
[Federal Register Volume 76, Number 178 (Wednesday, September 14, 2011)]
[Notices]
[Pages 56826-56832]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23383]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65292; File No. SR-MSRB-2011-15]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Interpretive Notice Concerning the 
Application of Rule G-17 to Municipal Advisors

September 8, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on August 24, 2011, the Municipal Securities 
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the SEC a proposed rule change consisting 
of a proposed interpretive notice (the ``Notice'') concerning the 
application of MSRB Rule G-17 to municipal advisors. The MSRB requests 
that the proposed rule change be made effective on the date that rules 
defining the term ``municipal advisor'' under the Exchange Act are 
first made effective by the Commission or such later date as the 
proposed rule change is approved by the Commission.
    The text of the proposed rule change is available on the MSRB's Web 
site at http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    With the passage of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''),\3\ 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.
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    \3\ Public Law No. 111-203, 124 Stat. 1376 (2010).
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    A more-detailed description of the provisions of the Notice 
follows:
    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

[[Page 56827]]

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.
2. Statutory Basis
    The MSRB believes that the proposed interpretive notice is 
consistent with Section 15B(b)(2) of the Exchange Act, which provides 
that:

    The Board shall propose and adopt rules to effect the purposes 
of this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
municipal securities dealers, and municipal advisors.

    Section 15B(b)(2)(C) of the Exchange Act, provides that the rules 
of the MSRB shall:

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities and 
municipal financial products, to remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
municipal entities, obligated persons, and the public interest.

    The proposed rule change is consistent with Section 15B(b)(2) of 
the Exchange Act because it will protect obligated persons and 
municipal entities from fraudulent and manipulative acts and practices 
and promote just and equitable principles of trade, as well as 
emphasizing the duty of fair dealing owed by municipal advisors to 
their obligated person clients and to municipal entities when 
soliciting such entities on behalf of third parties. Rule G-17 has two 
components, one an anti-fraud prohibition, and the other a fair dealing 
requirement (which promotes just and equitable principles of trade). 
The Notice would address both components of the rule. The sections of 
the Notice entitled ``Duty to Obligated Persons/Deceptive, Dishonest, 
or Unfair Practices'' and ``Solicitation of a Municipal Entity/
Deceptive, Dishonest, or Unfair Practices'' primarily would provide 
guidance as to conduct required to comply with the anti-fraud component 
of the rule and, in some cases, conduct that would violate the anti-
fraud component of the rule, depending on the facts and circumstances. 
The sections of the Notice entitled ``Duty to Obligated Persons/Fair 
Dealing'' and ``Solicitation of a Municipal Entity/Fair Deaing'' 
primarily would provide guidance as to conduct required to comply with 
the fair dealing component of the rule.

[[Page 56828]]

    Section 15B(b)(2)(L)(iv) of the Exchange Act requires that rules 
adopted by the Board:

not impose a regulatory burden on small municipal advisors that is 
not necessary or appropriate in the public interest and for the 
protection of investors, municipal entities, and obligated persons, 
provided that there is robust protection of investors against fraud.

