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Compliance Corner FAQs

Fall 2022:

Q: Rule G-14(d)(vii) provides that a “List Offering Price/Takedown Transaction” must meet certain definitional requirements, including, among others, that the transaction be a “primary market sale transaction.” Has the MSRB provided any further guidance on when a transaction should not be identified as a “primary market sale transaction” for purposes of Rule G-14’s “List Offering Price/Takedown Transaction” definition?  

A : Yes. In a primary offering of municipal securities where a syndicate is formed, once a maturity (or maturities) of new issue securities has been released to trade at prices other than the list offering price ( i.e., a free to trade wire has been sent), normal transaction reporting rules apply, and such transactions should no longer be identified as primary market sale transactions for purposes of Rule G-14. As a result, for purposes of reporting transactions after the free-to-trade information has been disseminated for a particular maturity (or maturities), syndicate managers, syndicate members, and selling group members should no longer identify a transaction as a “List Offering Price/Takedown Transaction” under Rule G-14, even if such transactions are executed on the first day of trading at the published list offering price of the security. See MSRB Notice 2019-15 (June 28, 2015) at note 6.


Summer 2022:

Q: Pursuant to MSRB Rule G-44, on supervisory and compliance obligations of municipal advisors, must the designated supervisory principal(s) be an employee of the municipal advisor?

A : Yes, the supervisory principal(s) must be an employee of the municipal advisor. MSRB Rule G-3(e)(i), defines a municipal advisor principal as an associated person of the municipal advisor firm who is directly engaged in management, direction or supervision of the municipal advisory activities of the firm and that of its associated persons. In addition, pursuant to MSRB Rule G-44, the designated supervisory principal must be vested with the authority to carry out the supervision for which they are responsible and have sufficient knowledge, experience and training to understand and effectively discharge their responsibilities. The Rule distinguishes the role of the supervisory principal from the chief compliance officer, who advises the municipal advisor on its overall compliance framework and permits the chief compliance officer to be a principal of the firm or a non-employee of the firm.


Winter 2022:

Q :  In the 2022 Report on the Financial Industry Regulatory Authority's (FINRA) Examination and Risk Monitoring Program it was noted that examiners identified firms using false and misleading statements or claims about safety, unqualified or unwarranted claims regarding the expertise of the firm, and promissory statements and claims regarding portfolio growth in municipal securities advertisements. Does this mean dealers and municipal advisors should assess their compliance programs to ensure that their advertisements comply with MSRB Rule G-21 and Rule G-40 respectively?

A: This information is helpful in understanding what one examining authority is observing and it would be prudent for firms to use this information as a data point when assessing their compliance programs. Both MSRB Rule G-21 and G-40 require that a principal review and approve each advertisement subject to the respective rule prior to first use. In assessing its compliance program, a firm should ensure that the appropriate principal responsible for reviewing advertisements is evaluating each advertisement consistent with the content standards of MSRB Rule G-21 and G-40, as applicable. This would include, at minimum, ensuring that advertisements are fair and balanced and do not contain false, exaggerated, unwarranted, promissory or misleading statements or claims.


Fall 2021:

Q: If a municipal advisor has been engaged by a municipal entity client and hires another municipal advisor to perform some of the municipal advisory activities outlined in the scope of services, would obligations under MSRB Rule G-42 apply to the subcontracted municipal advisor?

A: Yes. Notwithstanding that the municipal advisor is subcontracted by another municipal advisor that has entered into an engagement agreement with the municipal entity client, the subcontracted municipal advisor would still be subject to the core standards of conduct and applicable duties under MSRB Rule G-42(a). Accordingly, in the performance of municipal advisory activities for the municipal entity client, the subcontracted municipal advisor would owe a duty of care and a duty of loyalty to the municipal client. In addition, while delivery of disclosures may be made by the municipal advisor with the engagement agreement, the municipal entity client is to receive the appropriate disclosures under Rule G-42(b) regarding the subcontracted municipal advisor (e.g., conflicts of interest).


Spring 2021:

Q: When is it appropriate to use the “list offering price/takedown transaction” indicator for reporting transaction data to RTRS consistent with MSRB Rule G-14?

