure related to the solicitor
municipal advisor’s client would
protect municipal entities, obligated
persons and the public interest by
ensuring that—at any early stage—
solicited entities are directed to
disclosures about the entities the
solicitor municipal advisor represents
including, but not limited to,
information about the disciplinary
history of the solicitor municipal
advisor’s clients.
Section 15B(b)(2)(L)(iv) of the
Exchange Act 58 requires that rules
adopted by the Board not impose a
regulatory burden on small municipal
advisors that is not necessary or
appropriate in the public interest and
for the protection of investors,
municipal entities, and obligated
persons, provided that there is robust
protection of investors against fraud.
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(L)(iv) of the Exchange Act 59
because the proposed rule change
would impose on all municipal
advisors, including small municipal
advisors, only the necessary and
appropriate regulatory burdens needed
to promote compliance with the
proposed rule change. The proposed
rule change represents a balanced
approach to prescriptive standards with
flexibility for large and small municipal
advisors alike. For example, the MSRB
believes that the flexibility to provide
certain disclosures to a solicited entity
via a third party (i.e., the solicitor’s
client) could be particularly helpful for
small municipal advisors who may be
less likely to be involved in subsequent
communications with a solicited entity
and, therefore, may need to rely on their
clients to pass along certain disclosures
at the time of the solicitor client’s
engagement. Finally, the MSRB seeks to
harmonize standards, where
appropriate, among those applicable to
solicitor municipal advisors, nonsolicitor municipal advisors and
Commission-registered investment
advisers such that those that engage in
conduct that would make them two or
more of the above could leverage some
of the existing processes to comply with
relevant obligations under a comparable
regime. The MSRB believes that this
will minimize the regulatory burden on
all solicitor municipal advisors,
including small municipal advisors.
The MSRB also believes that the
proposed rule change is consistent with
Section 15B(b)(2)(G) of the Exchange
Act,60 which provides that the MSRB’s
rules shall prescribe records to be made
and kept by municipal securities
brokers, municipal securities dealers,
and municipal advisors and the periods
for which such records shall be
preserved. The proposed rule change
would require solicitor municipal
58 15
57 See
Rule G–42(e)(i)(E) and Proposed Rule G–
60 15
46(g)(ii).
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U.S.C. 78o–4(b)(2)(L)(iv).
59 Id.
PO 00000
U.S.C. 78o–4(b)(2)(G).
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9569
advisors to make and keep current
evidence that the disclosures required
by Proposed Rule G–46 were made in
the manner required by the proposed
rule change, a copy of the writing(s)
documenting the relationship, and
documentation substantiating the
solicitor municipal advisor’s reasonable
basis belief regarding its
representations. The MSRB believes that
the proposed amendments to Rule G–8
related to recordkeeping (with the
ensuing application of existing Rule G–
9 on records preservation) would
promote compliance and facilitate
enforcement of Proposed Rule G–46,
other MSRB rules, and other applicable
securities laws and regulations.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Section 15B(b)(2)(C) of the Act 61
requires that MSRB rules not be
designed to impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. The MSRB believes
that Proposed Rule G–46 on the duties
of solicitor municipal advisors and
Proposed Amended Rule G–8 on
recordkeeping obligations would not
impose any new burden on competition
and, in fact, may relieve a burden on
competition. The MSRB considered the
economic impact associated with the
proposed rule change, including a
comparison to reasonable alternative
regulatory approaches, relative to the
baseline.62 The MSRB believes that the
proposed rule change would not place
a burden on competition as it would
apply a regulatory regime to all solicitor
municipal advisors similar to the regime
that currently exists for non-solicitor
municipal advisors under Rule G–42
and Rule G–8 on recordkeeping, and for
underwriters under the Rule G–17
Underwriter’s Guidance. Additionally,
it would promote clearer regulatory
requirements and expectations,
enhancing the transparency and
protection for recipients of solicitations
and ensuring fair dealings between the
market participants.
Furthermore, Section 15B(b)(2)(L)(iv)
of the Act 63 provides that MSRB rules
may not impose a regulatory burden on
small municipal advisors that is not
necessary or appropriate in the public
61 15
U.S.C. 78o–4(b)(2)(C).
Policy on the Use of Economic Analysis in
MSRB Rulemaking, 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 approach.
63 15 U.S.C. 78o–4(b)(2)(L)(iv).
62 See
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interest and for the protection of
investors, municipal entities, and
obligated persons, provided that there is
robust protection of investors against
fraud. The MSRB believes the proposed
rule change would apply equally to all
solicitor municipal advisors, and on an
ongoing year-by-year basis, the
additional regulatory burden imposed
would be proportional to each solicitor
municipal advisory firm’s size and
business activities and hence would not
affect competition. Therefore, the MSRB
believes the proposed rule change
would not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
The purpose of amending Rule G–8
and proposing Proposed Rule G–46
would be to codify certain statements on
the obligations of solicitor municipal
advisors currently outlined in the G–17
Excerpt for Solicitor Municipal
Advisors. Further, Proposed Rule G–46
would better align the duty and
obligations of solicitor municipal
advisors with those for underwriters
under Rule G–17, for non-solicitor
municipal advisors under Rule G–42,
and for solicitors that undertake certain
solicitations on behalf of investment
advisers under the SEC’s investment
adviser regime.
The core standards applicable to nonsolicitor municipal advisors and
underwriters under MSRB Rule G–42
and Rule G–17 are highlighted in a
standalone rule for non-solicitor
municipal advisors and a standalone
interpretation that was filed with and
approved by the SEC, respectively. In
contrast, the G–17 Excerpt for Solicitor
Municipal Advisors was issued in a
notice that largely summarized existing
rules and obligations applicable to
solicitor municipal advisors and the
standards set forth in the G–17 Excerpt
for Solicitor Municipal Advisors were
not as robust as the standards set forth
in the proposed rule change. The
proposed rule change is intended to
enhance the consistency of regulatory
standards and should therefore remove
burdens to competition by providing
clear expectations for all solicitor
municipal advisors.
In conjunction with Proposed Rule G–
46, the proposed amendments to Rule
G–8 would add specific language
relating to solicitor municipal advisors,
which would facilitate recordkeeping
compliance associated with Proposed
Rule G–46 and help ensure solicitor
municipal advisor accountability.
In contrast to the regulation of
underwriters and non-solicitor
municipal advisors, the MSRB currently
does not have any explicit standards
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regarding documentation of a solicitor
municipal advisor’s engagement. Nor
does it have express standards regarding
solicitor municipal advisor disclosures
of conflicts of interest. The MSRB
believes that a Proposed Amended Rule
G–8 and a codified Proposed Rule G–46
would result in informed, clearer
regulatory standards and expectations
for all solicitor municipal advisors,
which would not impose a burden on
competition because the rule would
apply to all solicitor municipal advisors
equally. In addition, Proposed Amended
Rule G–8 and Proposed Rule G–46
would better align the obligations
imposed on solicitor municipal advisors
with those applicable to non-solicitor
municipal advisors under Rule G–42,
underwriters under the G–17
Underwriter’s Guidance, and
investment advisers or their promoters
under the IA Marketing Rule.64
For all solicitor municipal advisors,
the evaluation baseline is Rule G–17
which applies to all municipal advisors
(solicitor and non-solicitor alike) and
requires municipal advisors to deal
fairly with all persons and not engage in
any deceptive, dishonest, or unfair
practice and the G–17 Excerpt for
Solicitor Municipal Advisors which
applies to solicitor municipal advisors.
Another baseline for consideration is
the IA Marketing Rule 65 for investment
advisers, a merged rule that replaces the
former advertising and cash solicitation
rules for investment advisers. Thus, for
a subgroup of solicitor municipal
advisors who undertake solicitations on
behalf of an investment adviser that is
already subject to the requirements, the
burden for compliance is already in
place partially, as these solicitor
municipal advisors are presumably
already complying with the conditions
outlined by the IA Marketing Rule.
Finally, for a subset of municipal
advisory firms who conduct both
solicitation and non-solicitation
business activities, the baseline is
comprised of Rule G–17 and Rule G–42
on duties of non-solicitor municipal
advisors.
The MSRB also evaluated reasonable
alternative regulatory approaches. In
one alternative, the MSRB would create
a new Rule G–46 for solicitor municipal
advisors, but the text of the rule would
state that solicitors should follow the
SEC’s IA Marketing Rule. The main
benefit of this would be to completely
harmonize between MSRB and SEC
rules for solicitor municipal advisors
who solicit municipal entities and
obligated persons for investment
64 See
Benefits
The main benefit of Proposed
Amended Rule G–8 and Proposed Rule
G–46 would be to codify certain
statements and provide clarification on
regulatory obligations for solicitor
municipal advisors with regard to their
duties. By aligning Proposed Rule G–46
with Rule G–42, Rule G–17 and the IA
Marketing Rule 66 where appropriate,
Proposed Amended Rule G–8 and
Proposed Rule G–46 would enhance the
consistency of regulatory standards,
thereby removing burdens to
competition because it would provide
clear expectations for all solicitor
municipal advisors that are generally
consistent with the standards under the
comparative rules.
For example, Proposed Rule G–46
would make clear the types of
disclosures that a solicitor municipal
advisor would be expected to make to
solicited entities in order to ensure that
such entities have access to material
information to inform their decisions
pertaining to whether to retain the
solicitor municipal advisor’s client(s).
This information also would assist these
solicited entities in evaluating the
solicitor municipal advisor’s potential
conflicts of interest associated with
making such solicitations. Additionally,
by codifying much of the G–17 Excerpt
for Solicitor Municipal Advisors with
additional requirements, Proposed Rule
G–46 expressly would prohibit solicitor
municipal advisors from making certain
false or materially misleading
representations about their clients and
would require them to have a reasonable
basis for similar representations in order
to help ensure the protection of the
municipal entities and obligated
persons solicited by such solicitor
municipal advisors.
17 CFR 275.206(4)–1.
65 Id.
PO 00000
advisory services. However, this
alternative would reduce alignment
with MSRB Rule G–42 for solicitor
municipal advisors who are also nonsolicitor municipal advisors and are
obligated to comply with Rule G–42.
Since all municipal advisors are
permitted to engage in both solicitation
activity and non-solicitation activity,
the MSRB deems Proposed Rule G–46
superior to this alternative as it would
be a tailored rule for solicitor municipal
advisors that aligns with Rule G–42
where appropriate and aligns with the
IA Marketing Rule where appropriate.
Therefore, the MSRB believes that the
approach taken in Proposed Rule G–46
for solicitor municipal advisors is
warranted under the Exchange Act.
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Furthermore, the codification of
certain existing requirements and the
expansion of those standards in the
proposed rule change would enhance
transparency for the recipients of the
new disclosures that would be required
by the proposed rule change and
promote clearer regulatory obligations
for solicitor municipal advisors. The
proposed rule change also would
provide protection for municipal
entities and obligated persons of
solicitations, further promoting fair
dealings between the market
participants. As mentioned above, the
additional requirements also would
align some of the obligations imposed
on solicitor municipal advisors with
those applicable to non-solicitor
municipal advisors under Rule G–42
and underwriters under the G–17
Underwriter’s Guidance as well as those
applicable to certain endorsements and
testimonials in connection with certain
investment adviser advertisements
under the SEC’s investment adviser
regime. This alignment would level the
playing field by applying somewhat
similar obligations for different
regulated entities and increasing the
efficiency for regulatory entities tasked
with examining and enforcing such
requirements and regulated entities
seeking compliance. In particular,
Proposed Rule G–46 would require
solicitor municipal advisors to
document their relationships in writing
to the solicitor client, which would be
instrumental in assisting examining
authorities and other regulators to
determine the relevant regulatory
regime applicable to a solicitor
municipal advisor’s solicitation.
Costs
The MSRB acknowledges that
solicitor municipal advisors likely
would incur costs, relative to the
baseline state, to meet the standards of
conduct and duties contained in the
proposed rule change. These changes
may include the one-time upfront costs
related to setting up and/or revising
policies and procedures, as well as the
ongoing costs such as compliance costs
associated with maintaining and
updating disclosures. Solicitor
municipal advisors also may have
additional costs associated with
additional record-keeping.
For the upfront costs, it is possible
that solicitor municipal advisors may
need to seek the appropriate advice of
in-house or outside legal and
compliance professionals to revise
policies and procedures in compliance
with Proposed Amended Rule G–8 and
Proposed Rule G–46. Solicitor
municipal advisors also may incur costs
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related to standards of training in
preparation for the implementation of
Proposed Amended Rule G–8 and
Proposed Rule G–46. Assuming solicitor
municipal advisors currently already
have policies and procedures in place in
relation to the G–17 Excerpt for Solicitor
Municipal Advisors, the upfront costs
for Proposed Amended Rule G–8 and
Proposed Rule G–46 should be
incremental. Furthermore, the upfront
costs may be lower for solicitor
municipal advisors that are also nonsolicitor municipal advisors as they
presumably are already complying with
similar Rule G–8 and Rule G–42
requirements. Similarly, such costs may
be lower for solicitor municipal advisors
who are soliciting on behalf of
investment advisory business and
therefore presumably are already
complying with the IA Marketing
Rule.67
For the ongoing costs, solicitor
municipal advisors may incur
compliance costs related to each
solicitation, including costs pertaining
to creating and maintaining books and
records. Firms may have to make
changes to their current recordkeeping
practices in order to satisfy the
additional requirements of Proposed
Amended Rule G–8 and Proposed Rule
G–46 for the specific disclosures to a
solicited entity as outlined above, such
as the creation of disclosures for all
material information regarding the role
and compensation of the solicitor
municipal advisor; documentation of
the relationship between a solicitor
municipal advisor and its solicitor
client; disclosure of material conflicts of
interest; and certain payments made by
a solicitor municipal advisor to another
solicitor municipal advisor.
Table 1 below shows the number of
solicitor municipal advisory firms
registered with the MSRB as of the end
of January 2022. The table groups
together solicitor municipal advisor
only firms (meaning those firms that
indicated to the MSRB that they engage
in solicitation activity only and not nonsolicitation municipal advisory activity)
and separately groups together those
solicitor municipal advisor firms that
indicated to the MSRB in Form A–12
that they engage in both solicitation and
non-solicitation municipal advisory
activities (e.g., under some
engagements, they conduct solicitations
of municipal entities and/or obligated
persons whereas pursuant to other
engagements, they provide covered
advice to municipal entities and/or
obligated persons). Table 1 also
illustrates the type of solicitation
67 17
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activity in which solicitor municipal
advisory firms registered with the MSRB
engage (i.e., solicitations for investment
advisory business versus other
solicitations), as reported by solicitor
municipal advisory firms on Form A–
12.68
Table 2 illustrates preliminary
estimates for both the upfront and
ongoing compliance costs assuming
implementation of Proposed Amended
Rule G–8 and Proposed Rule G–46 for
each solicitor municipal advisory firm
in its respective group who chooses to
continue their solicitation business
practice in the future state.69 As of
January 2022, there is a total of 86
municipal advisory firms registered
with the MSRB who indicated
solicitation business activities on Form
A–12, with 17 of those firms indicating
that they engage solely in solicitation
activities and the remaining 69 firms
indicating they engage in both
solicitation and non-solicitation
municipal advisory activities.70 Of the
68 Pursuant to MSRB Rule A–12, on registration,
all municipal advisors, including solicitor
municipal advisors, must register with the MSRB
prior to engaging in any municipal advisory
activity. Form A–12 is the single, consolidated form
for registrants to provide the MSRB with
registration information required under Rule A–12.
Among other things, Form A–12 is used to: register
with the MSRB, update registration information
following a change to any information contained in
the form and affirm registration information on an
annual basis. The data in Tables 1 and 2 below
regarding the number and breakdown of solicitor
municipal advisor firms and the types of activities
in which they engage is derived from Form A–12
data submitted to the MSRB.
69 Hourly rate data are gathered from the 2021
SEC’s Amendments Regarding the Definition of
‘‘Exchange’’ and ‘‘Alternative Trading Systems
(ATSs) That Trade U.S. Treasury and Agency
Securities, National Market System (NMS) Stocks,
and Other Securities,’’ 17 CFR parts 232, 240, 242,
and 249. The SEC’s Economic Analysis utilizes the
Securities Industry and Financial Markets
Association, Management & Professional Earnings
in the Securities Industry—2013 Report for the
hourly rates of various financial industry market
professionals. To compensate for inflation, ‘‘the
2013 professional wage rates are adjusted for an
inflation rate of 17.45 percent based on the Bureau
of Labor Statistics data on Consumer Price Index for
all Urban Consumers (CPI–U) between September
2013 and September 2021’’ (Page 452). The MSRB
added an additional five percentage points for
relevant roles mentioned by the SEC and captured
in SIFMA’s 2013 Report to account for an increase
in salary inflation for 2022. The inflation-adjusted
effective hourly wage rates for in-house attorneys
are estimated at $465 ($380 × 1.2245), $594 ($485
× 1.2245) for chief compliance officers, $347 ($283
× 1.2245) for compliance managers, and $490 ($400
× 1.2245) for outside counsel.
