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Guidance on the Prohibition on Underwriting Issues of Municipal Securities for Which a Financial Advisory Relationship Exists Under Rule G-23
MSRB Rule G-23 establishes certain basic requirements applicable to a broker, dealer, or municipal securities dealer (“dealer”) acting as a financial advisor with respect to the issuance of municipal securities. MSRB Rule G-23(d) provides that a dealer that has a financial advisory relationship with respect to the issuance of municipal securities is precluded from acquiring all or any portion of such issue, directly or indirectly, from the issuer as principal, either alone or as a participant in a syndicate or other similar account formed for that purpose. A dealer is also precluded from arranging the placement of an issue with respect to which it has a financial advisory relationship. This notice refers to both of these activities as “underwritings” and provides interpretive guidance on when a dealer may be precluded by Rule G-23(d) from underwriting an issue of municipal securities due to having served as financial advisor with respect to that issue. Rule G-23 is solely a conflicts rule. Accordingly, this notice does not address whether provision of the advice permitted by Rule G-23 would cause the dealer to be considered a “municipal advisor” under the Exchange Act and the rules promulgated thereunder.
Rule G-23(b) provides, among other things, that a financial advisory relationship shall be deemed to exist for purposes of Rule G-23 when a dealer renders or enters into an agreement to provide financial advisory or consultant services to or on behalf of an issuer with respect to the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such issue or issues. Rule G-23(b) also provides, however, that a financial advisory relationship shall not be deemed to exist when, in the course of acting as an underwriter and not as a financial advisor, a dealer provides advice to an issuer, including advice with respect to the structure, timing, terms, and other similar matters concerning the issuance of municipal securities.
Although Rule G-23(c) requires a financial advisory relationship to be evidenced by a writing, a financial advisory relationship will be deemed to exist whenever a dealer renders the types of advice provided for in Rule G-23(b), regardless of the existence of a written agreement. However, a dealer that clearly identifies itself in writing as an underwriter and not as a financial advisor from the earliest stages of its relationship with the issuer with respect to that issue (e.g., in a response to a request for proposals or in promotional materials provided to an issuer) will be considered to be “acting as an underwriter” under Rule G-23(b) with respect to that issue. The writing must make clear that the primary role of an underwriter is to purchase, or arrange for the placement of, securities in an arm’s-length commercial transaction between the issuer and the underwriter and that the underwriter has financial and other interests that differ from those of the issuer. The dealer must not engage in a course of conduct that is inconsistent with an arm’s-length relationship with the issuer in connection with such issue of municipal securities or the dealer will be deemed to be a financial advisor with respect to that issue and precluded from underwriting that issue by Rule G-23(d). Thus, a dealer providing advice to an issuer with respect to the issuance of municipal securities (including the structure, timing, and terms of the issue and other similar matters, when integrally related to the issue being underwritten) will not be viewed as a financial advisor for purposes of Rule G-23, if such advice is rendered in its capacity as underwriter for such issue. In addition to engaging in underwriting activities, it shall not be a violation of Rule G-23(d) for a dealer that states that it is acting as an underwriter with respect to the issuance of municipal securities to provide advice with respect to the investment of the proceeds of the issue, municipal derivatives integrally related to the issue, or other similar matters concerning the issue.
1. Alternative Regulatory Solutions, L.L.C.: Letter from Kimberly McManus, President, dated December 13, 2011
2. Bond Dealers of America: Letter from Michael Nicholas, CEO, dated December 13, 2011
3. Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director, Associate General Counsel, dated December 13, 2011
4. TMC Bonds L.L.C.: Letter from John S. Craft, Director of Sales and Marketing, dated December 13, 2011
Reminder Regarding the Application of Rule G-37 to Federal Election Campaigns of Issuer Officials
In 1999, the MSRB published a notice on the application of Rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials.[1] In general, the notice described a 1995 interpretive letter[2] in which the Board noted that Rule G-37 is applicable to contributions given to an official of an issuer[3] who seeks election to federal office, such as the Presidency. The Board also explained that the only exception to Rule G-37’s absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals. Specifically, contributions by such persons to an official of an issuer would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official’s Presidential campaign without causing a ban on municipal securities business with that issuer. Finally, the Board noted that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign. In these circumstances, federal law allows individuals to contribute to the candidate’s compliance fund, which uses the contributions solely for legal and accounting services to ensure compliance with federal law and not for campaign activities. Thus, any municipal finance professional in the country can contribute the de minimis amount to an issuer official’s compliance fund without causing a ban on municipal securities business with that issuer. This would apply if the issuer official runs for President or Vice President.
