Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Create New MSRB Rule G-46, on Duties of Solicitor Municipal Advisors, and To Amend MSRB Rule G-8, on Books and Records, 20004-20014 [2023-06899]

Download as PDF 20004 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices III. Date of Effectiveness of the Proposed Rules 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 (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Board consents, the Commission will: (A) by order approve or disapprove such proposed rules; or (B) institute proceedings to determine whether the proposed rules 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 rules are consistent with the requirements of Title I of 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/pcaob.shtml); or • Send an email to rule-comments@ sec.gov. Please include PCAOB–2023– 01 on the subject line. ddrumheller on DSK120RN23PROD with NOTICES1 Paper Comments • Send paper comments in triplicate to Vanessa Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to PCAOB–2023–01. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/pcaob.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rules that are filed with the Commission, and all written communications relating to the proposed rules 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 20549–1090, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing will also be available for inspection and copying at the principal office of the PCAOB. All comments received will be posted without charge; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to PCAOB–2023–01 and should be submitted on or before April 25, 2023. For the Commission by the Office of the Chief Accountant.13 Sherry R. Haywood, Assistant Secretary. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 II. Description of Proposed Rule Change As described further below, the proposed rule change consists of new Proposed Rule G–46, as modified by Amendment No. 1, and amendments to Rule G–8. [FR Doc. 2023–06961 Filed 4–3–23; 8:45 am] A. Solicitor Municipal Advisor Activity BILLING CODE 8011–01–P 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.8 The first category of municipal advisors is often referred to as non-solicitor municipal advisors, while the latter is sometimes referred to as solicitors.9 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97218; File No. SR–MSRB– 2023–02] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Create New MSRB Rule G–46, on Duties of Solicitor Municipal Advisors, and To Amend MSRB Rule G–8, on Books and Records March 29, 2023. I. Introduction On January 31, 2023, the Municipal Securities Rulemaking Board (‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to create a new rule, MSRB Rule G–46 (‘‘Rule G–46’’), on duties of solicitor municipal advisors (‘‘Proposed Rule G–46’’) and amend MSRB Rule G– 8 (‘‘Rule G–8’’), on books and records (‘‘Proposed Amended Rule G–8’’) (together, the ‘‘proposed rule change’’). The proposed rule change was published for comment in the Federal Register on February 14, 2023.3 The public comment period closed on March 13 17 nor do they impose any ‘‘additional requirements’’ on auditors. Section 103(a)(3)(C) of Sarbanes-Oxley. Accordingly, the Board has concluded that Section 103(a)(3)(C) of Sarbanes-Oxley does not apply to this rulemaking. 7, 2023.4 The Commission received one comment letter on the proposed rule change.5 On March 23, 2023, the MSRB responded to the comment letter 6 and filed Amendment No. 1 to the proposed rule change (‘‘Amendment No. 1’’).7 The Commission is publishing this notice to solicit comments on Amendment No. 1 to the proposed rule change from interested parties and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. CFR 200.30–11(b)(1) and (3). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Release No. 34–96842 (February 8, 2023), 88 FR 9560 (February 14, 2023) (File No. MSRB–2023–02) (the ‘‘Notice’’). 1 15 PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 4 The comment letter received on the proposed rule change is available on the Commission’s website at https://www.sec.gov. 5 See Letter to Secretary, from Leslie Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated March 7, 2023 (‘‘SIFMA Letter’’). 6 See Letter to Secretary, Commission, from Saliha Olgun, Interim Chief Regulatory Officer, MSRB, dated March 23, 2023 (‘‘Response Letter’’). 7 Id. As described in Amendment No. 1, the MSRB stated it proposed to amend the original proposed rule change to make a change directly responsive to the comments and two other technical changes. 8 Exchange Act Section 15B(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. Additionally, 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. 15 U.S.C. 78o–4(e)(4). See also Release No. 34–70462 (September 20, 2013), 78 FR 67468 (November 12, 2013) (File No. S7–45–10) at 67469, n. 138, 408; 17 CFR 240.15Ba1–1(d)(1)(i). 9 Exchange Act Section 15B(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 E:\FR\FM\04APN1.SGM 04APN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices 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).10 Although the Exchange Act 11 permits a municipal advisor to conduct such solicitations on behalf of a third-party broker, dealer or municipal securities dealer (collectively and individually ‘‘dealers’’),12 MSRB Rule G–38 (‘‘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.13 Additionally, the MSRB stated 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.14 The MSRB noted that such solicitations often occur in connection with the solicitation of a public pension plan.15 For example, the MSRB offered that, 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.16 The MSRB also stated 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.17 Notwithstanding the relatively small size of such solicitation market, the MSRB argued that it is important that the fundamental protections extended to the municipal entity and obligated person clients of other MSRB-regulated entities be extended to the municipal entities and obligated persons with whom solicitor municipal advisors interact.18 Due to such increased protections contemplated by the proposed rule change, the MSRB concluded 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.19 With respect to solicitations on behalf of third parties to provide investment advisory services, the MSRB stated that there are two ways (discussed below) in which a solicitor municipal advisor typically may solicit a municipal entity: (1) directly or (2) through an intermediary.20 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. 15 U.S.C. 78o–4(e)(9). 10 Notice, 88 FR at 9561. 11 See 15 U.S.C. 78o–4(e)(4) and (e)(9). 12 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) (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). 13 The prohibition in Rule G–38 predates the regulation of municipal advisors. See Release No. 34–52278 (August 17, 2005), 70 FR 49342 (August 23, 2005) (File No. MSRB–2005–04). 14 Notice, 88 FR at 9561. 15 Id. The MSRB identified that 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.21 The MSRB further described that 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.22 The MSRB elaborated that this first communication potentially is one of many that may span years.23 Additionally, the MSRB further observed the solicitor municipal advisor’s client likely will have its own communications with the solicited entity, which may include board presentations, meetings and discussions VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 1. Direct Solicitations during which the solicitor municipal advisor may or may not be present.24 2. Indirect Solicitations Through an Intermediary The MSRB explained that 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.25 Such intermediary itself may be a solicitor municipal advisor. According to the MSRB, 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).26 Additionally, the MSRB noted that 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, the MSRB stated that a solicitor municipal advisor may not know if it is indirectly soliciting a municipal entity.27 The MSRB noted that 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.28 In some instances, the solicitor municipal advisor may never meet or directly communicate with an intermediary’s municipal entity or obligated person client.29 B. Summary of Proposed Rule G–46 As described in further detail below and in the Notice, the MSRB stated that Proposed Rule G–46 would establish the core standards of conduct and duties of ‘‘solicitor municipal advisors’’ when engaging in solicitation activities that would require them to register with the SEC and the MSRB as municipal advisors.30 The MSRB also noted that Proposed Rule G–46 would codify certain statements contained in an MSRB notice issued in 2017 pertaining 16 Id. 17 Id. 24 Id. 18 Id. 19 Notice, 25 Id. 88 FR at 9562. 26 Id. 20 Id. 27 Id. 21 Id. 28 Id. 22 Id. 29 Id. 23 Id. 30 Id. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 20005 E:\FR\FM\04APN1.SGM 04APN1 20006 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 to the application of MSRB rules to solicitor municipal advisors.31 Those statements relate to the obligation of solicitor municipal advisors under MSRB Rule G–17 (‘‘Rule G–17’’), on conduct of municipal securities and municipal advisory activities (the ‘‘G–17 Excerpt for Solicitor Municipal Advisors’’).32 In addition to codifying much of the substance of the G–17 Excerpt for Solicitor Municipal Advisors, the MSRB stated that the 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 MSRB Rule G–42 (‘‘Rule G–42’’), on duties of nonsolicitor 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’’).33 In summary, the MSRB stated that the core provisions of Proposed Rule G–46 generally would: • Set forth definitions for terms used in the proposed rule; 34 • 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; 35 • 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); 36 • 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; 37 • Require solicitor municipal advisors to disclose to solicited entities 31 See MSRB Regulatory Notice 2017–08, Application of MSRB Rules to Solicitor Municipal Advisors (May 4, 2017), available at https:// www.msrb.org/sites/default/files/2017-08.pdf (‘‘Regulatory Notice 2017–08’’). 32 Notice, 88 FR at 9562. 33 17 CFR 275.206(4)–1; Notice, 88 FR at 9562. 34 Notice, 88 FR at 9562. 35 Id. 36 Id. 37 Id. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 material facts about the solicitation, including but not limited to an obligation to disclose information about the solicitor municipal advisor’s role and compensation, the solicitor municipal advisor’s material conflict of interest; and information regarding the solicitor client; 38 • Set forth a dual disclosure standard with respect to required disclosures to solicited entities; 39 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.40 The MSRB stated that the 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; 41 • Explain the relationship between a solicitor municipal advisor’s fair dealing obligations and a federal fiduciary duty for municipal advisors; 42 • Explain the relationship between a municipal advisor’s obligations under Proposed Rule G–46 and Rule G–42; 43 and • Provide additional explanation applicable to a solicitor municipal advisor’s obligation to document its compensation arrangement and make related disclosures.44 1. Definitions The MSRB explained that Proposed Rule G–46(a) would set forth a set of definitions for terms used in the rule.45 In the proposed rule change, the MSRB would define the terms ‘‘compensation,’’ 46 ‘‘excluded communications,’’ 47 ‘‘solicitation,’’ 38 Id. 39 Notice, 88 FR at 9563. 40 Id. 41 Id. 42 Id. 43 Id. 44 Id. 45 Id. 46 Id. Proposed Rule G–46(a)(i) generally would provide that ‘‘compensation’’ means any cash, inkind or non-cash remuneration, including but not limited to merchandise, gifts, travel expenses, meals and lodging. Notice, 88 FR at 9563, n.17. 47 Notice, 88 FR at 9563. 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 PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 ‘‘solicited entity,’’ ‘‘solicitor client,’’ ‘‘solicitor municipal advisor,’’ and ‘‘solicitor relationship.’’ 48 As detailed below, the MSRB identified that several of these definitions are integral to understanding nearly all of the provisions of Proposed Rule G–46, and the MSRB discussed each of these definitions in fuller detail and context. The MSRB noted that 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).49 The MSRB stated that this definition is consistent with the defined term ‘‘solicitation of a municipal entity or obligated person’’ under Exchange Act Section 15B(e)(9), 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.50 The 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. Notice, 88 FR at 9563, n.18. The term ‘‘excluded communications’’ is used in the term ‘‘solicitation,’’ which would be defined in Proposed Rule G– 46(a)(iii). Id. 48 Notice, 88 FR at 9563. 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 Exchange Act Section 15B(e)(9) and the rules and regulations thereunder. Notice, 88 FR at 9563, n.19. 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. Id. 49 Notice, 88 FR at 9563. 50 Id.; 15 U.S.C. 78o–4(e)(9). E:\FR\FM\04APN1.SGM 04APN1 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices MSRB stated that because 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, Proposed Rule G–46 assumes that such solicitations do not occur.51 The MSRB wrote that 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 Exchange Act Sections 15B(e)(8) and (e)(10) 52 and the rules and regulations thereunder) that the solicitor municipal advisor has solicited, is soliciting or intends to solicit within the meaning of Exchange Act Sections 15B(e)(4)(A)(ii) and (e)(9) 53 and the rules and regulations thereunder.54 The MSRB generally defined ‘‘solicitor client’’ in Proposed Rule G– 46(a)(v) to mean the municipal advisor or investment adviser on behalf of whom the solicitor municipal advisor undertakes a solicitation within the meaning of Exchange Act Sections 15B(e)(4)(A)(ii) and (e)(9) 55 and the rules and regulations thereunder.56 As the MSRB previously noted, Proposed Rule G–46 presumes that solicitors do not conduct paid solicitations on behalf of third-party dealers because of the prohibition set forth in Rule G–38.57 As a result, the MSRB noted that Proposed Rule G–46(a)(v)’s definition of ‘‘solicitor client’’ does not include dealers as solicitor clients.58 The MSRB generally defined ‘‘solicitor municipal advisor’’ in Proposed Rule G–46(a)(vi) to mean, for purposes of the rule, a municipal advisor within the meaning of Exchange Act Section 15B(e)(4) 59 and other rules and regulations thereunder.60 The MSRB further provided that Proposed Rule G–46(a)(vi) shall exclude a person that is otherwise a municipal advisor solely based on activities within the meaning of Exchange Act Section 15B(e)(4)(A)(i) 61 and the rules and regulations thereunder.62 The MSRB stated that, generally, this means that a solicitor municipal advisor is any ddrumheller on DSK120RN23PROD with NOTICES1 51 Notice, 88 FR at 9563. 52 15 U.S.C. 78o–4(e)(8) and (e)(10). 53 15 U.S.C. 78o–4(e)(4)(A)(ii) and (e)(9). 54 Notice, 88 FR at 9563. 55 Id. 56 Id. 57 Id. 58 Id. 59 15 U.S.C. 78o–4(e)(4). 60 Notice, 88 FR at 9563. 61 15 U.S.C. 78o–4(e)(4)(A)(i). 62 Notice, 88 FR at 9563. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 municipal advisor that is not a nonsolicitor municipal advisor.63 2. Disclosure to Solicitor Clients The MSRB noted that its Proposed Rule G–46(b) would require a solicitor municipal advisor to provide 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.64 Further, the MSRB stated that these disclosures must be provided prior to or upon engaging in municipal advisory activities.65 The MSRB stated that the Proposed Rule G–46(b) 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.66 As a result, the MSRB posited, 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.67 The MSRB noted that 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.68 3. Documentation of the Solicitor Relationship The MSRB explained that Proposed Rule G–46(c) would require a solicitor municipal advisor to evidence each of its solicitor relationships by a writing or 20007 writings created and delivered to the solicitor client prior to, upon or promptly after the establishment of the solicitor relationship.69 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); 70 • the terms and amount of the compensation to be received by the solicitor municipal advisor for such activities; 71 • the date, triggering event, or means for the termination of the relationship, or, if none, a statement that there is none; 72 and • any terms relating to withdrawal from the relationship.73 The MSRB stated that the proposed obligation to document the relationship is generally consistent with a nonsolicitor municipal advisor’s obligation to document its municipal advisory relationship with a client under Rule G– 42(c).74 The MSRB argued 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.75 The MSRB also posited 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.76 The MSRB stated that a solicitor may be asked to solicit a broad range of entities on behalf of a client of the solicitor.77 These entities may include municipal entities, obligated persons and corporate entities that are not 69 Id. 63 Id. 70 Id. 64 Notice, 71 Id. 88 FR at 9563–64. 