70 As previously mentioned, the MSRB utilized
Form A–12 data for the economic analysis
provided. Of note, the MSRB identified that
between FY 2021–Q2 (January–March) and FY
2022–Q2 there was a 11.7% decline in the total
number of registered municipal advisory firms. The
number of solicitor municipal advisory firms,
including firms with both solicitation and non-
CFR 275.206(4)–1.
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business and 22 firms indicate
solicitation activities only made on
behalf of non-investment advisory
business.
17 municipal advisory firms engaging
solely in solicitation activities, 16 firms
(9 + 7) indicate solicitation activities
made on behalf of investment advisory
business and one firm indicates
solicitation activities only made on
behalf of non-investment advisory
business. Of the 69 municipal advisory
firms engaging in both solicitation and
non-solicitation activities, 47 firms (20 +
27) indicate solicitation activities made
on behalf of investment advisory
BILLING CODE 8011–01–C
As previously mentioned, the
incremental costs for the subgroup of
solicitor municipal advisory firms
soliciting on behalf of investment
advisory business may be lower than
other solicitor municipal advisory firms
to the extent that such solicitor
municipal advisors engage in
solicitations that are subject to the IA
Marketing Rule.72 These solicitor
municipal advisors are presumed to
have policies and procedures consistent
with, although not necessarily identical
to, some of the requirements under
Proposed Amended Rule G–8 and
Proposed Rule G–46. In addition, the
MSRB assumes that municipal advisory
firms that engage in both solicitation
and non-solicitation activities are
currently in compliance with Rule G–8
and Rule G–42 with respect to their
non-solicitation municipal advisory
activities. The MSRB believes these
firms may be able to leverage some of
their existing Rule G–8 and Rule G–42
policies and procedures, resulting in a
potentially lower upfront cost for
implementing Proposed Amended Rule
G–8 and Proposed Rule G–46 as
compared to municipal advisory firms
that engage in solicitation activities
only. For example, municipal advisory
firms that engage in both solicitation
and non-solicitation activities are likely
accustomed to documenting their
relationships in an engagement letter
and may be able to leverage their
existing supervisory and compliance
framework to extend it to their
solicitation activities.
solicitation activities, also decreased from 105 to 86
firms during the same period.
71 The MSRB uses the higher hourly rate in each
category of costs. For example, while the revision
of policies and procedures can be conducted by
either an in-house attorney (average hourly rate
$465) or outside counsel (average hourly rate $490),
the MSRB chooses the higher hourly rate for this
analysis to be aggressive in the cost estimate.
Similarly, for both the training and the ongoing
compliance cost per each solicitation, the task can
be performed by either a Chief Compliance Officer
(average hourly rate of $594), an in-house
compliance attorney (average hourly rate $465) or
an in-house compliance manager (average hourly
rate $347), and the MSRB chooses the Chief
Compliance Officer rate for the training and the
compliance attorney rate for the ongoing
compliance cost in the estimates.
72 17 CFR 275.206(4)–1.
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BILLING CODE 8011–01–P
Effect on Competition, Efficiency, and
Capital Formation
The MSRB believes that Proposed
Amended Rule G–8 and Proposed Rule
G–46 would neither impose a burden on
competition nor hinder capital
formation, as the proposed rule changes
bring a similar regulatory regime to
solicitor municipal advisors that
currently exists for non-solicitor
municipal advisors under Rule G–8 on
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recordkeeping and Rule G–42 and for
underwriters under the G–17
Underwriter’s Guidance. The MSRB
believes that the proposed rule change
would improve the municipal securities
market’s operational efficiency by
providing solicitor municipal advisors
with a clearer understanding of
regulatory obligations, as well as
enhancing the transparency and
protection for recipients of the
solicitations, further promoting fair
dealings between market participants.
At present, the MSRB is unable to
quantitatively evaluate the magnitude of
the efficiency gains or losses, but
believes the overall benefits
accumulated over time for market
participants would outweigh the
upfront costs of revising policies and
procedures and ongoing compliance and
recordkeeping costs by solicitor
municipal advisors.
Finally, the proposed rule change
would apply equally to all solicitor
municipal advisors. Therefore, the
MSRB does not expect that Proposed
Amended Rule G–8 and Proposed Rule
G–46 would impose a burden on
competition with respect to solicitor
municipal advisory services, as the
upfront costs are expected to be
relatively minor for all solicitor
municipal advisory firms while the
ongoing costs are expected to be
proportionate to the size and business
activities of each solicitor municipal
advisory firm. In fact, the proposed rule
change may relieve a burden on
competition. Therefore, the MSRB
believes the proposed rule change
would not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The MSRB solicited comment on the
proposed rule change in two requests
for comment. The MSRB first sought
comment on a draft of Rule G–46 in a
request for comment that was published
in March 2021 (the ‘‘First Request for
Comment’’).73 The MSRB again sought
comment on a revised draft of Rule G–
46 that was published in December 2021
(the ‘‘Second Request for Comment’’).74
73 See MSRB Notice Request for Comment on Fair
Dealing Solicitor Municipal Advisor Obligations
and New Draft Rule G–46 (March 17, 2021)
available at: https://msrb.org/sites/default/files/
2021-07.pdf.
74 See MSRB Notice 2021–18, Second Request for
Comment on Fair Dealing Solicitor Municipal
Advisor Obligations and New Draft Rule G–46
(December 15, 2021) available at: https://msrb.org/
sites/default/files/2021-18.pdf.
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The MSRB received three comment
letters in response to the First Request
for Comment 75 and another three
comment letters in response to the
Second Request for Comment.76 The
comments are summarized below by
topic and MSRB responses are provided.
As described above, Proposed Rule G–
46 would establish the core standards of
conduct and duties of solicitor
municipal advisors when engaging in
certain solicitation activities. The
proposed rule also would codify certain
statements from the G–17 Excerpt for
Solicitor Municipal Advisors and add
additional requirements that would
better align some of the obligations
imposed on solicitor municipal advisors
with those applicable to: non-solicitor
municipal advisors under Rule G–42;
underwriters under Rule G–17; and
certain solicitations undertaken on
behalf of third-party investment
advisers under the IA Marketing Rule.
Harmonization With Other Rules
Commenters were supportive of
harmonization efforts between the
standards set forth in the requests for
comment and those applicable to other
regulated entities. In response to the
First Request for Comment, commenters
urged even more harmonization with
those standards,77 in particular Rule G–
42 since issuers would be familiar with
the requirements applicable to
municipal advisors and greater
conformance with those standards
would permit issuers to receive
disclosures in a format with which they
may already be familiar.78
The MSRB made a number of
refinements to draft Rule G–46, as
reflected in the proposed rule change.
Key changes are discussed in the
context of the MSRB’s summary of
comments and responses thereto below.
75 Comments were received in response to the
First Request for Comment from: National
Association of Municipal Advisors: Letter from
Susan Gaffney, Executive Director, dated June 17,
2021 (‘‘NAMA I’’); Securities Industry and
Financial Markets Association: Letter from Leslie
M. Norwood, Managing Director and Associate
General Counsel, dated June 17, 2021 (‘‘SIFMA I’’);
and 3PM I, supra note 8. Comment letters are
available here.
76 Comments were received in response to the
Second Request for Comment from: National
Association of Municipal Advisors: Letter from
Susan Gaffney, Executive Director, dated March 15,
2022 (‘‘NAMA II’’); Securities Industry and
Financial Markets Association: Letter from Leslie
M. Norwood, Managing Director and Associate
General Counsel, dated March 15, 2022 (‘‘SIFMA
II’’); and Third-Party Marketers Association: Letter
form Donna DiMaria, Chairman of the Board of
Directors and Chair of the 3PM Regulatory
Committee, dated March 15, 2022 (‘‘3PM II’’).
Comment letters are available here.
77 See NAMA I at 1–2; see generally SIFMA I.
78 See NAMA I at 1–2.
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9573
Applicability of Fiduciary Duty
In the First Request for Comment, the
MSRB did not specifically include any
draft text regarding the application of a
fiduciary duty to solicitor municipal
advisors. However, the MSRB sought
comment as to whether such a statement
would be helpful to solicited entities.
Commenters generally supported adding
a clear statement to the rule text
indicating that solicitor municipal
advisors do not owe a federal fiduciary
duty to either their clients or the
municipal entities and obligated
persons that they solicit.79 They also
advocated for a similar mandatory
disclosure to solicited entities.80 While
one commenter did not see an
appreciable benefit to requiring any
such disclosure, this commenter did not
raise any objections to such disclosure
either.81
In response, in the Second Request for
Comment, the MSRB revised draft Rule
G–46 to add additional supplementary
material to the draft rule. This
supplementary material expressly stated
that solicitor municipal advisors must
comply with their fair dealing
obligations pursuant to Rule G–17 on
fair dealing, but that they do not owe a
fiduciary duty to their municipal entity
and obligated person clients in
connection with their solicitation
activities. The MSRB also revised the
draft rule text to require a similar
disclosure to be provided to the solicitor
municipal advisor’s solicited entities.
The substance of this supplementary
material as well as the draft disclosure
requirement also are reflected in the
proposed rule change.
Solicitor Representations
In response to the First Request for
Comment, draft rule text set forth
standards regarding solicitor municipal
advisor representations to solicited
entities. Commenters generally urged
the MSRB to narrow these draft
standards.82 One commenter suggested
that the standards should only apply to
a subset of a solicitor’s representations
(generally regarding the capacity and
resources of the municipal advisor).
This commenter also suggested that the
applicable standard more closely mirror
that posed in the G–17 Excerpt for
Solicitor Municipal Advisors.83
In the Second Request for Comment,
the MSRB revised the draft rule text
accordingly and in a manner that is
consistent with the standard set forth in
79 See
SIFMA I at 1–2.
NAMA I at 1 and SIFMA I at 4.
81 See 3PM I at 7.
82 See SIFMA I 2–3.
83 See id. at 2.
80 See
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the proposed rule change. The MSRB
believes that this more narrow standard
is consistent with the standard
applicable to non-solicitor municipal
advisors and that these standards, in
concert with a solicitor municipal
advisor’s Rule G–17 fair dealing
obligations, offer appropriate
protections to entities solicited by
solicitor municipal advisors.
Prohibited Conduct
The rule text in the First Request for
Comment did not include a section
setting forth specific conduct that would
expressly be prohibited. One commenter
suggested that the MSRB add such
language to the rule and that such
prohibitions could largely be drawn
from the specifically prohibited conduct
under Rule G–42.84 In the Second
Request for Comment, the MSRB
proposed a new section to draft Rule G–
46 that would prohibit solicitor
municipal advisors from: (i) receiving
excessive compensation and (ii)
delivering a materially inaccurate
invoice. Additionally, the MSRB sought
comment as to how to determine that
compensation for a solicitation is
excessive.
In response to the Second Request for
Comment, one commenter stated that
the provision to prohibit excessive
compensation should be excluded
noting, in part, the challenges in
determining the appropriate
compensation a solicitor municipal
advisor should earn. In the alternative,
this commenter suggested that the
MSRB should provide guidance as to
how excessive compensation should be
determined.85 In response, the MSRB
determined not to include in the
proposed rule change the prohibition on
excessive compensation. The MSRB
notes that, solicitor municipal advisors
are already subject to a general duty of
fair dealing under Rule G–17 and unlike
the clients of non-solicitor municipal
advisors, solicitor municipal advisor
clients are not municipal entities and
investors, but instead are themselves
regulated financial professionals. As a
result, the MSRB believes that the
potential benefits associated with such
a prohibition may not be sufficiently
outweighed by the burdens associated
with determining and demonstrating
compliance. Additionally, the proposed
rule change reflects the addition of
another specified prohibition pertaining
to third-party payments, which was
added in response to a comment
regarding the use of solicitors and the
establishment of a more level playing
field between solicitor municipal
advisors and dealers (discussed further
below).
Documentation of the Relationship
In the First Request for Comment,
draft Rule G–46 proposed to require
solicitor municipal advisors to
document their relationship and would
have required such documentation to
include relatively limited content—in
part to align with standards under the
IA Marketing Rule.86 One commenter
stated that the draft requirement to
document the solicitor municipal
advisor’s engagement should be more
aligned with a non-solicitor municipal
advisor’s obligation to document its
municipal advisory relationship under
Rule G–42 (which includes additional
terms not set forth in the First Request
for Comment).87 In the Second Request
for Comment, the MSRB added two
additional draft elements that would be
required to be included in such
engagement, both of which are required
under Rule G–42 and pertain to
termination of the relationship. The
MSRB also sought comment as to
whether additional information
regarding the terms of such
documentation may be warranted.
In response to the Second Request for
Comment, while one commenter stated
that the draft text of draft Rule G–46
adequately captured the description of
the compensation arrangement,88
another commenter stated that the
MSRB should provide additional
information regarding the terms and
amount of compensation to be received
by a solicitor (a term that would be
required to be included in the
documentation of the relationship).89
The proposed rule change currently
reflects a new Supplementary Material
.04, which provides additional detail
regarding written disclosures pertaining
to a solicitor’s compensation. This
supplementary material is designed to
inform a solicitor municipal advisor’s
compliance with both its documentation
obligation under Proposed Rule G–
46(c)(ii) and its disclosure obligation
under Proposed Rule G–46(e)(i)(D).
Required Disclosures
In the First Request for Comment, the
MSRB proposed to require solicitor
municipal advisors to disclose to
solicited entities certain: role and
compensation disclosures; conflicts
disclosures; and solicitor client
disclosures. Commenters did not oppose
86 17
CFR 275.206(4)–1.
SIFMA I at 3.
88 See SIFMA II at 8.
89 See 3PM II at 3.
87 See
84 See
85 See
id. at 3–4.
3PM II at 1–3.
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a draft obligation to make such
disclosures but suggested that the MSRB
modify them in some respects. One
commenter suggested that the MSRB
could better align the types of required
disclosures with those required by nonsolicitors under Rule G–42.90 Another
stated that the MSRB should require
solicitors to make certain disclosures to
their clients regarding their conflicts of
interest and legal and disciplinary
history.91 This commenter also
suggested that solicitor municipal
advisors should be permitted to
customize their role-based
disclosures.92
Commenters also suggested that the
MSRB align the timing and manner of
required disclosures with the standards
set forth under Rule G–42 93 and
requested guidance from the MSRB as to
what qualifies as evidence that
disclosure was provided in the manner
set forth under the draft rule. While one
commenter supported an option to make
oral disclosures if the MSRB were to
provide additional guidance in this area,
another commenter was not supportive
of such an option.94 Finally, one
commenter suggested a bifurcated
approach to disclosures for solicited
entities, which would permit the
solicitor municipal advisor to provide
an initial set of disclosures to the person
solicited followed by a second set of
disclosures at the time of capital
allocation that would increase the
likelihood that an official with the
authority to bind the solicited entity by
contract would see such disclosures.95
In the Second Request for Comment,
the MSRB revised the timing and
manner of such disclosures in response
to comments received and also sought
comment as to whether disclosures
should be permitted to be provided
orally, consistent with the IA Marketing
Rule.96 In response, commenters
generally indicated that the revised
timing and manner of disclosures was
workable and less burdensome than the
approach initially proposed.97 However,
one commenter requested clarification
regarding whether, in the case of an
indirect solicitation, the disclosure
requirement would be met if a solicitor
municipal advisor presents the requisite
disclosures to an intermediary to be
passed on to an official of the solicited
entity.98 Additionally, two commenters
90 See
NAMA I at 1–2.
3PM I at 6–7.
92 See id. at 1.
93 See SIFMA I at 4.
94 See id. at 11.
95 See 3PM I at 3.
96 17 CFR 275.206(4)–1.
97 See 3PM II at 7–8.
98 See 3PM II at 3–4.
91 See
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stated that disclosures should be
provided in writing,99 while another
commenter responded that disclosures
should be permitted to be provided
orally only if the MSRB can provide
proper guidance as how to meet a
solicitor municipal advisor’s books and
records obligations.100
In response to these comments, the
proposed rule change currently reflects
a slightly modified approach as
compared to that set forth in the Second
Request for Comment. As discussed
above, a solicitor municipal advisor
would be expected to provide the first
set of disclosures for a solicited entity
to the person actually solicited. For
indirect solicitations, the second set of
disclosures must be presented to an
official of the solicited entity. However,
the proposed rule change expressly
provides that an intermediary would be
permitted to pass such disclosures on to
such official. After reviewing the
comments received, the MSRB
determined to retain the requirement
that all disclosures be provided in
writing.
The MSRB believes that it is
important that all solicited entities
receive consistent role disclosures from
the solicitor municipal advisors that
solicit them. Accordingly, the proposed
rule change requires solicitor municipal
advisors to use identical language in
connection with their role disclosures.
The MSRB also believes that as
registered municipal advisors, solicitor
municipal advisors have been required
to keep appropriate books and records
in order to show compliance with other
relevant MSRB rules and that they can
leverage similar processes and
experiences to determine what evidence
would establish that disclosures were
made in the manner required by the
proposed rule change. If compliance
resources would assist solicitor
municipal advisors in their compliance
efforts, the MSRB is prepared to
produce such resources as solicitor
municipal advisors begin to implement
new policies and procedures to comply
with Proposed Rule G–46, if approved
by the Commission.101
Clarification of Solicitor Municipal
Advisory Activity
Commenters asked the MSRB to
provide guidance on certain areas
relevant to the definition of a municipal
advisor, including when the solicitation
of an obligated person would cause one
99 See
NAMA II at 2 and SIFMA II at 8.
