MSRB Board of Directors Holds Quarterly Meeting

Date: January 31, 2011

Contact: Jennifer A. Galloway, Chief Communications Officer
              (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) held its quarterly Board of Directors meeting January 27-28, 2011 in San Diego, CA and approved numerous draft rulemaking proposals for municipal advisors and dealers, among other actions.

Since October 2010, the MSRB has been working to establish a regulatory framework for municipal advisors based on a set of principles-based rules consistent with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Municipal Advisor Rulemaking
Under the Dodd-Frank Act, municipal advisors have a federal fiduciary duty to their municipal entity clients, which include state and local governments. At its meeting, the MSRB Board of Directors agreed to publish for industry comment a draft fiduciary duty rule, as well as a draft interpretive notice, which provides details of an advisor’s duty of loyalty and care to municipal entity clients.

“The MSRB has been charged with writing rules for municipal advisors on conduct that would violate their federal fiduciary duty,” said MSRB Chair Michael G. Bartolotta. “We have been discussing this topic for several months and are ready to seek comment on initial guidance.”

The MSRB is proposing a new fiduciary duty rule, MSRB Rule G-36, and a draft interpretive notice to address, among other things, disclosure of conflicts of interest, conflict waivers with client’s informed consent and circumstances under which conflicts may not be waived. The draft notice also provides guidance on what it means for a municipal advisor to have a duty of care to its municipal entity client. The MSRB will publish the draft rule and notice in the coming weeks.

The Board of Directors agreed to seek comment on a draft interpretive notice on the application of the MSRB’s Rule G-17 (on “fair dealing”) to municipal advisors. Rule G-17 is a fundamental rule governing the conduct of municipal financial intermediaries, with its application to municipal advisors becoming effective in December 2010. The MSRB’s draft interpretive notice provides details on how the rule applies to municipal advisors in their dealings with obligated persons and to municipal advisors that solicit business from municipal entities on behalf of others.

The Board also agreed to seek comment on a separate draft interpretive notice on the application of MSRB Rule G-17 to underwriters of municipal securities, which sets out basic duties of fairness owed by underwriters to issuers in the process of underwriting their new issues. Both the draft interpretive notice for municipal advisors and the draft interpretive notice for underwriters would require disclosure to clients of material terms and risks of proposed transactions, as well as any incentives and conflicts of interests associated with such transactions. Both draft interpretive notices are expected to be published for comment in the coming weeks.

In other municipal advisor rulemaking, the Board of Directors agreed to seek comment on extending its MSRB Rule G-20 on gifts and gratuities to municipal advisors. The draft rule change would prohibit municipal advisors from directly or indirectly giving any thing or service of value in excess of $100 per year to a person other than an employee or partner of their firm if such payments or services are in relation to its municipal advisory activities.

Dealer Rulemaking
At its meeting, the Board also addressed the conduct of broker’s brokers, a topic it has been studying for some time. The Board agreed to seek industry comment on a new draft rule addressing the activities of broker’s brokers, which play an important role in the provision of secondary market liquidity for retail investors by acting as intermediaries between broker-dealers. The draft rule, MSRB Rule G-43, was drafted after reviewing comments received by the MSRB in response to an earlier request for comments published by the MSRB in September 2010.

In other dealer-related work, the MSRB Board of Directors agreed that, in conjunction with its filing of proposed amendments to MSRB Rule G-23, on the activities of dealers that act as financial advisors to issuers of municipal securities, it would file with the Securities and Exchange Commission (SEC) a draft interpretive notice on when a dealer would be considered to be rendering advice “in the course of acting as an underwriter” and thereby would not be treated as acting as a financial advisor for purposes of Rule G-23. As the MSRB has previously announced, the proposed amendments to Rule G-23, which the MSRB expects to file with the SEC in the near future, would prohibit a dealer acting as financial advisor to an issuer from switching roles to serve as underwriter for that same issue. 

At its meeting, the Board of Directors discussed a number of other topics, including municipal advisor fees and disclosures of public pension plan obligations. The MSRB continues to work on developing a fair and equitable regulatory fee structure for advisors. It also is evaluating the implications for the municipal securities market of public pension fund obligations and associated disclosures to investors.

Other Actions
The Board also agreed to expand on its existing historical data subscription products to also offer individual historical data and document subscription products under its Primary Market, Continuing Disclosure and Short-term Data Subscription Services. These new historical services are expected to be launched over the coming year. All documents and data contained in these services are available on the MSRB’s Electronic Municipal Market Access (EMMA) website for free on an individual security basis. The new historical subscriptions will allow vendors and other high-volume users to populate data libraries with all of the data and documents collected by the MSRB since the inception of the services or by individual years.

Finally, the MSRB conducted an outreach event January 25, 2011 in Los Angeles to provide information to members of the municipal market about its ongoing initiatives. The event, which drew dealers, municipal advisors and municipal entities from throughout California, was the third such seminar hosted by the MSRB in the last three months. A similar event will be held in Austin, TX on February 15, 2011.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.