65 Notice, 88 FR at 9564. 66 Id. 67 Id. 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. Notice, 88 FR at 9564, n.26. 68 Notice, 88 FR at 9564. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 72 Id. 73 Id. 74 Id. 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. Notice, 88 FR at 9564, n.28. 75 Notice, 88 FR at 9564. 76 Id. 77 Id. E:\FR\FM\04APN1.SGM 04APN1 20008 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices obligated persons.78 Although the MSRB observed that 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 MSRB concluded that the solicitation of an entity that is not a municipal entity or an obligated person would not require such compliance.79 The MSRB stated that in order to promote certainty as to the applicable regulatory scheme for any engagement, 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.80 The MSRB also concluded that 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.81 The MSRB stated that Supplementary Material .04 to Proposed Rule G–46 would provide additional guidance with respect to the obligation to document the terms and the amount of compensation to be received.82 Specifically, the MSRB provided that such guidance provides that the documentation(s) must clearly describe the structure of the compensation arrangement and the amount of compensation paid or to be paid.83 ddrumheller on DSK120RN23PROD with NOTICES1 4. Representations to Solicited Entities The MSRB explained that 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.84 The MSRB stated that 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 78 Id. 79 Id. 80 Id. 81 Id. 82 Id. 83 Id. 84 Id. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 obtaining or retaining an engagement for the solicitor client.85 The MSRB explained this assertion by offering its belief 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 obtaining or retaining an engagement for their clients.86 The MSRB wrote that 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.87 The MSRB noted 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.88 The MSRB further asserted that such representations should have some reasonable basis.89 The MSRB stated that Supplementary Material .01 would provide guidance on compliance with the reasonable-basis standard.90 Specifically, the MSRB stated that this supplementary material would clarify 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.91 5. Disclosures to Solicited Entities The MSRB’s 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.92 The MSRB wrote that this proposed change would include an obligation to disclose 85 Id. 86 Notice, 87 Notice, 88 FR at 9564–65. 88 FR at 9565. 88 Id. 89 Id. The MSRB noted 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. Notice, 88 FR at 9565, n.30. While a non-solicitor municipal advisor provides advice to or on behalf of its municipal entity and obligated person clients, the MSRB stated that a solicitor municipal advisor solicits municipal entities and obligated persons on behalf of its clients. The MSRB concluded that, 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. Id. 90 Notice, 88 FR at 9565. 91 Id. 92 Id. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 certain information pertaining to the solicitor municipal advisor’s: (i) role and compensation; (ii) conflicts of interest; and (iii) client.93 i. Role and Compensation Disclosures The MSRB stated that 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.94 The MSRB stated that 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.95 Specifically, the MSRB noted 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.96 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.97 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 98 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 93 Id. 94 Id. 95 Id. 96 Id. 97 Id. 98 Id. E:\FR\FM\04APN1.SGM 04APN1 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices to deal fairly with all persons, including both solicited entities and the solicitor municipal advisor’s clients; 99 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.100 The MSRB stated that these statements draw from analogous disclosures that underwriters must make to their issuer clients pursuant to Rule G–17,101 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.102 The MSRB stated that Supplementary Material .02 to Proposed Rule G–46 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.103 The MSRB clarified, however, that this proposed change would specify 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.104 Finally, the MSRB described that Supplementary Material .02 would include 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 99 Id. ddrumheller on DSK120RN23PROD with NOTICES1 100 Id. 101 More specifically, the MSRB explained that 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. Notice, 88 FR at 9565, n.32; 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’’), available at https://www.msrb.org/InterpretiveNotice-Concerning-Application-MSRB-Rule-G-17Underwriters-Municipal-Securities. 102 Notice, 88 FR at 9565. 103 Id. 104 Id. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 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.105 ii. Conflicts Disclosures The MSRB stated that Proposed Rule G–46(e)(ii) would require a solicitor municipal advisor to disclose any material conflicts of interest, 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.106 The MSRB noted that a 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.107 The MSRB stated that 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.108 The MSRB observed that this proposed change 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.109 The MSRB concluded 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.110 In Amendment No. 1., the MSRB corrected a typographical error (i.e., remove an 105 Id. 106 Notice, 88 FR at 9565–66. 88 FR at 9566. 108 Id.; see Rule G–42(b)(i)(F). 109 Notice, 88 FR at 9566. 110 The MSRB offered the example that, 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. Id. 107 Notice, PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 20009 errant ‘‘’s’’ from the rule text) in proposed Rule G–46(e)(ii).111 iii. Solicitor Client Disclosures The MSRB wrote that 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) 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.112 The MSRB stated that 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.113 However, the MSRB provided that 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. 6. Timing and Manner of Disclosures to Solicited Entities The MSRB explained that Proposed Rule G–46(f), as modified by Amendment No. 1., would provide that any disclosures required under section (e) of the proposed rule (pertaining to disclosures to solicited entities) must be made in writing.114 The MSRB also noted the proposed rule 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.115 Specifically, the MSRB explained that the solicited entity 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).116 111 Amendment 112 Notice, No. 1. 88 FR at 9566. 113 Id. 114 Id. See also Amendment No. 1. 88 FR at 9566. 115 Notice, 116 Id. E:\FR\FM\04APN1.SGM 04APN1 20010 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 i. Initial Disclosure at the Time of the First Communication The MSRB stated that 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.117 Specifically, the MSRB wrote that 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 MSRB expounded that disclosures must be provided to the intermediary with whom such communication is made.118 In Amendment No. 1, the MSRB made a technical correction to state that, at the time of such first direct communication with a solicited entity on behalf of a specific solicitor client, the requisite disclosures must be provided to the solicited entity representative (rather than the solicitor client representative as set forth in the Notice) with whom such communication is made.119 Amendment No. 1 also corrected an errant crossreference in proposed Rule G–46(f)(i) ii. Second Disclosure at the Time of the Solicitor Client’s Engagement With the Solicited Entity The MSRB noted that 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.120 The MSRB concluded that this is the case even if there are no changes between the initial set of disclosures and the second set of disclosures.121 The MSRB also described that the second set of disclosures may be provided by either the solicitor client or the solicitor municipal advisor.122 The MSRB wrote 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.123 Further, the MSRB noted that 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 has the authority to bind the solicited entity by contract; and (2) is not a party to a disclosed conflict.124 The MSRB explained that these two conditions would not apply to the initial delivery of disclosures.125 The MSRB stated 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.126 However, the MSRB explained that, 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 the disclosures to be provided again at the time of the engagement between the solicited entity and the solicitor client (or promptly thereafter).127 The MSRB posited 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.128 Additionally, the MSRB noted that the MSRB has observed that solicitations may sometimes span years, and particularly in such instances, the MSRB concluded 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.129 7. Specified Prohibitions The MSRB stated that 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.130 88 FR at 9566–67. 125 Notice, 88 FR at 9567. 126 Id. 127 Id. 128 Id. 129 Id. 130 Id. 118 Id. 119 Amendment 120 Notice, No. 1. 88 FR at 9566. 121 Id. 122 Id. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 C. Proposed Rule G–46 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); 136 • Explaining the relationship between a solicitor municipal advisor’s fair dealing obligations and the applicability of a federal fiduciary duty for municipal advisors; 137 • Explaining the relationship between a municipal advisor’s obligations under Proposed Rule G–46 and Rule G–42; 138 and 131 Id. 132 Id. 133 Id. 123 Id. 124 Notice, 117 Id. Specifically, the MSRB wrote that 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; 131 • 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; 132 and • payments that are permissible ‘‘normal business dealings’’ as described in Rule G–20, on gifts, gratuities, noncash compensation and expenses of issuance.133 The MSRB explained that that these specified prohibitions are modeled on similar prohibitions applicable to nonsolicitors under 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.134 In Amendment No. 1 the MSRB proposed to correct an errant internal cross-reference in Proposed Rule G– 46(g)(ii).135 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 134 Id. See Rule G–42(e)(i); see also G–17 Underwriter’s Guidance at section titled, ‘‘Underwriter Compensation and New Issue Pricing.’’ 135 Amendment No. 1. 136 Notice, 88 FR at 9567. 137 Id. 138 Id. E:\FR\FM\04APN1.SGM 04APN1 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices • Providing additional detail regarding a solicitor municipal advisor’s compensation documentation and disclosure obligations.139 The MSRB stated that 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–42.140 For example, the MSRB explained that 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’’).141 The MSRB wrote that 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.142 The MSRB stated that 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.143 ddrumheller on DSK120RN23PROD with NOTICES1 D. Proposed Amendments to MSRB Rule G–8 The MSRB explained that proposed amendments to Rule G–8 would add specific recordkeeping obligations designed to help facilitate and document compliance with Proposed Rule G–46. Specifically, the MSRB stated that these amendments would add new subsection (viii) requiring solicitor municipal advisors to make and keep the following books and records: 144 • evidence that the disclosures required by Proposed Rule G–46(b) were made in the manner required by that section; 145 • a copy of each writing or writings required by Proposed Rule G–46(c); 146 • 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); 147 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).148 III. Summary of Comment Received and MSRB’s Response The Commission received one comment letter on the proposed rule change, as well as response from the MSRB to this comment letter. As more fully described below, the SIFMA Letter argued that the proposed MSRB Rule G– 46 is unclear and unworkable in several areas, and therefore, urged the SEC to disapprove the proposed rule.149 The MSRB’s Response Letter responded directly to each of these points.150 Avoiding Unnecessary Regulation SIFMA explained that its members believe that the proposed rule change is confusing and unnecessary, as many solicitor municipal advisors are already regulated by the SEC pursuant to the Investment Advisers Act.151 SIFMA also reiterated a request for the MSRB to prohibit municipal advisors from paying third-party municipal advisors for a solicitation of municipal advisory business.152 Finally, SIFMA warned that solicitation of municipal advisors could ‘‘create material conflict of interest,’’ and thereby, create circumstances leading to corruption that ‘‘could be damaging to the integrity of the municipal securities market.’’ 153 In its Response Letter, the MSRB stated that the proposed rule change is designed to harmonize with relevant rules under comparative regimes, including the regime for investment advisers.154 The MSRB also indicated that the MSRB does not believe that the fact that some solicitor municipal advisors are also investment advisers obviates the need for regulation in their capacity as solicitor municipal advisors.155 Further, the MSRB responded to SIFMA’s conflict of interest concerns by noting that, among other things, the proposed rule change is designed to address these material conflicts of interest and to provide some guardrails around such solicitation activities.156 The MSRB concluded that 147 Id. 148 Id. 139 Id. 149 SIFMA 140 Id. 150 See Letter at 1. Response Letter. 151 SIFMA Letter at 2. 152 Id. 153 Id. 154 Response Letter at 2. 155 Id. 156 Id. 141 Id. 142 Id. 143 Id. 144 Id. 145 Id. 146 Id. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 PO 00000 Frm 00109 Fmt 4703 the proposed rule change’s approach (as opposed to the outright prohibition on paying solicitor municipal advisors for their third-party solicitations of municipal advisory business) is consistent with the apparent intent in the Dodd-Frank Act in granting rulemaking authority to the MSRB over such conduct.157 Inadvertent Solicitations SIFMA further indicated that a safe harbor for inadvertent solicitations is warranted because there confusion exists as to what disclosures are due to which parties and when.158 In response to SIFMA’s concern, the MSRB explained that, as described in Amendment No. 1, the MSRB made a technical correction to the proposed rule change to correct a typographical error in Proposed Rule G–46(f)(i)(A) that it believes may have inadvertently contributed to any confusion.159 The MSRB identified that Amendment No. 1’s revisions clarify that, at the time of the first direct communication with a solicited entity on behalf of a specific solicitor client, the requisite disclosures must be provided to the solicited entity representative (rather than the solicitor client representative as set forth in the Notice) with whom such communication is made.160 Further, the MSRB explained that this prose is consistent with the heading of section (f) of Proposed Rule G–46 (titled ‘‘Timing and Manner of Disclosures to Solicited Entities’’).161 The MSRB described that the dual disclosure obligation set forth in the proposed rule change require the following. For direct solicitations of a solicited entity by a solicitor municipal advisor, the MSRB stated that, at the time of the first solicitation, the solicitor municipal advisor would be required to make the disclosures required by Proposed Rule G–46(e) to the solicited entity representative (i.e., the person actually solicited, such as an employee of the solicited entity).162 The MSRB also noted that, if that solicitation results in the solicited entity engaging the 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 again at the time that such engagement documentation is delivered to the solicited entity or promptly 157 Id. 158 SIFMA Letter at 2. Letter at 2. 