The MSRB wishes to remind dealers that these concepts also apply to an issuer official who campaigns for any federal office. For example, any municipal finance professional residing in a state in which an issuer official is campaigning for a state-wide federal office may contribute the de minimis amount to the official’s campaign without causing a ban on municipal securities business with that issuer. The MSRB does not opine whether any particular individual is or is not an issuer official.
The MSRB also wishes to remind dealers to be aware of the Rule G-37 issues involving indirect rule violations and contributions to non-dealer associated political action committees and payments to political parties, which issues have been the subjects of previous notices and interpretive Questions and Answers.[4]
September 28, 2011
[1] See Application of Rule G-37 to Presidential Campaigns of Issuer Officials reprinted in MSRB Rule Book (January 1, 2011) at 299-300. The notice is also available from the MSRB Rules/Interpretive Notices section of the MSRB’s website at www.msrb.org.
[2] See MSRB Interpretation of May 31, 1995, reprinted in MSRB Rule Book (January 1, 2011) at 309-311. The letter is also available from the MSRB Rules/Interpretive Letters section of the MSRB’s website at www.msrb.org.
[3] The term “official of an issuer” is defined in Rule G-37(g)(vi) as any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or of any political subdivision, which office has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by an issuer.
[4] See Notice Concerning Indirect Rule Violations: Rules G-37 and G-38, reprinted in MSRB Rule Book (January 1, 2011) at 302-303; Rule G-37 Questions and Answers Nos. III.4 and III.5 regarding contributions to a non-dealer associated PAC and payments to a state or local political party, reprinted in MSRB Rule Book (January 1, 2011) at 290; and Rule G-37 Question and Answer No. III.7 regarding supervisory procedures relating to indirect contributions, reprinted in MSRB Rule Book (January 1, 2011) at 291. The notice and Questions and Answers are also available on the MSRB’s website at www.msrb.org.
1. Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated November 3, 2011
2. Dolan, Tom: Letter dated October 21, 2011
3. Hartfield, Titus & Donnelly, LLC: Letter from Mark J. Epstein, President and CEO, dated November 3, 2011
4. Knight BondPoint: Letter from Marshall Nicholson, Managing Director, dated November 3, 2011
5. Regional Brokers, Inc.: Letter from Joseph A. Hemphill III, President, and H. Deane Armstrong, CCO, dated November 1, 2011
6. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated November 2, 2011
7. TMC Bonds L.L.C.: Letter from Thomas S. Vales, Chief Executive Officer, dated November 3, 2011
8. Vista Securities, Inc.: Letter from Paul Larkin, President, dated November 1, 2011
9. Wolfe & Hurst Bond Brokers, Inc.: Letter from O. Gene Hurst, President, dated November 3, 2011
1. College Savings Plans Network: Letter from Joan Marshall, Chair, dated September 14, 2011
2. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated September 14, 2011
1. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated September 14, 2011
2. WM Financial Strategies: Letter from Joy A. Howard, Principal, dated September 13, 2011
1. Kaplan Financial Consulting, Inc.: E-mail from Dan Kaplan, dated July 29, 2011
2. Kitahata & Company: E-mail from Gary Kitahata, Principal, dated July 26, 2011
3. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated August 29, 2011
4. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated September 12, 2011
5. Repsholdt, John V.: Letter dated August 29, 2011
6. Securities Industry and Financial Markets Association: Letter from Michael Decker, Managing Director, dated September 12, 2011
1. Bond Dealers of America: Letter from Mike Nicholas, Chief Executive Officer, dated June 24, 2011
2. Bradley Payne LLC: Letter from John B. Payne, Principal, dated May 25, 2011
3. Dixworks LLC: Letter from Dennis Dix, Jr., Principal, dated June 1, 2011
4. First Southwest: Letter from Robert Coulter, Senior Vice President, Chief Administrative Officer, dated June 23, 2011
5. Leigh Fisher: Letter from Nicholas Davidson, President, dated June 22, 2011
6. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated June 24, 2011
7. Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director, Associate General Counsel, dated June 24, 2011
8. Third Party Marketers Association: Letter from Lisa Roth, Board Director, dated June 13, 2011
1. American Municipal Securities, Inc.: Letter from John C. Petagna, Jr., President, dated April 26, 2011
2. Barker, Bill: E-mail dated April 18, 2011
3. Bond Dealers of America: Letter from Mike Nicholas, Chief Executive Officer, dated April 21, 2011
4. Chapdelaine & Co.: Letter from August J. Hoerrner, President, dated May 5, 2011
5. Conners & Company, Inc.: E-mail from Jay White dated April 13, 2011
6. Foard, Dale: E-mail dated April 21, 2011
7. Hartfield, Titus & Donnelly, LLC: Letter from Mark J. Epstein, President and Chief Executive Officer, dated April 21, 2011
8. KeyBanc Capital Markets Inc.: E-mail from Michael A. Burrello, Managing Director, Municipal Trading and Underwriting, dated April 21, 2011
9. Kiley Partners, Inc.: E-mail from Michael Kiley dated April 12, 2011
10. Knight BondPoint: Letter from Marshall Nicholson, Managing Director, dated April 21, 2011
11. M.E. Allison & Co., Inc.: E-mail from Christopher R. Allison, Chief Financial Officer, dated April 20, 2011
12. National Alliance Securities: E-mail from Bob Barnette, Municipal Trader, dated April 21, 2011
13. Oppenheimer & Co., Inc.: Letter from Marty Campbell, Senior Director, Municipal Underwriting & Trading
14. Potratz, Jay: E-mail dated April 21, 2011
15. R. Seelaus & Co., Inc.: E-mail from Richard Seelaus dated April 13, 2011
16. Regional Brokers, Inc.: Letter from Joseph A. Hemphill, III, CEO, and H. Deane Armstrong, CCO, dated April 21, 2011
17. Regional Brokers, Inc.: Letter from Joseph A. Hemphill, III, President and CEO, and H. Deane Armstrong, CCO, dated May 12, 2011
18. RH Investment Corporation: Letter from Andrew L. "Bud" Byrnes, III, Chief Executive Officer, dated April 21, 2011
19. Robbins, Leonard Jack: Letter dated May 1, 2011
20. RW Smith & Associates, Inc.: Letter from Paige W. Pierce, President and CEO, dated April 27, 2011
21. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated April 29, 2011
22. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated April 29, 2011
23. Seidel & Shaw, LLC: Letter from Thomas W. Shaw, President
24. Sentinel Brokers Company, Inc.: E-mail from Joseph M. Lawless, President, dated April 12, 2011
25. Sentinel Brokers Company, Inc.: E-mail from Joseph M. Lawless, President, dated April 13, 2011
26. Seven Points Capital: E-mail from Jerry Racasi dated April 13, 2011
27. Stifel, Nicolaus & Company, Incorporated: E-mail from Andy Jackson dated April 20, 2011
28. Stoever Glass & Co.: Letter from Frederick J. Stoever, President, dated April 15, 2011
29. TheMuniCenter, LLC: Letter from Thomas S. Vales, Chief Executive Officer, dated April 21, 2011
30. Tradeweb Markets LLC: Letter from John Cahalane, Managing Director, Head of Tradeweb Retail, dated May 3, 2011
31. Walsh, John: E-mail dated April 21, 2011
32. Wiley Bros.-Aintree Capital, LLC: E-mail from Keener Billups, Managing Director, dated April 26, 2011, corrects Wiley Bros.-Aintree Capital, LLC: E-mail from Keener Billups, Managing Director, dated April 13, 2011
33. William Blair: E-mail from Tom Greene dated April 21, 2011
34. Welbourn, Steve: E-mail dated April 21, 2011
35. Wolfe & Hurst Bond Brokers, Inc.: Letter from O. Gene Hurst, President, dated April 25, 2011, corrects Wolfe & Hurst Bond Brokers, Inc.: Letter from O. Gene Hurst, President, dated April 21, 2011
36. Ziegler Capital Markets: E-mail from Kathleen R. Murphy dated April 13, 2011
1. Catholic Finance Corporation: Letter from Michael P. Schaefer, Executive Director, dated February 16, 2011
2. Catholic Finance Corporation: Letter from Michael P. Schaefer, Executive Director, dated April 5, 2011
3. Fisher, Robert: E-mail dated April 6, 2011
4. Municipal Regulatory Consulting LLC: Letter from David Levy, Principal, dated April 1, 2011
5. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated April 1, 2011
6. Public Financial Management, Inc.: Letter from Joseph J. Connolly, General Counsel, dated April 4, 2011
7. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated April 5, 2011
8. WM Financial Strategies: Letter from Joy A. Howard, Principal, dated April 2, 2011
1. American Federation of State, County and Municipal Employees: Letter from Gerald W. McEntee, International President, dated April 11, 2011