A: MSRB Rule G-14 permits dealers to report primary market sale transactions executed on the first day of trading of a new issue by the end of the trading day and requires that such transactions be reported with the “list offering price/takedown transaction” indicator. As noted in MSRB Notice 2019-15, in a primary offering of municipal securities where a syndicate is formed (i.e., not a sole managed offering), a free-to-trade wire is sent by the senior syndicate manager to syndicate members once all of the municipal securities in the issue or particular maturity (or maturities) are free to trade. That is, the free-to-trade wire communicates to members of the syndicate that they may trade the bonds in the secondary market at market prices that could be the same or different than the initial offering price. The MSRB has indicated that, for purposes of reporting transactions once a new issue has been released for trading (i.e., is free to trade), normal transaction reporting rules apply. As a result, syndicate managers, syndicate members and selling group members must report secondary market transactions executed on the first day of trading, whether at prices that are the same or different than the initial offering price, within 15 minutes of “Time of Trade” and without the “list offering price/takedown transaction” indicator.


Winter 2021:

Q: Various state statutes provide authorization for Special District financing. As a municipal advisor to a special district that will be using municipal bond proceeds to purchase public improvements that have been constructed by a developer, would I need to disclose an affiliation with the developer?

A : Yes. MSRB Rule G-42 requires a municipal advisor to provide its client full and fair disclosure of any material conflicts of interest as well as any actual or potential conflict of interest that might impair the municipal advisor’s ability to provide advice to or on behalf of the client. Rule G-42(b) provides a non-exhaustive list of material conflicts of interest that must be disclosed, including disclosing if any affiliate of the municipal advisor provides any advice, service, or product to or on behalf of the client that is directly related to the municipal advisory activities to be performed by the disclosing municipal advisor.

Q: When the municipal advisor’s client is a municipal entity, does the municipal advisor’s fiduciary duty obligations mitigate all conflicts?

A: No. Supplementary Material .05 of Rule G-42 requires that written disclosures be sufficiently detailed to inform the client of the nature, implications and potential consequences of each conflict. The municipal advisor’s written disclosures must also include an explanation of how the municipal advisor addresses or intends to manage or mitigate each conflict in order to fulfill the duty of care and, as applicable, the duty of loyalty.


Fall 2020:

Q:   Under MSRB Rule G-37, on political contributions, if a municipal finance professional (MFP) or a municipal advisor professional (MAP) inadvertently makes a political contribution to an official of a municipal entity, which would subject the regulated entity to the two-year prohibition on business, does the regulated entity have to disclose the contribution on Form G-37, if the regulated entity avails itself of an exemption under Rule to cure the ban on business?

A: Yes, in cases where a regulated entity takes the necessary steps to cure the ban on business by availing itself of one of the exemptions, which includes the conditional requirement to return the contribution, the regulated entity would still need to disclose the contribution on Form G-37. More specifically, under provisions (i) and (j) of Rule G-37, a regulated entity that is subject to a ban on business, as a result of a contribution, may cure the ban on business, upon satisfying the requirements under one of the applicable provisions (i.e., the application exemption or automatic exemption); but as indicated, the required Form G-37 submission must be made to account for the initial reportable political contribution to the official of a municipal entity.

Q:   Under MSRB Rule G-42, as it relates to the specified prohibitions, does the prohibition on fee-splitting apply to arrangements in which an underwriter is seeking to engage in an arrangement to split fees with a municipal advisor on a municipal securities transaction?

A: Yes, the prohibition on fee-splitting would apply to such an arrangement. Under Rule G-42(e), governing specified prohibitions, a municipal advisor is prohibited from making or participating in, any fee-splitting arrangement with underwriters on any municipal securities transaction. That would include, therefore, instances where the underwriter initiates such an arrangement to split a portion of its fees, the municipal advisor would be precluded from “participating” in such an arrangement.


Summer 2020:

Q: If a dealer is acting as a private placement agent in connection with a conduit borrowing, must the dealer disclose the activity as "municipal securities business" as part of the dealer's Form G-37 quarterly filing?

A: Yes. The term "municipal securities business" includes the offer or sale of a primary offering of municipal securities on behalf of any municipal entity (e.g., private placement). Although the ultimate obligor in such a conduit financing may be the conduit borrower, to the extent the dealer acts as private placement agent on behalf of a municipal entity, it is engaging in municipal securities business for purposes of Rule G-37.

