State and local government issuers rely on the municipal securities market to raise money to finance their capital projects. Whether they issue securities once a decade or many times a year, state and local government issuers and related agencies (municipal entities) generally hire a municipal advisor, an underwriter or both to assist with the offering. This document provides an overview of the duties and obligations of municipal advisors and dealers that are regulated by the Municipal Securities Rulemaking Board (MSRB) and summarizes the key responsibilities of these professionals under MSRB rules.
Dealers and Municipal Advisors Must Register with MSRB and SEC
Dealers and municipal advisors must register with the MSRB and the U.S. Securities and Exchange Commission (SEC) before engaging in certain municipal securities and advisory activities. See the list of dealers and municipal advisors registered with MSRB.
Dealers and Municipal Advisors Have Duty of Fair Dealing
MSRB Rule G-17 requires that dealers and municipal advisors deal fairly with all persons in the conduct of their municipal securities or municipal advisory activities, including their municipal entity clients, and prohibits dealers and municipal advisors from engaging in any deceptive, dishonest or unfair practice.
Rule G-17 also requires that dealers underwriting a municipal securities transaction on a negotiated basis disclose certain information to municipal entities and obligors in writing at several points in the transaction, including:
- The arm’s-length nature of an underwriting transaction (underwriters have financial and other interests that may differ from those of the issuer)
- The role of an underwriter, compensation and conflicts of interests
- Material financial characteristics and risks of complex and applicable routine financings.
Dealers and Municipal Advisors Must Steer Clear of Pay to Play
MSRB Rule G-37 does not prohibit dealers and municipal advisors from making political contributions. However, it does restrict dealers and municipal advisors from engaging in municipal securities business (that is, negotiated underwritings or private placements) or municipal advisory business with a municipal entity for two years after certain political contributions have been made to an official of that municipal entity that has the power to hire such professionals. Learn more about ban on business provisions.
An exception applies for contributions made by municipal finance professionals and municipal advisor professionals to an official for whom they are entitled to vote if their contributions to that official do not exceed $250 per election.
Rule G-37 also subjects dealers and municipal advisors to certain prohibitions on soliciting and coordinating contributions to issuer officials and payments to state and local political parties and requires that dealers and municipal advisors submit quarterly disclosures to the MSRB about their municipal securities or municipal advisory business and certain political contributions and payments.
Dealers Prohibited from Making Certain Payments Related to Solicitation of Municipal Securities Business
MSRB Rule G-38 generally prohibits dealers from providing or agreeing to provide, directly or indirectly, payment to any unaffiliated person for soliciting municipal securities business from a municipal entity on their behalf. However, in some circumstances, a third party may solicit business from an issuer on behalf of an investment adviser or certain other financial professionals as a paid solicitor. In such cases, the third-party would be treated as a solicitor municipal advisor that is required under MSRB Rule G-46 to make certain disclosures to the issuer about its relationship with the party on whose behalf it is soliciting municipal securities business from the issuer.
Limitations on Gifts and Gratuities
MSRB Rule G-20 prohibits dealers and municipal advisors from making certain gifts and gratuities in excess of $100 per year if such payments or services are in relation to the municipal securities or municipal advisory activities of the employer of the recipient of the payment or service. This limit generally applies to gifts or gratuities to issuer personnel.
There are exclusions from the $100 limit for certain categories of gifts if those gifts do not give rise to any apparent or actual material conflict of interest. These include gifts in connection with normal business dealings, such as occasional meals or tickets to theatrical or sporting events, the sponsoring of legitimate business functions, and de minimis gifts or promotional gifts of nominal value that otherwise satisfy certain conditions.
Rule G-20 also prohibits a dealer or municipal advisor from seeking reimbursement from the proceeds of a municipal securities offering for certain entertainment costs or expenses if they are not ordinary and reasonable expenses for meals hosted by the dealer or municipal advisor and directly related to the offering for which the dealer or municipal advisor was retained.
With some exceptions, Rule G-20 also generally limits a dealer or any of its associated persons from accepting or providing certain non-cash compensation in connection with the sale and distribution of a primary offering of municipal securities.