3PM II at 6.
101 Additionally, if the proposed rule change is
approved, the MSRB expects to revise the G–17
Excerpt for Solicitor Municipal Advisors to reflect
the adoption of Proposed Rule G–46.
100 See
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to be a solicitor municipal advisor as
well as when the solicitation of an
intermediary of a municipal entity
would cause one to be a solicitor
municipal advisor.
The MSRB believes that the more
appropriate regulator to whom to direct
such comments may be the
Commission. Commenters may wish to
consult the Commission’s set of
Frequently Asked Questions pertaining
to registration as a municipal advisor.102
The Use of Solicitors
One commenter emphasized the
importance of creating a level playing
field between dealers and municipal
advisors, noting that under Rule G–38,
on solicitation of municipal securities
business, dealers are currently
prohibited from providing payment to
unaffiliated persons for a solicitation of
municipal securities business on behalf
of the dealer.103 This commenter
suggested that a similar standard should
apply with respect to solicitor
municipal advisors, such that Proposed
Rule G–46 expressly should prohibit
solicitor municipal advisors from
paying other third-party solicitors to
solicit municipal advisory business on
their behalf. This commenter further
suggested that, if the MSRB deemed not
to extend this prohibition to solicitor
municipal advisors, it should permit
both dealers and municipal advisors to
pay solicitor municipal advisors for
their third-party solicitation efforts;
provided, that such solicitors are subject
to comprehensive pay-to-play
regulation.
As described above, Exchange Act
Sections 15B(e)(4) and 15B(e)(9) 104
permit municipal advisors to engage in
certain solicitation activities on behalf
of third-party dealers, municipal
advisors, and investment advisers.
MSRB Rule G–38 (which pre-dates the
amendments to the Exchange Act that
brought municipal advisors under the
MSRB’s regulatory jurisdiction)
prohibits dealers from paying third
parties for such solicitation activities.
Non-solicitor municipal advisors are
similarly subject to a restriction on
paying third parties for solicitation
activities on their behalf, subject to an
exception.105 Unlike dealers, nonsolicitor municipal advisors are
permitted to pay reasonable fees to
102 See SEC, Registration of Municipal Advisors
Frequently Asked Questions, available at: SEC.gov
Registration of Municipal Advisors Frequently
Asked Questions.
103 See SIFMA II at 2–3.
104 15 U.S.C 78o–4(e)(4) and 15 U.S.C. 78o–
4(e)(9).
105 See Rule G–42(e)(i)(E).
PO 00000
Frm 00150
Fmt 4703
Sfmt 4703
9575
another registered municipal advisor for
such solicitation.
In response to commenters and as
discussed above, the proposed rule
change would extend a similar
prohibition (and related narrow
exception) to solicitor municipal
advisors. Because registered municipal
advisors are permitted to engage in both
solicitation and non-solicitation
municipal advisory activities, the MSRB
believes that this is the appropriate
approach to harmonization among
regulated entities. The MSRB notes that,
unlike dealers, municipal advisors owe
their municipal entity clients a fiduciary
duty, which may mitigate any potential
risk associated with municipal advisor
use of third-party solicitors. As a result,
the MSRB believes that the current
approach taken in the proposed rule
change represents an appropriate
approach to protecting municipal
entities and obligated persons.
Books and Records
In the First Request for Comment, the
MSRB proposed to include the books
and records obligations relevant to draft
Rule G–46 in the text of draft Rule G–
46 itself. In the Second Request for
Comment, the MSRB explained that it
proposed to take a similar approach
with respect to future MSRB rules or
rule amendments. A number of
commenters opposed this standard and
urged the MSRB to move the relevant
books and records requirements into
Rule G–8, on books and records, as
regulated entities are more accustomed
to consulting that rule to identify their
relevant books and records
obligations.106 As discussed above, the
proposed rule change proposes to
amend Rule G–8 to take such an
approach.
Inadvertent Solicitations
In the First Request for Comment and
the Second Request for Comment, the
MSRB did not propose a safe harbor for
inadvertent solicitations. One
commenter recommended that the
MSRB consider such a safe harbor
provision, modeled off of the safe harbor
provision in Rule G–42.107 The MSRB
determined not to include such a
provision in the proposed rule change
because even a one-time solicitation
could result in a solicitor municipal
advisor’s client getting hired and
providing services to the municipal
entity or obligated person solicited. As
a result, the MSRB believes that it is
important that the solicited entity has
106 See SIFMA I at 4, NAMA II at 2 and SIFMA
II at 4–5.
107 See SIFMA I at 6 and SIFMA II at 4.
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Federal Register / Vol. 88, No. 30 / Tuesday, February 14, 2023 / Notices
all of the protections afforded by the
proposed rule change and that all of the
other obligations under Rule G–46 are
met. The MSRB notes that the proposed
rule change would apply only to certain
solicitations on behalf of unaffiliated
dealers, municipal advisors or
investment advisers. As a result, if a
firm solicits an entity only on its own
behalf or even on behalf of an entity that
controls, is controlled by, or is under
common control with the soliciting
firm, the proposed rule change would
not apply.
ddrumheller on DSK120RN23PROD with NOTICES
Other
In the First Request for Comment and
the Second Request for Comment, the
MSRB inquired whether a municipal
advisor client should be required to
make a bona fide effort to ascertain
whether the solicitor municipal advisor
has provided to solicited entities the
required disclosures related to a
municipal advisor client. The MSRB
also sought comment as to whether
there would be value to solicited
entities receiving disclosures regarding
the payments made by one solicitor
municipal advisor to another to
facilitate a solicitation.
With respect to the bona fide effort
requirement, commenters were not
supportive of such a requirement 108 and
the proposed rule change does not
impose this obligation on municipal
advisor clients of solicitor municipal
advisors. With respect to the comment
regarding payments made by one
solicitor municipal advisor to another,
commenters indicated that such
disclosures are important and supported
an obligation to require such
disclosures.109 The MSRB subsequently
refined draft Rule G–46 to require the
disclosure of such payments. This
obligation appears in Proposed Rule G–
46(e)(i)(E).
One commenter suggested that
reference to obligated persons should be
removed from the definitions of solicitor
municipal advisor and solicited entity,
noting that they are not relevant for the
purposes of the activity in which
solicitors typically engage.110 Because
the MSRB has an obligation to protect
both municipal entities and obligated
persons and because solicitor municipal
advisors may (within the scope of their
professional qualification activities)
solicit obligated persons, the MSRB
believes that it is important that the
proposed rule change extend the same
protections afforded to municipal
108 See
3PM I at 8 and 3PM II at 7.
SIFMA II at 9 and 3PM II at 7.
110 See 3PM I at 4.
109 See
VerDate Sep<11>2014
20:12 Feb 13, 2023
Jkt 259001
entities under Proposed Rule G–46 to
obligated persons as well.
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:
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–2023–02 and should
be submitted on or before March 7,
2023.
For the Commission, pursuant to delegated
authority.111
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–03060 Filed 2–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96836; File No. SR–
PEARL–2023–02]
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–2023–02 on the subject line.
Self-Regulatory Organizations: MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change by MIAX PEARL, LLC To
Amend the MIAX Pearl Options Fee
Schedule
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–2023–02. 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
Pursuant to the provisions of section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder, 2 notice is hereby given that
on January 31, 2023, MIAX PEARL, LLC
(‘‘MIAX Pearl’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
PO 00000
Frm 00151
Fmt 4703
Sfmt 4703
February 8, 2023.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
111 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 88, Number 30 (Tuesday, February 14, 2023)]
[Notices]
[Pages 9560-9576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03060]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96842; File No. SR-MSRB-2023-02]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change To Create New MSRB
Rule G-46, on Duties of Solicitor Municipal Advisors, and To Amend MSRB
Rule G-8, on Books and Records
February 8, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on January 31, 2023, the Municipal Securities
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and
Exchange Commission (``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 9561]]
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 change to create
a new rule, MSRB Rule G-46, on duties of solicitor municipal advisors
(``Proposed Rule G-46'') and amend MSRB Rule G-8, on books and records
(``Proposed Amended Rule G-8'') (together, the ``proposed rule
change''). The MSRB requests that the proposed rule change be approved
with an implementation date to be announced by the MSRB in a regulatory
notice published no later than one month following the Commission
approval date, which implementation date shall be no later than twelve
months following the Commission approval date.
The text of the proposed rule change is available on the MSRB's
website at https://msrb.org/2023-SEC-Filings, 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
Solicitor Municipal Advisor Activity
There are two broad categories of municipal advisors--those that
provide certain advice to or on behalf of a municipal entity or
obligated person and those that undertake certain solicitations of a
municipal entity or obligated person on behalf of certain third-party
financial professionals.\3\ The first category of municipal advisors is
often referred to as non-solicitor municipal advisors, while the latter
is sometimes referred to as solicitors.\4\ Proposed Rule G-46 would
govern the conduct of these solicitors, more specifically defined as
``solicitor municipal advisors'' under Proposed Rule G-46(a)(vi).
---------------------------------------------------------------------------
\3\ Section 15B(e)(4) of the Exchange Act (15 U.S.C. 78o-
4(e)(4)) generally defines ``municipal advisor'' to mean a person
(who is not a municipal entity or an employee of a municipal entity)
that (i) provides advice to or on behalf of a municipal entity or
obligated person with respect to municipal financial products or the
issuance of municipal securities, including advice with respect to
the structure, timing, terms, and other similar matters concerning
such financial products or issues; or (ii) undertakes a solicitation
of a municipal entity. Notwithstanding the omission of the term,
``obligated person'' in connection with the undertaking of a
solicitation under Section 15B(e)(4)(A)(ii) of the Exchange Act (15
U.S.C. 78o-4(e)(4)(A)(ii)), the SEC has interpreted the definition
of ``municipal advisor'' to include a person who engages in the
solicitation of an obligated person acting in the capacity of an
obligated person. See Release No. 34-70462 (September 20, 2013), 78
FR 67467, at notes 138 and 408 (November 12, 2013) (File No. S7-45-
10) (``SEC Final MA Rule Adopting Release''). See also Exchange Act
Rule 15Ba1-1(d)(1)(i) (17 CFR 240.15Ba1-1(d)(1)(i)).
\4\ Section 15B(e)(9) of the Exchange Act (15 U.S.C. 78o-
4(e)(9)) generally defines ``solicitation of a municipal entity or
obligated person'' to mean a direct or indirect communication with a
municipal entity or obligated person made by a person, for direct or
indirect compensation, on behalf of a broker, dealer, municipal
securities dealer, municipal advisor, or investment adviser . . .
that does not control, is not controlled by, or is not under common
control with the person undertaking such solicitation for the
purpose of obtaining or retaining an engagement by a municipal
entity or obligated person of a broker, dealer, municipal securities
dealer, or municipal advisor for or in connection with municipal
financial products, the issuance of municipal securities, or of an
investment adviser to provide investment advisory services to or on
behalf of a municipal entity. The SEC has interpreted this phrase
generally in a manner similar to the statutory definition. However,
it has also added two exceptions to the statutory definition for (i)
advertising by a dealer, municipal advisor or investment adviser and
(ii) solicitations of an obligated person where such obligated
person is not acting in the capacity of an obligated person or the
solicitation is not in connection with the issuance of municipal
securities or with respect to municipal financial products. See
Exchange Act Rule 15Ba1-1(n) (17 CFR 240.15Ba1-1(n)). Additionally,
the SEC has exempted from the municipal advisor definition a person
that undertakes a solicitation of a municipal entity or obligated
person for the purpose of obtaining or retaining an engagement by a
municipal entity or by an obligated person of a dealer or a
municipal advisor for or in connection with municipal financial
products that are investment strategies, to the extent such
investment strategies are not plans or programs for the investment
of the proceeds of municipal securities or the recommendation of and
brokerage of municipal escrow investments. See Exchange Act Rule
15Ba1-1(d)(1) (17 CFR 240.15Ba1-1(d)(1)) and 15Ba1-1(d)(3)(viii) (17
CFR 240.15Ba1-1(d)(3)(viii)).
---------------------------------------------------------------------------
While the Exchange Act \5\ permits a municipal advisor to conduct
such solicitations on behalf of a third-party broker, dealer or
municipal securities dealer (collectively and individually
``dealers''),\6\ MSRB Rule G-38, on solicitation of municipal
securities business, prohibits a dealer from providing or agreeing to
provide payment to third parties for solicitations of municipal
securities business made on behalf of the dealer.\7\ Additionally, as
discussed in the MSRB's Statement on Burden on Competition below,
according to MSRB data, it appears that a substantial number of
solicitations that would be subject to Proposed Rule G-46 involve a
solicitation on behalf of a third-party investment adviser to provide
investment advisory services to a municipal entity. Anecdotally, the
MSRB understands that such solicitations often occur in connection with
the solicitation of a public pension plan.\8\ For example, if a person
communicates with a public pension plan for the purpose of getting a
particular investment advisory firm hired by the plan to provide
investment advisory services to such plan, that person may be a
solicitor municipal advisor if such person is paid by the investment
advisory firm for the communication and if such person and the
investment advisory firm are not affiliated.
---------------------------------------------------------------------------
\5\ See Section 15B(e)(4) (15 U.S.C. 78o-4(e)(4)) and Section
15B(e)(9) of the Exchange Act (15 U.S.C. 78o-4(e)(9)).
\6\ See 15 U.S.C. 78c(a)(4)(a) defining the term ``broker'' to
mean ``any person engaged in the business of effecting transactions
in securities for the account of others;'' see also 15 U.S.C.
78c(a)(5) defining the term ``dealer'' to mean ``any person engaged
in the business of buying and selling securities (not including
security-based swaps, other than security-based swaps with or for
persons that are not eligible contract participants) for such
person's own account through a broker or otherwise'' and 15 U.S.C.
78c(a)(30) generally defining the term ``municipal securities
dealer'' to mean any person (including a separately identifiable
department or division of a bank) engaged in the business of buying
and selling municipal securities for his own account, through a
broker or otherwise, subject to certain exclusions.
\7\ The prohibition in Rule G-38 predates the regulation of
municipal advisors.
\8\ See e.g., Third-Party Marketers Association: Letter from
Donna DiMaria, Chairman of the Board of Directors and Chair of the
3PM Regulatory Committee to the MSRB, dated June 16, 2021 (``3PM
I'').
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As discussed below, MSRB data suggests that the number of municipal
advisors that engage in solicitations that may subject them to Proposed
Rule G-46 comprise a relatively small percentage of the municipal
advisors that are registered with the MSRB. However, notwithstanding
the relatively small size of such solicitation market, the MSRB
believes that it is important that the fundamental protections extended
to the municipal entity and obligated person clients of other MSRB
regulated entities are also extended to the municipal entities and
obligated persons with whom solicitor municipal advisors interact. For
example, as noted in the SEC Final MA Rule Adopting Release, the
solicitation of public pension plans in connection with investment
advisory services has been subject to multiple SEC enforcement
[[Page 9562]]
actions.\9\ The MSRB believes that the proposed rule change would serve
as an important bulwark against potential improper practices in the
municipal market and also would provide greater certainty and
transparency to solicitor municipal advisors regarding regulatory
expectations.
---------------------------------------------------------------------------
\9\ See SEC Final MA Rule Adopting Release, 78 FR at 67482.
---------------------------------------------------------------------------
From a practical perspective, any registered municipal advisor is
permitted to act as both a solicitor municipal advisor and a non-
solicitor municipal advisor. However, anecdotally, the MSRB understands
that relatively few non-solicitor municipal advisors also act as
solicitor municipal advisors.\10\ With respect to solicitations on
behalf of third parties to provide investment advisory services,
commenters have informed the MSRB that there are two ways in which a
solicitor municipal advisor typically may solicit a municipal entity:
(1) directly or (2) through an intermediary.\11\ They are discussed
below.
---------------------------------------------------------------------------
\10\ According to MSRB data shown in Table 1 below, 69 municipal
advisors indicated that they engage in both solicitation and non-
solicitation municipal advisory activity. However, it is unclear the
extent to which these municipal advisors actively engage in both
types of activity.
\11\ See e.g., ``3PM I''. While these comments pertained
primarily to the solicitation of municipal entities, the MSRB does
not have reason to believe that the practice of soliciting obligated
persons, to the extent that such solicitations occur, would be
substantially different. The MSRB notes that the intermediary itself
may be a solicitor municipal advisor to the extent that the
intermediary makes a communication with an unaffiliated municipal
entity or obligated person, for compensation, on behalf of a third-
party dealer, municipal advisor, or investment adviser for the
purpose of obtaining or retaining an engagement by such municipal
entity or obligated person of a dealer or municipal advisor for or
in connection with municipal financial products or the issuance of
municipal securities, or of an investment adviser to provide
investment advisory services. See Section 15B(e)(9) of the Exchange
Act (15 U.S.C. 78o-4(e)(9)).
