Compliance Corner: Fall 2021
Compliance in Focus: Hearing from Municipal Advisors Around the Country
By Gail Marshall, Chief Regulatory Officer
Over the course of the summer, the MSRB held five virtual regional town halls for municipal advisors across the country. We recognize that municipal advisors in different parts of the country specialize in unique types of transactions and have different ways of running their businesses. The MSRB’s regulatory framework for municipal advisors strives to account for these differences, aiming to provide guidance and compliance resources that enable all municipal advisors to do their jobs effectively, efficiently and fairly no matter where they practice.
During these virtual town halls, we had the opportunity to meet with over 260 municipal advisors to address their compliance questions and discuss their observations about the market. Many of the topics raised – books and records, registration requirements, professional qualification exams, tips and findings from compliance examinations – will also be discussed at the Virtual Compliance Outreach Program for Municipal Advisors on October 7, 2021 co-sponsored by the MSRB, Securities and Exchange Commission and Financial Industry Regulatory Authority. This program is a great capstone to the series of virtual regional town halls for municipal advisors that the MSRB held during the summer months.
Series 54 Exam Deadline Approaching
The compliance deadline is approaching for individuals engaging in the management, direction or supervision of the municipal advisory activities at their firms to take and pass the Municipal Advisor Principal Qualification Examination (Series 54 Exam). To facilitate compliance in light of pandemic-related challenges, the MSRB has made the Series 54 Exam available online on a temporary basis and extended the compliance deadline to November 30, 2021.
See resources for the Series 54 Exam on the MSRB’s Series 54 Examination webpage.
MSRB Seeks Comment on Draft Compliance Resources Concerning New Issue Pricing
The MSRB is requesting comment on draft companion compliance resources for brokers, dealers, municipal securities dealers and municipal advisors to enhance understanding regarding the existing regulatory standards applicable to regulated entities’ supervision of conduct when pricing a new issuance of municipal securities. Comments or information must be submitted by January 4, 2022.
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: If a municipal advisor has been engaged by a municipal entity client and hires another municipal advisor to perform some of the municipal advisory activities outlined in the scope of services, would obligations under MSRB Rule G-42 apply to the subcontracted municipal advisor?
A: Yes. Notwithstanding that the municipal advisor is subcontracted by another municipal advisor that has entered into an engagement agreement with the municipal entity client, the subcontracted municipal advisor would still be subject to the core standards of conduct and applicable duties under MSRB Rule G-42(a). Accordingly, in the performance of municipal advisory activities for the municipal entity client, the subcontracted municipal advisor would owe a duty of care and a duty of loyalty to the municipal client. In addition, while delivery of disclosures may be made by the municipal advisor with the engagement agreement, the municipal entity client is to receive the appropriate disclosures under Rule G-42(b) regarding the subcontracted municipal advisor (e.g., conflicts of interest).
Compliance Tip: Unlike Couples, Municipal Advisors Must Register BEFORE Getting Engaged
The SEC recently charged two individuals with improperly providing municipal advice to two charter school clients without their firm being registered with the SEC or the MSRB as a municipal advisor. In addition, the individuals were charged with violating MSRB Rule G-42 for failing to adequately disclose conflicts of interest and for engaging in a prohibited fee-splitting arrangement with an underwriter.
Compliance Calendar
Dealers and municipal advisors should note the following key compliance dates and deadlines relevant during the fourth quarter of calendar year 2021.
October 1, 2021: Quarterly Form G-37 Disclosure Submission Period Opens
October 31, 2021: Last Day to Make Timely Payment for Annual Registration Fee(s), Under Rule A-12
October 31, 2021: Quarterly Form G-37 Disclosure Submission Period Closes
November 30, 2021: Compliance date to become appropriately qualified as a Municipal Advisor Principal by having passed the Municipal Advisor Principal Qualification Examination (Series 54 Exam).
Enforcement InsightThis 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 September 23, 2021, the Securities and Exchange Commission (SEC) announced a settled action against Paula Permenter for engaging in municipal advisory services in contravention of the rules requiring municipal advisor firms to be registered with the SEC and MSRB. Permenter failed to disclose that her firm was not registered to clients and that she had a fee-splitting arrangement with her prior employer. This settlement is the first instance in which the SEC has charged a respondent with violations of MSRB Rule G-42.
Permenter and her colleague, Matthias O’Meara, were colleagues at a dealer and left in 2018 to form a municipal advisor firm, Choice Advisors, LLC, in May 2018. At the time they left employment with the dealer, Permenter and O’Meara negotiated to split fees on underwriting engagements that they originated while employed with the dealer. The fee-splitting agreement covered several of Choice Advisors’ clients, including at least two for which Permenter and Choice Advisors ultimately received fees pursuant to the agreement.
After the formation of Choice Advisors, but prior to Choice Advisors becoming registered with either the SEC or the MSRB, Permenter provided municipal advice to two charter schools, both first-time borrowers. Despite either school district expressing an interest to Permenter in obtaining the services of a municipal advisor, Permenter presented the engagement of Choice Advisors to both charter schools as a way to complete the transaction with their underwriter without interruption by her decision to leave employment with the dealer. In engaging the school districts, Permenter failed to disclose that Choice Advisors was not a registered municipal advisor, that her prior employment with the underwriter was a conflict of interest, and falsely stated that Choice Advisors did not share fees with any other parties.
As a result of this conduct, Permenter violated MSRB Rule A-12 on Registration and Section 15B(c)(1) of the Securities and Exchange Act of 1934 (Exchange Act), which prohibits any municipal advisor from providing advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products, the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, in contravention of any rule. Furthermore, Permenter violated MSRB Rule G-42 by engaging in a prohibited fee-splitting arrangement with an underwriter engaged on transactions for which Permenter provided advice, and by failing to provide full and fair disclosure of all material conflicts of interest to her clients. In addition to the settled action with Permenter, the SEC has filed a complaint against O’Meara and Choice Advisors, alleging violations of SEC rules and MSRB Rules A-12, G-17, and G-42.
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Regulatory Roundup
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 .
October 5, 2021: Request for Comment on Draft Compliance Resources for Dealers and Municipal Advisors Concerning New Issue Pricing
September 2, 2021: MSRB Provides Further Extension of Time to Take the Series 54 Qualification Examination
August 11, 2021: MSRB Provides Interim Accommodation for the Municipal Advisor Principal Qualification Examination (Series 54 Exam)
May 19, 2021: MSRB Updates Rule A-8, on Rulemaking Procedures
May 14, 2021: Request for Comment on Amendments to Rule G-10 Notification Requirements for Dealers