159 Response 160 Id. 161 Id. 162 Response Sfmt 4703 20011 E:\FR\FM\04APN1.SGM Letter at 2–3. 04APN1 ddrumheller on DSK120RN23PROD with NOTICES1 20012 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices thereafter.163 The MSRB wrote that the same standard would apply for indirect solicitations, except for the fact that, at the time of the first solicitation, the disclosures would be required to be provided to the intermediary with whom such communication is made.164 The MSRB stated that a solicitor municipal advisor may make multiple solicitations of a solicited entity (sometimes spanning more than one year) before a solicitation may result in a solicited entity engaging a solicitor client.165 As a result, the MSRB concluded that it is important that the disclosures set forth in Proposed Rule G–46(e) are provided twice—once in connection with the initial solicitation so that the solicitee can appropriately evaluate the disclosures in connection with the solicitation and again at the time of the relevant engagement when an official that is reasonably believed to have the authority to bind the solicited entity by contract is guaranteed to receive the disclosures.166 Next, the MSRB asserted that, pursuant to Sections 15B(e)(4)(ii) and (e)(9) of the Exchange Act,167 one meets the definition of a ‘‘municipal advisor’’ if, in relevant part, one undertakes a direct or indirect communication with a municipal entity or obligated person.168 Consequently, the MSRB deemed it consistent with a regulated entity’s supervisory and compliance obligations to expect regulated entities to be cognizant of their communications and to put into place appropriate processes to help them ascertain whether or not they are engaging in municipal advisory activity.169 The MSRB explained that, in the context of third-party solicitations, one such mechanism may be to inquire of intermediaries whether they represent municipal entities or obligated persons.170 The MSRB also noted that nothing would prohibit a solicitor municipal advisor from, out of an abundance of caution, providing the disclosures specified in Proposed Rule G–46(e) to all intermediaries that the solicitor municipal advisor solicits. After careful consideration, the MSRB stated that a safe harbor for inadvertent solicitations is not warranted. The MSRB explained that, consistent with the definition of ‘‘municipal advisor’’ under the Exchange Act, to trigger the application of Proposed Rule G–46, a 163 Response Letter at 3. 164 Id. solicitor municipal advisor must undertake the relevant solicitation ‘‘for the purpose of obtaining or retaining’’ an engagement between the solicited entity and the solicitor client.171 Because this requires affirmative intent, the MSRB deemed that a provision for ‘‘inadvertent’’ solicitations is not appropriate.172 To that end, the MSRB concluded that the example set forth in the SIFMA Letter would subject a firm to Proposed Rule G–46. If a firm initially solicits a solicited entity on its own behalf, but the solicited entity unilaterally chooses not to engage the firm and, instead, seeks to engage a third-party investment adviser and the firm earns compensation based on such engagement, the MSRB does not believe that the firm would be subject to Proposed Rule G–46 if it has not solicited the solicited entity for the purpose of obtaining or retaining an engagement on behalf of that third-party investment adviser.173 III. Discussion of Commission’s Findings The Commission has carefully considered the proposed rule change, the comment letter received, the MSRB Response Letter, and Amendment No. 1. The Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Exchange Act, and the rules and regulations thereunder applicable to the MSRB. In particular, the Commission believes that the proposed rule change, as modified by Amendment No. 1, is consistent with the provisions of Section 15B(b)(2)(C), which provides, in part, 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.174 The Commission finds that the proposed rule change, as modified by Amendment No. 1, will: (i) prevent 165 Id. 166 Id. 167 15 U.S.C. 78o–4(e)(4) and (e)(9). 168 Response Letter at 3. 169 Id. 170 Id. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 171 Exchange Act Section 15B(e)(9), 15 U.S.C. 78o–4(e)(9). 172 Response Letter at 3. 173 Response Letter at 3–4. 174 15 U.S.C. 78o–4(b)(2)(C). PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 fraudulent and manipulative acts and practices; (ii) foster cooperation and coordination among regulators; and (iii) protect investors, municipal entities, obligated persons, and the public interest. A. Prevention of Fraudulent and Manipulative Acts and Practices The Commission finds that the proposed rule change, as modified by Amendment No. 1, would help prevent fraudulent and manipulative acts and practices. First, Proposed Rule G–46 would expressly 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.175 Second, Proposed Rule G–46 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.176 Third, Proposed Rule G–46 expressly would prohibit solicitor municipal advisors from delivering an inaccurate invoice for fees or expenses.177 The Commission believes that the proposed rule change’s prohibitions prevent either: (i) forms of fraudulent and manipulative acts and practices themselves (e.g., materially false or misleading representations and inaccurate invoices for fees or expenses) or (ii) behavior that could reasonably be understood to accompany (or serve as indicia of) the commission of fraudulent and manipulative acts and practices, if they are not fraudulent and manipulative acts and practices themselves (e.g., lacking reasonable basis for a material representation). Furthermore, the proposed Supplementary Materials to Rule G–46 provide explanations of Proposed Rule G–46’s prohibitions of fraudulent and manipulative acts and practices. This increased clarity would increase the effectiveness of such prohibitions by raising understanding of these prohibitions among solicitor municipal advisors and the municipal entities and obligated persons with whom they interact. Additionally, Proposed Rule G–46 prohibit solicitor municipal advisors from making payments for the purpose of obtaining or retaining an engagement to perform municipal advisory activities 175 Notice, 88 FR 9568. 176 Id. 177 Id. E:\FR\FM\04APN1.SGM 04APN1 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 (subject to specified exceptions).178 Among other things, the Commission finds that this prohibition would effectively require solicitor municipal advisors to use only associated persons or other regulated solicitor municipal advisors to obtain business on their behalf. This proposed rule change 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. As such, the Commission finds that the proposed rule change, as modified by Amendment No. 1, helps prevent fraudulent and manipulative acts and practices. B. Fostering Cooperation and Coordination The Commission finds that the proposed rule change, as modified by Amendment No. 1, would foster cooperation and coordination with persons engaged in regulating transactions in municipal securities and municipal financial products. Proposed Rule G–46 requires 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).179 Proposed Rule G–46’s new documentation obligation (and the Supplementary Materials to Rule G–46 explaining it) 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). By promoting certainty regarding the regulatory scheme applicable to solicitor municipal advisors, the proposed rule change will allow different regulators to operate with a common understanding that these solicitations fall under the new regulatory regime for solicitor municipal advisors. Similarly, the Commission finds that proposed Rule G–46 and the proposed amendments to Rule G–8 would assist regulators who examine solicitor municipal advisors understand the solicitation arrangement through both Proposed Rule G–46’s documentation requirements, as well as Rule G–8’s requirements that such documentation be preserved in solicitor municipal advisor’s books and records.180 Furthermore, these proposals would provide these regulators with necessary information to assist in evaluating a solicitor municipal advisor’s compliance with relevant obligations.181 The Commission further believes that the proposed amendments to Rule G–8 (with the ensuing application of existing MSRB Rule G–9 on records preservation) would help create an audit trail, assisting examination and enforcement authorities in their examination for compliance with, and prosecution of, these prohibitions.182 As such, the Commission finds that the proposed rule change, as modified by Amendment No. 1, fosters cooperation and coordination among persons engaged in regulating transactions in municipal securities and municipal financial products. C. Protection of Municipal Entities, Obligated Persons, and the Public Interest The Commission believes that the proposed rule change, as modified by Amendment No. 1, would protect municipal entities, obligated persons, and the public interest. Specifically, Proposed Rule G–46 requires 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.183 The Commission finds that this requirement would increase solicitor municipal advisor accountability and discourage conduct inconsistent with a solicitor municipal advisor’s obligations under Proposed Rule G–46 because such conduct would be required to be disclosed in information provided to clients. Specifically, the Commission finds that a municipal entity or obligated person could view a solicitor municipal advisor’s disclosure of material conflict of interests and/or disclosure of material legal or disciplinary events as a reason to avoid retaining that solicitor municipal advisor. Therefore, the Commission believes that a solicitor municipal advisors may try to avoid such behavior to avoid losing future 180 Id. 181 Id. 178 Id. 182 Notice, 179 Id. 183 Notice, VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 PO 00000 88 FR at 9567–68. 88 FR at 9565–66. Frm 00111 Fmt 4703 Sfmt 4703 20013 engagements. As such, the Commission finds that the proposed rule change incentivizes firms to refrain from behavior that could harm municipal entities and obligated persons, and therefore, protect municipal entities, obligated persons, and the public interest. The proposed rule change also would protect municipal entities, obligated persons, and the public interest by setting forth obligations applicable to solicitor municipal advisors similar to 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; 184 document their relationships in writing; 185 and refrain from certain conduct such as making certain materially false or misleading representations,186 delivering a materially inaccurate invoice,187 and making certain payments for the purpose of obtaining or retaining an engagement.188 Under Proposed Rule G– 46, the protections provided by these provisions would be provided to municipal entities and obligated persons solicited by solicitor municipal advisors. Furthermore, the proposed changes to Rule G–8 would mandate preserving records related to Proposed Rule G–46; as such, Rule G–8 would strengthening these new protections by compelling contemporaneous documentation of compliance with them. As such, the Commission finds that the proposed rule change, as modified by Amendment No. 1, protects municipal entities, obligated persons, and the public interest. In approving the proposed rule change, the Commission has considered the proposed rule change’s impact on efficiency, competition, and capital formation.189 Exchange Act Section 15B(b)(2)(C) 190 requires that MSRB rules not be designed to impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Commission does not believe the proposed rule change, as modified by Amendment No. 1, would impose any new burden on competition as it would apply a regulatory regime equally to all 184 See Rule G–42(b)(i)(F). Rule G–42(c) and Proposed Rule G–46(c). 186 See Rule G–42(e)(i)(C) and Proposed Rule G– 46(d)(i). 187 See Rule G–42(e)(i)(B) and Proposed Rule G– 46(g)(i). 188 See Rule G–8 and Rule G–46. 189 15 U.S.C. 78c(f). 190 15 U.S.C. 78o–4(b)(2)(C). 185 See E:\FR\FM\04APN1.SGM 04APN1 ddrumheller on DSK120RN23PROD with NOTICES1 20014 Federal Register / Vol. 88, No. 64 / Tuesday, April 4, 2023 / Notices solicitor municipal advisors (similar to the regime that currently exists for nonsolicitor municipal advisors under Rule G–42 and Rule G–8 on recordkeeping, and for underwriters under the Rule G– 17 Underwriter’s Guidance).191 This consequence of the proposed rule change, as modified by Amendment No. 1, would not burden competition. Further, the Commission finds that 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. Accordingly, the Commission does not believe that the proposed rule change, as modified by Amendment No. 1, would result in any additional burden on competition that is not necessary or appropriate in in furtherance of the purposes of the Exchange Act. The Commission also finds that the proposed rule change, as modified by Amendment No. 1, will not hinder capital formation. As noted above, the proposed rule change brings a regulatory regime to solicitor municipal advisors similar to the regimes that currently exist for non-solicitor municipal advisors and underwriters. Therefore, Commission finds that the proposed rule change would not negatively impact the municipal securities market’s operational efficiency. The Commission also finds that the proposed rule change includes provisions that could help promote efficiency. As noted above, the Commission believes that the proposed rule change would promote clearer regulatory requirements for all solicitor municipal advisors. As noted above, the Commission received one comment letter on the filing. The Commission believes that the MSRB, through its response and Amendment No. 1, addressed the commenters’ concerns. For the reasons noted above, the Commission believes that the proposed rule change, as modified by Amendment No. 1, is consistent with the Exchange Act. Electronic Comments V. Solicitation of Comments on Amendment No. 1 The Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 1, prior to the 30th day after the date of publication of notice of Amendment No. 1 in the Federal Register. As noted by the MSRB, Amendment No. 1 does not raise any significant issues with respect to the proposed rule change and only provides a minor change to address an issue raised by the commenter and other technical corrections. Further, the Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Exchange Act. Comments may be submitted by any of the following methods: 191 See Rules G–42; G–8; and G–17. VerDate Sep<11>2014 19:41 Apr 03, 2023 Jkt 259001 • 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. 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; the Commission does not 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 April 25, 2023. VI. Accelerated Approval of Proposed Rule Change as Modified by Amendment No. 1 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 proposed rule change, as modified by Amendment No. 1, is designed to ease burdens without negatively affecting investors or the public interest. For the foregoing reasons, the Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis, pursuant to Section 19(b)(2) of the Exchange Act. VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,192 that the proposed rule change (SR– MSRB–2023–02) be, and hereby is, approved. For the Commission, by the Office of Municipal Securities, pursuant to delegated authority.193 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–06899 Filed 4–3–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [SEC File No. 270–40, OMB Control No. 3235–0313] Proposed Collection; Comment Request; Extension: Rule 203–2 & Form ADV–W Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736 Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (‘‘Commission’’) is soliciting comments on the collection of information summarized below. The Commission plans to submit this existing collection of information to the Office of Management and Budget for extension and approval. The title for the collection of information is ‘‘Rule 203–2 (17 CFR 275.203–2) and Form ADV–W (17 CFR 279.2) under the Investment Advisers Act of 1940 (15 U.S.C. 80b).’’ Rule 203– 2 under the Investment Advisers Act of 1940 establishes procedures for an investment adviser to withdraw its registration or pending registration with the Commission. Rule 203–2 requires every person withdrawing from investment adviser registration with the Commission to file Form ADV–W electronically on the Investment Adviser Registration Depository 192 15 193 17 E:\FR\FM\04APN1.SGM U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 04APN1