---------------------------------------------------------------------------
Direct Solicitations
A solicitor municipal advisor often first communicates with a staff
member of the solicited entity (i.e., the municipal entity or obligated
person) who handles investment manager research for the entity. This
individual generally is responsible for evaluating the solicitor
client's product/services to ensure they are appropriate for the entity
given the entity's investment policy statement guidelines and
restrictions. This first communication potentially is one of many that
may span years. Additionally, the solicitor municipal advisor's client
likely will have its own communications with the solicited entity,
which may include board presentations, meetings and discussions during
which the solicitor municipal advisor may or may not be present.
Indirect Solicitations Through an Intermediary
A solicitor municipal advisor typically initially will solicit a
financial intermediary or an investment consultant (collectively
``intermediary'') who is hired by the solicited entity to conduct
searches and identify appropriate investment managers to meet a
municipal entity's specific need.\12\ Such intermediary itself may be a
solicitor municipal advisor.\13\ When a solicitor municipal advisor
first solicits the intermediary, the solicitor municipal advisor may
not necessarily know who the intermediary represents (i.e., whether the
intermediary represents municipal entities, obligated persons, other
private entities, or all of the above). Additionally, the solicitor
municipal advisor generally will not know whether the intermediary will
recommend the solicitor municipal advisor's client to the
intermediary's municipal entity client(s) (if any). As a result, at the
time of the first solicitation, a solicitor municipal advisor may not
know if it is indirectly soliciting a municipal entity. Moreover, the
solicitor municipal advisor's client (e.g., the investment adviser) may
engage in multiple subsequent communications with either the
intermediary and/or the intermediary's client (e.g., the municipal
entity or obligated person), during which the solicitor municipal
advisor may or may not be present. In some instances, the solicitor
municipal advisor may never meet or directly communicate with an
intermediary's municipal entity or obligated person client.
---------------------------------------------------------------------------
\12\ In the most common scenario, an intermediary will be an
investment consultant or will perform similar functions.
\13\ See supra note 11.
---------------------------------------------------------------------------
Proposed Rule G-46
Summary of Proposed Rule G-46
Proposed Rule G-46 would establish the core standards of conduct
and duties of ``solicitor municipal advisors'' (as defined below) when
engaging in solicitation activities that would require them to register
with the SEC and the MSRB as municipal advisors. The proposed rule also
would codify certain statements in an MSRB notice issued in 2017
pertaining to the application of MSRB rules to solicitor municipal
advisors.\14\ Those statements relate to the obligation of solicitor
municipal advisors under MSRB Rule G-17, on conduct of municipal
securities and municipal advisory activities (the ``G-17 Excerpt for
Solicitor Municipal Advisors'').\15\ In addition to codifying much of
the substance of the G-17 Excerpt for Solicitor Municipal Advisors,
Proposed Rule G-46 also would add additional requirements that would
better align some of the obligations imposed on solicitor municipal
advisors with those applicable to: non-solicitor municipal advisors
under Rule G-42, on duties of non-solicitor municipal advisors;
underwriters under Rule G-17, on fair dealing, and; certain
solicitations undertaken on behalf of third-party investment advisers
under the SEC's marketing rule for investment advisers (the ``IA
Marketing Rule'' or ``IA Rule 206(4)-1'').\16\
---------------------------------------------------------------------------
\14\ See MSRB Notice 2017-08, Application of MSRB Rules to
Solicitor Municipal Advisors (May 4, 2017).
\15\ See id. at 17-18.
\16\ 17 CFR 275.206(4)-1.
---------------------------------------------------------------------------
In summary, the core provisions of Proposed Rule G-46 generally
would:
Set forth definitions for terms used in the proposed rule;
Require solicitor municipal advisors to provide to their
solicitor clients full and fair disclosure in writing of all of their
material conflicts of interest and material legal or disciplinary
events;
Require solicitor municipal advisors to document their
relationships in writing(s), deliver such writing(s) to their solicitor
clients, and set forth certain minimum content that must be included in
such writing(s);
Prohibit solicitor municipal advisors from making a
representation that the solicitor municipal advisor knows or should
know is either materially false or misleading regarding the capacity,
resources or knowledge of the solicitor client and require solicitor
municipal advisors to have a reasonable basis for any material
representations it makes to a solicited entity regarding the capacity,
resources or knowledge of the solicitor client;
Require solicitor municipal advisors to disclose to
solicited entities material facts about the solicitation, including but
not limited to an obligation to disclose:
[cir] Information about the solicitor municipal advisor's role and
compensation;
[cir] The solicitor municipal advisor's material conflicts of
interest;
[cir] Information regarding the solicitor client (i.e., the type of
information that is generally on Form MA or Form ADV, Part 2 and a
description of how the solicited entity can obtain a copy of the
[[Page 9563]]
solicitor client's Form MA or Form ADV, Part 2, as applicable);
Set forth a dual disclosure standard with respect to
required disclosures to solicited entities:
[cir] Generally, disclosures would be required to be made in
writing and delivered:
[ssquf] At the time of the first communication to a solicited
entity (or in the case of an indirect solicitation, the first
communication to an intermediary of the solicited entity) on behalf of
a specific solicitor client; and
[ssquf] If the solicitation results in a solicited entity engaging
a solicitor client for investment advisory services or municipal
advisory services, again at the time that engagement documentation
between the solicitor client and the solicited entity is delivered to
the solicited entity or promptly thereafter. Such disclosures may be
provided by either the solicitor client or the solicitor municipal
advisor, but must be made to an official of the solicited entity that,
among other things, the solicitor municipal advisor (or, the solicitor
client if the solicitor client provides such disclosures) reasonably
believes has the authority to bind the solicited entity by contract;
and
Expressly prohibit solicitor municipal advisors from:
delivering an inaccurate invoice for fees or expenses and making
payments for the purpose of obtaining or retaining an engagement to
perform municipal advisory activities subject to exceptions specified
in the rule.
Supplementary material to Proposed Rule G-46 generally would:
Provide additional explanation regarding the MSRB's
expectations with respect to the reasonable basis a solicitor municipal
advisor must have for certain of its representations;
Explain the relationship between a solicitor municipal
advisor's fair dealing obligations and a federal fiduciary duty for
municipal advisors;
Explain the relationship between a municipal advisor's
obligations under Proposed Rule G-46 and Rule G-42; and
Provide additional explanation applicable to a solicitor
municipal advisor's obligation to document its compensation arrangement
and make related disclosures.
Provided below is a more detailed description of Proposed Rule G-
46.
Definitions
Proposed Rule G-46(a) would set forth a set of definitions for
terms used in the rule. It would define the terms ``compensation,''
\17\ ``excluded communications,'' \18\ ``solicitation,'' ``solicited
entity,'' ``solicitor client,'' ``solicitor municipal advisor,'' and
``solicitor relationship.'' \19\ The most important of these
definitions, which are integral to understanding nearly all of the
provisions of Proposed Rule G-46 are discussed below.
---------------------------------------------------------------------------
\17\ Proposed Rule G-46(a)(i) generally would provide that
``compensation'' means any cash, in-kind or non-cash remuneration,
including but not limited to merchandise, gifts, travel expenses,
meals and lodging.
\18\ Proposed Rule G-46(a)(ii) generally would provide that
``excluded communications'' means (A) advertising by a dealer,
municipal advisor, or investment adviser; (B) direct or indirect
communications with an obligated person if such obligated person is
not acting in the capacity of an obligated person; (C) direct or
indirect communications with an obligated person made for the
purpose of obtaining or retaining an engagement that is not in
connection with the issuance of municipal securities or with respect
to municipal financial products; and (D) direct or indirect
communications made for the purpose of obtaining or retaining an
engagement for or in connection with municipal financial products
that are investment strategies to the extent that those investment
strategies are not plans or programs for the investment of the
proceeds of municipal securities or the recommendation of and
brokerage of municipal escrow investments. The term ``excluded
communications'' is used in the term ``solicitation,'' which would
be defined in Proposed Rule G-46(a)(iii).
\19\ Proposed Rule G-46(a)(vii) generally would provide that,
for purposes of the rule, a ``solicitor relationship'' is deemed to
exist when a municipal advisor enters into an agreement to undertake
a solicitation of a municipal entity or obligated person within the
meaning of Section 15B(e)(9) of the Act, 15 U.S.C. 78o-4(e)(9), and
the rules and regulations thereunder. The solicitor relationship
shall be deemed to have ended on the date which is the earlier of
(i) the date on which the solicitor relationship has terminated
pursuant to the terms of the documentation of the solicitor
relationship required by Proposed Rule G-46(c) or (ii) the date on
which the solicitor municipal advisor withdraws from the solicitor
relationship.
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Proposed Rule G-46(a)(iii) generally would define the term
``solicitation'' to mean a direct or indirect communication with a
municipal entity or obligated person made by a solicitor municipal
advisor, for direct or indirect compensation, on behalf of a municipal
advisor or investment adviser that does not control, is not controlled
by, or is not under common control with the solicitor municipal advisor
for the purpose of obtaining or retaining an engagement by a municipal
entity or obligated person of a municipal advisor for or in connection
with municipal financial products or the issuance of municipal
securities or of an investment adviser to provide investment advisory
services to or on behalf of a municipal entity; provided, however, that
it does not include excluded communications, as defined in Proposed
Rule G-46(a)(ii). This definition is consistent with the defined term
``solicitation of a municipal entity or obligated person'' under
Section 15B(e)(9) of the Exchange Act,\20\ except to the extent that
the term ``solicitation'' under Proposed Rule G-46(a)(iii) does not
address solicitations undertaken on behalf of a third-party dealer. As
noted above, MSRB Rule G-38 generally prohibits a dealer from providing
or agreeing to provide payment to third parties for solicitations of
municipal securities business made on behalf of the dealer. As a
result, Proposed Rule G-46 assumes that such solicitations do not
occur.
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\20\ 15 U.S.C. 78o-4(e)(9).
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Proposed Rule G-46(a)(iv) generally would define the term
``solicited entity'' to mean any municipal entity or obligated person
(as those terms are defined in Section 15B(e)(8) and (e)(10) of the
Exchange Act \21\ and the rules and regulations thereunder) that the
solicitor municipal advisor has solicited, is soliciting or intends to
solicit within the meaning of Sections 15B(e)(4)(A)(ii) and (e)(9) of
the Act \22\ and the rules and regulations thereunder.
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\21\ 15 U.S.C. 78o-4(e)(8) and 15 U.S.C. 78o-4(e)(10).
\22\ 15 U.S.C. 78o-4(e)(4)(A)(ii) and 15 U.S.C. 78o-4(e)(9).
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Proposed Rule G-46(a)(v) generally would define the term
``solicitor client'' to mean the municipal advisor or investment
adviser on behalf of whom the solicitor municipal advisor undertakes a
solicitation within the meaning of Sections 15B(e)(4)(A)(ii) and (e)(9)
of the Act \23\ and the rules and regulations thereunder. As noted
above, because of the prohibition set forth in MSRB Rule G-38, Proposed
Rule G-46 presumes that solicitors do not conduct paid solicitations on
behalf of third-party dealers. As a result, the term ``solicitor
client'' as defined in Proposed Rule G-46(a)(v) does not include
dealers as solicitor clients.
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\23\ Id.
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Proposed Rule G-46(a)(vi) generally would define the term
``solicitor municipal advisor'' to mean, for purposes of the rule, a
municipal advisor within the meaning of Section 15B(e)(4) of the Act
\24\ and other rules and regulations thereunder; provided, that it
shall exclude a person that is otherwise a municipal advisor solely
based on activities within the meaning of Section 15B(e)(4)(A)(i) of
the Act \25\ and the rules and regulations thereunder. Generally, this
means that a solicitor municipal advisor is any municipal advisor that
is not a non-solicitor municipal advisor.
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\24\ 15 U.S.C. 78o-4(e)(4).
\25\ 15 U.S.C. 78o-4(e)(4)(A)(i).
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Disclosure to Solicitor Clients
Proposed Rule G-46(b) would require a solicitor municipal advisor
to provide
[[Page 9564]]
to a client full and fair disclosure in writing of all material
conflicts of interest and any legal or disciplinary event that would be
material to a reasonable solicitor client's evaluation of the solicitor
municipal advisor or the integrity of its management or advisory
personnel. The disclosures must be provided prior to or upon engaging
in municipal advisory activities.
The proposed rule sets forth an alternative to providing a
narrative description of any such legal or disciplinary events by
permitting solicitor municipal advisors to reference such information
in certain other publicly available information if the conditions
specified in the rule are met. As a result, solicitor municipal
advisors that are also registered broker-dealers or investment advisers
would be permitted to identify the specific type of event and make
specific reference to the relevant portions of the solicitor municipal
advisor's Form BD or Form ADV if the solicitor municipal advisor
provides detailed information specifying where the client may
electronically access such forms.\26\ All other municipal advisors
would be permitted to identify the specific type of event and make
specific reference to the relevant portions of the solicitor municipal
advisor's most recent Forms MA or MA-I filed with the Commission if the
solicitor municipal advisor provides detailed information specifying
where the client may electronically access such forms.\27\
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\26\ For example, a solicitor municipal advisor could direct a
solicitor client to FINRA's BrokerCheck system or the Investment
Adviser Public Disclosure website, as applicable; provided, that the
direction is accompanied by information as to how to retrieve the
firm's specific Form BD or Form ADV and specific reference to the
relevant portions of the applicable form.
\27\ For example, a solicitor municipal advisor could direct a
solicitor client to the SEC's EDGAR system; provided, that the
direction is accompanied by information as to how to retrieve the
firm's specific form(s) and specific reference to the relevant
portions of the applicable form(s).
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Documentation of the Solicitor Relationship
Proposed Rule G-46(c) would require a solicitor municipal advisor
to evidence each of its solicitor relationships by a writing or
writings created and delivered to the solicitor client prior to, upon
or promptly after the establishment of the solicitor relationship. The
writing(s) would be required to be dated and include, at a minimum:
A description of the solicitation activities to be engaged
in by the solicitor municipal advisor on behalf of the solicitor client
(including the scope of the agreed-upon activities and a statement that
the scope of the solicitation is anticipated to include the
solicitation of municipal entities and/or obligated persons);
The terms and amount of the compensation to be received by
the solicitor municipal advisor for such activities;
The date, triggering event, or means for the termination
of the relationship, or, if none, a statement that there is none; and
Any terms relating to withdrawal from the relationship.
The proposed obligation to document the relationship is generally
consistent with a non-solicitor municipal advisor's obligation to
document its municipal advisory relationship with a client under Rule
G-42(c).\28\ The MSRB believes that this documentation obligation will
help ensure that the solicitor client has certain basic material
information about the engagement including the scope of agreed-upon
activities and information pertaining to compensation for such
activities. The MSRB also believes that this documentation obligation
will assist examining authorities in understanding the solicitation
arrangement and will provide them with necessary information to assist
in evaluating a solicitor municipal advisor's compliance with relevant
obligations.
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\28\ Rule G-42(c) generally requires a municipal advisor to
evidence each of its municipal advisory relationships by a writing
or writings created and delivered to the municipal entity or
obligated person client prior to, upon or promptly after the
establishment of the municipal advisory relationship.
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The MSRB understands that a solicitor may be asked to solicit a
broad range of entities on behalf of a client of the solicitor. These
entities may include municipal entities, obligated persons and
corporate entities that are not obligated persons. While the
solicitation of municipal entities and obligated persons generally
would require compliance with Proposed Rule G-46 (to the extent the
solicitation would make the solicitor a ``municipal advisor''), the
solicitation of an entity that is not a municipal entity or an
obligated person would not require such compliance. In order to promote
certainty as to the applicable regulatory scheme for any engagement,
the MSRB believes that it is imperative for any engagement to be
documented in a writing that clearly indicates whether the solicitation
of municipal entities and/or obligated persons is anticipated.
Information pertaining to termination of the relationship or withdrawal
from the relationship will similarly assist both solicitor clients and
examination and enforcement authorities in understanding the scope of
an engagement.
Supplementary Material .04 would provide additional guidance with
respect to the obligation to document the terms and the amount of
compensation to be received. Specifically, it provides that the
documentation(s) must clearly describe the structure of the
compensation arrangement and the amount of compensation paid or to be
paid. For example, a solicitor municipal advisor that will be paid on
the basis of a flat or fixed fee would be required to disclose the
amount of the flat fee, if known and/or calculable at the time of the
documentation. If the precise dollar amount is not known at the time,
the documentation should disclose how such compensation will be
calculated. As another example, if the compensation arrangement calls
for a percentage of fees collected from the referred clients, then the
documentation should state so and describe what that percentage is.
Representations to Solicited Entities
Proposed Rule G-46(d)(i) expressly would prohibit a solicitor
municipal advisor from making a representation that the solicitor
municipal advisor knows or should know is either materially false or
materially misleading due to the omission of a material fact about the
capacity, resources or knowledge of the solicitor client. This
prohibition is similar to a prohibition applicable to non-solicitor
municipal advisors under Rule G-42 except that, unlike with Rule G-42,
the prohibition for solicitor municipal advisors would not be limited
to representations that occur in response to requests for proposals or
qualifications or in oral presentations to a client or prospective
client for the purpose of obtaining or retaining an engagement for the
solicitor client.\29\ This is because the MSRB believes that all of the
solicitor municipal advisor's communications regarding the capacity,
resources or knowledge of the solicitor's clients are expected to be
for the purpose of
[[Page 9565]]
obtaining or retaining an engagement for their clients.
