Compliance Corner: Fall 2020

Compliance in Focus: Seeking Volunteers for the Compliance Advisory Group

By Frank Fairman, MSRB Board Member and Chair of the Compliance Advisory Group

In my time on the Board, I have had the opportunity to collaborate with many compliance professionals who are deeply committed to creating a culture of compliance at firms that serve municipal bond investors and issuers. Many of these compliance professionals generously volunteered their time to serve on the Board’s Compliance Advisory Group (CAG) in recent years. The Board is re-establishing CAG for Fiscal Year 2021, and applications are now open for volunteers and suggestions for topics for the group to consider.

Input from CAG members and other stakeholders helps the Board prioritize and develop compliance resources and educational materials that effectively assist dealers and municipal advisors with their efforts in developing effective supervisory and compliance programs. This input is particularly valuable as the MSRB continues to focus on reviewing our rules and the associated body of interpretive guidance for opportunities to modernize and streamline.

Qualified individuals should email their name, a resume or biography documenting their experience in the municipal securities market, along with a statement of interest in serving on CAG to Nikki Faucette at nfaucette@msrb.org. The MSRB will accept volunteer submissions through December 15, 2020 and assess candidates based on knowledge and experience as well as other factors such as diversity in geographic location and size and type of firm.

You can read more about MSRB advisory groups and the volunteer process here. We look forward to another year of close collaboration with the compliance professionals of the municipal market.

Frank Fairman is a member of the Board of Directors of MSRB and serves on the Finance Committee and the Nominating Committee.

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 :  Under MSRB Rule G-37, on political contributions, if a municipal finance professional (MFP) or a municipal advisor professional (MAP) inadvertently makes a political contribution to an official of a municipal entity, which would subject the regulated entity to the two-year prohibition on business, does the regulated entity have to disclose the contribution on Form G-37, if the regulated entity avails itself of an exemption under Rule to cure the ban on business?

A : Yes, in cases where a regulated entity takes the necessary steps to cure the ban on business by availing itself of one of the exemptions, which includes the conditional requirement to return the contribution, the regulated entity would still need to disclose the contribution on Form G-37. More specifically, under provisions (i) and (j) of Rule G-37, a regulated entity that is subject to a ban on business, as a result of a contribution, may cure the ban on business, upon satisfying the requirements under one of the applicable provisions (i.e., the application exemption or automatic exemption); but as indicated, the required Form G-37 submission must be made to account for the initial reportable political contribution to the official of a municipal entity.

Q :  Under MSRB Rule G-42, as it relates to the specified prohibitions, does the prohibition on fee-splitting apply to arrangements in which an underwriter is seeking to engage in an arrangement to split fees with a municipal advisor on a municipal securities transaction?

A : Yes, the prohibition on fee-splitting would apply to such an arrangement. Under Rule G-42(e), governing specified prohibitions, a municipal advisor is prohibited from making or participating in, any fee-splitting arrangement with underwriters on any municipal securities transaction. That would include, therefore, instances where the underwriter initiates such an arrangement to split a portion of its fees, the municipal advisor would be precluded from “participating” in such an arrangement.

Compliance Tip: Not Every Underwriting Includes a Public Distribution

MSRB Rule G-32 requires a dealer to complete Form G-32 in a timely and accurate manner when acting as an underwriter, as the term is defined in SEC Rule 15c2-12(f)(8), in a primary offering. Generally, with limited exception, SEC Rule 15c2-12(f)(8) defines an underwriter as a dealer that purchases from an issuer, or offers or sells for an issuer, an offering of municipal securities. This includes dealers having a direct or indirect participation in any such undertaking, or a participation in the direct or indirect underwriting of any such undertaking. Accordingly, an underwriter for purposes of Rule G-32 includes a dealer acting as an underwriter in a primary offering, whether that offering is a public distribution or a private placement (e.g., an exempt limited offering or direct purchase). See the rule.

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.