Agencies

[Federal Register Volume 88, Number 64 (Tuesday, April 4, 2023)]
[Notices]
[Pages 20004-20014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06899]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97218; File No. SR-MSRB-2023-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Create New MSRB Rule G-46, on Duties of Solicitor 
Municipal Advisors, and To Amend MSRB Rule G-8, on Books and Records

March 29, 2023.

I. Introduction

    On January 31, 2023, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to create a new rule, MSRB 
Rule G-46 (``Rule G-46''), on duties of solicitor municipal advisors 
(``Proposed Rule G-46'') and amend MSRB Rule G-8 (``Rule G-8''), on 
books and records (``Proposed Amended Rule G-8'') (together, the 
``proposed rule change'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on February 14, 2023.\3\ The public comment period closed on 
March 7, 2023.\4\ The Commission received one comment letter on the 
proposed rule change.\5\ On March 23, 2023, the MSRB responded to the 
comment letter \6\ and filed Amendment No. 1 to the proposed rule 
change (``Amendment No. 1'').\7\ The Commission is publishing this 
notice to solicit comments on Amendment No. 1 to the proposed rule 
change from interested parties and is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \3\ Release No. 34-96842 (February 8, 2023), 88 FR 9560 
(February 14, 2023) (File No. MSRB-2023-02) (the ``Notice'').
    \4\ The comment letter received on the proposed rule change is 
available on the Commission's website at https://www.sec.gov.
    \5\ See Letter to Secretary, from Leslie Norwood, Managing 
Director and Associate General Counsel, Securities Industry and 
Financial Markets Association (``SIFMA''), dated March 7, 2023 
(``SIFMA Letter'').
    \6\ See Letter to Secretary, Commission, from Saliha Olgun, 
Interim Chief Regulatory Officer, MSRB, dated March 23, 2023 
(``Response Letter'').
    \7\ Id. As described in Amendment No. 1, the MSRB stated it 
proposed to amend the original proposed rule change to make a change 
directly responsive to the comments and two other technical changes.
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II. Description of Proposed Rule Change

    As described further below, the proposed rule change consists of 
new Proposed Rule G-46, as modified by Amendment No. 1, and amendments 
to Rule G-8.