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\29\ See Rule G-42(e)(i)(C) which prohibits non-solicitor
municipal advisors from making any representation or the submission
of any information that the municipal advisor knows or should know
is either materially false or materially misleading due to the
omission of a material fact about the capacity, resources or
knowledge of the municipal advisor, in response to requests for
proposals or qualifications or in oral presentations to a client or
prospective client, for the purpose of obtaining or retaining an
engagement to perform municipal advisory activities.
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Proposed Rule G-46(d)(ii) would require a solicitor municipal
advisor to have a reasonable basis for any material representations it
makes to a solicited entity regarding the capacity, resources or
knowledge of the solicitor client. The MSRB believes that solicited
entities should be entitled to rely on the material representations
made by solicitor municipal advisors, as regulated financial
professionals hired for the purpose of soliciting business on behalf of
their clients, with respect to the qualifications of their clients. The
MSRB further believes that such representations should have some
reasonable basis.\30\
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\30\ The MSRB notes that this obligation bears some analogy to a
non-solicitor municipal advisor's duty of care obligation to have a
reasonable basis for any advice provided to or on behalf of a client
pursuant to Rule G-42, Supplementary Material .01. While a non-
solicitor municipal advisor provides advice to or on behalf of its
municipal entity and obligated person clients, a solicitor municipal
advisor solicits municipal entities and obligated persons on behalf
of its clients. In both cases, the municipal advisor would be
required to have a reasonable basis for what are likely to be the
core material statements the municipal advisor was hired to provide
to municipal entities and obligated persons.
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Supplementary Material .01 would provide guidance on compliance
with the reasonable-basis standard. Specifically, this supplementary
material would state that while a solicitor municipal advisor must have
a reasonable basis for the representations described in Proposed Rule
G-46(d), the solicitor municipal advisor is not required to actively
seek out every piece of information that may be relevant to such
representations. It further provides an example to help illustrate this
point.
Disclosures to Solicited Entities
Proposed Rule G-46(e) would require a solicitor municipal advisor
to disclose to any solicited entity all material facts about the
solicitation in the manner specified in section (f) of the proposed
rule. This would include an obligation to disclose certain information
pertaining to the solicitor municipal advisor's: (i) role and
compensation; (ii) conflicts of interest; and (iii) client.
Role and Compensation Disclosures. Proposed Rule G-46(e)(i) would
require a solicitor municipal advisor to disclose to any solicited
entity:
The solicitor municipal advisor's name;
The solicitor client's name;
The type of business being solicited (i.e., municipal
advisory business or investment advisory services);
The material terms of the solicitor municipal advisor's
compensation arrangement, including a description of the compensation
provided or to be provided, directly or indirectly, to the solicitor
municipal advisor for such solicitation; and
Payments made by the solicitor municipal advisor to
another solicitor municipal advisor to facilitate the solicitation.
Supplementary Material .04 would provide additional guidance with
respect to the obligation to disclose the material terms of the
solicitor municipal advisor's compensation arrangement. Specifically,
it would provide that Proposed Rule G-46(e)(i)(D) would require
disclosure of at least the same information as that required by
Proposed Rule G-46(c)(ii), to the extent material. However, Proposed
Rule G-46(e)(i)(D) also may require the disclosure of additional
information, depending on the facts and circumstances. For example, if
the solicitor municipal advisor receives indirect compensation for the
solicitation, information pertaining to the indirect compensation also
must be disclosed.
Additionally, the solicitor municipal advisor would be required to
disclose the following statements:
In connection with its solicitation activities as a
municipal advisor, a solicitor municipal advisor does not owe a
fiduciary duty under Section 15B(c)(i) of the Exchange Act or MSRB
rules to the entities that it solicits and is not required by those
provisions to act in the best interests of such entities without regard
to the solicitor municipal advisor's own financial or other interests.
However, in connection with such solicitation activities, a solicitor
municipal advisor is required to deal fairly with all persons,
including both solicited entities and the solicitor municipal advisor's
clients; and
A solicitor municipal advisor's primary role is to solicit
the solicited entity on behalf of certain third-party regulated
entities and the solicitor municipal advisor will be compensated for
its solicitation services by the solicitor municipal advisor's
client.\31\
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\31\ While the proposed rule text uses the defined term
``solicitor municipal advisor,'' to facilitate a more plain-language
disclosure, the MSRB expects that solicitor municipal advisors would
insert their name in place of the term ``solicitor municipal
advisor.''
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These statements draw from analogous disclosures that underwriters
must make to their issuer clients pursuant to Rule G-17 \32\ but are
tailored to reflect the existence of a federal fiduciary duty for non-
solicitor municipal advisors and to make clear that a solicitor
municipal advisor's fair dealing obligations apply in connection with
its solicitation activities.\33\
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\32\ These disclosures include an obligation to disclose that:
Rule G-17 requires an underwriter to deal fairly at all times with
both issuers and investors; unlike a municipal advisor, the
underwriter does not have a fiduciary duty to the issuer under the
federal securities laws and is, therefore, not required by federal
law to act in the best interests of the issuer without regard to its
own financial or other interests; and the underwriter's primary role
is to purchase securities with a view to distribution in an arm's-
length commercial transaction with the issuer and it has financial
and other interests that differ from those of the issuer. See MSRB
Interpretive Notice Concerning the Application of MSRB Rule G-17 to
Underwriters of Municipal Securities (March 31, 2021) (the ``G-17
Underwriter's Guidance'').
\33\ See SEC MA Final Rule Adopting Release, 78 FR 67467 at note
100 (stating that ``. . . the fiduciary duty of a municipal advisor,
as set forth in Exchange Act Section 15B(c)(1), extends only to its
municipal entity clients'') (emphasis added); see also text
accompanying note 100 (stating that ``. . . the Exchange Act, as
amended by the Dodd-Frank Act, grants the MSRB regulatory authority
over municipal advisors and imposes a fiduciary duty on municipal
advisors when advising municipal entities'') (emphasis added);
Exchange Act Section 15B(b)(2)(L)(i) (15 U.S.C. 78o-4(b)(2)(L)(i))
(granting the MSRB authority to ``prescribe means reasonably
designed to prevent acts, practices, and courses of business as are
not consistent with a municipal advisor's fiduciary duty to its
clients'') (emphasis added). Because a solicitor municipal advisor's
clients are not the municipal entities that they solicit, but rather
the third parties that retain or engage the solicitor municipal
advisor to solicit such municipal entities, solicitor municipal
advisors do not owe a fiduciary duty under the Exchange Act or MSRB
rules to their clients (or the municipal entity) in connection with
such activity. See MSRB Notice 2017-08, at 10.
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Supplementary Material .02 would expound on the relationship
between Proposed Rule G-46 and the fair dealing obligation under Rule
G-17 and includes similar discussion regarding application of the
federal fiduciary duty to a solicitor municipal advisor's solicitations
of solicited entities. However, it specifies that solicitor municipal
advisors may be subject to fiduciary or other duties under state or
other laws and that nothing in Proposed Rule G-46 shall be deemed to
supersede any more restrictive provision of state or other laws
applicable to municipal advisory activities. Finally, Supplementary
Material .02 includes a cross reference to Supplementary Material .03
and would remind solicitor municipal advisors that, to the extent they
also engage in non-solicitor municipal advisory activity, the
requirements of Rule G-42 will apply with respect to such activity and
a federal fiduciary duty will apply with respect to the municipal
entity clients of the municipal advisor.
Conflicts Disclosures. Proposed Rule G-46(e)(ii) would require a
solicitor municipal advisor to disclose any
[[Page 9566]]
material conflicts of interest,\34\ including but not limited to the
fact that, because the solicitor municipal advisor is compensated for
its solicitation efforts, it has an incentive to recommend its clients,
resulting in a material conflict of interest. The solicitor municipal
advisor also would be required to disclose any material conflicts of
interest, of which the solicitor municipal advisor is aware after
reasonable inquiry, that could reasonably be anticipated to impair the
solicitor municipal advisor's ability to solicit the solicited entity
in accordance with its duty of fair dealing. This obligation is
comparable to a non-solicitor municipal advisor's obligation under Rule
G-42 to disclose to its clients all material conflicts of interest,
including any conflicts, of which the municipal advisor is aware after
reasonable inquiry, that could reasonably be anticipated to impair the
municipal advisor's ability to provide advice to or on behalf of the
client in accordance with the standards set forth in the rule.\35\ It
also is comparable to the obligation under the IA Marketing Rule to
disclose that a promoter, due to the fact that it is compensated, has
an incentive to recommend the investment adviser it promotes, resulting
in a material conflict of interest.\36\ The MSRB believes that
disclosure of such conflict-of-interest information is key to assisting
a solicited entity in evaluating the solicitor municipal advisor's
statements and in determining whether to retain the solicitor's client.
For example, without a specific disclosure about a solicitor municipal
advisor's incentives, a solicitation creates a risk that the solicited
entity would mistakenly view the solicitor municipal advisor's
recommendation as being an unbiased opinion about the solicitor
client's ability to, for example, manage the solicited entity's assets,
and would rely on that recommendation more than the solicited entity
otherwise would if the solicited entity knew of the solicitor municipal
advisor's incentive.
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\34\ If a reasonable solicited entity would consider a
particular conflict of interest on the part of the solicitor
municipal advisor to be material to the decision to choose the
solicitor municipal adviser's client, then such conflict of interest
should be disclosed.
\35\ See Rule G-42(b)(i)(F).
\36\ See Investment Adviser Marketing, Release No. IA-5653 at
101 (Dec. 22, 2020), 86 FR 13024 (March 5, 2021) available at:
https://www.federalregister.gov/d/2020-28868/p-618.
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Solicitor Client Disclosures. Proposed Rule G-46(e)(iii) would
require a solicitor municipal advisor to provide to the solicited
entity the following information regarding the solicitor client:
The type of information that is generally available on
Form MA (in the case of a municipal advisor client) or Form ADV, Part 2
(in the case of an investment adviser client); and
A description of how the solicited entity can obtain a
copy of the solicitor client's Form MA or Form ADV, Part 2, as
applicable.
These requirements are designed to help ensure that, at any early
stage, solicited entities are directed to important written information
about the entities the solicitor municipal advisor represents--
including, but not limited to, information about the disciplinary
history of the solicitor municipal advisor's clients. However, it does
not require solicitor municipal advisors to obtain a copy of these
documents and provide them to their solicited entities, nor does it
require a solicitor municipal advisor to disclose any specific
information about the client that is included in such forms.\37\
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\37\ However, solicitor municipal advisors should be mindful of
their general fair dealing obligations under Rule G-17 and of their
obligations related to certain of their representations under
Proposed Rule G-46(d). If a solicitor municipal advisor were to make
a representation regarding the capacity, resources or knowledge of
the solicitor's client that the solicitor municipal advisor knows or
should know is inaccurate based on a review of its client's Form MA
or Form ADV, that solicitor municipal advisor could be in violation
of Proposed Rule G-46.
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Timing and Manner of Disclosures to Solicited Entities
Proposed Rule G-46(f) would provide that any disclosures required
under section (e) of the proposed rule (pertaining to disclosures to
solicited entities) must be made in writing. The proposed rule also
would provide for a dual-disclosure requirement, such that
solicitations that result in a solicited entity engaging a solicitor
client would receive the requisite disclosures twice. Specifically,
they would receive the disclosures once at the time of the first
communication giving rise to the solicitation and again at the time
that engagement documentation pertaining to the solicited entity's
engagement of the solicitor client is delivered (or promptly
thereafter).
Initial Disclosure at the Time of the First Communication. The
disclosures would be required to be delivered at the time of the first
communication (as that term is used in the definition of
``solicitation'') with a solicited entity on behalf of a specific
solicitor client.\38\ Specifically, the disclosures would be required
to be provided to the solicitor client representative with whom such
communication is made. In the case of an indirect solicitation--a
solicitation of an intermediary who represents a municipal entity or
obligated person--the disclosures must be provided to the intermediary
with whom such communication is made.\39\
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\38\ A solicitor municipal advisor would be expected to provide
separate disclosures for each of its engagements. For example,
assume that a solicitor municipal advisor solicits a municipal
entity on behalf of a municipal advisor client to provide municipal
advisory services to the municipal entity. One week later, the
solicitor municipal advisor solicits the municipal entity again--
this time to obtain an engagement for the solicitor municipal
advisor's investment advisory client to provide investment advisory
services to the municipal entity. The solicitor municipal advisor
would be expected to provide its disclosures to the municipal entity
again in connection with the second solicitation.
\39\ For example, a solicitor municipal advisor presentation to
an investment consultant hired by a public pension plan may be an
indirect solicitation of that public pension plan. In such a case,
the disclosure would be provided to the investment consultant.
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Second Disclosure at the Time of the Solicitor Client's Engagement
with the Solicited Entity. If the solicitation results in a solicited
entity engaging a solicitor client for investment advisory services or
municipal advisory services, all disclosures required by Proposed Rule
G-46(e) would be required to be provided at the time that such
engagement documentation is delivered to the solicited entity or
promptly thereafter. This is the case even if there are no changes
between the initial set of disclosures and the second set of
disclosures.
The second set of disclosures may be provided by either the
solicitor client or the solicitor municipal advisor. The MSRB believes
that this flexibility would permit, for example, a solicitor municipal
advisor's investment adviser client to provide the solicitor's
disclosures to the solicited entity at the time that the investment
adviser enters into an engagement with the solicited entity.\40\ These
disclosures would be required to be made to an official of the
solicited entity that: (1) the solicitor municipal advisor (or, the
solicitor client, if the solicitor client provides such disclosures)
reasonably believes
[[Page 9567]]
has the authority to bind the solicited entity by contract; \41\ and
(2) is not a party to a disclosed conflict.\42\ These two conditions
would not apply to the initial delivery of disclosures.
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\40\ The MSRB does not propose to require the engagement
documentation between the solicitor municipal advisor and its
solicitor clients to include an affirmative undertaking on the part
of the solicitor client to provide the solicitor's disclosures to a
solicited entity. However, a solicitor municipal advisor might seek
the inclusion of such language in its engagement documentation as
one means of seeking to comply with Proposed Rule G-46. As one
additional alternative, a solicitor municipal advisor might seek to
include in its engagement documentation with its solicitor clients a
requirement that the solicitor client provide to the solicitor
municipal advisor prompt notice that the solicitor client has been
engaged by the solicited entity. Proposed Rule G-46 would provide
solicitor municipal advisors flexibility in determining how to
deliver the second set of disclosures.
\41\ Solicitor municipal advisors would be expected to adopt
reasonable policies and procedures to support the reasonable belief
that the solicited entity representative has the authority to bind
the solicited entity. However, consistent with the flexible approach
to supervision under Rule G-44, on supervisory and compliance
obligations of municipal advisors, the reasonable policies and
procedures of one firm may reasonably differ from that of another's.
As one example only, solicitor municipal advisors could seek to
incorporate into their written agreements with their solicitor
clients a condition that such disclosures provided on behalf of the
solicitor municipal advisor must be provided to a solicited entity
representative that the solicitor client reasonably believes has the
authority to bind the solicited entity.
\42\ To the extent a solicitor municipal advisor relies on its
client to pass on its second set of disclosures, the solicitor
municipal advisor may wish to provide its clients with a list of
persons associated with the solicited entity who are a party to a
conflict to help ensure that the solicitor client does not pass on
the disclosures to such persons.
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The MSRB believes that this dual or bifurcated approach would help
ensure that the person that is initially solicited receives this key
information in time to consider it in connection with the initial
solicitation. However, because such person(s) may not have the
authority to bind the solicited entity by contract (particularly where
such person is an intermediary between the solicitor and the solicited
entity), the MSRB would require that the disclosures are provided again
at the time of the engagement between the solicited entity and the
solicitor client (or promptly thereafter). The MSRB believes that any
risk associated with the first disclosures not being passed on to a
knowledgeable person with the authority to bind the solicited entity in
contract would be mitigated by requiring that the disclosures are
provided again at the time of the engagement--this time, to someone who
does have such authority. Additionally, the MSRB understands that
solicitations may sometimes span years. Particularly in such instances,
the MSRB believes that it is important that the solicited entity
receives the disclosures again at the time of the solicitor client's
engagement with the solicited entity.
Specified Prohibitions
Proposed Rule G-46(g) expressly would prohibit a solicitor
municipal advisor from:
Delivering an invoice for fees or expenses for municipal
advisory activities that is materially inaccurate in its reflection of
the activities actually performed or the personnel that actually
performed those activities; and
Making payments for the purpose of obtaining or retaining
an engagement to perform municipal advisory activities, subject to
three specified exceptions discussed further below.
Exceptions for Payments to Obtain or Retain an Engagement.
