In the third quarter of 2019, the municipal securities industry saw new regulatory activity relating to underwriters’ disclosure obligations, new enforcement matters, and the private placement of municipal securities. Below, we have summarized the most significant regulatory developments from the past quarter affecting municipal bond underwriters and Municipal Advisors.
MSRB Seeks Amendments to 2012 Interpretive Notice Regarding Rule G-17. During the last quarter, the MSRB twice filed amendments with the SEC to its 2012 Interpretive Notice regarding Rule G-17, which governs the conduct of both broker-dealers and Municipal Advisors. The MSRB made its first such filing on August 1 and then filed proposed revisions to the August 1 amendments on October 9. Taken together the two sets of proposals would: (i) clarify that the underwriter making a recommendation to an issuer regarding a financing structure or product, including, when applicable, a Complex Municipal Securities Financing recommendation, has the fair dealing obligation to deliver the applicable transaction-specific disclosures, and consequently, when a syndicate manager (or any other underwriter in a syndicate) is not the underwriter making the recommendation, such underwriter does not have a fair dealing obligation to make such disclosures; (ii) clarify that dealers may modify certain standard disclosures when acting as a placement agent; and (iii) clarify the particular issuer personnel to whom a disclosure must be delivered. The proposals would also categorically exempt any dealer acting as a primary distributor in a continuous offering of municipal fund securities as well as set forth additional technical changes.
Should the SEC approve the MSRB’s proposed amendments to the 2012 Interpretive Release, the MSRB will publish one or more Regulatory Notices that will specify the compliance dates for these changes. The amendments apply only to the 2012 Interpretive Release and will not amend Rule G-17 itself.
SEC Issues Proposed Order Regarding Municipal Advisors’ Engagement in Private Placements.
On October 2, the SEC issued a Proposed Exemptive Order that would grant exemptive relief pursuant to Section 15 the Exchange Act to permit a registered Municipal Advisor, acting on behalf of a municipal issuer client, to solicit specified institutional investors (such as commercial banks) in connection with the direct placement of municipal securities without registering as a broker-dealer when certain conditions are met. Through its proposal, the SEC has directly weighed in on one of the most controversial areas of the existing Municipal Advisor regulation, one that has been the subject of an increasingly heated battle between independent Municipal Advisors (meaning Municipal Advisors that are not registered broker-dealers) and the investment banking community. The SEC issued its proposal in direct response to letters seeking this exemption from both the National Association of Municipal Advisors and PFM, a large independent Municipal Advisor firm, which were promptly countered by letters from the broker-dealer community. The investment banking industry immediately condemned the SEC’s proposal, and both the Securities and Financial Markets Association (SIFMA) and Bond Dealers of America have expressed their intention to vigorously lobby against its implementation.
MSRB Seeks to Drop Requirement that Municipal Advisors Obtain a CUSIP When Advising on a Competitive Sale. At its July quarterly meeting, the MSRB determined to pursue dropping the requirement in Rule G-34 that all Municipal Advisors, whether dealer or non-dealer, must apply for a CUSIP number when advising on competitive sales. The requirement was codified only in 2018 and has proven controversial among independent Municipal Advisors (which are not registered broker-dealers). The announcement was only preliminary, and it is likely that the MSRB will distribute a Regulatory Notice and seek comments from industry members before filing any proposed changes to Rule G-34 with the SEC. The MSRB issued a Request for Comment on this topic earlier in the year.
FINRA Settles Four Actions Involving Municipal Industry Firms and Representatives. Since August, FINRA has settled at least four cases involving municipal industry firms and personnel which reflect a broad variety of rule violations, including for failing to adequately note whether trades were solicited or unsolicited on trade confirmations, inaccurately representing the tax status of interest payments to bondholders, failing to timely report secondary market trades, and failing to adequately disclose the uses of proceeds of an offering. The regulator also issued an informal notice to the municipal securities community warning that broker-dealers that engage in investment-related activities with municipal clients, but which have not registered as Municipal Advisors, must have reasonably designed supervisory systems and controls to determine whether they are required to register as Municipal Advisors. Further, this month FINRA’s Fixed Income Regulation division commented informally that member firms are increasingly not making timely disclosures at the outset of advisory engagements as prescribed by Rule G-42.
Elizabeth Warren Co-Sponsors MSRB Reform Act. The MSRB Reform Act, which was introduced by Senator John Kennedy of Louisiana, has found a high profile ally in presidential candidate Elizabeth Warren, who has signed on as a co-sponsor. Kennedy has consistently criticized the MSRB as an example of the ineffectiveness of industry self-regulation. If passed by both houses of Congress in its current form, the MSRB Reform Act would (i) require public representatives of the MSRB to be no less than five years removed from any association with a municipal securities broker-dealer or a Municipal Adviser; (ii) require the SEC’s commissioners to directly confirm new members of the MSRB’s Board; and (iii) require the SEC to promulgate a rule that would cap compensation for the MSRB’s Board within 60 days of the Act’s enactment.
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.