December 31, 2020: Last Day to Provide Annual Written Notifications to Customers and Clients with Information Required Under MSRB Rule G-10

December 31, 2020: Last Day for SEC Order Granting a Temporary Conditional Exemption from the Broker Registration Requirements for Certain Activities of Registered Municipal Advisors

December 31, 2020: Complete Annual Update of SEC Form MA Within 90 days of End of Fiscal Year (Calendar Year for Sole Proprietors)

January 4, 2021: First Day for A-12 Affirmation

January 27, 2021: Last Day for A-12 Affirmation

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 September 15, 2020, Park View School, Inc. and Debra Kay Slagle, president of Park View School, agreed to a settlement with the Securities and Exchange Commission (SEC) in the District Court of Arizona.  The state-funded Arizona charter school and its president violated Federal Securities Laws by making material misstatements and omissions in the Official Statement in connection with an April 2016 Bond Offering. They violated Section 10(b) of the Exchange Act and Rule 10b-5, Sections 17(a)(1) and (3) of the Securities Act, and the school violated Section 17(a)(2) of the Securities Act by committing fraud directly or indirectly in the offer or sale of securities.1

They failed to disclose Park View's financial difficulties in the 2016 Official Statement for the Bond Offering, omitting that they had previously funded operations by improperly using money that had been set aside in reserve accounts. Moreover, they knew they would not be able to meet the financial projections in the 2016 Official Statement, including the profit projection and the debt service coverage ratio projection.

The school agreed to be enjoined from future violations of securities laws and Slagle agreed to be enjoined from future violations of securities laws and from participating in an offering of municipal securities as well as a fine in the amount of $30,000.

https://www.sec.gov/news/press-release/2020-208

https://www.sec.gov/litigation/complaints/2020/comp-pr2020-208.pdf

New Season of the MSRB Podcast

The second season of the MSRB Podcast currently features three episodes exploring the MSRB’s response to COVID-19, Board governance enhancements and technology investments. Stay tuned for new episodes on MSRB.org and all major podcast platforms, including Apple Podcasts , Google Podcasts and Spotify.

Available episodes:

Investing in Technology for the Future: Modern regulation is dependent on technological advancement. This episode features several members of the MSRB Board of Directors discussing the MSRB's strategic investment in technology and their vision for advancing fairness, transparency and efficiency in the municipal market.
Enhancing Board Governance: Effective municipal market regulation depends on efficient and representative governance. This episode covers new amendments to MSRB rules that enhance governance standards and reduce the size of the MSRB Board of Directors.
Leading through Crisis: In the first episode of the second season of the MSRB Podcast, MSRB leadership walks through the organization’s response to the pandemic and corresponding municipal market liquidity and credit crises. The MSRB Director of Research later joins for a deep dive into the data behind the March market dislocation.

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 28, 2020: Federal Register Notice of Filing of Proposed Rule Change to Amend MSRB Form G-32

October 27, 2020: MSRB Notice: MSRB Seeks Input and Volunteers for Advisory Groups

October 13, 2020: Proposed Rule Change to Amend MSRB Form G-32

October 7, 2020: Federal Register Notice of Immediately Effective Rule Change of Proposed Rule Change Consisting of Amendments to the By-Laws of the Municipal Securities Rulemaking Board to Reflect Recent Changes to MSRB Rules A-3, A-4 and A-6

October 1, 2020: SEC Approval Order of Proposed Rule Change Consisting of Amendments to the By-Laws of the Municipal Securities Rulemaking Board to Reflect Recent Changes to MSRB Rules A-3, A-4 and A-6

October 1, 2020: Federal Register Notice of Immediately Effective Rule Change of Proposed Rule Change Consisting of Amendments to MSRB Rules A-3 and A-4 Relating to Board Quorum, Meeting, and Voting Requirements

September 30, 2020: Federal Register Notice of Immediately Effective Rule Change of Proposed Rule Change Consisting of Amendments to the MSRB's Amended and Restated Articles of Incorporation

September 25, 2020: SEC Approval Order of Proposed Rule Change Consisting of Amendments to MSRB Rules A-3 and A-4 Relating to Board Quorum, Meeting, and Voting Requirements

September 25, 2020: Proposed Rule Change Consisting of Amendments to the By-Laws of the Municipal Securities Rulemaking Board to Reflect Recent Changes to MSRB Rules A-3, A-4 and A-6

September 25, 2020: SEC Approval Order of Proposed Rule Change Consisting of Amendments to the MSRB's Amended and Restated Articles of Incorporation

September 15, 2020: Proposed Rule Change Consisting of Amendments to the MSRB's Amended and Restated Articles of Incorporation

September 15, 2020: Proposed Rule Change Consisting of Amendments to MSRB Rules A-3 and A-4 Relating to Board Quorum, Meeting, and Voting Requirements