Solicitor municipal advisors would be prohibited from making payments
for the purpose of obtaining or retaining an engagement to perform
municipal advisory activities other than:
Payments to an affiliate for a direct or indirect
communication with a municipal entity or obligated person on behalf of
the solicitor municipal advisor where such communication is made for
the purpose of obtaining or retaining an engagement to perform
municipal advisory activities;
Reasonable fees paid to another municipal advisor
registered as such with the Commission and the MSRB for making a
communication for the purpose of obtaining or retaining an engagement
to perform municipal advisory activities; and
Payments that are permissible ``normal business dealings''
as described in Rule G-20, on gifts, gratuities, non-cash compensation
and expenses of issuance.
These specified prohibitions are modeled on similar prohibitions
applicable to non-solicitors under MSRB Rule G-42(e)(i) and to a lesser
degree would align with certain prohibitions applicable to underwriters
under the G-17 Underwriter's Guidance.\43\
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\43\ See Rule G-42(e)(i); see also G-17 Underwriter's Guidance
at section titled, ``Underwriter Compensation and New Issue
Pricing.''
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Supplementary Material
Proposed Rule G-46 would set forth four supplementary material
sections:
Providing additional explanation regarding the MSRB's
expectations with respect to the reasonable basis a solicitor municipal
advisor must have for the representations described in Proposed Rule G-
46(d); \44\
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\44\ See supra discussion titled ``Representations to Solicited
Entities.''
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Explaining the relationship between a solicitor municipal
advisor's fair dealing obligations and the applicability of a federal
fiduciary duty for municipal advisors; \45\
---------------------------------------------------------------------------
\45\ See supra discussion titled ``Disclosures to Solicited
Entities.''
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Explaining the relationship between a municipal advisor's
obligations under Proposed Rule G-46 and Rule G-42; and
Providing additional detail regarding a solicitor
municipal advisor's compensation documentation and disclosure
obligations.\46\
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\46\ See supra discussion titled ``Documentation of the
Solicitor Relationship'' and ``Disclosures to Solicited Entities.''
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Supplementary Material .03 explains that municipal advisors should
be mindful that one may be, simultaneously, both a solicitor municipal
advisor for purposes of Proposed Rule G-46 and a non-solicitor
municipal advisor for purposes of Rule G-42. For example, a municipal
advisor may provide ``advice'' as defined in Rule G-42 to a municipal
entity (the ``advisory engagement'') and separately may act as a
solicitor municipal advisor with respect to that same municipal entity
or another municipal entity as contemplated in Proposed Rule G-46 (the
``solicitor municipal advisor engagement''). As a result, the municipal
advisor would be subject to Rule G-42 with respect to the advisory
engagement and would be subject to Proposed Rule G-46 with respect to
the solicitor municipal advisor engagement. Municipal advisors should
evaluate the activity undertaken with respect to each engagement to
determine which rule governs and ensure the written supervisory
procedures required under Rule G-44 reflect such.
Proposed Amendments to MSRB Rule G-8
Proposed amendments to Rule G-8 would add specific recordkeeping
obligations designed to help facilitate and document compliance with
Proposed Rule G-46. Specifically, they would add new subsection (viii)
\47\ requiring solicitor municipal advisors to make and keep the
following books and records:
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\47\ Today the MSRB also filed a proposed rule change to amend
MSRB Rule G-40, on advertising by municipal advisors, and amend MSRB
Rule G-8 by adding subparagraph (h)(viii) to the rule.
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Evidence that the disclosures required by Proposed Rule G-
46(b) were made in the manner required by that section;
A copy of each writing or writings required by Proposed
Rule G-46(c);
Documentation substantiating the solicitor municipal
advisor's reasonable basis for believing its representations as
described in Proposed Rule G-46(d) (e.g., a checklist confirming that
an investment adviser client's Form ADV was reviewed); and
Evidence that the disclosures required by Proposed Rule G-
46(e) were made in the manner described in Proposed Rule G-46(f) (e.g.,
automatic email delivery receipt).
[[Page 9568]]
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2) of the Exchange Act,\48\ which provides that the
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.
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\48\ 15 U.S.C. 78o-4(b)(2).
---------------------------------------------------------------------------
Section 15B(b)(2)(C) of the Exchange Act \49\ 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.
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
Prevention of Fraudulent and Manipulative Acts and Practices
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Exchange Act \50\ because the proposed rule
change would help prevent fraudulent and manipulative acts and
practices. It would do so by expressly prohibiting solicitor municipal
advisors from making a representation that the solicitor municipal
advisor knows or should know is either materially false or misleading
regarding the capacity, resources or knowledge of the solicitor client.
It also would require solicitor municipal advisors to have a reasonable
basis for any material representations the solicitor municipal advisor
makes to a solicited entity regarding the capacity, resources or
knowledge of the solicitor client. The proposed rule change also
expressly would prohibit solicitor municipal advisors from delivering
an inaccurate invoice for fees or expenses. The MSRB believes that the
express prohibition of such conduct--all of which could be forms of
fraudulent and manipulative acts and practices themselves--would help
prevent fraudulent and manipulative acts and practices. Finally, the
proposed rule change would provide that solicitor municipal advisors
would be prohibited from making payments for the purpose of obtaining
or retaining an engagement to perform municipal advisory activities
subject to specified exceptions. Among other things, this would
effectively require solicitor municipal advisors to use only associated
persons or other regulated solicitor municipal advisors to obtain
business on their behalf. This would help ensure that only regulated
persons--who are subject to rules designed to prevent fraudulent and
manipulative acts and practices--may engage in solicitation activities
on behalf of a solicitor municipal advisor.
---------------------------------------------------------------------------
\50\ Id.
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Fostering Cooperation and Coordination
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Exchange Act \51\ because it would foster
cooperation and coordination with persons engaged in regulating
transactions in municipal securities and municipal financial products.
It would do so by requiring solicitor municipal advisors to document
their relationships in writing that includes certain minimum content
that is vital to the solicitor municipal advisor, its clients and
applicable regulators in understanding the material terms of an
engagement--including the scope of agreed-upon activities, information
pertaining to compensation for such activities and whether the
solicitation of municipal entities and/or obligated persons is
anticipated. This documentation obligation would help promote certainty
as to the applicable regulatory scheme for any engagement since only
solicitations of municipal entities and obligated persons would be
subject to Proposed Rule G-46, whereas other solicitations may fall
within the jurisdiction of the rules of other regulators (e.g., the
Commission or the Financial Industry Regulatory Authority). The MSRB
believes that this documentation obligation (and related books and
records obligations stemming from the proposed amendments to Rule G-8)
would assist examining authorities in understanding the solicitation
arrangement and would provide them with necessary information to assist
in evaluating a solicitor municipal advisor's compliance with relevant
obligations. The MSRB further believes that the proposed amendments to
Rule G-8 (with the ensuing application of existing Rule G-9 on records
preservation) would help create an audit trail to assist examination
and enforcement authorities in their examination for compliance with
these prohibitions, fostering cooperation and coordination between
regulatory authorities.
---------------------------------------------------------------------------
\51\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
Protection of Municipal Entities, Obligated Persons, and the Public
Interest
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Exchange Act \52\ because it would protect
municipal entities, obligated persons, and the public interest. It
would do so by requiring solicitor municipal advisors to disclose in
writing all of their material conflicts of interest and material legal
or disciplinary events to the entities that determine whether to hire
such solicitor municipal advisors. The MSRB believes that this
requirement would increase solicitor municipal advisor accountability
and discourage conduct inconsistent with a solicitor municipal
advisor's obligations because such conduct would be required to be
disclosed in information provided to clients, thereby incentivizing
firms to refrain from such conduct or risk not retaining an engagement.
The MSRB also believes that such requirement would simultaneously
provide prospective clients with valuable information that is directly
relevant to their solicitor municipal advisor hiring decisions.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The proposed rule change also would protect municipal entities and
obligated persons by better aligning the obligations owed by solicitor
municipal advisors to their clients with those applicable to non-
solicitor municipal advisors to their clients under Rule G-42. Like
non-solicitor municipal advisors, solicitor municipal advisors would be
required to: disclose their material conflicts of interest; \53\
document their relationships in writing; \54\ and refrain from certain
conduct such as making certain materially false or misleading
representations,\55\ delivering a materially inaccurate invoice,\56\
and making certain payments for the purpose of obtaining or retaining
an
[[Page 9569]]
engagement.\57\ These Rule G-42 provisions protect municipal entities
by assisting non-solicitor municipal advisors in complying with, or
helping prevent breaches of, applicable obligations such as the duty of
fair dealing, which is owed under Rule G-17 by all municipal advisors
to all persons. These protections also would be provided to municipal
entities and obligated persons solicited by solicitor municipal
advisors. Additionally, as municipal advisors are permitted to engage
in both solicitor municipal advisor activity and non-solicitor
municipal advisor activity, the MSRB believes that the promotion of
consistent standards among these municipal advisors, where applicable,
is appropriate since the municipal entities and obligated persons
solicited by solicitor municipal advisors and the municipal entity and
obligated person clients of non-solicitor municipal advisors may
reasonably expect a certain baseline level of conduct from all
municipal advisors. More specifically, the MSRB believes that the
proposed rule change would protect municipal entities and obligated
persons by requiring solicitor municipal advisors to disclose to
solicited entities all material facts about the solicitation including
certain information pertaining to the solicitor municipal advisor's:
(i) role and compensation; (ii) conflicts of interest; and (iii)
client. The MSRB believes that the role disclosures would help ensure
that solicited entities (which are municipal entities and obligated
persons) understand the role of a solicitor municipal advisor. The MSRB
also believes that such disclosures would help to clarify potential
confusion about the difference between a solicitor municipal advisor
and other municipal advisors since they owe very different obligations
to municipal entities. The proposed compensation disclosures are
designed to help ensure that solicited entities have important
information about how a solicitor municipal advisor is compensated to
help inform the solicited entity's analysis of the nature and extent of
a solicitor municipal advisor's incentive to recommend that a solicited
entity hire a specific solicitor client. Finally, the MSRB believes
that disclosure related to the solicitor municipal advisor's client
would protect municipal entities, obligated persons and the public
interest by ensuring that--at any early stage-- solicited entities are
directed to disclosures about the entities the solicitor municipal
advisor represents including, but not limited to, information about the
disciplinary history of the solicitor municipal advisor's clients.
---------------------------------------------------------------------------
\53\ See Rule G-42(b)(i)(F).
\54\ See Rule G-42(c) and Proposed Rule G-46(c).
\55\ See Rule G-42(e)(i)(C) and Proposed Rule G-46(d)(i).
\56\ See Rule G-42(e)(i)(B) and Proposed Rule G-46(g)(i).
\57\ See Rule G-42(e)(i)(E) and Proposed Rule G-46(g)(ii).
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Section 15B(b)(2)(L)(iv) of the Exchange Act \58\ requires that
rules adopted by the Board not impose a regulatory burden on small
municipal advisors that is not necessary or appropriate in the public
interest and for the protection of investors, municipal entities, and
obligated persons, provided that there is robust protection of
investors against fraud. The MSRB believes that the proposed rule
change is consistent with Section 15B(b)(2)(L)(iv) of the Exchange Act
\59\ because the proposed rule change would impose on all municipal
advisors, including small municipal advisors, only the necessary and
appropriate regulatory burdens needed to promote compliance with the
proposed rule change. The proposed rule change represents a balanced
approach to prescriptive standards with flexibility for large and small
municipal advisors alike. For example, the MSRB believes that the
flexibility to provide certain disclosures to a solicited entity via a
third party (i.e., the solicitor's client) could be particularly
helpful for small municipal advisors who may be less likely to be
involved in subsequent communications with a solicited entity and,
therefore, may need to rely on their clients to pass along certain
disclosures at the time of the solicitor client's engagement. Finally,
the MSRB seeks to harmonize standards, where appropriate, among those
applicable to solicitor municipal advisors, non-solicitor municipal
advisors and Commission-registered investment advisers such that those
that engage in conduct that would make them two or more of the above
could leverage some of the existing processes to comply with relevant
obligations under a comparable regime. The MSRB believes that this will
minimize the regulatory burden on all solicitor municipal advisors,
including small municipal advisors.
---------------------------------------------------------------------------
\58\ 15 U.S.C. 78o-4(b)(2)(L)(iv).
\59\ Id.
---------------------------------------------------------------------------
The MSRB also believes that the proposed rule change is consistent
with Section 15B(b)(2)(G) of the Exchange Act,\60\ which provides that
the MSRB's rules shall prescribe records to be made and kept by
municipal securities brokers, municipal securities dealers, and
municipal advisors and the periods for which such records shall be
preserved. The proposed rule change would require solicitor municipal
advisors to make and keep current evidence that the disclosures
required by Proposed Rule G-46 were made in the manner required by the
proposed rule change, a copy of the writing(s) documenting the
relationship, and documentation substantiating the solicitor municipal
advisor's reasonable basis belief regarding its representations. The
MSRB believes that the proposed amendments to Rule G-8 related to
recordkeeping (with the ensuing application of existing Rule G-9 on
records preservation) would promote compliance and facilitate
enforcement of Proposed Rule G-46, other MSRB rules, and other
applicable securities laws and regulations.
---------------------------------------------------------------------------
\60\ 15 U.S.C. 78o-4(b)(2)(G).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Act \61\ requires that MSRB rules not
be designed to impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. The MSRB
believes that Proposed Rule G-46 on the duties of solicitor municipal
advisors and Proposed Amended Rule G-8 on recordkeeping obligations
would not impose any new burden on competition and, in fact, may
relieve a burden on competition. The MSRB considered the economic
impact associated with the proposed rule change, including a comparison
to reasonable alternative regulatory approaches, relative to the
baseline.\62\ The MSRB believes that the proposed rule change would not
place a burden on competition as it would apply a regulatory regime to
all solicitor municipal advisors similar to the regime that currently
exists for non-solicitor municipal advisors under Rule G-42 and Rule G-
8 on recordkeeping, and for underwriters under the Rule G-17
Underwriter's Guidance. Additionally, it would promote clearer
regulatory requirements and expectations, enhancing the transparency
and protection for recipients of solicitations and ensuring fair
dealings between the market participants.
---------------------------------------------------------------------------
\61\ 15 U.S.C. 78o-4(b)(2)(C).
\62\ See Policy on the Use of Economic Analysis in MSRB
Rulemaking, 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 approach.
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Furthermore, Section 15B(b)(2)(L)(iv) of the Act \63\ provides that
MSRB rules may not impose a regulatory burden on small municipal
advisors that is not necessary or appropriate in the public
[[Page 9570]]
interest and for the protection of investors, municipal entities, and
obligated persons, provided that there is robust protection of
investors against fraud. The MSRB believes the proposed rule change
would apply equally to all solicitor municipal advisors, and on an
ongoing year-by-year basis, the additional regulatory burden imposed
would be proportional to each solicitor municipal advisory firm's size
and business activities and hence would not affect competition.
Therefore, the MSRB believes the proposed rule change would not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 78o-4(b)(2)(L)(iv).
---------------------------------------------------------------------------
The purpose of amending Rule G-8 and proposing Proposed Rule G-46
would be to codify certain statements on the obligations of solicitor
municipal advisors currently outlined in the G-17 Excerpt for Solicitor
Municipal Advisors. Further, Proposed Rule G-46 would better align the
duty and obligations of solicitor municipal advisors with those for
underwriters under Rule G-17, for non-solicitor municipal advisors
under Rule G-42, and for solicitors that undertake certain
solicitations on behalf of investment advisers under the SEC's
investment adviser regime.
The core standards applicable to non-solicitor municipal advisors
and underwriters under MSRB Rule G-42 and Rule G-17 are highlighted in
a standalone rule for non-solicitor municipal advisors and a standalone
interpretation that was filed with and approved by the SEC,
respectively. In contrast, the G-17 Excerpt for Solicitor Municipal
Advisors was issued in a notice that largely summarized existing rules
and obligations applicable to solicitor municipal advisors and the
standards set forth in the G-17 Excerpt for Solicitor Municipal
Advisors were not as robust as the standards set forth in the proposed
rule change. The proposed rule change is intended to enhance the
consistency of regulatory standards and should therefore remove burdens
to competition by providing clear expectations for all solicitor
municipal advisors.
In conjunction with Proposed Rule G-46, the proposed amendments to
Rule G-8 would add specific language relating to solicitor municipal
advisors, which would facilitate recordkeeping compliance associated
with Proposed Rule G-46 and help ensure solicitor municipal advisor
accountability.
In contrast to the regulation of underwriters and non-solicitor
municipal advisors, the MSRB currently does not have any explicit
standards regarding documentation of a solicitor municipal advisor's
engagement. Nor does it have express standards regarding solicitor
municipal advisor disclosures of conflicts of interest. The MSRB
believes that a Proposed Amended Rule G-8 and a codified Proposed Rule
G-46 would result in informed, clearer regulatory standards and
expectations for all solicitor municipal advisors, which would not
impose a burden on competition because the rule would apply to all
solicitor municipal advisors equally. In addition, Proposed Amended
Rule G-8 and Proposed Rule G-46 would better align the obligations
imposed on solicitor municipal advisors with those applicable to non-
solicitor municipal advisors under Rule G-42, underwriters under the G-
17 Underwriter's Guidance, and investment advisers or their promoters
under the IA Marketing Rule.\64\
---------------------------------------------------------------------------
\64\ See 17 CFR 275.206(4)-1.