A. 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.\8\ The first category of municipal advisors is 
often referred to as non-solicitor municipal advisors, while the latter 
is sometimes referred to as solicitors.\9\

[[Page 20005]]

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).\10\
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    \8\ Exchange Act Section 15B(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. 
Additionally, 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. 15 
U.S.C. 78o-4(e)(4). See also Release No. 34-70462 (September 20, 
2013), 78 FR 67468 (November 12, 2013) (File No. S7-45-10) at 67469, 
n. 138, 408; 17 CFR 240.15Ba1-1(d)(1)(i).
    \9\ Exchange Act Section 15B(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. 15 U.S.C. 78o-4(e)(9).
    \10\ Notice, 88 FR at 9561.
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    Although the Exchange Act \11\ permits a municipal advisor to 
conduct such solicitations on behalf of a third-party broker, dealer or 
municipal securities dealer (collectively and individually 
``dealers''),\12\ MSRB Rule G-38 (``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.\13\ 
Additionally, the MSRB stated 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.\14\ The MSRB noted 
that such solicitations often occur in connection with the solicitation 
of a public pension plan.\15\ For example, the MSRB offered that, 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.\16\
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    \11\ See 15 U.S.C. 78o-4(e)(4) and (e)(9).
    \12\ 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) 
(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).
    \13\ The prohibition in Rule G-38 predates the regulation of 
municipal advisors. See Release No. 34-52278 (August 17, 2005), 70 
FR 49342 (August 23, 2005) (File No. MSRB-2005-04).
    \14\ Notice, 88 FR at 9561.
    \15\ Id.
    \16\ Id.
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    The MSRB also stated 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.\17\ Notwithstanding the relatively small size 
of such solicitation market, the MSRB argued that it is important that 
the fundamental protections extended to the municipal entity and 
obligated person clients of other MSRB-regulated entities be extended 
to the municipal entities and obligated persons with whom solicitor 
municipal advisors interact.\18\ Due to such increased protections 
contemplated by the proposed rule change, the MSRB concluded 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.\19\
---------------------------------------------------------------------------

    \17\ Id.
    \18\ Id.
    \19\ Notice, 88 FR at 9562.
---------------------------------------------------------------------------

    With respect to solicitations on behalf of third parties to provide 
investment advisory services, the MSRB stated that there are two ways 
(discussed below) in which a solicitor municipal advisor typically may 
solicit a municipal entity: (1) directly or (2) through an 
intermediary.\20\
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

1. Direct Solicitations
    The MSRB identified that 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.\21\ The MSRB further described that 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.\22\ The MSRB elaborated that this first communication 
potentially is one of many that may span years.\23\ Additionally, the 
MSRB further observed 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.\24\
---------------------------------------------------------------------------

    \21\ Id.
    \22\ Id.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

2. Indirect Solicitations Through an Intermediary
    The MSRB explained that 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.\25\ 
Such intermediary itself may be a solicitor municipal advisor. 
According to the MSRB, 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).\26\ Additionally, the MSRB 
noted that 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, the MSRB 
stated that a solicitor municipal advisor may not know if it is 
indirectly soliciting a municipal entity.\27\ The MSRB noted that 
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.\28\ In some instances, the 
solicitor municipal advisor may never meet or directly communicate with 
an intermediary's municipal entity or obligated person client.\29\
---------------------------------------------------------------------------

    \25\ Id.
    \26\ Id.
    \27\ Id.
    \28\ Id.
    \29\ Id.
---------------------------------------------------------------------------

B. Summary of Proposed Rule G-46

    As described in further detail below and in the Notice, the MSRB 
stated that Proposed Rule G-46 would establish the core standards of 
conduct and duties of ``solicitor municipal advisors'' when engaging in 
solicitation activities that would require them to register with the 
SEC and the MSRB as municipal advisors.\30\ The MSRB also noted that 
Proposed Rule G-46 would codify certain statements contained in an MSRB 
notice issued in 2017 pertaining

[[Page 20006]]

to the application of MSRB rules to solicitor municipal advisors.\31\ 
Those statements relate to the obligation of solicitor municipal 
advisors under MSRB Rule G-17 (``Rule G-17''), on conduct of municipal 
securities and municipal advisory activities (the ``G-17 Excerpt for 
Solicitor Municipal Advisors'').\32\ In addition to codifying much of 
the substance of the G-17 Excerpt for Solicitor Municipal Advisors, the 
MSRB stated that the 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 MSRB Rule G-42 (``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'').\33\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ See MSRB Regulatory Notice 2017-08, Application of MSRB 
Rules to Solicitor Municipal Advisors (May 4, 2017), available at 
https://www.msrb.org/sites/default/files/2017-08.pdf (``Regulatory 
Notice 2017-08'').
    \32\ Notice, 88 FR at 9562.
    \33\ 17 CFR 275.206(4)-1; Notice, 88 FR at 9562.
---------------------------------------------------------------------------

    In summary, the MSRB stated that the core provisions of Proposed 
Rule G-46 generally would:
     Set forth definitions for terms used in the proposed rule; 
\34\
---------------------------------------------------------------------------

    \34\ Notice, 88 FR at 9562.
---------------------------------------------------------------------------

     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; \35\
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

     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); \36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

     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; \37\
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

     Require solicitor municipal advisors to disclose to 
solicited entities material facts about the solicitation, including but 
not limited to an obligation to disclose information about the 
solicitor municipal advisor's role and compensation, the solicitor 
municipal advisor's material conflict of interest; and information 
regarding the solicitor client; \38\
---------------------------------------------------------------------------

    \38\ Id.
---------------------------------------------------------------------------

     Set forth a dual disclosure standard with respect to 
required disclosures to solicited entities; \39\ and
---------------------------------------------------------------------------

    \39\ Notice, 88 FR at 9563.
---------------------------------------------------------------------------

     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.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

    The MSRB stated that the 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; \41\
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

     Explain the relationship between a solicitor municipal 
advisor's fair dealing obligations and a federal fiduciary duty for 
municipal advisors; \42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

     Explain the relationship between a municipal advisor's 
obligations under Proposed Rule G-46 and Rule G-42; \43\ and
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

     Provide additional explanation applicable to a solicitor 
municipal advisor's obligation to document its compensation arrangement 
and make related disclosures.\44\
---------------------------------------------------------------------------

    \44\ Id.
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1. Definitions
    The MSRB explained that Proposed Rule G-46(a) would set forth a set 
of definitions for terms used in the rule.\45\ In the proposed rule 
change, the MSRB would define the terms ``compensation,'' \46\ 
``excluded communications,'' \47\ ``solicitation,'' ``solicited 
entity,'' ``solicitor client,'' ``solicitor municipal advisor,'' and 
``solicitor relationship.'' \48\ As detailed below, the MSRB identified 
that several of these definitions are integral to understanding nearly 
all of the provisions of Proposed Rule G-46, and the MSRB discussed 
each of these definitions in fuller detail and context.
---------------------------------------------------------------------------

    \45\ Id.
    \46\ Id. 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. Notice, 88 FR at 9563, n.17.
    \47\ Notice, 88 FR at 9563. 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. Notice, 88 FR at 9563, 
n.18. The term ``excluded communications'' is used in the term 
``solicitation,'' which would be defined in Proposed Rule G-
46(a)(iii). Id.
    \48\ Notice, 88 FR at 9563. 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 Exchange Act Section 
15B(e)(9) and the rules and regulations thereunder. Notice, 88 FR at 
9563, n.19. 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. Id.
---------------------------------------------------------------------------

    The MSRB noted that 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).\49\ The MSRB stated that this 
definition is consistent with the defined term ``solicitation of a 
municipal entity or obligated person'' under Exchange Act Section 
15B(e)(9), 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.\50\ The

[[Page 20007]]

MSRB stated that because 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, Proposed Rule G-46 assumes that such solicitations do not 
occur.\51\
---------------------------------------------------------------------------

    \49\ Notice, 88 FR at 9563.
    \50\ Id.; 15 U.S.C. 78o-4(e)(9).
    \51\ Notice, 88 FR at 9563.
---------------------------------------------------------------------------

    The MSRB wrote that 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 Exchange Act Sections 
15B(e)(8) and (e)(10) \52\ and the rules and regulations thereunder) 
that the solicitor municipal advisor has solicited, is soliciting or 
intends to solicit within the meaning of Exchange Act Sections 
15B(e)(4)(A)(ii) and (e)(9) \53\ and the rules and regulations 
thereunder.\54\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78o-4(e)(8) and (e)(10).
    \53\ 15 U.S.C. 78o-4(e)(4)(A)(ii) and (e)(9).
    \54\ Notice, 88 FR at 9563.
---------------------------------------------------------------------------

    The MSRB generally defined ``solicitor client'' in Proposed Rule G-
46(a)(v) to mean the municipal advisor or investment adviser on behalf 
of whom the solicitor municipal advisor undertakes a solicitation 
within the meaning of Exchange Act Sections 15B(e)(4)(A)(ii) and (e)(9) 
\55\ and the rules and regulations thereunder.\56\ As the MSRB 
previously noted, Proposed Rule G-46 presumes that solicitors do not 
conduct paid solicitations on behalf of third-party dealers because of 
the prohibition set forth in Rule G-38.\57\ As a result, the MSRB noted 
that Proposed Rule G-46(a)(v)'s definition of ``solicitor client'' does 
not include dealers as solicitor clients.\58\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ Id.
    \57\ Id.
    \58\ Id.
---------------------------------------------------------------------------

