Request for Comment on Draft Rule G-46 (on Activities of Municipal Advisors)

The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on draft Rule G-46 (on activities of municipal advisors).  Comments should be submitted no later than September 14, 2011 and may be submitted in electronic or paper form.  Electronic comments may be submitted via email to CommentLetters@msrb.org. Please indicate the notice number in the subject line of the email and, if possible, send comments in PDF format.  Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[1]

Questions about this notice should be directed to Peg Henry, Deputy General Counsel, or Kathleen Miles, Associate General Counsel, at 703-797-6600.

BACKGROUND

Rule G-23 requires that a broker, dealer, or municipal securities dealer (“dealer”) that enters into a financial advisory relationship must evidence that relationship in writing prior to, upon, or promptly after the relationship has been entered into.  The writing must set forth the basis for any compensation to be provided.  Rule G-23 does not cover municipal advisory relationships entered in by municipal advisors that are not dealers or other types of municipal advisory relationships entered into by dealers.  Draft interpretive notices under Rule G-17 and draft Rule G-36 would require municipal advisors to make certain conflicts disclosures in writing to their obligated person clients and municipal entity clients, respectively.

This request for comment discusses draft Rule G-46 (on activities of municipal advisors), which is modeled on Rule G-23, but is broader in scope.  The purpose of draft Rule G-46 is to ensure that there is written documentation by municipal advisors of their municipal advisory engagements with municipal entity or obligated person clients and that such documentation includes certain key disclosures.  Draft Rule G-46 would also require the disclosure to investors of certain affiliations.  Draft Rule G-46 would not apply to a municipal advisor that undertakes a solicitation of a municipal entity or obligated person on behalf of a third-party client.

Effective November 27, 2011, underwriters of municipal securities will also be required to provide certain written disclosures to issuers if they wish to be considered to be “acting as an underwriter” for purposes of Rule G-23(b).[2]  If a dealer that expected to be otherwise acting as an underwriter also expected to provide advice that would cause the dealer to be considered a municipal advisor under the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder, the dealer could provide the disclosures required by Rule G-23 and draft Rule G-46 in the same writing.  However, multiple writings would be permitted.

The MSRB is not requesting comment on draft amendments to Rule G-8 (on books and records) with regard to the writings described in draft Rule G-46, because the SEC has already proposed that municipal advisors keep records of all written communications relating to their municipal advisory activities and all written agreements entered into by them relating to their municipal advisory business as such.[3]

SUMMARY OF DRAFT RULE G-46

Draft Rule G-46 would require written evidence of a municipal advisory relationship with a municipal entity or obligated person (in each case, a “client”).  A municipal advisory relationship would be deemed to exist when a municipal advisor renders advice to a client or enters into an agreement with a client to render advice.  The writing generally would be required to be created prior to, upon, or promptly after the commencement of the municipal advisory relationship.  The writing would not need to be a two-party agreement.  For example, if state law provided for the procurement of municipal advisory services in a manner that did not include a written agreement, the municipal advisor could send a letter referencing the procurement document and containing the disclosures required by draft Rule G-46 to the appropriate official of the municipal entity.[4]

Draft Rule G-46 would require that the writing documenting the municipal advisory relationship include:

• the basis of compensation, if any;
• the disclosures required by Rule G-17 and draft Rule G-36 (such as the amount of direct and indirect compensation, the scope of services and any conflicts of interest);
• whether an affiliate of the municipal advisor provides advice, services, or products to the client, but only if the advice, services, or products are directly or indirectly related to the municipal advisory engagement of the disclosing municipal advisor; and
• whether the municipal advisor is registered as a municipal advisor with the SEC and the MSRB.

Draft Rule G-46 would require that the municipal advisor amend or supplement the writing during the term of the municipal advisory engagement as necessary to reflect changes in the above required disclosures.  For example, if the scope of services or basis of compensation changed during the term of the engagement, the municipal advisor would be required to amend or supplement the writing.  The same would be true in the case of conflicts of interest discovered or arising after the initial writing had been provided or entered into.

Draft Rule G-46 would also require that the municipal advisor provide written disclosure to investors of any affiliation that meets the requirements of section (d) of the draft rule (as set forth below) if a document prepared by the municipal advisor or the affiliate is included in an official statement for an issue of municipal securities (e.g., accountant’s letter, bond opinion, feasibility study).  This requirement could be satisfied if the municipal advisor’s affiliate provided written disclosure of the affiliation to investors.  For example, if the financial advisor for a bond issue were affiliated with the accounting firm that would certify as to the issuer’s financial statements, the disclosure of affiliation could be included in the accounting firm’s letter to the issuer, or disclosures concerning the accounting firm, which would be included in the official statement for the bonds.  These disclosures would alert investors to the affiliation.

If draft Rule G-46 is filed with the Securities and Exchange Commission (the “SEC”), the MSRB expects to propose that it be made effective on the date that the rules defining the term “municipal advisor” under Section 15B of the Exchange Act are first made effective by the SEC or such later date that it is approved by the SEC.

REQUEST FOR COMMENT

The MSRB requests comments on draft Rule G-46.

August 10, 2011

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TEXT OF DRAFT RULE G-46

Rule G-46

Activities of Municipal Advisors

(a)        Purpose.  The purpose and intent of this rule is to establish disclosure requirements for municipal advisors.

(b)        Municipal Advisory Relationship.  For purposes of this rule, a municipal advisory relationship shall be deemed to exist when a municipal advisor renders or enters into an agreement to render advice to or on behalf of a municipal entity or obligated person.

(c)        Agreement with Respect to Municipal Advisory Relationship.  Each municipal advisory relationship shall be evidenced by a writing entered into prior to, upon or promptly after the inception of the municipal advisory relationship (or promptly after the creation or selection of the issuer or obligated person, as appropriate, if the issuer or obligated person does not exist or has not been determined at the time the relationship commences).  Such writing shall include (i) the basis of compensation, if any, for the municipal advisory services to be rendered, (ii) the disclosure required by section (d) of this rule, (iii) the disclosures required by Rule G-17 and Rule G-36 to be made in writing to the municipal advisor’s client, and (iv) whether the municipal advisor is registered as a municipal advisor with the Commission and the Board, as required by law.   The writing shall be amended or supplemented during the term of the municipal advisory engagement as necessary to reflect changes in the disclosures required by this section.

(d)        Disclosure of Affiliation.  A municipal advisor must disclose to the municipal entity client or obligated person client whether the municipal advisor controls, is controlled by, or is under common control with, another person (an “affiliate”) that provides advice, services, or products to such municipal entity client or obligated person client if the advice, services, or products of the affiliate are directly or indirectly related to the municipal advisory engagement of the disclosing municipal advisor.

(e)        Disclosure to Investors.  If all or a portion of a document prepared by a municipal advisor or an affiliate is included in an official statement for an issue of municipal securities, the municipal advisor must provide written disclosure to investors of any affiliation that meets the criteria of section (d) of this rule.  The disclosure requirement of this section (e) shall be deemed satisfied if the municipal advisor’s affiliate provides written disclosure of the affiliation to investors.