Municipal Advisors Must Uphold Certain Standards of Conduct
In addition to the standard of fair dealing, municipal advisors must follow certain standards of conduct when providing advice to their clients. As a matter of federal securities law, municipal advisors owe a fiduciary duty to municipal entity clients when advising them concerning the issuance of municipal securities and certain other matters. Consistent with the fiduciary duty, MSRB Rule G-42 provides that municipal advisors owe their municipal entity clients a duty of loyalty and a duty of care.
In conduit borrowings, where a municipal entity acts as a “conduit issuer” on behalf of the non-governmental borrower (or obligor), municipal advisors owe a duty of care to their obligated person clients rather than a statutory fiduciary duty. For all municipal advisory clients, MSRB Rule G-42 requires municipal advisors to disclose material conflicts of interest and to document in writing the scope of their advisory relationship. In addition, Rule G-42 requires municipal advisors to conduct reasonable due diligence prior to making any recommendations to their clients.
Dealers Acting as Financial/Municipal Advisors Prohibited from Certain Role Switching
MSRB Rule G-23 generally prohibits a dealer that has a financial advisory relationship with an issuer with respect to the issuance of municipal securities (this role being one category of municipal advisory activities) from acquiring, as a principal acting alone or as a syndicate member, directly or indirectly, all or any portion of the offering or act as a placement agent for the offering. That is, a dealer that has provided such advice for an offering cannot, either simultaneously or after resigning as financial/municipal advisor, serve as underwriter for that offering.
Underwriters Must Adhere to Retail Order Periods and Priority Orders Specified by Issuer
Under MSRB Rule G-11, before the offer of securities by the underwriting syndicate, the senior syndicate manager is required to provide the other syndicate members and selling group members, in writing, certain information about the offering, including, among other things, any of the issuer’s terms and conditions on the offering, the issuer’s retail order period requirements and priority provisions, as well as procedures, if any, by which the priority provisions may be changed. If a retail order period is established, certain retail bond purchase orders generally must be given priority over other orders based on eligibility criteria established by the issuer.
Underwriters and Municipal Advisors Required to Obtain CUSIP Numbers for New Issuance
MSRB Rule G-34 requires the underwriter in a negotiated offering to apply for CUSIP numbers (unique nine-digit identifiers for financial securities) for the new issue no later than the time that pricing information for the new issue is finalized. This ensures sufficient time for CUSIP number assignment to occur prior to the formal award of the issue. In a competitive offering, the municipal advisor must apply to obtain CUSIP numbers for the new offering at a time sufficient to ensure final CUSIP number assignment occurs prior to the award of the issue. In a competitive offering where CUSIP numbers have not been preassigned (for example, if there is no municipal advisor, or if the municipal advisor has failed to obtain CUSIP numbers), the underwriter is required to apply for CUSIP numbers immediately after receiving notification of the award from the issuer.
The requirement to obtain CUSIP numbers also generally applies to placement agents in the private placement of municipal securities except under limited circumstances (such as a direct purchase by a bank or a non-broker-dealer affiliate of a bank or certain placements of bonds into a state revolving fund or bond bank where the purchaser is reasonably believed to intend to hold to maturity or earlier redemption or mandatory tender).
Underwriters Required to Report Information about New Issuance and Post Official Statements to EMMA
MSRB Rule G-34 requires underwriters of municipal securities to submit certain information about a new issue of municipal securities information to the New Issue Information Dissemination Service (NIIDS) of the Depository Trust and Clearing Corporation. Relatedly, program dealers and remarketing agents must submit information to the MSRB’s Short-term Obligation Rate Transparency (SHORT) System for dissemination to the public. MSRB Rule G-32 requires underwriters to submit official statements, if available, and escrow agreements for advance refundings for posting on the MSRB’s Electronic Municipal Market Assess (EMMA®) website within certain time periods.
Underwriters Must Determine That Issuer Has Committed to Provide Continuing Disclosures to EMMA
Underwriters have responsibilities under other securities laws applicable to municipal securities offerings. For example, the SEC’s Rule 15c2-12 generally prohibits an underwriter from purchasing or selling most new issues of municipal securities unless the underwriter has determined that the issuer has committed through a continuing disclosure agreement or continuing disclosure undertaking to provide certain updated information on a periodic basis to the MSRB. Consequently, issuers of municipal securities subject to the SEC rule generally contractually commit to submit annual disclosures with updated financial information and operating data, as well as certain event-based disclosures, to the EMMA website.