    The MSRB generally defined ``solicitor municipal advisor'' in 
Proposed Rule G-46(a)(vi) to mean, for purposes of the rule, a 
municipal advisor within the meaning of Exchange Act Section 15B(e)(4) 
\59\ and other rules and regulations thereunder.\60\ The MSRB further 
provided that Proposed Rule G-46(a)(vi) shall exclude a person that is 
otherwise a municipal advisor solely based on activities within the 
meaning of Exchange Act Section 15B(e)(4)(A)(i) \61\ and the rules and 
regulations thereunder.\62\ The MSRB stated that, generally, this means 
that a solicitor municipal advisor is any municipal advisor that is not 
a non-solicitor municipal advisor.\63\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78o-4(e)(4).
    \60\ Notice, 88 FR at 9563.
    \61\ 15 U.S.C. 78o-4(e)(4)(A)(i).
    \62\ Notice, 88 FR at 9563.
    \63\ Id.
---------------------------------------------------------------------------

2. Disclosure to Solicitor Clients
    The MSRB noted that its Proposed Rule G-46(b) would require a 
solicitor municipal advisor to provide 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.\64\ Further, the 
MSRB stated that these disclosures must be provided prior to or upon 
engaging in municipal advisory activities.\65\
---------------------------------------------------------------------------

    \64\ Notice, 88 FR at 9563-64.
    \65\ Notice, 88 FR at 9564.
---------------------------------------------------------------------------

    The MSRB stated that the Proposed Rule G-46(b) 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.\66\ As a 
result, the MSRB posited, 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.\67\ 
The MSRB noted that 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.\68\
---------------------------------------------------------------------------

    \66\ Id.
    \67\ Id. 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. Notice, 88 FR at 9564, 
n.26.
    \68\ Notice, 88 FR at 9564.
---------------------------------------------------------------------------

3. Documentation of the Solicitor Relationship
    The MSRB explained that 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.\69\ The writing(s) would be required to be 
dated and include, at a minimum:
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

     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); \70\
---------------------------------------------------------------------------

    \70\ Id.
---------------------------------------------------------------------------

     the terms and amount of the compensation to be received by 
the solicitor municipal advisor for such activities; \71\
---------------------------------------------------------------------------

    \71\ Id.
---------------------------------------------------------------------------

     the date, triggering event, or means for the termination 
of the relationship, or, if none, a statement that there is none; \72\ 
and
---------------------------------------------------------------------------

    \72\ Id.
---------------------------------------------------------------------------

     any terms relating to withdrawal from the 
relationship.\73\
---------------------------------------------------------------------------

    \73\ Id.
---------------------------------------------------------------------------

    The MSRB stated that 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).\74\ The MSRB argued 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.\75\ The MSRB also posited 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.\76\
---------------------------------------------------------------------------

    \74\ Id. 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. Notice, 88 FR 
at 9564, n.28.
    \75\ Notice, 88 FR at 9564.
    \76\ Id.
---------------------------------------------------------------------------

    The MSRB stated that a solicitor may be asked to solicit a broad 
range of entities on behalf of a client of the solicitor.\77\ These 
entities may include municipal entities, obligated persons and 
corporate entities that are not

[[Page 20008]]

obligated persons.\78\ Although the MSRB observed that 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 MSRB concluded 
that the solicitation of an entity that is not a municipal entity or an 
obligated person would not require such compliance.\79\ The MSRB stated 
that in order to promote certainty as to the applicable regulatory 
scheme for any engagement, 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.\80\ The MSRB also concluded that 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.\81\
---------------------------------------------------------------------------

    \77\ Id.
    \78\ Id.
    \79\ Id.
    \80\ Id.
    \81\ Id.
---------------------------------------------------------------------------

    The MSRB stated that Supplementary Material .04 to Proposed Rule G-
46 would provide additional guidance with respect to the obligation to 
document the terms and the amount of compensation to be received.\82\ 
Specifically, the MSRB provided that such guidance provides that the 
documentation(s) must clearly describe the structure of the 
compensation arrangement and the amount of compensation paid or to be 
paid.\83\
---------------------------------------------------------------------------

    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

4. Representations to Solicited Entities
    The MSRB explained that 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.\84\ The MSRB stated that 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.\85\ 
The MSRB explained this assertion by offering its belief 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 obtaining or retaining an engagement 
for their clients.\86\
---------------------------------------------------------------------------

    \84\ Id.
    \85\ Id.
    \86\ Notice, 88 FR at 9564-65.
---------------------------------------------------------------------------

    The MSRB wrote that 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.\87\ The MSRB noted 
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.\88\ The MSRB further asserted that such representations should 
have some reasonable basis.\89\
---------------------------------------------------------------------------

    \87\ Notice, 88 FR at 9565.
    \88\ Id.
    \89\ Id. The MSRB noted 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. Notice, 88 
FR at 9565, n.30. While a non-solicitor municipal advisor provides 
advice to or on behalf of its municipal entity and obligated person 
clients, the MSRB stated that a solicitor municipal advisor solicits 
municipal entities and obligated persons on behalf of its clients. 
The MSRB concluded that, 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. Id.
---------------------------------------------------------------------------

    The MSRB stated that Supplementary Material .01 would provide 
guidance on compliance with the reasonable-basis standard.\90\ 
Specifically, the MSRB stated that this supplementary material would 
clarify 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.\91\
---------------------------------------------------------------------------

    \90\ Notice, 88 FR at 9565.
    \91\ Id.
---------------------------------------------------------------------------

5. Disclosures to Solicited Entities
    The MSRB's 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.\92\ The MSRB wrote that this proposed change 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.\93\
---------------------------------------------------------------------------

    \92\ Id.
    \93\ Id.
---------------------------------------------------------------------------

i. Role and Compensation Disclosures
    The MSRB stated that 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.\94\
---------------------------------------------------------------------------

    \94\ Id.
---------------------------------------------------------------------------

    The MSRB stated that 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.\95\ Specifically, the MSRB noted 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.\96\ 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.\97\
---------------------------------------------------------------------------

    \95\ Id.
    \96\ Id.
    \97\ Id.
---------------------------------------------------------------------------

    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 \98\ 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

[[Page 20009]]

to deal fairly with all persons, including both solicited entities and 
the solicitor municipal advisor's clients; \99\ and
---------------------------------------------------------------------------

    \98\ Id.
    \99\ Id.
---------------------------------------------------------------------------

     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.\100\
---------------------------------------------------------------------------

    \100\ Id.
---------------------------------------------------------------------------

    The MSRB stated that these statements draw from analogous 
disclosures that underwriters must make to their issuer clients 
pursuant to Rule G-17,\101\ 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.\102\
---------------------------------------------------------------------------

    \101\ More specifically, the MSRB explained that 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. Notice, 88 
FR at 9565, n.32; 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''), 
available at https://www.msrb.org/Interpretive-Notice-Concerning-Application-MSRB-Rule-G-17-Underwriters-Municipal-Securities.
    \102\ Notice, 88 FR at 9565.
---------------------------------------------------------------------------

    The MSRB stated that Supplementary Material .02 to Proposed Rule G-
46 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.\103\ The MSRB 
clarified, however, that this proposed change would specify 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.\104\ Finally, 
the MSRB described that Supplementary Material .02 would include 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.\105\
---------------------------------------------------------------------------

    \103\ Id.
    \104\ Id.
    \105\ Id.
---------------------------------------------------------------------------

ii. Conflicts Disclosures
    The MSRB stated that Proposed Rule G-46(e)(ii) would require a 
solicitor municipal advisor to disclose any material conflicts of 
interest, 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.\106\ The MSRB noted that a 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.\107\ The 
MSRB stated that 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.\108\ The MSRB observed that 
this proposed change 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.\109\ The MSRB 
concluded 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.\110\ In Amendment No. 1., the MSRB corrected a 
typographical error (i.e., remove an errant ``'s'' from the rule text) 
in proposed Rule G-46(e)(ii).\111\
---------------------------------------------------------------------------

    \106\ Notice, 88 FR at 9565-66.
    \107\ Notice, 88 FR at 9566.
    \108\ Id.; see Rule G-42(b)(i)(F).
    \109\ Notice, 88 FR at 9566.
    \110\ The MSRB offered the example that, 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. Id.
    \111\ Amendment No. 1.
---------------------------------------------------------------------------

iii. Solicitor Client Disclosures
    The MSRB wrote that 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) 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.\112\
---------------------------------------------------------------------------

    \112\ Notice, 88 FR at 9566.
---------------------------------------------------------------------------

    The MSRB stated that 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.\113\ 
However, the MSRB provided that 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.
---------------------------------------------------------------------------

    \113\ Id.
---------------------------------------------------------------------------

6. Timing and Manner of Disclosures to Solicited Entities
    The MSRB explained that Proposed Rule G-46(f), as modified by 
Amendment No. 1., would provide that any disclosures required under 
section (e) of the proposed rule (pertaining to disclosures to 
solicited entities) must be made in writing.\114\ The MSRB also noted 
the proposed rule 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.\115\ 
Specifically, the MSRB explained that the solicited entity 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).\116\
---------------------------------------------------------------------------

    \114\ Id. See also Amendment No. 1.
    \115\ Notice, 88 FR at 9566.
    \116\ Id.

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

[[Page 20010]]

i. Initial Disclosure at the Time of the First Communication
    The MSRB stated that 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.\117\ Specifically, the MSRB 
wrote that 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 
MSRB expounded that disclosures must be provided to the intermediary 
with whom such communication is made.\118\ In Amendment No. 1, the MSRB 
made a technical correction to state that, at the time of such first 
direct communication with a solicited entity on behalf of a specific 
solicitor client, the requisite disclosures must be provided to the 
solicited entity representative (rather than the solicitor client 
representative as set forth in the Notice) with whom such communication 
is made.\119\ Amendment No. 1 also corrected an errant cross-reference 
in proposed Rule G-46(f)(i)
---------------------------------------------------------------------------

    \117\ Id.
    \118\ Id.
    \119\ Amendment No. 1.
---------------------------------------------------------------------------

ii. Second Disclosure at the Time of the Solicitor Client's Engagement 
With the Solicited Entity
    The MSRB noted that 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.\120\ The MSRB concluded that this is the case even 
if there are no changes between the initial set of disclosures and the 
second set of disclosures.\121\
---------------------------------------------------------------------------

    \120\ Notice, 88 FR at 9566.
    \121\ Id.
---------------------------------------------------------------------------

    The MSRB also described that the second set of disclosures may be 
provided by either the solicitor client or the solicitor municipal 
advisor.\122\ The MSRB wrote 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.\123\ Further, the MSRB noted that 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 has 
the authority to bind the solicited entity by contract; and (2) is not 
a party to a disclosed conflict.\124\ The MSRB explained that these two 
conditions would not apply to the initial delivery of disclosures.\125\
---------------------------------------------------------------------------

    \122\ Id.
    \123\ Id.
    \124\ Notice, 88 FR at 9566-67.
    \125\ Notice, 88 FR at 9567.
---------------------------------------------------------------------------

