MSRB NOTICE 2010-59 (DECEMBER 23, 2010)

MSRB FAIR DEALING RULE FOR MUNICIPAL ADVISORS APPROVED

On December 22, 2010, the Securities and Exchange Commission (SEC) approved the MSRB’s proposed rule change[1] on fair dealing and disciplinary actions.[2] The rule change consists of amendments to MSRB Rule G-17, the MSRB’s basic fair practice rule, and MSRB Rule G-5, on disciplinary actions by appropriate regulatory agencies, to apply the rules to municipal advisors.

As a result of the rule change, Rule G-17 now requires that, in the conduct of their municipal advisory activities,[3] municipal advisors must deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice, just as Rule G-17 governs the conduct of brokers, dealers, and municipal securities dealers (“dealers”) in their municipal securities activities. Frequently referred to as the MSRB’s “fair dealing” rule, Rule G-17 prescribes a code of conduct for all entities and associated persons regulated by the MSRB. Not only must they not engage in conduct that is deceptive, dishonest, or an unfair practice, but they also have an affirmative duty to deal fairly with all persons. The fair dealing principles of Rule G-17 are fundamental to all MSRB rulemaking. 

The rule change also amended MSRB Rule G-5 to provide that municipal advisors and their associated persons may not engage in municipal advisory activities in contravention of restrictions imposed upon them by the SEC, just as dealers may not engage in municipal securities activities in contravention of restrictions imposed on them by the SEC, a registered securities association, or another appropriate regulatory agency.[4] Just as municipal advisors must register with the SEC before they may conduct municipal advisory activities, so too must they cease such activities if ordered to do so by the SEC.  

As the MSRB said in its rule filing:

The proposed rule change is necessary for the robust protection of investors against fraud. Many municipal advisors play a key role in the structuring of offerings of municipal securities and the preparation of offering documents used to market those securities to investors. In some cases, they advise on the appropriateness of derivatives entered into by municipal issuers, the effectiveness of which may have a substantial impact on the finances of those issuers. In other cases, they solicit public pension fund investment advisory business that, if not conducted according to the highest standards, may have a substantial effect on the finances of the state and local governments that control those funds. Investors, therefore, have a substantial interest in municipal advisors conducting their municipal advisory activities fairly, not engaging in fraudulent conduct, and not engaging in municipal advisory activities contrary to disciplinary actions imposed by the SEC.  

Existing MSRB interpretive guidance under Rule G-17 does not apply to municipal advisors. However, the MSRB plans to issue guidance for municipal advisors on their obligations under Rule G-17 in the near future. That guidance will be published for review and comment prior to adoption.

Questions about the rule change may be directed to Peg Henry, Deputy General Counsel, at 703-797-6625.

December 23, 2010

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TEXT OF RULE CHANGE[5]

Rule G-5: Disciplinary Actions by Appropriate Regulatory Agencies; Remedial Notices by Registered Securities Associations

(a) No change

(b) No broker, dealer or municipal securities dealer that is a member of a registered securities association shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security, or otherwise act in contravention of or fail to act in accordance with rules adopted by the association as of April 3, 1984, pertaining to remedial activities of members experiencing financial or operational difficulties, as if such rules were applicable to such broker, dealer or municipal securities dealer.

(c) No municipal advisor shall engage in municipal advisory activities in contravention of any effective restrictions imposed upon such municipal advisor by the Commission pursuant to section 15B(c)(2) or (3) of the Act, and no natural person shall be associated with a municipal advisor in contravention of any effective restrictions imposed upon such person by the Commission pursuant to section 15B(c)(4) of the Act.

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Rule G-17: Conduct of Municipal Securities and Municipal Advisory Activities

In the conduct of its municipal securities or municipal advisory activities, each broker, dealer, and municipal securities dealer, and municipal advisor shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.


[1] The proposed rule change was filed with the SEC on November 1, 2010.  See MSRB Notice 2010-47 (November 1, 2010).

[2] Exchange Act Release No. 63599 (December 22, 2010).

[3] The term “municipal advisory activities” is defined by Rule D-13 as “the activities described in Section 15B(e)(4)(A)(i) and (ii) of the Securities Exchange Act of 1934,” which are: “advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues” and “solicitation of a municipal entity.”

[4] The rule change also removed an outdated reference to a rule of the National Association of Securities Dealers.

[5] Underlining indicates additions; strikethrough denotes deletions.