MSRB NOTICE 2011-28 (MAY 25, 2011)

REQUEST FOR COMMENT ON DRAFT RULE G-44 (ON SUPERVISION OF MUNICIPAL ADVISORY ACTIVITIES) AND ASSOCIATED AMENDMENTS TO RULES G-8 (ON BOOKS AND RECORDS) AND G-9 (ON PRESERVATION OF RECORDS)

The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on draft Rule G-44 (on supervision of municipal advisory activities), as well as associated draft amendments to Rule G-8 (on books and records) and G-9 (on records preservation). Comments should be submitted no later than June 24, 2011. Comments should be sent via email to CommentLetters@msrb.org. Please indicate the notice number in the subject line of the email and if possible, send comments in PDF format. Written comments should be sent to Ronald W. Smith, Corporate Secretary, 1900 Duke Street, Suite 600, Alexandria, VA 22314. Written comments will be available for public inspection on the MSRB’s web site.

Questions about this notice should be directed to Peg Henry, Deputy General Counsel, at 703-797-6600, or Karen Du Brul, Associate General Counsel, at 703-797-6600.

BACKGROUND

Rule G-27 (on supervision) requires the supervision of brokers, dealers, and municipal securities dealers (“dealers”) and their associated persons engaged in municipal securities activities, including financial advisory activities.  The purpose of Rule G-27 is to help ensure that such dealers and their associated persons comply with MSRB rules.  Rule G-27 does not include all municipal advisory activities now subject to MSRB rules.  Municipal advisors that are not dealer financial advisors are not currently subject to a comparable MSRB rule.

Draft Rule G-44 would require all municipal advisors to adopt a basic supervisory structure for municipal advisory activities not already subject to supervision under Rule G-27.  Dealer financial advisory activities would continue to be supervised under Rule G-27.  The establishment of a basic supervisory structure for municipal advisors is particularly important as the MSRB adopts rules for municipal advisors and municipal advisors must educate themselves about these new rules and adopt procedures for compliance.  The MSRB does not consider it necessary at this time to extend the more detailed supervisory structure required by Rule G-27 to other municipal advisory activities.  For example, the creation of “offices of municipal supervisory jurisdiction” in the case of municipal advisors with multiple offices is not recommended by the MSRB at this time.  Similarly, many of the provisions of Rule G-27 concern dealer relationships with customers (e.g., the handling of customer complaints), which do not have a municipal advisor counterpart.

The MSRB notes that, in the case of a small municipal advisor firm or a firm that engages in limited municipal advisory activities, it may be necessary for an individual municipal advisor that engages in municipal advisory activities to also supervise those activities.  However, the procedures would vary depending on factors, such as the size of the firm, number of offices, type of municipal advisory activities engaged in, etc.

SUMMARY OF DRAFT RULE G-44

Draft Rule G-44(a) sets forth the obligation of municipal advisors to supervise the municipal advisory activities of the municipal advisor and its associated persons to ensure compliance with applicable MSRB and SEC rules (“applicable rules”).

Draft Rule G-44(b) would require a municipal advisor to establish and maintain a system to supervise the municipal advisory activities of each associated person designed to achieve compliance with applicable rules.  The minimum requirements of a municipal advisor’s supervisory system include:

  • establishing and maintaining written procedures;
  • designating one or more municipal advisor principal(s) based on experience or training;[1]
  • maintaining a written record of the designation of the municipal advisor principals and their responsibilities regarding supervision; and
  • conducting an annual compliance interview or meeting to discuss compliance matters relevant to the municipal advisory activities of associated persons.

Draft Rule G-44(c) would require municipal advisors to adopt, maintain and enforce written supervisory procedures designed to ensure that the conduct of the municipal advisory activities of the municipal advisor and its associated persons are in compliance with applicable rules.  The minimum requirements of the written supervisory procedures include procedures relating to:

  • the manner in which a designated principal shall monitor compliance and supervise municipal advisory activities;
  • the periodic review by a designated principal of each office that engages in municipal advisory activities;
  • the maintenance and preservation of books and records; and
  • the maintenance of the written supervisory procedures, a copy of which must be made available in each office of the municipal advisor and in each office where supervisory activities with respect to municipal advisory activities are conducted.

Draft Rule G-44(d) would require an annual review of the municipal advisory activities of the firm.  The purpose of the review is to assist in detecting and preventing violations of, and achieving compliance with, applicable rules.

