Who Are You and How Much Are You Paid? MSRB Proposes Regulation of Solicitor Municipal Advisors

On Wednesday, March 17, 2021, the Municipal Securities Rulemaking Board (“MSRB”) proposed new Rule G-46 to codify the “fair dealing …obligations” of “solicitor municipal advisors” (“SAM’s;” not to be confused with Surface to Air Missiles). The MSRB Notice states that municipal advisors generally and SAM’s, in particular, were not subject to regulatory oversight until the Dodd-Frank Act was passed in 2010 in response to the Great Recession of 2007-2009. The MSRB is a self-regulatory organization (somewhat like the Financial Institutions Regulatory Authority [“FINRA”]) created in 1975 under Section 15 B of the Securities Exchange Act of 1934, as amended, and subject to the oversight of the Securities and Exchange Commission (“SEC”). The MSRB Notice requests comments on the proposed new regulation by Thursday, June 17, 2021. Accordingly for those persons and entities that participate in the market for selling municipal securities, including the issuers of the securities, NOW is the time to study the proposed MSRB regulation and submit comments.

MSRB Proposes Regulation of Solicitor Municipal Advisors

Under existing MSRB Rules and previously published guidance, municipal advisors are held to “basic principles of fair dealing.” MSRB Notice 2017-08 (May 4, 2017) made clear that existing MSRB Rules, particularly G-17, applied to SAM’s as well as to municipal advisors and G-42 “Duties of Non-solicitor Municipal Advisors.” The MSRB has now concluded that the regulatory requirements for SAM’s will be clearer by consolidating the previous guidance into one Rule specifically aimed at SAM’s, G-46. The MSRB Notice notes that in reaching its decision to promulgate the draft of G-46, it took into account the SEC’s December 22, 2020, issuance of an entirely redesigned and rewritten Investment Adviser Marketing Rule, see my January 28, 2021, blog post, “Speaking with Divided Minds: The SEC ‘Modernizes’ Investment Adviser Advertising.”

The MSRB Notice makes clear that SAM’s are important in the business of “cultivating” the market for the issuance of municipal securities, both by approaching potential municipal issuers or other entities (typically termed “obligated persons”) who might utilize a conduit issuer to raise funds in the capital market, AND perhaps by creating relationships with potential purchasers of municipal securities (underwriters, insurer, pension funds, and tax-exempt mutual funds, among others). Proposed Rule G-46 has four key provisions:

1. Requiring SAM’s to disclose their relationships in writing to those whom the SAM solicits
2. Requiring that all statements made by SAM’s be accurate and not misleading
3. Requiring full disclosure of both compensation arrangements and conflicts of interest
4. Setting standards as to the timing and manner of required disclosures

Who Are You and How Much Are You Paid?

Despite the apparent conclusion by the MSRB that a separate, focused regulation of SAM’s is needed, the St. Patrick’s Day Notice also reflects a considerable degree of regulatory uncertainty. Thus the Notice evokes the ancient radio show by posing 20 questions about proposed Rule G-46. The following is a summary of those 20 requests for comments:

1. Would codifying the Excerpt of Rule G-17 about SAM’s “promote clearer expectations” for SAM’s?
2. Would the standards regarding the timing and manner of disclosures be helpful for SAM’s and those they solicit?
3. Are the G-46 requirements well-designed in light of the activities of SAM’s?
4. Do SAM’s see problems following G-46, and, if so, are there better alternatives?
5. Are there provisions in the Rule G-17 excerpt that are not included in G-46, but should be?
6. What are the benefits and burdens of G-46?
7. Do you agree or disagree with the compliance cost estimates in Table 2 to the Notice?
8. How is the scope of SAM’s duties decided? Are the engagements limited to particular “targets” or are they broader and less specific? When do SAM’s determine whether an engagement is subject to MSRB rules?
9. Do SAM’s pay other SAM’s to aid soliciting municipal entities? If so, what disclosures should be made?
10. Do SAM’s present information about products or services to municipal clients akin to what investment advisors present to investment clients?
11. Should SAM’s be required to disclose disciplinary history and conflicts of interests as part of documenting an engagement?
12. Are there any special disclosures that should be made about compensation?
13. What books and records should be required for SAM’s, including how the delivery of disclosures should be documented?
14. Should conflict disclosures be limited to compensation arrangements, as SAM’s do not advise the municipal entities that they solicit?
15. Should SAM’s be required to disclose (assert?) that they are/are not fiduciaries? And how should the SAM’s deal with varying status determinations under the laws of the several states?
16. Does it work if the required disclosures are given at the time of the first solicitation?
17. Do clients of SAM’s have a duty to confirm that required disclosures have been timely made? What policy goals would be promoted by such a requirement?
18. May any of the required disclosures be made orally, so long as the SAM maintains a record of the content and timing of that disclosure?
19. Are there elements of the SEC’s Investment Adviser Marketing Rule that are not in G-46, but should be?
20. Rule G-38 prohibits dealers in municipal securities from making any payment for engaging in soliciting municipal entities and/or obligated persons. Rule G-46 “assumes that such solicitations do not occur.” Is this an accurate assumption, and should G-46 be based on that assumption? Why or why not?

The St. Patrick’s Day Notice is an open invitation to think through the regulatory design (in terms of both architecture and policy choices) and to provide appropriate comments to the MSRB. A failure to comment may be seen as a kind of deference to the views of “Leprechauns” bearing shamrocks. The business law attorneys at Norris McLaughlin, P.A., are prepared to assist you in capturing your thoughts and concerns about the proposed Rule G-46 and to help you to craft your comments.

If you have any questions about this post or any other related securities or general business law matters, please do not hesitate to contact the attorneys in our Business Law Group.