Where the MSRB's rule review will focus

WASHINGTON — Municipal Securities Rulemaking Board regulations covering dealers acting as financial advisors may soon be overhauled to reflect more recent rules covering municipal advisors.

The MSRB announced Tuesday that its ongoing retrospective rule review will next focus on its Rule G-23 on activities of financial advisors, as well as Rule G-34 on CUSIP numbers and Rule G-29 on availability of board rules. The announcement closely followed the conclusion of the board’s quarterly meeting last week, and sets the table for at least a portion of the MSRB’s work over the next several months. The MSRB has made the retrospective rule review one of its strategic priorities for the year.

“Today’s market requires that we reevaluate and modernize certain rules to reflect rapid change in our market,” said MSRB Chair Gary Hall. “We need to ensure that the interests of investors and issuers are protected and that financial professionals can serve them effectively and without unnecessary burdens.”

Rule G-23 is under some scrutiny because, while it governs dealers acting as financial advisors, it predates the municipal advisor regulatory regime establishes primarily over the past five years. Issuers’ financial advisors are also municipal advisors under the rules, and bound under federal law and a newer MSRB rules by a fiduciary duty to put the interests of issuer clients ahead of their own.

Rule G-23 defines when a financial advisory relationship exists, requires written evidence of that relationship, and generally prohibits a firm from acting as an FA and an underwriter or placement agent on the same transaction.

“Now that the general framework for municipal advisor regulation is largely established, the MSRB believes it is appropriate to conduct a retrospective review of Rule G-23 to ensure that, among other things, the restrictions and requirements imposed upon dealers acting in a financial advisor capacity remain appropriate in light of the municipal advisor regulatory regime and that they are clearly delineated,” the MSRB said in a notice posted Tuesday.

The review of Rule G-34 was born from relatively recent amendments to the rule that require muni advisors on competitive deals to apply for CUSIP numbers within specified time frames. In the less than two years since the Securities and Exchange Commission approved those amendments, the MSRB said it has heard from “numerous” muni advisors and others with “questions regarding the need for this requirement and concerns about the burdens associated with it.”

“The MSRB believes that it is appropriate to solicit comments and to obtain any available data from all stakeholders concerning, among other things, whether the requirement addresses actual market harms; is appropriate to the role of the municipal advisor in some or all instances; imposes undue burdens on municipal advisors; and raises any considerations relating to competition among regulated entities,” the MSRB said.

The MSRB said it will consider whether there is still a need for Rule G-29, which requires each dealer to keep a copy of all MSRB rules in all offices in which certain municipal securities activities are conducted. The rules are now available online, including on the MSRB’s website.

Dealers welcomed the announcement of the review priorities.

”SIFMA is pleased that the MSRB is continuing the process of its retrospective rule review,” said Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “SIFMA agrees that Rule G-23, which predates the SEC’s municipal advisor registration rule, could be amended to come into better alignment with the other municipal advisor regulations. We also appreciate the review and potential elimination of Rule G-29, in light of the widespread availability of the MSRB rules on the internet. These efforts to reduce unnecessary regulatory burdens on the regulated community are welcome.”

Mike Nicholas, CEO of Bond Dealers of America, said his group appreciates the review.

"The BDA believes that a retrospective review of regulation is critical to ensure that they are effective and not overly burdensome for market participants- especially middle-market, regional and small firms," Nicholas said. "The BDA looks forward to continued engagement with its membership to ensure effective changes, where needed, are made."

Susan Gaffney, executive director of the National Association of Municipal Advisors, said she applauded the MSRB's initiative.

"There are many areas where due to both the nature of the changing regulatory environment – which now includes MAs – and market practices, that a review will help to ensure that the MSRB’s rules protect issuers and investors, are clear to regulated entities and other marketplace participants, and are more readily accessible on the MSRB’s web site," Gaffney said. NAMA looks forward to contributing to this dialogue with respect to the rules discussed in the release, as well as review of guidance or noting the need for guidance to assist with the application of these rules within a MA firm’s practice."

The MSRB said it welcomes comments “on any aspect” of the retrospective review.