2. Bond Dealers of America: Letter from Mike Nicholas, Chief Executive Officer, dated April 11, 2011
3. Municipal Regulatory Consulting LLC: Letter from David Levy, Principal, dated April 11, 2011
4. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated April 11, 2011
5. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated April 11, 2011
1. American Federation of State, County and Municipal Employees: Letter from Gerald W. McEntee, International President, dated April 11, 2011
2. American Governmental Financial Services: E-mail from Robert Doty, President, dated April 11, 2011
3. B-Payne Group: Letter from John B. Payne, Principal, dated March 28, 2011
4. Catholic Finance Corporation: Letter from Michael P. Schaefer, Executive Director, dated April 11, 2011
5. Municipal Regulatory Consulting LLC: Letter from David Levy, Principal, dated April 11, 2011
6. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated April 11, 2011
7. Not For Profit Capital Strategies: E-mail from Ed Crouch, dated February 14, 2011
8. Public Financial Management: Letter from Joseph J. Connolly, General Counsel, dated April 8, 2011
9. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated April 11, 2011
1. American Bankers Association: Letter from Cristeena G. Naser, Senior Counsel, dated April 11, 2011
2. American Council of Engineering Companies: Letter from David A. Raymond, President and CEO, dated April 11, 2011
3. American Federation of State, County and Municipal Employees: Letter from Gerald W. McEntee, International President, dated April 11, 2011
4. American Governmental Financial Services: E-mail from Robert Doty, President, dated April 11, 2011
5. B-Payne Group: Letter from John B. Payne, Principal, dated March 28, 2011
6. Education Finance Council: Letter from Vince Sampson, President, dated April 11, 2011
7. Fi360: Letter from Blaine F. Aikin, CEO, and Kristina A. Fausti, Director of Legal and Regulatory Affairs, dated April 11, 2011
8. Lewis Young Robertson & Burningham, Inc.: Letter from Scott J. Robertson, Principal, dated April 11, 2011
9. Michigan Bankers Association: Letter from Richard D. Lavolette, General Counsel
10. Municipal Regulatory Counsulting LLC: Letter from David Levy, Principal, dated April 11, 2011
11. National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated April 11, 2011
12. Not For Profit Capital Strategies: E-mail from Ed Crouch, dated February 14, 2011
13. Phoenix Advisors, LLC: E-mail from Peter G. Egan, Managing Director, dated March 3, 2011
14. Phoenix Advisors, LLC: E-mail from Peter G. Egan, Managing Director, dated March 4, 2011
15. Public Financial Management: Letter from Joseph J. Connolly, General Counsel, dated April 8, 2011
16. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated April 11, 2011
17. Wisconsin Bankers Association: Letter from Rose Oswald Poels, Interim CEO/President, dated April 11, 2011
1. Acacia Financial Group, Inc.: Letter from Kim M. Whelan, Co-President, dated February 25, 2011
2. American Bankers Association: Letter from Cristeena G. Naser, Senior Counsel, dated February 25, 2011
3. American Governmental Financial Services: E-mail from Robert Doty, President, dated March 1, 2011
4. BMO Capital Markets GKST Inc.: Letter from Robert J. Stracks, Counsel, dated February 25, 2011
5. Callcott, W. Hardy: Letter dated February 8, 2011
6. Fisher, Robert: E-mail dated February 25, 2011
7. G.L. Hicks Financial LLC: E-mail from Dareth Goulding, dated January 14, 2011
8. H.J. Umbaugh & Associates: Letter from Gerald G. Malone, dated February 24, 2011
9. National Association of Independent Public Finance Advisors: Letter from Colette Irwin-Knott, President, dated February 24, 2011
10. Repex & Co., Inc.: E-mail from Erich Sokolower, dated January 14, 2011
11. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated February 25, 2011
12. State of Texas: Letter from Susan Combs, Texas Comptroller of Public Accounts, dated February 25, 2011
13. State of Texas: Letter from Charles B. McDonald, Assistant Attorney General, Office of Attorney General of Texas, dated February 25, 2011
14. T. Rowe Price: Letter from David Oestreicher, Chief Legal Counsel, dated February 25, 2011
15. The PFM Group: Letter from Joseph J. Connolly, General Counsel, dated February 23, 2011
16. WM Financial Strategies: Letter from Joy A. Howard, Principal, dated February 21, 2011