---------------------------------------------------------------------------
For all solicitor municipal advisors, the evaluation baseline is
Rule G-17 which applies to all municipal advisors (solicitor and non-
solicitor alike) and requires municipal advisors to deal fairly with
all persons and not engage in any deceptive, dishonest, or unfair
practice and the G-17 Excerpt for Solicitor Municipal Advisors which
applies to solicitor municipal advisors. Another baseline for
consideration is the IA Marketing Rule \65\ for investment advisers, a
merged rule that replaces the former advertising and cash solicitation
rules for investment advisers. Thus, for a subgroup of solicitor
municipal advisors who undertake solicitations on behalf of an
investment adviser that is already subject to the requirements, the
burden for compliance is already in place partially, as these solicitor
municipal advisors are presumably already complying with the conditions
outlined by the IA Marketing Rule. Finally, for a subset of municipal
advisory firms who conduct both solicitation and non-solicitation
business activities, the baseline is comprised of Rule G-17 and Rule G-
42 on duties of non-solicitor municipal advisors.
---------------------------------------------------------------------------
\65\ Id.
---------------------------------------------------------------------------
The MSRB also evaluated reasonable alternative regulatory
approaches. In one alternative, the MSRB would create a new Rule G-46
for solicitor municipal advisors, but the text of the rule would state
that solicitors should follow the SEC's IA Marketing Rule. The main
benefit of this would be to completely harmonize between MSRB and SEC
rules for solicitor municipal advisors who solicit municipal entities
and obligated persons for investment advisory services. However, this
alternative would reduce alignment with MSRB Rule G-42 for solicitor
municipal advisors who are also non-solicitor municipal advisors and
are obligated to comply with Rule G-42. Since all municipal advisors
are permitted to engage in both solicitation activity and non-
solicitation activity, the MSRB deems Proposed Rule G-46 superior to
this alternative as it would be a tailored rule for solicitor municipal
advisors that aligns with Rule G-42 where appropriate and aligns with
the IA Marketing Rule where appropriate. Therefore, the MSRB believes
that the approach taken in Proposed Rule G-46 for solicitor municipal
advisors is warranted under the Exchange Act.
Benefits
The main benefit of Proposed Amended Rule G-8 and Proposed Rule G-
46 would be to codify certain statements and provide clarification on
regulatory obligations for solicitor municipal advisors with regard to
their duties. By aligning Proposed Rule G-46 with Rule G-42, Rule G-17
and the IA Marketing Rule \66\ where appropriate, Proposed Amended Rule
G-8 and Proposed Rule G-46 would enhance the consistency of regulatory
standards, thereby removing burdens to competition because it would
provide clear expectations for all solicitor municipal advisors that
are generally consistent with the standards under the comparative
rules.
---------------------------------------------------------------------------
\66\ 17 CFR 275.206(4)-1.
---------------------------------------------------------------------------
For example, Proposed Rule G-46 would make clear the types of
disclosures that a solicitor municipal advisor would be expected to
make to solicited entities in order to ensure that such entities have
access to material information to inform their decisions pertaining to
whether to retain the solicitor municipal advisor's client(s). This
information also would assist these solicited entities in evaluating
the solicitor municipal advisor's potential conflicts of interest
associated with making such solicitations. Additionally, by codifying
much of the G-17 Excerpt for Solicitor Municipal Advisors with
additional requirements, Proposed Rule G-46 expressly would prohibit
solicitor municipal advisors from making certain false or materially
misleading representations about their clients and would require them
to have a reasonable basis for similar representations in order to help
ensure the protection of the municipal entities and obligated persons
solicited by such solicitor municipal advisors.
[[Page 9571]]
Furthermore, the codification of certain existing requirements and
the expansion of those standards in the proposed rule change would
enhance transparency for the recipients of the new disclosures that
would be required by the proposed rule change and promote clearer
regulatory obligations for solicitor municipal advisors. The proposed
rule change also would provide protection for municipal entities and
obligated persons of solicitations, further promoting fair dealings
between the market participants. As mentioned above, the additional
requirements also would align some of the obligations imposed on
solicitor municipal advisors with those applicable to non-solicitor
municipal advisors under Rule G-42 and underwriters under the G-17
Underwriter's Guidance as well as those applicable to certain
endorsements and testimonials in connection with certain investment
adviser advertisements under the SEC's investment adviser regime. This
alignment would level the playing field by applying somewhat similar
obligations for different regulated entities and increasing the
efficiency for regulatory entities tasked with examining and enforcing
such requirements and regulated entities seeking compliance. In
particular, Proposed Rule G-46 would require solicitor municipal
advisors to document their relationships in writing to the solicitor
client, which would be instrumental in assisting examining authorities
and other regulators to determine the relevant regulatory regime
applicable to a solicitor municipal advisor's solicitation.
Costs
The MSRB acknowledges that solicitor municipal advisors likely
would incur costs, relative to the baseline state, to meet the
standards of conduct and duties contained in the proposed rule change.
These changes may include the one-time upfront costs related to setting
up and/or revising policies and procedures, as well as the ongoing
costs such as compliance costs associated with maintaining and updating
disclosures. Solicitor municipal advisors also may have additional
costs associated with additional record-keeping.
For the upfront costs, it is possible that solicitor municipal
advisors may need to seek the appropriate advice of in-house or outside
legal and compliance professionals to revise policies and procedures in
compliance with Proposed Amended Rule G-8 and Proposed Rule G-46.
Solicitor municipal advisors also may incur costs related to standards
of training in preparation for the implementation of Proposed Amended
Rule G-8 and Proposed Rule G-46. Assuming solicitor municipal advisors
currently already have policies and procedures in place in relation to
the G-17 Excerpt for Solicitor Municipal Advisors, the upfront costs
for Proposed Amended Rule G-8 and Proposed Rule G-46 should be
incremental. Furthermore, the upfront costs may be lower for solicitor
municipal advisors that are also non-solicitor municipal advisors as
they presumably are already complying with similar Rule G-8 and Rule G-
42 requirements. Similarly, such costs may be lower for solicitor
municipal advisors who are soliciting on behalf of investment advisory
business and therefore presumably are already complying with the IA
Marketing Rule.\67\
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\67\ 17 CFR 275.206(4)-1.
---------------------------------------------------------------------------
For the ongoing costs, solicitor municipal advisors may incur
compliance costs related to each solicitation, including costs
pertaining to creating and maintaining books and records. Firms may
have to make changes to their current recordkeeping practices in order
to satisfy the additional requirements of Proposed Amended Rule G-8 and
Proposed Rule G-46 for the specific disclosures to a solicited entity
as outlined above, such as the creation of disclosures for all material
information regarding the role and compensation of the solicitor
municipal advisor; documentation of the relationship between a
solicitor municipal advisor and its solicitor client; disclosure of
material conflicts of interest; and certain payments made by a
solicitor municipal advisor to another solicitor municipal advisor.
Table 1 below shows the number of solicitor municipal advisory
firms registered with the MSRB as of the end of January 2022. The table
groups together solicitor municipal advisor only firms (meaning those
firms that indicated to the MSRB that they engage in solicitation
activity only and not non-solicitation municipal advisory activity) and
separately groups together those solicitor municipal advisor firms that
indicated to the MSRB in Form A-12 that they engage in both
solicitation and non-solicitation municipal advisory activities (e.g.,
under some engagements, they conduct solicitations of municipal
entities and/or obligated persons whereas pursuant to other
engagements, they provide covered advice to municipal entities and/or
obligated persons). Table 1 also illustrates the type of solicitation
activity in which solicitor municipal advisory firms registered with
the MSRB engage (i.e., solicitations for investment advisory business
versus other solicitations), as reported by solicitor municipal
advisory firms on Form A-12.\68\
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\68\ Pursuant to MSRB Rule A-12, on registration, all municipal
advisors, including solicitor municipal advisors, must register with
the MSRB prior to engaging in any municipal advisory activity. Form
A-12 is the single, consolidated form for registrants to provide the
MSRB with registration information required under Rule A-12. Among
other things, Form A-12 is used to: register with the MSRB, update
registration information following a change to any information
contained in the form and affirm registration information on an
annual basis. The data in Tables 1 and 2 below regarding the number
and breakdown of solicitor municipal advisor firms and the types of
activities in which they engage is derived from Form A-12 data
submitted to the MSRB.
---------------------------------------------------------------------------
Table 2 illustrates preliminary estimates for both the upfront and
ongoing compliance costs assuming implementation of Proposed Amended
Rule G-8 and Proposed Rule G-46 for each solicitor municipal advisory
firm in its respective group who chooses to continue their solicitation
business practice in the future state.\69\ As of January 2022, there is
a total of 86 municipal advisory firms registered with the MSRB who
indicated solicitation business activities on Form A-12, with 17 of
those firms indicating that they engage solely in solicitation
activities and the remaining 69 firms indicating they engage in both
solicitation and non-solicitation municipal advisory activities.\70\ Of
the
[[Page 9572]]
17 municipal advisory firms engaging solely in solicitation activities,
16 firms (9 + 7) indicate solicitation activities made on behalf of
investment advisory business and one firm indicates solicitation
activities only made on behalf of non-investment advisory business. Of
the 69 municipal advisory firms engaging in both solicitation and non-
solicitation activities, 47 firms (20 + 27) indicate solicitation
activities made on behalf of investment advisory business and 22 firms
indicate solicitation activities only made on behalf of non-investment
advisory business.
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\69\ Hourly rate data are gathered from the 2021 SEC's
Amendments Regarding the Definition of ``Exchange'' and
``Alternative Trading Systems (ATSs) That Trade U.S. Treasury and
Agency Securities, National Market System (NMS) Stocks, and Other
Securities,'' 17 CFR parts 232, 240, 242, and 249. The SEC's
Economic Analysis utilizes the Securities Industry and Financial
Markets Association, Management & Professional Earnings in the
Securities Industry--2013 Report for the hourly rates of various
financial industry market professionals. To compensate for
inflation, ``the 2013 professional wage rates are adjusted for an
inflation rate of 17.45 percent based on the Bureau of Labor
Statistics data on Consumer Price Index for all Urban Consumers
(CPI-U) between September 2013 and September 2021'' (Page 452). The
MSRB added an additional five percentage points for relevant roles
mentioned by the SEC and captured in SIFMA's 2013 Report to account
for an increase in salary inflation for 2022. The inflation-adjusted
effective hourly wage rates for in-house attorneys are estimated at
$465 ($380 x 1.2245), $594 ($485 x 1.2245) for chief compliance
officers, $347 ($283 x 1.2245) for compliance managers, and $490
($400 x 1.2245) for outside counsel.
\70\ As previously mentioned, the MSRB utilized Form A-12 data
for the economic analysis provided. Of note, the MSRB identified
that between FY 2021-Q2 (January-March) and FY 2022-Q2 there was a
11.7% decline in the total number of registered municipal advisory
firms. The number of solicitor municipal advisory firms, including
firms with both solicitation and non-solicitation activities, also
decreased from 105 to 86 firms during the same period.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN14FE23.014
[GRAPHIC] [TIFF OMITTED] TN14FE23.015
BILLING CODE 8011-01-C
As previously mentioned, the incremental costs for the subgroup of
solicitor municipal advisory firms soliciting on behalf of investment
advisory business may be lower than other solicitor municipal advisory
firms to the extent that such solicitor municipal advisors engage in
solicitations that are subject to the IA Marketing Rule.\72\ These
solicitor municipal advisors are presumed to have policies and
procedures consistent with, although not necessarily identical to, some
of the requirements under Proposed Amended Rule G-8 and Proposed Rule
G-46. In addition, the MSRB assumes that municipal advisory firms that
engage in both solicitation and non-solicitation activities are
currently in compliance with Rule G-8 and Rule G-42 with respect to
their non-solicitation municipal advisory activities. The MSRB believes
these firms may be able to leverage some of their existing Rule G-8 and
Rule G-42 policies and procedures, resulting in a potentially lower
upfront cost for implementing Proposed Amended Rule G-8 and Proposed
Rule G-46 as compared to municipal advisory firms that engage in
solicitation activities only. For example, municipal advisory firms
that engage in both solicitation and non-solicitation activities are
likely accustomed to documenting their relationships in an engagement
letter and may be able to leverage their existing supervisory and
compliance framework to extend it to their solicitation activities.
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\71\ The MSRB uses the higher hourly rate in each category of
costs. For example, while the revision of policies and procedures
can be conducted by either an in-house attorney (average hourly rate
$465) or outside counsel (average hourly rate $490), the MSRB
chooses the higher hourly rate for this analysis to be aggressive in
the cost estimate. Similarly, for both the training and the ongoing
compliance cost per each solicitation, the task can be performed by
either a Chief Compliance Officer (average hourly rate of $594), an
in-house compliance attorney (average hourly rate $465) or an in-
house compliance manager (average hourly rate $347), and the MSRB
chooses the Chief Compliance Officer rate for the training and the
compliance attorney rate for the ongoing compliance cost in the
estimates.
\72\ 17 CFR 275.206(4)-1.
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Effect on Competition, Efficiency, and Capital Formation
The MSRB believes that Proposed Amended Rule G-8 and Proposed Rule
G-46 would neither impose a burden on competition nor hinder capital
formation, as the proposed rule changes bring a similar regulatory
regime to solicitor municipal advisors that currently exists for non-
solicitor municipal advisors under Rule G-8 on
[[Page 9573]]
recordkeeping and Rule G-42 and for underwriters under the G-17
Underwriter's Guidance. The MSRB believes that the proposed rule change
would improve the municipal securities market's operational efficiency
by providing solicitor municipal advisors with a clearer understanding
of regulatory obligations, as well as enhancing the transparency and
protection for recipients of the solicitations, further promoting fair
dealings between market participants.
At present, the MSRB is unable to quantitatively evaluate the
magnitude of the efficiency gains or losses, but believes the overall
benefits accumulated over time for market participants would outweigh
the upfront costs of revising policies and procedures and ongoing
compliance and recordkeeping costs by solicitor municipal advisors.
Finally, the proposed rule change would apply equally to all
solicitor municipal advisors. Therefore, the MSRB does not expect that
Proposed Amended Rule G-8 and Proposed Rule G-46 would impose a burden
on competition with respect to solicitor municipal advisory services,
as the upfront costs are expected to be relatively minor for all
solicitor municipal advisory firms while the ongoing costs are expected
to be proportionate to the size and business activities of each
solicitor municipal advisory firm. In fact, the proposed rule change
may relieve a burden on competition. Therefore, the MSRB believes the
proposed rule change would not impose any burden on competition that is
not necessary or appropriate in furtherance of the purposes of the
Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The MSRB solicited comment on the proposed rule change in two
requests for comment. The MSRB first sought comment on a draft of Rule
G-46 in a request for comment that was published in March 2021 (the
``First Request for Comment'').\73\ The MSRB again sought comment on a
revised draft of Rule G-46 that was published in December 2021 (the
``Second Request for Comment'').\74\
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\73\ See MSRB Notice Request for Comment on Fair Dealing
Solicitor Municipal Advisor Obligations and New Draft Rule G-46
(March 17, 2021) available at: https://msrb.org/sites/default/files/2021-07.pdf.
\74\ See MSRB Notice 2021-18, Second Request for Comment on Fair
Dealing Solicitor Municipal Advisor Obligations and New Draft Rule
G-46 (December 15, 2021) available at: https://msrb.org/sites/default/files/2021-18.pdf.
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The MSRB received three comment letters in response to the First
Request for Comment \75\ and another three comment letters in response
to the Second Request for Comment.\76\ The comments are summarized
below by topic and MSRB responses are provided.
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\75\ Comments were received in response to the First Request for
Comment from: National Association of Municipal Advisors: Letter
from Susan Gaffney, Executive Director, dated June 17, 2021 (``NAMA
I''); Securities Industry and Financial Markets Association: Letter
from Leslie M. Norwood, Managing Director and Associate General
Counsel, dated June 17, 2021 (``SIFMA I''); and 3PM I, supra note 8.
Comment letters are available here.
\76\ Comments were received in response to the Second Request
for Comment from: National Association of Municipal Advisors: Letter
from Susan Gaffney, Executive Director, dated March 15, 2022 (``NAMA
II''); Securities Industry and Financial Markets Association: Letter
from Leslie M. Norwood, Managing Director and Associate General
Counsel, dated March 15, 2022 (``SIFMA II''); and Third-Party
Marketers Association: Letter form Donna DiMaria, Chairman of the
Board of Directors and Chair of the 3PM Regulatory Committee, dated
March 15, 2022 (``3PM II''). Comment letters are available here.
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As described above, Proposed Rule G-46 would establish the core
standards of conduct and duties of solicitor municipal advisors when
engaging in certain solicitation activities. The proposed rule also
would codify certain statements from the G-17 Excerpt for Solicitor
Municipal Advisors and add additional requirements that would better
align some of the obligations imposed on solicitor municipal advisors
with those applicable to: non-solicitor municipal advisors under Rule
G-42; underwriters under Rule G-17; and certain solicitations
undertaken on behalf of third-party investment advisers under the IA
Marketing Rule.