Draft Rule G-44(e) addresses the requirements of municipal advisors with regard to the review and recordkeeping of correspondence.

SUMMARY OF DRAFT AMENDMENTS TO RULES G-8 AND G-9

The draft amendments to Rules G-8 and G-9 would require records to be kept of:

  • the designations of municipal advisor principals and their responsibilities;
  • the written supervisory procedures;
  • the results of the designated principal(s) annual review of the municipal advisory activities of the firm.

SAMPLE CHECKLIST

A sample checklist is provided below for use by a designated municipal advisor principal based on pending MSRB rule proposals.  It is illustrative only, and municipal advisors would not be required to use the checklist.  It is also not intended as a substitute for a municipal advisor’s written supervisory procedures, which would provide more detail on how the municipal advisor and its associated persons are to comply with each rule.  For example, the written supervisory procedures would be expected to provide specific instructions regarding actions that municipal advisor professionals and appropriately designated principals would undertake to ensure compliance with Rule G-42.  Such written supervisory procedures would also describe how the municipal advisor would compile the information on political contributions and municipal advisory engagements that would be required to be reported quarterly to the MSRB under draft Rule G-42.  The procedures would vary depending on factors, such as the size of the firm, number of offices, type of municipal advisory activities engaged in, etc.

REQUEST FOR COMMENT

The MSRB requests comments on (i) draft Rule G-44 and (ii) the draft amendments to Rules G-8 and G-9. 

May 25, 2011

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TEXT OF DRAFT RULE G-44

Rule G-44: Supervision of Municipal Advisory Activities

(a)        Obligation to Supervise.  Each municipal advisor shall supervise the conduct of the municipal advisory activities of the municipal advisor and its associated persons to ensure compliance with applicable Board rules and the applicable provisions of the Act and rules thereunder ("applicable rules").  For the purposes of this rule, “municipal advisory activities” shall mean those municipal advisory activities not otherwise subject to supervision pursuant to Rule G-27.

(b)        Supervisory System.  Each municipal advisor shall establish and maintain a system to supervise the municipal advisory activities of each associated person that is reasonably designed to achieve compliance with applicable rules.  Final responsibility for proper supervision shall rest with the municipal advisor.  A municipal advisor's supervisory system shall provide, at a minimum, for the following:

            (i)         The establishment and maintenance of written procedures as required by sections (c) and (e) of this rule.

            (ii)        (A)       General. The designation of one or more associated person(s) as municipal advisor principal(s) to be responsible for the supervision of the municipal advisory activities of the municipal advisor and its associated persons as required by this rule. 

                        (B)       Written Record.  A written record of each supervisory designation and of the designated principal's responsibilities under this rule shall be maintained and updated as required under Rule G-8.

                        (C)       Appropriate Principal. The designation of the municipal advisor principal(s) responsible for supervision under this rule. 

            (iii)       Reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities with respect to municipal advisory activities.

            (iv)       The participation of each associated person, either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the municipal advisor at which compliance matters relevant to the municipal advisory activities of the associated persons are discussed.  Such interview or meeting may occur in conjunction with the discussion of other matters.

(c)        Written Supervisory Procedures.

            (i)         General Provisions.  Each municipal advisor shall adopt, maintain, and enforce written supervisory procedures reasonably designed to ensure that the conduct of the municipal advisory activities of the municipal advisor and its associated persons are in compliance as required in section (a) of this rule.  Such procedures shall document the municipal advisor's supervisory system for ensuring compliance with applicable rules and, at a minimum, shall establish procedures:

                        (A)       that state how a designated principal shall monitor for compliance by the municipal advisor with all applicable rules and supervise the municipal advisory activities of associated persons;

                        (B)       for the periodic review, no less frequently than every three years, by a designated principal of each office that engages in municipal advisory activities pursuant to section (d) of this rule;

                        (C)       for the maintenance and preservation, by a designated principal, of the books and records required to be maintained and preserved by municipal advisors under Rules G-8 and G-9 of the Board; and

                        (D)       for the maintenance of the written supervisory procedures for a period of no less than three years from the date that the municipal advisor establishes and implements the procedures required by the provisions of this subsection.