    The MSRB stated 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.\126\ However, the MSRB explained that, 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 the 
disclosures to be provided again at the time of the engagement between 
the solicited entity and the solicitor client (or promptly 
thereafter).\127\ The MSRB posited 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.\128\ Additionally, the MSRB noted that the MSRB has observed 
that solicitations may sometimes span years, and particularly in such 
instances, the MSRB concluded 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.\129\
---------------------------------------------------------------------------

    \126\ Id.
    \127\ Id.
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

7. Specified Prohibitions
    The MSRB stated that 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.\130\ Specifically, the MSRB 
wrote that 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:
---------------------------------------------------------------------------

    \130\ Id.
---------------------------------------------------------------------------

     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; \131\
---------------------------------------------------------------------------

    \131\ Id.
---------------------------------------------------------------------------

     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; \132\ and
---------------------------------------------------------------------------

    \132\ Id.
---------------------------------------------------------------------------

     payments that are permissible ``normal business dealings'' 
as described in Rule G-20, on gifts, gratuities, non-cash compensation 
and expenses of issuance.\133\
---------------------------------------------------------------------------

    \133\ Id.
---------------------------------------------------------------------------

    The MSRB explained that that these specified prohibitions are 
modeled on similar prohibitions applicable to non-solicitors under 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.\134\
---------------------------------------------------------------------------

    \134\ Id. See Rule G-42(e)(i); see also G-17 Underwriter's 
Guidance at section titled, ``Underwriter Compensation and New Issue 
Pricing.''
---------------------------------------------------------------------------

    In Amendment No. 1 the MSRB proposed to correct an errant internal 
cross-reference in Proposed Rule G-46(g)(ii).\135\
---------------------------------------------------------------------------

    \135\ Amendment No. 1.
---------------------------------------------------------------------------

C. Proposed Rule G-46 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); \136\
---------------------------------------------------------------------------

    \136\ Notice, 88 FR at 9567.
---------------------------------------------------------------------------

     Explaining the relationship between a solicitor municipal 
advisor's fair dealing obligations and the applicability of a federal 
fiduciary duty for municipal advisors; \137\
---------------------------------------------------------------------------

    \137\ Id.
---------------------------------------------------------------------------

     Explaining the relationship between a municipal advisor's 
obligations under Proposed Rule G-46 and Rule G-42; \138\ and
---------------------------------------------------------------------------

    \138\ Id.

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

[[Page 20011]]

     Providing additional detail regarding a solicitor 
municipal advisor's compensation documentation and disclosure 
obligations.\139\
---------------------------------------------------------------------------

    \139\ Id.
---------------------------------------------------------------------------

    The MSRB stated that 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.\140\ 
For example, the MSRB explained that 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'').\141\ The MSRB wrote that 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.\142\ The MSRB stated that 
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.\143\
---------------------------------------------------------------------------

    \140\ Id.
    \141\ Id.
    \142\ Id.
    \143\ Id.
---------------------------------------------------------------------------

D. Proposed Amendments to MSRB Rule G-8

    The MSRB explained that proposed amendments to Rule G-8 would add 
specific recordkeeping obligations designed to help facilitate and 
document compliance with Proposed Rule G-46. Specifically, the MSRB 
stated that these amendments would add new subsection (viii) requiring 
solicitor municipal advisors to make and keep the following books and 
records: \144\
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    \144\ Id.
---------------------------------------------------------------------------

     evidence that the disclosures required by Proposed Rule G-
46(b) were made in the manner required by that section; \145\
---------------------------------------------------------------------------

    \145\ Id.
---------------------------------------------------------------------------

     a copy of each writing or writings required by Proposed 
Rule G-46(c); \146\
---------------------------------------------------------------------------

    \146\ Id.
---------------------------------------------------------------------------

     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); \147\ and
---------------------------------------------------------------------------

    \147\ Id.
---------------------------------------------------------------------------

     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).\148\
---------------------------------------------------------------------------

    \148\ Id.
---------------------------------------------------------------------------

III. Summary of Comment Received and MSRB's Response

    The Commission received one comment letter on the proposed rule 
change, as well as response from the MSRB to this comment letter. As 
more fully described below, the SIFMA Letter argued that the proposed 
MSRB Rule G-46 is unclear and unworkable in several areas, and 
therefore, urged the SEC to disapprove the proposed rule.\149\ The 
MSRB's Response Letter responded directly to each of these points.\150\
---------------------------------------------------------------------------

    \149\ SIFMA Letter at 1.
    \150\ See Response Letter.
---------------------------------------------------------------------------

Avoiding Unnecessary Regulation

    SIFMA explained that its members believe that the proposed rule 
change is confusing and unnecessary, as many solicitor municipal 
advisors are already regulated by the SEC pursuant to the Investment 
Advisers Act.\151\ SIFMA also reiterated a request for the MSRB to 
prohibit municipal advisors from paying third-party municipal advisors 
for a solicitation of municipal advisory business.\152\ Finally, SIFMA 
warned that solicitation of municipal advisors could ``create material 
conflict of interest,'' and thereby, create circumstances leading to 
corruption that ``could be damaging to the integrity of the municipal 
securities market.'' \153\
---------------------------------------------------------------------------

    \151\ SIFMA Letter at 2.
    \152\ Id.
    \153\ Id.
---------------------------------------------------------------------------

    In its Response Letter, the MSRB stated that the proposed rule 
change is designed to harmonize with relevant rules under comparative 
regimes, including the regime for investment advisers.\154\ The MSRB 
also indicated that the MSRB does not believe that the fact that some 
solicitor municipal advisors are also investment advisers obviates the 
need for regulation in their capacity as solicitor municipal 
advisors.\155\ Further, the MSRB responded to SIFMA's conflict of 
interest concerns by noting that, among other things, the proposed rule 
change is designed to address these material conflicts of interest and 
to provide some guardrails around such solicitation activities.\156\ 
The MSRB concluded that the proposed rule change's approach (as opposed 
to the outright prohibition on paying solicitor municipal advisors for 
their third-party solicitations of municipal advisory business) is 
consistent with the apparent intent in the Dodd-Frank Act in granting 
rulemaking authority to the MSRB over such conduct.\157\
---------------------------------------------------------------------------

    \154\ Response Letter at 2.
    \155\ Id.
    \156\ Id.
    \157\ Id.
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Inadvertent Solicitations

    SIFMA further indicated that a safe harbor for inadvertent 
solicitations is warranted because there confusion exists as to what 
disclosures are due to which parties and when.\158\
---------------------------------------------------------------------------

    \158\ SIFMA Letter at 2.
---------------------------------------------------------------------------

    In response to SIFMA's concern, the MSRB explained that, as 
described in Amendment No. 1, the MSRB made a technical correction to 
the proposed rule change to correct a typographical error in Proposed 
Rule G-46(f)(i)(A) that it believes may have inadvertently contributed 
to any confusion.\159\ The MSRB identified that Amendment No. 1's 
revisions clarify that, at the time of the first direct communication 
with a solicited entity on behalf of a specific solicitor client, the 
requisite disclosures must be provided to the solicited entity 
representative (rather than the solicitor client representative as set 
forth in the Notice) with whom such communication is made.\160\ 
Further, the MSRB explained that this prose is consistent with the 
heading of section (f) of Proposed Rule G-46 (titled ``Timing and 
Manner of Disclosures to Solicited Entities'').\161\
---------------------------------------------------------------------------

    \159\ Response Letter at 2.
    \160\ Id.
    \161\ Id.
---------------------------------------------------------------------------

    The MSRB described that the dual disclosure obligation set forth in 
the proposed rule change require the following. For direct 
solicitations of a solicited entity by a solicitor municipal advisor, 
the MSRB stated that, at the time of the first solicitation, the 
solicitor municipal advisor would be required to make the disclosures 
required by Proposed Rule G-46(e) to the solicited entity 
representative (i.e., the person actually solicited, such as an 
employee of the solicited entity).\162\ The MSRB also noted that, if 
that solicitation results in the solicited entity engaging the 
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 again at the time that such engagement 
documentation is delivered to the solicited entity or promptly

[[Page 20012]]

thereafter.\163\ The MSRB wrote that the same standard would apply for 
indirect solicitations, except for the fact that, at the time of the 
first solicitation, the disclosures would be required to be provided to 
the intermediary with whom such communication is made.\164\
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    \162\ Response Letter at 2-3.
    \163\ Response Letter at 3.
    \164\ Id.
---------------------------------------------------------------------------

    The MSRB stated that a solicitor municipal advisor may make 
multiple solicitations of a solicited entity (sometimes spanning more 
than one year) before a solicitation may result in a solicited entity 
engaging a solicitor client.\165\ As a result, the MSRB concluded that 
it is important that the disclosures set forth in Proposed Rule G-46(e) 
are provided twice--once in connection with the initial solicitation so 
that the solicitee can appropriately evaluate the disclosures in 
connection with the solicitation and again at the time of the relevant 
engagement when an official that is reasonably believed to have the 
authority to bind the solicited entity by contract is guaranteed to 
receive the disclosures.\166\
---------------------------------------------------------------------------

    \165\ Id.
    \166\ Id.
---------------------------------------------------------------------------

    Next, the MSRB asserted that, pursuant to Sections 15B(e)(4)(ii) 
and (e)(9) of the Exchange Act,\167\ one meets the definition of a 
``municipal advisor'' if, in relevant part, one undertakes a direct or 
indirect communication with a municipal entity or obligated 
person.\168\ Consequently, the MSRB deemed it consistent with a 
regulated entity's supervisory and compliance obligations to expect 
regulated entities to be cognizant of their communications and to put 
into place appropriate processes to help them ascertain whether or not 
they are engaging in municipal advisory activity.\169\ The MSRB 
explained that, in the context of third-party solicitations, one such 
mechanism may be to inquire of intermediaries whether they represent 
municipal entities or obligated persons.\170\ The MSRB also noted that 
nothing would prohibit a solicitor municipal advisor from, out of an 
abundance of caution, providing the disclosures specified in Proposed 
Rule G-46(e) to all intermediaries that the solicitor municipal advisor 
solicits.
---------------------------------------------------------------------------

    \167\ 15 U.S.C. 78o-4(e)(4) and (e)(9).
    \168\ Response Letter at 3.
    \169\ Id.
    \170\ Id.
---------------------------------------------------------------------------

