Compliance Corner: Winter 2021
Compliance in Focus: How Your Input Will Help Modernize MSRB Interpretive Guidance
By Gail Marshall, MSRB Chief Regulatory Officer
In May 2021, the MSRB plans to retire 15 pieces of interpretive guidance that we believe have become outdated over time as market practices and our rules themselves have evolved. This is an initial step in a multi-year review of the historical body of interpretive guidance. The goal is to identify opportunities to clarify, amend or delete interpretive guidance to help ensure it continues to achieve the intended purposes. With the input of regulated entities and others, this initiative will be an impactful way to support compliance and reduce unnecessary costs and burdens for regulated entities, while fulfilling the MSRB’s regulatory obligation to protect investors, municipal entities, obligated persons, and the public interest.
In case you missed it, you can learn more about this initiative in our on-demand webinar available here.
The majority of the more than 200 unique pieces of interpretive guidance in the MSRB Rule Book is more than 20 years old. But what is old can be new again, as we see in this 1993 message from then-MSRB Chair Charles Fish that rings just as true today:
“If the Board is to keep pace with the accelerating rate of change, the increasing demand for liquidity and universally available information, we need your input. If we are to have more relevant rules, not just more rules, we need your input. If we are to maintain professional qualifications at levels consistent with the standards necessary to protect the investor, we need your input. If we are to effectively deny participation in the municipal securities industry to those that have shown disregard for its rules and have diminished the contributions of those who have toiled relentlessly for the highest standards of ethics, we need your input!”
Charles W. Fish
MSRB Chair 1992-1993.
Read Chair Fish’s full letter.
To echo Former Chair Fish, we need your input to inform the retrospective review of interpretive guidance. We will be seeking your comments, questions and concerns throughout this comprehensive effort. Please reach out to me directly at gmarshall@msrb.org or 202-838-1361.
Compliance Frequently Asked Questions ( FAQs)
This periodic feature provides answers to commonly asked questions about compliance with MSRB rules. The answers to these questions do not create new legal or regulatory requirements or new interpretations of existing requirements and should not be interpreted by regulated entities or examining authorities as establishing new standards of conduct. This resource should be read in conjunction with MSRB rules and interpretations. The complete text of all MSRB rules and interpretations is available here .
Q: Various state statutes provide authorization for Special District financing. As a municipal advisor to a special district that will be using municipal bond proceeds to purchase public improvements that have been constructed by a developer, would I need to disclose an affiliation with the developer?
A : Yes. MSRB Rule G-42 requires a municipal advisor to provide its client full and fair disclosure of any material conflicts of interest as well as any actual or potential conflict of interest that might impair the municipal advisor’s ability to provide advice to or on behalf of the client. Rule G-42(b) provides a non-exhaustive list of material conflicts of interest that must be disclosed, including disclosing if any affiliate of the municipal advisor provides any advice, service, or product to or on behalf of the client that is directly related to the municipal advisory activities to be performed by the disclosing municipal advisor.
Q: When the municipal advisor’s client is a municipal entity, does the municipal advisor’s fiduciary duty obligations mitigate all conflicts?
A: No. Supplementary Material .05 of Rule G-42 requires that written disclosures be sufficiently detailed to inform the client of the nature, implications and potential consequences of each conflict. The municipal advisor’s written disclosures must also include an explanation of how the municipal advisor addresses or intends to manage or mitigate each conflict in order to fulfill the duty of care and, as applicable, the duty of loyalty.
Compliance Tip: Is the Pandemic Making it Feel Like Groundhog Day?
Like Bill Murray's character lived the same day over and over again in the movie “Groundhog Day,” compliance officers continue to monitor the impact of the COVID-19 pandemic on their firms' operations long after they initially expected to. Similarly, the MSRB provided initial regulatory relief in light of the operational challenges due to the pandemic and has since extended such relief. Regulated entities should be sure to document their reliance on any of the temporary relief and continue to visit the MSRB’s COVID-19 information page for updates to FAQs about the regulatory relief – again and again.
Compliance Calendar
Dealers and municipal advisors should note the following key compliance dates and deadlines relevant through the fourth quarter of calendar year 2020 and first quarter of 2021.