            (ii)        Availability of and Revisions to Written Supervisory Procedures.  A copy of a municipal advisor's written supervisory procedures, or the relevant portions thereof, shall be kept and maintained, either electronically or in hard copy, in each office of the municipal advisor and at each location where supervisory activities with respect to municipal advisory activities are conducted on behalf of the municipal advisor.  Each municipal advisor shall amend its written supervisory procedures as appropriate within a reasonable time after changes occur in Board or other applicable rules and as changes occur in its supervisory system, and each municipal advisor shall be responsible for training its associated persons on the changes to such procedures within a reasonable time after such changes occur.

(d)        Internal Inspections.

            Each municipal advisor shall conduct a review, at least annually, of the municipal advisory activities in which it engages, which review shall be reasonably designed to assist in detecting and preventing violations of, and achieving compliance with, applicable rules.  The municipal advisor shall retain a record of each annual review as required by Rule G-8(h)(iii).

(e)        Correspondence. 

            (i)         Review.  Each municipal advisor shall develop written procedures that are appropriate to its business, size, structure, and clients for the post-use review by a municipal advisor principal of incoming and outgoing written (i.e., non-electronic) and electronic correspondence relating to its municipal advisory activities.

            (ii)        Recordkeeping.  Each municipal advisor shall keep records of correspondence of associated persons related to its municipal advisory activities, as provided in Rule G-8(h)(iii).  The names of the persons who prepared outgoing correspondence and who reviewed the correspondence shall be ascertainable from the retained records, and the retained records shall be readily available, upon request, to the appropriate regulatory agency.

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TEXT OF DRAFT AMENDMENTS TO RULES G-8 AND G-9 [2]

Rule G-8: Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers, and Municipal Advisors

(a) - (g)  No change.

(h)       Municipal Advisor Records.  Each municipal advisor shall maintain the following records in the manner described in section (b) of this rule:

(i)-(ii)      [No change to record keeping proposals set forth in MSRB Notices 2011-04 (on draft Rule G-42) and 2011-16 (on draft amendments to Rule G-20)]

(iii)        Records Concerning Compliance with Rule G-44.

For each municipal advisor that is subject to Rule G-44, a record of:

(A) each person designated as responsible for supervision of the municipal advisory activities of the municipal advisor and the designated principal's supervisory responsibilities as required by Rule G-44(b)(ii)(B); and

(B) the records required under Rule G-44(c), (d) and (e).

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Rule G-9: Preservation of Records

(a) - (g)  No change.

(h)       Municipal Advisor Records.

            (i)         Records to be Preserved for Six Years.  Every municipal advisor shall preserve for no less than six years:

                        (A)-(B) [No change to records preservation proposals set forth in MSRB Notices 2011-04 (on draft Rule G-42) and on 2011-16 (on draft amendments to Rule G-20).]

                        (C)       the records required by Rule G-8(h)(iii)(A).

            (ii)        Records to be Preserved for Three Years.  Every municipal advisor shall preserve for no less than three years:

                        (A)       to the extent made or received by such municipal advisor in connection with its business as such municipal advisor and not otherwise described in this rule, the records required to be maintained pursuant to Rule G-8(h)(iii)(B).

            (iii)       Method of Record Retention.   Such records shall be accessible and available as required by subsection (d) of this rule and retained in the manner required by subsection (e) of this rule.

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Checklist for Written Supervisory Procedures[3] 

The following is a sample checklist of the MSRB rules to be addressed in written supervisory procedures to be established and maintained by a municipal advisor pursuant to proposed Rule G-44.

IMPORTANT NOTE: This checklist is not all-inclusive and does not necessarily represent all areas that are required to be addressed in the municipal advisor’s written supervisory procedures. This checklist is not a safe harbor with respect to potential deficiencies in a municipal advisor’s supervisory procedures, and is offered only as an aid in preparing such written supervisory procedures. Any written supervisory procedures must be updated when and as necessary to reflect new or amended MSRB rules.

 MSRB Rule G-44


[1] At this time, there are no professional qualifications examinations for municipal advisor principals.  The MSRB notes, however, that supervisors of dealer financial advisory activities under Rule G-27 must have passed the Series 53 examination (municipal securities principal).

[2] Underlining indicates additions; strikethrough indicates deletions.

[3] This checklist is illustrative only.  Much of the content of this checklist consists of items that have been published by the MSRB for comment and have not yet become effective.