Protection of Municipal Entities and Obligated Persons

Since the MSRB’s creation by Congress in 1975, the MSRB has been providing important protections and transparency for investors engaging in the municipal securities market. In 2010 Congress broadened the MSRB’s original investor protection mandate to explicitly include the protection of municipal entities and obligated persons. Federal law generally defines a municipal entity as any state, political subdivision of a state or municipal corporate instrumentality of a state, including 1) any agency, authority or instrumentality of a state, its political subdivisions and municipal corporate instrumentalities; 2) any plan, program or pool of assets sponsored or established by the state, political subdivision or municipal corporate instrumentality or any agency, authority or instrumentality thereof including 529 plans, ABLE programs, state and locally sponsored public pension and benefit plans, and local government investment pools; 3) any other issuer of municipal securities.

The MSRB’s mandate to protect municipal entities is unique among federal securities regulators, reflecting the important role of municipal entities in the establishment and maintenance of essential public services nationwide, and the provision of pension and other benefits for public sector employees. To assist the MSRB in fulfilling this expanded mandate, Congress extended the jurisdiction of the MSRB to include, in addition to the regulation of brokers, dealers and municipal securities dealers (collectively, “dealers”) in connection with municipal securities transactions, the regulation of municipal advisors – those that provide advice to municipal entities as well as those that solicit municipal entities, for compensation, on behalf of certain unaffiliated financial professionals. The MSRB’s obligation is limited to the protection of municipal entities and obligated persons. The MSRB has no regulatory authority over municipal entities and obligated persons.

In the primary market, the MSRB regulates dealers that distribute municipal securities or that arrange for the placement of municipal securities. The MSRB also regulates municipal advisors that advise issuers about the issuance of municipal securities and about municipal financial products (including derivatives). Because public pension plans do not issue municipal securities, the MSRB’s rules for dealers and municipal advisors concerning primary market activities generally would not apply to public pension plans. However, the MSRB regulates dealers that trade municipal securities for investors in the secondary market. The dealers that effect municipal securities transactions for public pension plans or other municipal entities, as investors in municipal securities, are subject to the MSRB’s rules relating to secondary market activities. 

Further, the MSRB regulates municipal advisors that solicit municipal entities (such as public pension plans) or obligated persons on behalf of a third-party broker, dealer, municipal securities dealer, or municipal advisor for the purpose of obtaining or retaining an engagement by a municipal entity in connection with municipal financial products or the issuance of municipal securities, or that solicit a municipal entity on behalf of a third-party investment adviser for the purpose of obtaining or retaining an engagement to provide investment advisory services to or on behalf of a municipal entity. MSRB rules help ensure the integrity of such solicitation practices. Nonetheless, the MSRB’s rules regarding solicitations on behalf of investment advisers are limited to those seeking engagements to provide investment advisory services – not investment products. The municipal advisor definition established by the Securities and Exchange Commission (SEC) does not extend to persons who solicit municipal entities to invest in a pooled investment vehicle such as a hedge fund, mutual fund or private equity fund. This category of solicitors is not soliciting on behalf of a third-party broker, dealer, municipal securities dealer, municipal advisor or investment adviser. For example, hedge fund managers hire third-party marketers to identify investors for their fund. The SEC does not consider soliciting a municipal entity to invest in a fund to be equivalent to soliciting a municipal entity to retain a particular investment adviser to provide investment advisory services. Moreover, the MSRB does not regulate investment products, including hedge funds or private equity funds.

To fulfill its mandate, the MSRB protects all municipal entities and obligated persons by:

1. Establishing and maintaining rules for dealers and municipal advisors designed to promote fair, efficient and transparent transactions; prevent fraudulent, manipulative and other unfair practices; and address dealer and municipal advisor conflicts of interest;

2. Collecting and disseminating market information to help ensure that the underwriting, trading and selling of municipal bonds, and the provision of advice on municipal securities and municipal financial products are conducted in compliance with MSRB rules;

3. Providing market leadership by facilitating discussions to address market challenges and aggregating available resources for market participants, and by providing outreach and education to issuers, dealers, municipal advisors and other market participants to promote a broad market understanding of regulatory developments that may affect market participants; and

4. Coordinating with governmental agencies and other regulatory organizations, as well as with municipal market trade associations, to encourage effective and efficient municipal securities market regulation.

The MSRB protects municipal entities that are issuers of municipal securities, including municipal fund securities (e.g., 529 plans, ABLE programs, local government investment pools), and obligated persons in connection with:

1. Transactions in municipal securities effected by dealers with or on behalf of such municipal entities and obligated persons;
2. Advice provided by municipal advisors to such municipal entities and obligated persons with respect to municipal financial products and the issuance of municipal securities; and 
3. Solicitation of such municipal entities and obligated persons undertaken by a solicitor municipal advisor on behalf of a third-party broker, dealer, municipal securities dealer, or municipal advisor for the purpose of obtaining or retaining an engagement by a municipal entity for or in connection with municipal financial products or the issuance of municipal securities, or solicitation of a municipal entity undertaken by a solicitor municipal advisor on behalf of a third-party investment adviser for the purpose of obtaining or retaining an engagement to provide investment advisory services to or on behalf of a municipal entity.

The MSRB protects other municipal entities, such as state and locally sponsored public pension and benefit plans in connection with:

1. Transactions in municipal securities effected by dealers with or on behalf of such municipal entities;
2. Advice provided by municipal advisors to such municipal entities with respect to municipal financial products; and
3. Solicitation of such municipal entities undertaken by a solicitor municipal advisor on behalf of a third-party dealer or municipal advisor for the purpose of obtaining or retaining an engagement by a municipal entity for or in connection with municipal financial products or a solicitation of such municipal entities undertaken by a solicitor municipal advisor on behalf of a third-party investment adviser for the purpose of obtaining or retaining an engagement to provide investment advisory services to or on behalf of such municipal entity.