March 31, 2021: Compliance Date for Revised Interpretive Notice of Underwriters’ Fair Dealing Obligations to Issuers under MSRB Rule G-17
March 31, 2021: Final Day of Extension of Time to Complete Certain Supervisory Functions under MSRB Rules G-27 and G-44
Enforcement Insight
This periodic feature summarizes a recent enforcement matter brought by an examining authority, which includes the SEC, FINRA or applicable bank regulator, relevant to the municipal securities market. Enforcement matters can, when applicable, inform firms and help identify potential compliance risks. Read about the MSRB’s regulatory coordination and enforcement support.
On December 22, 2020, First Midstate, Inc. and Paul D. Brown, its sole owner and president, agreed to a settlement with the Securities and Exchange Commission (SEC) for violations of MSRB Rule G-17 on Conduct of Municipal Securities and Municipal Advisory Activities and Rule G-21 on Advertising by Brokers, Dealers or Municipal Securities Dealers, as well as Section 15B(c)(1) of the Exchange Act of 1934, by effecting transactions in municipal securities in contravention of MSRB rules.
First Midstate, an Illinois broker-dealer, served as the sole underwriter on a number of bond offerings for municipal issuers, primarily school districts in Illinois during the relevant period, June 1, 2014 to October 1, 2018. The firm stated on its website that it had a large customer list which would allow it to locate suitable investors for the bonds at competitive interest rates. On some occasions, the firm made similar representations when soliciting issuers through responses to requests for proposals. In fact, the firm had an extremely limited client base and its practice was to sell the bonds it underwrote to other broker-dealers, not investors. Indeed, in 101 offerings where the firm was the sole underwriter, the firm sold the entire offering to a single broker-dealer. For those 101 offerings, the purchasing broker-dealer then marked up the bonds and resold them to investors at higher prices (and corresponding lower yields).
These practices were unfair to issuers and in violation of MSRB Rule G-17. Issuers may have received more competitive pricing for their bonds and, as a result, may have paid a lower yield, if the firm had sold the bonds to investors. In addition, the firm’s website violated MSRB Rule G-21 in that it included misleading content. The firm’s website noted that it had an extensive list of municipal bond purchasers and the ability to place each issue with investors but failed to disclose the firm’s practice of selling entire offerings to other broker-dealers who then resold those bonds to investors at higher prices.
As a result of this conduct, First Midstate and Brown agreed to pay civil penalties totaling $200,000 and to cease and desist from committing or causing any violations and any future violations of Section 15(B)(c)(1) of the Exchange Act and MSRB Rules G-17 and G-21. First Midstate also agreed to retain an independent compliance consultant to conduct a review of the firm’s policies and procedures as they relate to the firm’s disclosures to issuers regarding its municipal securities underwriting practices and its professional advertisements.
Regulatory Roundup
February 17, 2021: MSRB Extends Compliance Date for Amended Form G-32
February 16, 2021: MSRB Reminds Dealers of the March 31, 2021 Compliance Date for the Revised Interpretive Notice of Underwriters’ Fair Dealing Obligations to Issuers
February 11, 2021: MSRB to Retire Select Interpretive Guidance for Dealers and Municipal Advisors
January 29, 2021: MSRB’s Board Votes to Return $19 Million in Excess Reserves to the Industry
January 19, 2021: MSRB Notice: Designation Information Regarding Mandatory Participation in Business Continuity and Disaster Recovery Testing
January 15, 2021: The MSRB Announces Members of 2021 Board Advisory Groups. View the members of the Compliance Advisory Group.
January 13, 2021: The MSRB Publishes 2020 Annual Report and Audited Financial Statements
December 15, 2020: Federal Register Notice of Approval of Proposed Rule Change to Amend MSRB Form G-32
December 9, 2020: SEC Approval Order: Proposed Rule Change to Amend MSRB Form G-32
December 7, 2020: MSRB Notice: MSRB Requests Input on Strategic Goals and Priorities
December 2, 2020: MSRB Notice: MSRB Provides Additional Regulatory Relief During COVID-19 Pandemic
November 20, 2020: MSRB Notice: Reminder for Regulated Entities of Their Annual Notification Requirements Under Rule G-10
Keep up with current requests for comment, updated regulatory requirements and upcoming rule filings, and learn about opportunities to provide input at various stages of the MSRB’s rulemaking process.