Q: If a dealer has adopted a default proxy to determine whether a trade is "contemporaneous" in connection with determining the prevailing market price (PMP) for purpose of its fair pricing obligation under Rule G-30, what are the supervisory obligations in establishing and reviewing the continued appropriateness of such default proxy?

A: As a threshold matter, the MSRB guidance does not prescribe a bright-line standard for what time period may be used as a reasonable proxy; and a firm's determination may be informed by case law (i.e., relevant cases have often viewed transactions as contemporaneous when they occur on the same trading day, and in some instances, transactions that occurred up to five days later were viewed as contemporaneous), industry standards and a dealer's own experience, among other factors. MSRB previously discussed establishing a default proxy in its Confirmation Disclosure and Prevailing Market Price Guidance: Frequently Asked Questions 3.9 noting that:

Dealers may establish an objective set of criteria to determine whether a trade is contemporaneous, provided the objective criteria are established based on the exercise of reasonable diligence. For example, dealers could define an objective period of time as a default proxy for determining whether the trade is contemporaneous. Dealers could also define criteria to consider other relevant factors, such as whether intervening trades by other firms occurred at prices sufficiently different than the dealer’s trade to suggest that the dealer’s trade no longer reasonably reflects the current market price for the security, or whether changes in interest rates or the credit quality of the security, or news reports were significant enough to reasonably change the PMP of the security. Given the different trading characteristics of different municipal securities, and relevant court and SEC case law applicable to debt securities in general, it likely would not be reasonable for a dealer’s policies and procedures to determine categorically that all transactions that occur outside of a specified time frame are not “contemporaneous.” Accordingly, dealers should include in their policies and procedures an opportunity to review and override the automatic application of default proxies (e.g., by reconsidering the application for transactions identified through reasonable exception reporting and specifying designated time intervals (or market events) after which such proxies will be reviewed).

In light of the principles outlined in FAQ 3.9 and to help demonstrate compliance with its obligation to determine prevailing market prices under Rule G-30 and facilitate compliance with its supervisory obligations under Rule G-27(a), it would be prudent for a dealer to, for example, document why a default proxy it has established is reasonable and to have procedures that provide a mechanism(s) for the review and, if necessary, override of the firm’s automatically applied default proxies to ensure that the firm’s definition of “contemporaneous” is and continues to be reasonable.


Spring 2020:

Q: After a position has been exited from Continuous Net Settlement (CNS) by the Depository Trust & Clearing Corporation (DTCC), in order to resolve an inter-dealer fail, what is the resulting time period for completing a close out?

A: Pursuant to Rule G-12(h), on close outs, an inter-dealer fail must be resolved within 10 calendar days of the purchasing dealer’s original settlement date. The buyer has the option to grant the seller a one-time 10-calendar-day extension. Hence, inter-dealer fails must be closed out in a maximum of 20 calendar days after the purchasing dealer’s original settlement date notwithstanding the date a position is exited from CNS.


Winter 2020:

Q: If a registered municipal advisor employs a subcontractor to act as a co-municipal advisor on an issuance of municipal securities, is the subcontractor subject to conflicts of interest disclosures under MSRB Rule G-42?

A: Yes. MSRB Rule G-42, on duties of non-solicitor municipal advisors, requires municipal advisors to disclose all material conflicts of interest, in writing, prior to or upon a municipal advisor engaging in municipal advisory activities on behalf of a municipal entity or obligated person client. Additionally, if a municipal advisor concludes that it has no known material conflicts of interest based on reasonable diligence, a municipal advisor must provide a written statement to the client to that effect.

Generally, a subcontractor, acting as a co-municipal advisor, may not have entered into an engagement with the municipal entity or obligated person client for municipal advisory services. If a subcontractor, in acting in its capacity as a co-municipal advisor, provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, such subcontractor is engaged in municipal advisory activities and would be subject to the same conflicts of interest disclosure obligations under Rule G-42 as the employing municipal advisor that was directly engaged by the municipal entity or obligated person client.


Fall 2019:

Q: Can a municipal advisor outsource its compliance functions, including the role of the Chief Compliance Officer (CCO)?

