MSRB NOTICE 2011-47 (AUGUST 22, 2011)

MSRB FILES RULE G-44 (ON SUPERVISION OF MUNICIPAL ADVISORY ACTIVITIES) AND ASSOCIATED AMENDMENTS TO RULE G-8 (ON BOOKS AND RECORDS) AND G-9 (ON PRESERVATION OF RECORDS)

On August 22, 2011, the Municipal Securities Rulemaking Board (“Board” or “MSRB”) filed with the Securities and Exchange Commission (“SEC”) a proposed rule change (“proposed rule change”) consisting of proposed Rule G-44 (on supervision of municipal advisory activities), along with related proposed amendments to Rule G-8 (on books and records) and Rule G-9 (or preservation of records).[1]  The MSRB has requested that the proposed rule change be made effective on the date that rules defining the term “municipal advisor” under the Securities Exchange Act of 1934 (the “Exchange Act”) are first approved by the SEC or such later date as the SEC approves the proposed rule change.

BACKGROUND

With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”),[2] the MSRB was expressly directed by Congress to adopt rules relating to the protection of investors, municipal entities and obligated persons and to the activities of municipal advisors. Presently, MSRB Rule G-27 (on supervision) applies only to brokers, dealers, and municipal securities dealers (“dealers”) and their associated persons engaged in municipal securities activities, including financial advisory activities. Rule G-27 does not include all municipal advisory activities now subject to MSRB rules, even if engaged in by dealers. For example, swap advisory activities and solicitations of business on behalf of others are not subject to supervision under Rule G-27. Furthermore, municipal advisors that are not dealer financial advisors are not subject to supervision under Rule G-27. Accordingly, the MSRB is proposing to adopt a rule providing for a basic supervisory structure applicable to municipal advisors to insure compliance with MSRB rules.

SUMMARY OF PROPOSED RULE CHANGE

Obligation to Supervise. The proposed rule change would set 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”).

Requirements for a Supervisory System. The proposed rule change 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 would include:

  • establishing and maintaining written supervisory procedures;
  • designating one or more municipal advisor principal(s) qualified by virtue of experience or training to carry out their supervisory responsibilities;[3]
  • 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.

Written Procedures. The proposed rule change would require a municipal advisor 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 would 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 would be required to 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.

Annual Review. The proposed rule change 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.

Recordkeeping. The proposed rule would address the requirements of municipal advisors with regard to the review and recordkeeping of correspondence.

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.

Proposed Amendments to MSRB Rules G-8 and G-9. The proposed rule change would necessitate related amendments to Rule G-8 (on books and records) and Rule G-9 (on preservation of records). The proposed 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 content of each annual compliance interview or meeting and a list of attendees;
  • the written supervisory procedures;
  • the results of the designated principal(s) annual review of the municipal advisory activities of the firm; and
  • correspondence and any other written and electronic communications of associated persons.

Finally, the MSRB has posted on its website a sample supervisory checklist, which small municipal advisors may find useful in the development of their written supervisory procedures for compliance with MSRB rules. The MSRB plans to update that checklist as new MSRB rules are adopted.

* * * *

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

August 22, 2011

* * * * *

TEXT OF PROPOSED RULE CHANGE[4]

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 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. A record of the content of the interview or meeting, as well as a list of attendees, must be maintained.

(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.

(e) Correspondence.

(i) Review. Each municipal advisor shall develop written procedures that are appropriate to its business, size, structure, and clients for the 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:

(A) the correspondence described in subsection (e)(i) of this rule, and

(B) any other written and electronic communications received or sent, including interoffice memoranda, of associated persons related to its municipal advisory activities.

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.

* * * * *

TEXT OF PROPOSED AMENDMENTS TO RULES G-8 AND G-9

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

(a) - (g) No change.

(h) Municipal Advisor Records. Each municipal advisor shall maintain:

(i) Reserved.

(ii) Reserved.

(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(b)(iv), (c), (d) and (e).

(i) Reserved.

* * * * *

Rule G-9: Preservation of Records

(a) - (g) No change.

(h) Municipal Advisor Records. Every municipal advisor shall preserve for no less than six years:

(i) Reserved.

(ii) Reserved.

(iii) the records required by Rule G-8(h)(iii)(A), provided that such record shall be preserved for the period of designation of each person designated and for at least six years following any change in such designation.

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.

(i) Municipal Advisor Records. Every municipal advisor shall preserve for no less than three years:

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

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.


[1]  File No. SR-MSRB-2011-13. Comments on the proposed rule change should be submitted to the SEC and should reference this file number.

[2]  Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[3]  At this time, there are no professional qualifications examinations for municipal advisor principals. The MSRB notes, however, under Rule G-27 and Rule G-3(b)(i)(B), supervisors of dealer financial advisory activities must be qualified as municipal securities principals.

[4]  Underlining indicates additions.