    After careful consideration, the MSRB stated that a safe harbor for 
inadvertent solicitations is not warranted. The MSRB explained that, 
consistent with the definition of ``municipal advisor'' under the 
Exchange Act, to trigger the application of Proposed Rule G-46, a 
solicitor municipal advisor must undertake the relevant solicitation 
``for the purpose of obtaining or retaining'' an engagement between the 
solicited entity and the solicitor client.\171\ Because this requires 
affirmative intent, the MSRB deemed that a provision for 
``inadvertent'' solicitations is not appropriate.\172\ To that end, the 
MSRB concluded that the example set forth in the SIFMA Letter would 
subject a firm to Proposed Rule G-46. If a firm initially solicits a 
solicited entity on its own behalf, but the solicited entity 
unilaterally chooses not to engage the firm and, instead, seeks to 
engage a third-party investment adviser and the firm earns compensation 
based on such engagement, the MSRB does not believe that the firm would 
be subject to Proposed Rule G-46 if it has not solicited the solicited 
entity for the purpose of obtaining or retaining an engagement on 
behalf of that third-party investment adviser.\173\
---------------------------------------------------------------------------

    \171\ Exchange Act Section 15B(e)(9), 15 U.S.C. 78o-4(e)(9).
    \172\ Response Letter at 3.
    \173\ Response Letter at 3-4.
---------------------------------------------------------------------------

III. Discussion of Commission's Findings

    The Commission has carefully considered the proposed rule change, 
the comment letter received, the MSRB Response Letter, and Amendment 
No. 1. The Commission finds that the proposed rule change, as modified 
by Amendment No. 1, is consistent with the requirements of the Exchange 
Act, and the rules and regulations thereunder applicable to the MSRB.
    In particular, the Commission believes that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
provisions of Section 15B(b)(2)(C), which provides, in part, 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.\174\
---------------------------------------------------------------------------

    \174\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 1, will: (i) prevent fraudulent and manipulative acts and 
practices; (ii) foster cooperation and coordination among regulators; 
and (iii) protect investors, municipal entities, obligated persons, and 
the public interest.

A. Prevention of Fraudulent and Manipulative Acts and Practices

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 1, would help prevent fraudulent and manipulative acts 
and practices.
    First, Proposed Rule G-46 would expressly 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.\175\ Second, Proposed Rule G-46 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.\176\ Third, Proposed Rule G-46 expressly would 
prohibit solicitor municipal advisors from delivering an inaccurate 
invoice for fees or expenses.\177\ The Commission believes that the 
proposed rule change's prohibitions prevent either: (i) forms of 
fraudulent and manipulative acts and practices themselves (e.g., 
materially false or misleading representations and inaccurate invoices 
for fees or expenses) or (ii) behavior that could reasonably be 
understood to accompany (or serve as indicia of) the commission of 
fraudulent and manipulative acts and practices, if they are not 
fraudulent and manipulative acts and practices themselves (e.g., 
lacking reasonable basis for a material representation). Furthermore, 
the proposed Supplementary Materials to Rule G-46 provide explanations 
of Proposed Rule G-46's prohibitions of fraudulent and manipulative 
acts and practices. This increased clarity would increase the 
effectiveness of such prohibitions by raising understanding of these 
prohibitions among solicitor municipal advisors and the municipal 
entities and obligated persons with whom they interact.
---------------------------------------------------------------------------

    \175\ Notice, 88 FR 9568.
    \176\ Id.
    \177\ Id.
---------------------------------------------------------------------------

    Additionally, Proposed Rule G-46 prohibit solicitor municipal 
advisors from making payments for the purpose of obtaining or retaining 
an engagement to perform municipal advisory activities

[[Page 20013]]

(subject to specified exceptions).\178\ Among other things, the 
Commission finds that this prohibition would effectively require 
solicitor municipal advisors to use only associated persons or other 
regulated solicitor municipal advisors to obtain business on their 
behalf. This proposed rule change 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.
---------------------------------------------------------------------------

    \178\ Id.
---------------------------------------------------------------------------

    As such, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, helps prevent fraudulent and manipulative 
acts and practices.

B. Fostering Cooperation and Coordination

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 1, would foster cooperation and coordination with persons 
engaged in regulating transactions in municipal securities and 
municipal financial products.
    Proposed Rule G-46 requires 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).\179\ Proposed Rule G-46's new documentation obligation 
(and the Supplementary Materials to Rule G-46 explaining it) 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). By promoting certainty regarding the regulatory scheme 
applicable to solicitor municipal advisors, the proposed rule change 
will allow different regulators to operate with a common understanding 
that these solicitations fall under the new regulatory regime for 
solicitor municipal advisors.
---------------------------------------------------------------------------

    \179\ Id.
---------------------------------------------------------------------------

    Similarly, the Commission finds that proposed Rule G-46 and the 
proposed amendments to Rule G-8 would assist regulators who examine 
solicitor municipal advisors understand the solicitation arrangement 
through both Proposed Rule G-46's documentation requirements, as well 
as Rule G-8's requirements that such documentation be preserved in 
solicitor municipal advisor's books and records.\180\ Furthermore, 
these proposals would provide these regulators with necessary 
information to assist in evaluating a solicitor municipal advisor's 
compliance with relevant obligations.\181\ The Commission further 
believes that the proposed amendments to Rule G-8 (with the ensuing 
application of existing MSRB Rule G-9 on records preservation) would 
help create an audit trail, assisting examination and enforcement 
authorities in their examination for compliance with, and prosecution 
of, these prohibitions.\182\
---------------------------------------------------------------------------

    \180\ Id.
    \181\ Id.
    \182\ Notice, 88 FR at 9567-68.
---------------------------------------------------------------------------

    As such, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, fosters cooperation and coordination among 
persons engaged in regulating transactions in municipal securities and 
municipal financial products.

C. Protection of Municipal Entities, Obligated Persons, and the Public 
Interest

    The Commission believes that the proposed rule change, as modified 
by Amendment No. 1, would protect municipal entities, obligated 
persons, and the public interest.
    Specifically, Proposed Rule G-46 requires 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.\183\ The 
Commission finds that this requirement would increase solicitor 
municipal advisor accountability and discourage conduct inconsistent 
with a solicitor municipal advisor's obligations under Proposed Rule G-
46 because such conduct would be required to be disclosed in 
information provided to clients. Specifically, the Commission finds 
that a municipal entity or obligated person could view a solicitor 
municipal advisor's disclosure of material conflict of interests and/or 
disclosure of material legal or disciplinary events as a reason to 
avoid retaining that solicitor municipal advisor. Therefore, the 
Commission believes that a solicitor municipal advisors may try to 
avoid such behavior to avoid losing future engagements. As such, the 
Commission finds that the proposed rule change incentivizes firms to 
refrain from behavior that could harm municipal entities and obligated 
persons, and therefore, protect municipal entities, obligated persons, 
and the public interest.
---------------------------------------------------------------------------

    \183\ Notice, 88 FR at 9565-66.
---------------------------------------------------------------------------

    The proposed rule change also would protect municipal entities, 
obligated persons, and the public interest by setting forth obligations 
applicable to solicitor municipal advisors similar to 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; 
\184\ document their relationships in writing; \185\ and refrain from 
certain conduct such as making certain materially false or misleading 
representations,\186\ delivering a materially inaccurate invoice,\187\ 
and making certain payments for the purpose of obtaining or retaining 
an engagement.\188\ Under Proposed Rule G-46, the protections provided 
by these provisions would be provided to municipal entities and 
obligated persons solicited by solicitor municipal advisors. 
Furthermore, the proposed changes to Rule G-8 would mandate preserving 
records related to Proposed Rule G-46; as such, Rule G-8 would 
strengthening these new protections by compelling contemporaneous 
documentation of compliance with them.
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    \184\ See Rule G-42(b)(i)(F).
    \185\ See Rule G-42(c) and Proposed Rule G-46(c).
    \186\ See Rule G-42(e)(i)(C) and Proposed Rule G-46(d)(i).
    \187\ See Rule G-42(e)(i)(B) and Proposed Rule G-46(g)(i).
    \188\ See Rule G-8 and Rule G-46.
---------------------------------------------------------------------------

    As such, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, protects municipal entities, obligated 
persons, and the public interest.
    In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation.\189\ Exchange Act Section 
15B(b)(2)(C) \190\ requires that MSRB rules not be designed to impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act. The Commission does not believe 
the proposed rule change, as modified by Amendment No. 1, would impose 
any new burden on competition as it would apply a regulatory regime 
equally to all

[[Page 20014]]

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).\191\ This consequence of the proposed rule 
change, as modified by Amendment No. 1, would not burden competition. 
Further, the Commission finds that 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. 
Accordingly, the Commission does not believe that the proposed rule 
change, as modified by Amendment No. 1, would result in any additional 
burden on competition that is not necessary or appropriate in in 
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \189\ 15 U.S.C. 78c(f).
    \190\ 15 U.S.C. 78o-4(b)(2)(C).
    \191\ See Rules G-42; G-8; and G-17.
---------------------------------------------------------------------------

    The Commission also finds that the proposed rule change, as 
modified by Amendment No. 1, will not hinder capital formation. As 
noted above, the proposed rule change brings a regulatory regime to 
solicitor municipal advisors similar to the regimes that currently 
exist for non-solicitor municipal advisors and underwriters. Therefore, 
Commission finds that the proposed rule change would not negatively 
impact the municipal securities market's operational efficiency.
    The Commission also finds that the proposed rule change includes 
provisions that could help promote efficiency. As noted above, the 
Commission believes that the proposed rule change would promote clearer 
regulatory requirements for all solicitor municipal advisors.
    As noted above, the Commission received one comment letter on the 
filing. The Commission believes that the MSRB, through its response and 
Amendment No. 1, addressed the commenters' concerns. For the reasons 
noted above, the Commission believes that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the Exchange Act.

V. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
is consistent with the Exchange 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; the Commission does not 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 April 25, 2023.

VI. Accelerated Approval of Proposed Rule Change as Modified by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of Amendment No. 1 in the Federal 
Register. As noted by the MSRB, Amendment No. 1 does not raise any 
significant issues with respect to the proposed rule change and only 
provides a minor change to address an issue raised by the commenter and 
other technical corrections. Further, the proposed rule change, as 
modified by Amendment No. 1, is designed to ease burdens without 
negatively affecting investors or the public interest.
    For the foregoing reasons, the Commission finds good cause for 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis, pursuant to Section 19(b)(2) of the Exchange Act.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\192\ that the proposed rule change (SR-MSRB-2023-02) be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Office of Municipal Securities, 
pursuant to delegated authority.\193\
---------------------------------------------------------------------------

    \193\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-06899 Filed 4-3-23; 8:45 am]
BILLING CODE 8011-01-P
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