A: Yes. MSRB Rule G-44, on supervision, provides municipal advisors with flexibility in establishing a reasonably designed supervisory system by allowing compliance tasks, including the role of the CCO, to be outsourced. While the CCO role may be outsourced, the municipal advisor retains ultimate responsibility for its compliance obligations. Due to the unique and integral role a CCO has in administration of a firm’s compliance processes, a municipal advisor must consider whether an outsourced CCO has the time and skill to understand the specific services and activities that the municipal advisor engages in and, if engaged by multiple firms, whether the outsourced CCO has the capacity to effectively discharge its duty as CCO.


Summer 2019:

Q: What is a dealer’s obligation under MSRB Rule G-18, on best execution, when there is limited pricing information available about a municipal security?

The absence or limitation of accessible quotations or pricing information is not uncommon for many municipal securities, but it does not relieve a dealer of its best-execution obligations. Indeed, Supplementary Material .06 to Rule G-18 specifically requires dealers to have written policies and procedures in place that address how the dealer will make its best-execution determinations with respect to securities with limited quotations or pricing information, and address when those policies and procedures are triggered by establishing what it means to have limited quotations or pricing information. See Rule G-18 Interpretive Guidance.


Spring 2019:

Q: If a dealer has a customer who has affirmed Sophisticated Municipal Market Professional (SMMP) status, consistent with MSRB Rule D-15, can the dealer, despite the provisions of MSRB Rule G-48 (e) on best execution, agree to use reasonable diligence to ascertain the best market for the municipal securities transaction so that the resultant price to the SMMP is as favorable as possible?

A: Yes. If an SMMP requests to receive, for example, time of trade disclosures or would otherwise like the dealer to retain the best execution or suitability obligation, a dealer may contract with an SMMP to fulfill the obligation(s) that would otherwise be modified under Rule G-48. A dealer is reminded that it may need to modify its supervisory controls to align with any modification.


Winter 2018:

Q: How can a firm indicate on its website that it is registered with the MSRB?

A: Consistent with Rule A-12(e), a municipal advisor, broker, dealer or municipal securities dealer registered with the MSRB may use the designation “ MSRB registered” in advertising, including on its website. The use of designations such as “accredited by” or “qualified with” or “member of” with respect to MSRB registration would be inconsistent with Rule A-12(e) and could be misleading.


Fall 2018:

Q: If I am a municipal advisor firm, does everyone at my firm need to be Series-50 qualified?

A: Anyone engaging in municipal advisory activities must pass the MSRB’s Municipal Advisor Representative Qualification Examination (Series 50 exam). Remember, if a municipal advisor firm currently has an SEC Form MA-I on file for a person that has not passed the Series 50 exam, that Form MA-I should be amended to indicate that the person is not engaging in municipal advisory activities on behalf of the firm. See SEC’s Registration of Municipal Advisors FAQs Section 16: Professional Qualifications and Municipal Advisor Firms.


Summer 2018:

Q: Where can I learn about the grounds for exemptive relief from the prohibition on business under MSRB Rule G-37?

A: The MSRB recently added to its website information regarding exemptive relief under MSRB Rule G-37, on political contributions and prohibitions on municipal securities business and municipal advisory business. The information includes an overview of the grounds that may warrant an exemption from the ban on business and a complete list of summaries of certain decisions issued since 1996 in response to applications for an exemption. Find this information in the Compliance Center on MSRB.org and on the Compliance Resources tab of Rule G-37.


Spring 2018:

Q: How can municipal advisors distinguish between providing “advice” and “recommendations” for purposes of compliance with MSRB Rule G-42?

A: The MSRB has received many questions from municipal advisors on the topic of advice versus recommendations under MSRB Rule G-42. To enhance understanding of the difference between these two activities and compliance with the rule’s provisions, the MSRB developed a draft compliance resource that addresses frequently asked questions (FAQs) and illustrates the application of the rule in scenarios municipal advisors may encounter. Municipal advisors are encouraged to provide feedback on the draft FAQs and scenarios by April 16, 2018 in advance of the publication of a final document. Read the request for comment. The draft FAQs are not meant to be interpretive guidance and all proposed answers are derived directly from the rulemaking record. Watch a recording of the MSRB’s Compliance Workshop: MSRB Rule G-42 Advice and Recommendations.


Winter 2017:

Q: What are the different types of compliance information the MSRB provides, and how can firms use the information?

A: The MSRB provides ongoing compliance information to supplement understanding of its rules by dealers and municipal advisors. The table below explains the type and intent of various forms of compliance information.