Quarterly Municipal Regulatory Update

In the second quarter of 2019, the municipal securities industry saw new regulatory activity relating to disclosures at primary offering, new enforcement matters, and the adoption of Regulation Best Interest. Below, we have summarized the most significant regulatory developments from the past quarter affecting municipal bond underwriters and Municipal Advisors. 

The SEC has Approved the MSRB’s Proposed Amendments to Rule G-11 and Rule G-32. The MSRB received approval from the SEC on June 27 for its proposed amendments to Rule G-11, which addresses primary offering practices, and Rule G-32, which addresses disclosures in connection with primary offerings of municipal securities. The Board’s proposed amendments to Rules G-11 and G-32 were described in the last Quarterly Municipal Regulatory Update. In conjunction with the amendments, the SEC has also approved changes to Form G-32, which will now include (i) an additional 57 data fields that consist of information already required of underwriters in connection with an application to the Depository Trust Company’s New Issue Information Dissemination Service (NIIDS) for NIIDS-eligible offerings and (ii) nine brand new data fields for manual completion in NIIDS-eligible offerings.

The amendments to Rule G-11 and G-32 will take effect on January 13, 2020. With respect to the amendments to Form G-32, the MSRB will publish one or more Regulatory Notices on or before December 25, 2019 that will specify the compliance dates for these changes.

The SEC Adopts Regulation Best-Interest and Accompanying New Rules and Interpretations. After years of debate, the SEC voted to adopt the new Regulation Best Interest—which is aimed at enhancing the duties that broker-dealers owe to retail investors—as well as a package of accompanying new rules, amendments, and interpretations. The primary purpose of Regulation Best Interest is to impose a new standard of conduct for broker-dealers that goes beyond the existing standard, which requires that broker-dealers make recommendations that are “suitable” for the relevant customer. Under Regulation Best Interest, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests. Regulation Best Interest includes several other components, including a new “Disclosure Obligation,” “Care Obligation,” “Conflict of Interest Obligation,” and “Compliance Obligation.” The various rules and interpretations that accompany Regulation Best Interest, portions of which apply to both broker-dealers and investment advisors, are generally designed to enhance investor protections while preserving retail investor access and choice in: (i) the type of professional with whom they work, (ii) the services they receive, and (iii) the method of payment for these services.

Regulation Best Interest will apply to all secondary market retail transactions in municipal securities made by registered broker-dealers but may also apply to primary offerings if any of the bond purchaser(s) meet the SEC’s definition of a “retail investor,” which the SEC further clarifies in its Adopting Release to Regulation Best Interest. Regulation Best Interest will become effective 60 days after it is published in the Federal Register and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance.

The MSRB Seeks Comments on Rule G-23. The MSRB is seeking comments on MSRB Rule G-23, which governs the activities of financial advisors. The MSRB’s Request for Comment discusses the interaction between Rule G-23 and Rules G-42 and G-17, specifically the various ways in which these rules overlap and the importance of consistency. Accordingly, the MSRB asks commenters to provide feedback on whether the objectives of Rule G-23 could be achieved without retaining Rule G-23 as a standalone rule. The MSRB also seeks comments on the scope of Rule G-23’s current prohibition on role-switching from an advisory to an underwriting relationship, the ways in which Rule G-23 could be better aligned with the Municipal Advisor Rule, and whether certain aspects of the existing Interpretive Guidance to the rule should be retired, among several other topics.

Recent SEC Complaint Charges Rhode Island Issuer with Disclosure Failure. The SEC recently charged a Rhode Island issuer as well as Wells Fargo Securities with defrauding investors in connection with a conduit financing, where the borrower was a video game company, and in which the bonds were privately placed. In SEC v. Rhode Island Commercial Corporation, the SEC notes that the issuer offered the bonds pursuant to a Private Placement Memorandum in lieu of an Official Statement, as the transaction was not subject to Rule 15c2-12. The primary basis for the SEC’s charge was that the Private Placement Memorandum “failed to disclose that the project being financed by the Bonds, the development of a video game, could not be completed with the financing the Bonds would provide. The document did not disclose that even with the proceeds of the loan financed by [the bonds], [the video game company] faced a known shortfall in funding.” The litigation has garnered considerable press and has stimulated discussion regarding the nature and scope of disclosure required in private placements of municipal securities.

The MSRB Comments on Municipal Advisor Considerations in Preparing for Regulatory Examinations. In its June edition of the MSRB Podcast, the MSRB provides guidance on Municipal Advisor firms’ preparation for regulatory examinations, as all Municipal Advisors are periodically examined by the SEC, FINRA, and other regulators for compliance with MSRB rules. In the podcast episode, the MSRB’s Assistant General Counsel, Lisa Wilhelmy, indicated that regulators generally continue to focus on the following topics during examinations: the persons responsible for conducting supervisory tasks regarding a firm’s Municipal Advisor business and the manner in which they discharge this role, evidence of proper disclosures, conflicts of interest, and whether firms’ written supervisory procedures are adequate and are being followed. Regulators further consider a firm’s size, their organizational structure, the nature and scope of a firm’s municipal business, and any record of past misconduct, when determining whether to apply sanctions. The MSRB’s comments closely adhere to the SEC’s 2019 Examination Priorities Letter, which was released on December 20, 2018.


Harsha Sekar is an attorney in Sherman & Howard’s Public Finance Group. His practice involves the representation of underwriters, issuers and borrowers, banks and other transaction participants in municipal securities offerings.