Municipal Securities Rule Making Board - Rule G-17

FINRA Municipal Bond Fraud and Misrepresentation Arbitration Attorney, Russell L. Forkey, Esq.

August, 2011:


On August 24, 2011, the Municipal Securities Rulemaking Board ("Board" or "MSRB") filed with the Securities and Exchange Commission ("SEC") a proposed rule change consisting of a proposed interpretive notice (the "Notice") concerning the application of MSRB Rule G-17 to municipal advisors advising obligated persons or soliciting municipal entities on behalf of others. The MSRB 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 made effective by the SEC or such later date as the proposed rule change is approved by the SEC.


With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the MSRB was expressly directed by Congress to protect municipal entities and obligated persons. Accordingly, the MSRB is proposing to provide interpretive guidance that addresses how Rule G-17 applies to municipal advisors when advising obligated person clients or when soliciting municipal entities on behalf of others.


Duty to Obligated Persons; Fair Dealing. The Notice would provide that the Rule G-17 duty of fair dealing requires that the municipal advisor determine if a recommended municipal securities transaction or municipal financial product is suitable for its obligated person client, and that it provide disclosure of the material risks and characteristics of the transaction or product, as well as any incentives the municipal advisor has received for recommending the transaction or product and any other associated conflicts of interest. Further, under the Notice, the Rule G-17 duty of fair dealing would require that the municipal advisor exercise due care when providing advice to the obligated person client, and not undertake an engagement if the municipal advisor does not have the necessary skills and resources to perform its duties in respect of the engagement.

The Notice also would provide that the municipal advisor must disclose all material conflicts of interest such as those that may color its judgment and impair its ability to render unbiased advice to its obligated person client, including those existing at the time the engagement is entered into, and those discovered or arising during the course of the engagement. The municipal advisor would be required to make these disclosures in writing and, in general, to obtain the informed consent thereto by an official of the obligated person having the authority to bind the obligated person by contract with the municipal advisor. Conflicts that constituted an unfair, deceptive, or dishonest practice would preclude a municipal advisor from undertaking an engagement with an obligated person client and disclosure of such conflict would not be effective in permitting such engagement to be undertaken.

The Notice would provide that a municipal advisor is required to provide written disclosure of the amount of its direct compensation and indirect compensation ( e.g ., amounts paid to affiliates) from the engagement, and the scope of services to be provided. The municipal advisor would also be required to provide written disclosure of the conflicts of interest associated with various forms of compensation, including the form of compensation applicable to its engagement, unless the obligated person client has required a particular form of compensation, in which case such disclosure would only need to address that particular form of compensation.

Deceptive, Dishonest or Unfair Practices. The Notice would provide that all representations made by municipal advisors to their obligated person clients, whether written or oral, must be truthful and accurate, and municipal advisors must not omit material facts, and that matters not within the personal knowledge of those preparing the response ( e.g., pending litigation) must be confirmed by those with knowledge of the subject matter. A municipal advisor would not be permitted to represent that it has the requisite knowledge or expertise with respect to a particular type of transaction or product if the personnel that it intends to work on the engagement do not have the requisite knowledge or expertise.

The Notice would provide that in certain cases and depending upon the specific facts and circumstances of the engagement, a municipal advisor's compensation, including payments from third parties, may be so disproportionate to the nature of the municipal advisory services to be an unfair practice in violation of Rule G-17.

The Notice would also provide that kickback arrangements, and certain fee-splitting arrangements, with underwriters or the providers of investments or services to obligated persons are unfair, dishonest, and deceptive practices that are prohibited by Rule G-17, as are payments by municipal advisors made for the purpose of obtaining or retaining municipal advisory business, other than reasonable fees paid to a municipal advisor regulated by the MSRB.

Solicitation of a Municipal Entity; Fair Dealing. The Notice would provide that, while municipal advisors are not required to exercise a fiduciary duty when soliciting municipal entities on behalf of third parties (in such capacity, a "solicitor"), they are required to deal fairly with the municipal entities they solicit and not engage in conduct that is deceptive, dishonest, or unfair.

The Notice would provide that a solicitor must provide written disclosure of all material facts about the solicitation to the municipal entity being solicited, including, among other things, the amount and source of all compensation received by the solicitor, any payments (including in-kind) made by the solicitor to facilitate the solicitation regardless of characterization; and any relationships of the solicitor with any employees, board members, or affiliated persons of the municipal entity or its officials who may have influence over the selection of the solicitor's client.

The Notice would provide that the solicitor, if engaged by its client to present information to the municipal entity about a product or service being offered by the client, is required to disclose all material risks and characteristics of the product or service, as well as any incentives received by the solicitor (other than compensation from its client) to recommend the product or service, and any other conflicts of interest regarding the product or service.

Deceptive, Dishonest or Unfair Practices.

The Notice would provide that kickbacks and fee-splitting arrangements with others, made or entered into by solicitors for the purpose of facilitating the solicitation are unfair, dishonest, and deceptive practices that violate Rule G-17. The Notice would also provide that lavish gifts and gratuities (that exceed limits set forth in MSRB Rule G-20) made to officials of the municipal entity or affiliated parties may improperly influence the decision of the municipal entity to engage the solicitor's client, and may therefore be a violation of Rule G-17.

If the reader would like to review the entire proposal, please follow the highlighted link.