Harmonization With Other Rules
Commenters were supportive of harmonization efforts between the
standards set forth in the requests for comment and those applicable to
other regulated entities. In response to the First Request for Comment,
commenters urged even more harmonization with those standards,\77\ in
particular Rule G-42 since issuers would be familiar with the
requirements applicable to municipal advisors and greater conformance
with those standards would permit issuers to receive disclosures in a
format with which they may already be familiar.\78\
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\77\ See NAMA I at 1-2; see generally SIFMA I.
\78\ See NAMA I at 1-2.
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The MSRB made a number of refinements to draft Rule G-46, as
reflected in the proposed rule change. Key changes are discussed in the
context of the MSRB's summary of comments and responses thereto below.
Applicability of Fiduciary Duty
In the First Request for Comment, the MSRB did not specifically
include any draft text regarding the application of a fiduciary duty to
solicitor municipal advisors. However, the MSRB sought comment as to
whether such a statement would be helpful to solicited entities.
Commenters generally supported adding a clear statement to the rule
text indicating that solicitor municipal advisors do not owe a federal
fiduciary duty to either their clients or the municipal entities and
obligated persons that they solicit.\79\ They also advocated for a
similar mandatory disclosure to solicited entities.\80\ While one
commenter did not see an appreciable benefit to requiring any such
disclosure, this commenter did not raise any objections to such
disclosure either.\81\
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\79\ See SIFMA I at 1-2.
\80\ See NAMA I at 1 and SIFMA I at 4.
\81\ See 3PM I at 7.
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In response, in the Second Request for Comment, the MSRB revised
draft Rule G-46 to add additional supplementary material to the draft
rule. This supplementary material expressly stated that solicitor
municipal advisors must comply with their fair dealing obligations
pursuant to Rule G-17 on fair dealing, but that they do not owe a
fiduciary duty to their municipal entity and obligated person clients
in connection with their solicitation activities. The MSRB also revised
the draft rule text to require a similar disclosure to be provided to
the solicitor municipal advisor's solicited entities. The substance of
this supplementary material as well as the draft disclosure requirement
also are reflected in the proposed rule change.
Solicitor Representations
In response to the First Request for Comment, draft rule text set
forth standards regarding solicitor municipal advisor representations
to solicited entities. Commenters generally urged the MSRB to narrow
these draft standards.\82\ One commenter suggested that the standards
should only apply to a subset of a solicitor's representations
(generally regarding the capacity and resources of the municipal
advisor). This commenter also suggested that the applicable standard
more closely mirror that posed in the G-17 Excerpt for Solicitor
Municipal Advisors.\83\
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\82\ See SIFMA I 2-3.
\83\ See id. at 2.
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In the Second Request for Comment, the MSRB revised the draft rule
text accordingly and in a manner that is consistent with the standard
set forth in
[[Page 9574]]
the proposed rule change. The MSRB believes that this more narrow
standard is consistent with the standard applicable to non-solicitor
municipal advisors and that these standards, in concert with a
solicitor municipal advisor's Rule G-17 fair dealing obligations, offer
appropriate protections to entities solicited by solicitor municipal
advisors.
Prohibited Conduct
The rule text in the First Request for Comment did not include a
section setting forth specific conduct that would expressly be
prohibited. One commenter suggested that the MSRB add such language to
the rule and that such prohibitions could largely be drawn from the
specifically prohibited conduct under Rule G-42.\84\ In the Second
Request for Comment, the MSRB proposed a new section to draft Rule G-46
that would prohibit solicitor municipal advisors from: (i) receiving
excessive compensation and (ii) delivering a materially inaccurate
invoice. Additionally, the MSRB sought comment as to how to determine
that compensation for a solicitation is excessive.
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\84\ See id. at 3-4.
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In response to the Second Request for Comment, one commenter stated
that the provision to prohibit excessive compensation should be
excluded noting, in part, the challenges in determining the appropriate
compensation a solicitor municipal advisor should earn. In the
alternative, this commenter suggested that the MSRB should provide
guidance as to how excessive compensation should be determined.\85\ In
response, the MSRB determined not to include in the proposed rule
change the prohibition on excessive compensation. The MSRB notes that,
solicitor municipal advisors are already subject to a general duty of
fair dealing under Rule G-17 and unlike the clients of non-solicitor
municipal advisors, solicitor municipal advisor clients are not
municipal entities and investors, but instead are themselves regulated
financial professionals. As a result, the MSRB believes that the
potential benefits associated with such a prohibition may not be
sufficiently outweighed by the burdens associated with determining and
demonstrating compliance. Additionally, the proposed rule change
reflects the addition of another specified prohibition pertaining to
third-party payments, which was added in response to a comment
regarding the use of solicitors and the establishment of a more level
playing field between solicitor municipal advisors and dealers
(discussed further below).
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\85\ See 3PM II at 1-3.
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Documentation of the Relationship
In the First Request for Comment, draft Rule G-46 proposed to
require solicitor municipal advisors to document their relationship and
would have required such documentation to include relatively limited
content--in part to align with standards under the IA Marketing
Rule.\86\ One commenter stated that the draft requirement to document
the solicitor municipal advisor's engagement should be more aligned
with a non-solicitor municipal advisor's obligation to document its
municipal advisory relationship under Rule G-42 (which includes
additional terms not set forth in the First Request for Comment).\87\
In the Second Request for Comment, the MSRB added two additional draft
elements that would be required to be included in such engagement, both
of which are required under Rule G-42 and pertain to termination of the
relationship. The MSRB also sought comment as to whether additional
information regarding the terms of such documentation may be warranted.
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\86\ 17 CFR 275.206(4)-1.
\87\ See SIFMA I at 3.
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In response to the Second Request for Comment, while one commenter
stated that the draft text of draft Rule G-46 adequately captured the
description of the compensation arrangement,\88\ another commenter
stated that the MSRB should provide additional information regarding
the terms and amount of compensation to be received by a solicitor (a
term that would be required to be included in the documentation of the
relationship).\89\
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\88\ See SIFMA II at 8.
\89\ See 3PM II at 3.
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The proposed rule change currently reflects a new Supplementary
Material .04, which provides additional detail regarding written
disclosures pertaining to a solicitor's compensation. This
supplementary material is designed to inform a solicitor municipal
advisor's compliance with both its documentation obligation under
Proposed Rule G-46(c)(ii) and its disclosure obligation under Proposed
Rule G-46(e)(i)(D).
Required Disclosures
In the First Request for Comment, the MSRB proposed to require
solicitor municipal advisors to disclose to solicited entities certain:
role and compensation disclosures; conflicts disclosures; and solicitor
client disclosures. Commenters did not oppose a draft obligation to
make such disclosures but suggested that the MSRB modify them in some
respects. One commenter suggested that the MSRB could better align the
types of required disclosures with those required by non-solicitors
under Rule G-42.\90\ Another stated that the MSRB should require
solicitors to make certain disclosures to their clients regarding their
conflicts of interest and legal and disciplinary history.\91\ This
commenter also suggested that solicitor municipal advisors should be
permitted to customize their role-based disclosures.\92\
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\90\ See NAMA I at 1-2.
\91\ See 3PM I at 6-7.
\92\ See id. at 1.
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Commenters also suggested that the MSRB align the timing and manner
of required disclosures with the standards set forth under Rule G-42
\93\ and requested guidance from the MSRB as to what qualifies as
evidence that disclosure was provided in the manner set forth under the
draft rule. While one commenter supported an option to make oral
disclosures if the MSRB were to provide additional guidance in this
area, another commenter was not supportive of such an option.\94\
Finally, one commenter suggested a bifurcated approach to disclosures
for solicited entities, which would permit the solicitor municipal
advisor to provide an initial set of disclosures to the person
solicited followed by a second set of disclosures at the time of
capital allocation that would increase the likelihood that an official
with the authority to bind the solicited entity by contract would see
such disclosures.\95\
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\93\ See SIFMA I at 4.
\94\ See id. at 11.
\95\ See 3PM I at 3.
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In the Second Request for Comment, the MSRB revised the timing and
manner of such disclosures in response to comments received and also
sought comment as to whether disclosures should be permitted to be
provided orally, consistent with the IA Marketing Rule.\96\ In
response, commenters generally indicated that the revised timing and
manner of disclosures was workable and less burdensome than the
approach initially proposed.\97\ However, one commenter requested
clarification regarding whether, in the case of an indirect
solicitation, the disclosure requirement would be met if a solicitor
municipal advisor presents the requisite disclosures to an intermediary
to be passed on to an official of the solicited entity.\98\
Additionally, two commenters
[[Page 9575]]
stated that disclosures should be provided in writing,\99\ while
another commenter responded that disclosures should be permitted to be
provided orally only if the MSRB can provide proper guidance as how to
meet a solicitor municipal advisor's books and records
obligations.\100\
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\96\ 17 CFR 275.206(4)-1.
\97\ See 3PM II at 7-8.
\98\ See 3PM II at 3-4.
\99\ See NAMA II at 2 and SIFMA II at 8.
\100\ See 3PM II at 6.
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In response to these comments, the proposed rule change currently
reflects a slightly modified approach as compared to that set forth in
the Second Request for Comment. As discussed above, a solicitor
municipal advisor would be expected to provide the first set of
disclosures for a solicited entity to the person actually solicited.
For indirect solicitations, the second set of disclosures must be
presented to an official of the solicited entity. However, the proposed
rule change expressly provides that an intermediary would be permitted
to pass such disclosures on to such official. After reviewing the
comments received, the MSRB determined to retain the requirement that
all disclosures be provided in writing.
The MSRB believes that it is important that all solicited entities
receive consistent role disclosures from the solicitor municipal
advisors that solicit them. Accordingly, the proposed rule change
requires solicitor municipal advisors to use identical language in
connection with their role disclosures. The MSRB also believes that as
registered municipal advisors, solicitor municipal advisors have been
required to keep appropriate books and records in order to show
compliance with other relevant MSRB rules and that they can leverage
similar processes and experiences to determine what evidence would
establish that disclosures were made in the manner required by the
proposed rule change. If compliance resources would assist solicitor
municipal advisors in their compliance efforts, the MSRB is prepared to
produce such resources as solicitor municipal advisors begin to
implement new policies and procedures to comply with Proposed Rule G-
46, if approved by the Commission.\101\
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\101\ Additionally, if the proposed rule change is approved, the
MSRB expects to revise the G-17 Excerpt for Solicitor Municipal
Advisors to reflect the adoption of Proposed Rule G-46.
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Clarification of Solicitor Municipal Advisory Activity
Commenters asked the MSRB to provide guidance on certain areas
relevant to the definition of a municipal advisor, including when the
solicitation of an obligated person would cause one to be a solicitor
municipal advisor as well as when the solicitation of an intermediary
of a municipal entity would cause one to be a solicitor municipal
advisor.
The MSRB believes that the more appropriate regulator to whom to
direct such comments may be the Commission. Commenters may wish to
consult the Commission's set of Frequently Asked Questions pertaining
to registration as a municipal advisor.\102\
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\102\ See SEC, Registration of Municipal Advisors Frequently
Asked Questions, available at: SEC.gov Registration of Municipal
Advisors Frequently Asked Questions.
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The Use of Solicitors
One commenter emphasized the importance of creating a level playing
field between dealers and municipal advisors, noting that under Rule G-
38, on solicitation of municipal securities business, dealers are
currently prohibited from providing payment to unaffiliated persons for
a solicitation of municipal securities business on behalf of the
dealer.\103\ This commenter suggested that a similar standard should
apply with respect to solicitor municipal advisors, such that Proposed
Rule G-46 expressly should prohibit solicitor municipal advisors from
paying other third-party solicitors to solicit municipal advisory
business on their behalf. This commenter further suggested that, if the
MSRB deemed not to extend this prohibition to solicitor municipal
advisors, it should permit both dealers and municipal advisors to pay
solicitor municipal advisors for their third-party solicitation
efforts; provided, that such solicitors are subject to comprehensive
pay-to-play regulation.
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\103\ See SIFMA II at 2-3.
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As described above, Exchange Act Sections 15B(e)(4) and 15B(e)(9)
\104\ permit municipal advisors to engage in certain solicitation
activities on behalf of third-party dealers, municipal advisors, and
investment advisers. MSRB Rule G-38 (which pre-dates the amendments to
the Exchange Act that brought municipal advisors under the MSRB's
regulatory jurisdiction) prohibits dealers from paying third parties
for such solicitation activities. Non-solicitor municipal advisors are
similarly subject to a restriction on paying third parties for
solicitation activities on their behalf, subject to an exception.\105\
Unlike dealers, non-solicitor municipal advisors are permitted to pay
reasonable fees to another registered municipal advisor for such
solicitation.
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\104\ 15 U.S.C 78o-4(e)(4) and 15 U.S.C. 78o-4(e)(9).
\105\ See Rule G-42(e)(i)(E).
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In response to commenters and as discussed above, the proposed rule
change would extend a similar prohibition (and related narrow
exception) to solicitor municipal advisors. Because registered
municipal advisors are permitted to engage in both solicitation and
non-solicitation municipal advisory activities, the MSRB believes that
this is the appropriate approach to harmonization among regulated
entities. The MSRB notes that, unlike dealers, municipal advisors owe
their municipal entity clients a fiduciary duty, which may mitigate any
potential risk associated with municipal advisor use of third-party
solicitors. As a result, the MSRB believes that the current approach
taken in the proposed rule change represents an appropriate approach to
protecting municipal entities and obligated persons.
Books and Records
In the First Request for Comment, the MSRB proposed to include the
books and records obligations relevant to draft Rule G-46 in the text
of draft Rule G-46 itself. In the Second Request for Comment, the MSRB
explained that it proposed to take a similar approach with respect to
future MSRB rules or rule amendments. A number of commenters opposed
this standard and urged the MSRB to move the relevant books and records
requirements into Rule G-8, on books and records, as regulated entities
are more accustomed to consulting that rule to identify their relevant
books and records obligations.\106\ As discussed above, the proposed
rule change proposes to amend Rule G-8 to take such an approach.
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\106\ See SIFMA I at 4, NAMA II at 2 and SIFMA II at 4-5.
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Inadvertent Solicitations
In the First Request for Comment and the Second Request for
Comment, the MSRB did not propose a safe harbor for inadvertent
solicitations. One commenter recommended that the MSRB consider such a
safe harbor provision, modeled off of the safe harbor provision in Rule
G-42.\107\ The MSRB determined not to include such a provision in the
proposed rule change because even a one-time solicitation could result
in a solicitor municipal advisor's client getting hired and providing
services to the municipal entity or obligated person solicited. As a
result, the MSRB believes that it is important that the solicited
entity has
[[Page 9576]]
all of the protections afforded by the proposed rule change and that
all of the other obligations under Rule G-46 are met. The MSRB notes
that the proposed rule change would apply only to certain solicitations
on behalf of unaffiliated dealers, municipal advisors or investment
advisers. As a result, if a firm solicits an entity only on its own
behalf or even on behalf of an entity that controls, is controlled by,
or is under common control with the soliciting firm, the proposed rule
change would not apply.
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\107\ See SIFMA I at 6 and SIFMA II at 4.
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Other
In the First Request for Comment and the Second Request for
Comment, the MSRB inquired whether a municipal advisor client should be
required to make a bona fide effort to ascertain whether the solicitor
municipal advisor has provided to solicited entities the required
disclosures related to a municipal advisor client. The MSRB also sought
comment as to whether there would be value to solicited entities
receiving disclosures regarding the payments made by one solicitor
municipal advisor to another to facilitate a solicitation.
With respect to the bona fide effort requirement, commenters were
not supportive of such a requirement \108\ and the proposed rule change
does not impose this obligation on municipal advisor clients of
solicitor municipal advisors. With respect to the comment regarding
payments made by one solicitor municipal advisor to another, commenters
indicated that such disclosures are important and supported an
obligation to require such disclosures.\109\ The MSRB subsequently
refined draft Rule G-46 to require the disclosure of such payments.
This obligation appears in Proposed Rule G-46(e)(i)(E).
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\108\ See 3PM I at 8 and 3PM II at 7.
\109\ See SIFMA II at 9 and 3PM II at 7.
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One commenter suggested that reference to obligated persons should
be removed from the definitions of solicitor municipal advisor and
solicited entity, noting that they are not relevant for the purposes of
the activity in which solicitors typically engage.\110\ Because the
MSRB has an obligation to protect both municipal entities and obligated
persons and because solicitor municipal advisors may (within the scope
of their professional qualification activities) solicit obligated
persons, the MSRB believes that it is important that the proposed rule
change extend the same protections afforded to municipal entities under
Proposed Rule G-46 to obligated persons as well.
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\110\ See 3PM I at 4.
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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-2023-02 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-2023-02. 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-2023-02 and should be submitted on
or before March 7, 2023.
For the Commission, pursuant to delegated authority.\111\
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\111\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03060 Filed 2-13-23; 8:45 am]
BILLING CODE 8011-01-P