    The proposed rule change is necessary for the protection of 
obligated persons and municipal entities and the robust protection of 
investors against fraud. Many municipal advisors play a key role in the 
structuring of offerings of municipal securities by obligated persons 
through municipal entities and the preparation of offering documents 
used to market those securities to investors. In some cases, they 
advise on the appropriateness of derivatives entered into by obligated 
persons, the effectiveness of which may have a substantial impact on 
the finances of their clients. In other cases, they solicit business 
from public pension funds, which, if not conducted according to the 
highest standards, may have a substantial effect on the finances of the 
state and local governments that control those funds. Municipal 
entities, obligated persons, and investors, therefore, have a 
substantial interest in municipal advisors conducting their municipal 
advisory activities fairly and not engaging in fraudulent conduct.
    Accordingly, the MSRB does not believe that the proposed rule 
change would impose an unreasonable burden on small municipal advisors. 
However, the MSRB recognizes that there are costs of compliance. That 
is the reason the MSRB has included Appendix A to the Notice. By using 
Appendix A to provide disclosure concerning compensation conflicts, 
small municipal advisors will satisfy the compensation disclosure 
requirement of the Notice without having to retain legal counsel to 
assist them in the preparation of such disclosure.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, since it would apply 
equally to all municipal advisors advising obligated persons or 
soliciting third-party business from municipal entities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    On February 14, 2011, the MSRB requested comment on a draft of the 
Notice (the ``draft Notice''). The MSRB received comment letters from: 
The American Federation of State, County and Municipal Employees 
(``AFSCME''); B-Payne Group Financial Advisors (``B-Payne Group''); 
Catholic Finance Corporation (``Catholic Finance''); Municipal 
Regulatory Consulting LLC (``MRC''); the National Association of 
Independent Public Finance Advisors (``NAIPFA''); Not for Profit 
Capital Strategies (``Capital Strategies''); Public Financial 
Management (``PFM''); and the Securities Industry and Financial Markets 
Association (``SIFMA'').
Scope of Notice
     Comment: Delay Provisions Until SEC Rule on Municipal 
Advisors Finalized. SIFMA requested that the MSRB withdraw or delay 
some or all of the provisions of the draft Notice until the SEC has 
defined ``municipal advisor,'' after which time they asked that the 
MSRB afford commenters an additional opportunity to comment on the 
Notice.
     MSRB Response: Because Rule G-17 became applicable to 
municipal advisors on December 23, 2010, the MSRB feels it is important 
to provide guidance on how the rule applies to municipal advisors. The 
MSRB has requested that the proposed rule change be made effective on 
the date that rules defining the term ``municipal advisor'' under the 
Exchange Act are first made effective by the SEC, or such later date 
that the SEC approves the proposed rule change. At that time, the MSRB 
may propose additional guidance, if necessary.
     Comment: Duty When Advising Obligated Persons. Capital 
Strategies requested that the MSRB clarify a municipal advisor's duty 
when a financing alternative for a municipal advisor's obligated person 
client is not in the best interests of a municipal entity.
     MSRB Response: The MSRB determined to address these 
comments by revising the Notice so that it would provide (in endnote 
7): ``Although a municipal advisor advising an obligated person does 
not have a fiduciary duty to the municipal entity that is the conduit 
issuer for the obligated person (but is not the client of the advisor), 
it still has a fair dealing duty to the municipal entity.'' Thus, when 
a municipal advisor is advising an obligated person, its primary 
obligation of fair dealing is to its client. The municipal advisor 
would not be required to act in the best interests of the municipal 
entity acting as a conduit issuer, although the advisor would be 
prohibited from acting in a deceptive, dishonest or unfair manner.
     Comment: Interpretation of Fair Dealing Too Broad. SIFMA 
said that the draft Notice interpreted a municipal advisor's fair 
dealing obligations far beyond the common understanding of ``fair 
dealing'' and beyond prior interpretations of fair dealing as applied 
to brokers, dealers, and municipal securities dealers (``dealers''). 
SIFMA said that the draft Notice imposed many ``fiduciary-like'' 
obligations on municipal advisors when advising entities other than 
municipal entities. SIFMA further commented that concepts of a duty of 
care and a duty to disclose conflicts and obtain consent have never 
before been interpreted to be part of a duty to deal fairly under Rule 
G-17, and that imposing these duties under Rule G-17 may be 
inconsistent with existing obligations of currently regulated persons.
     MSRB Response: The MSRB has determined not to make any 
changes to the Notice based on these comments. The MSRB notes that 
prior interpretations of the concept of ``fair dealing'' with respect 
to dealers applied to counterparty, not advisory, relationships, and 
that a comparison between such prior interpretations and duties 
applicable to an advisor would therefore be inappropriate. Further, the 
MSRB considered carefully the violations of fair dealing and fiduciary 
duty in numerous state and federal cases, as well as SEC proceedings, 
and determined that fair dealing obligations and fiduciary obligations 
in an advisory relationship were closely aligned and not as disparate 
as SIFMA might suggest.
Duty to Obligated Persons
Appropriateness; Due Care
     Comment: Revise ``Appropriateness'' Standard. SIFMA 
questioned whether the draft Notice created a new standard of conduct 
by requiring a municipal advisor to advise an obligated person client 
as to the appropriateness of a municipal financial product or 
transaction or whether ``appropriateness'' was intended by the MSRB to 
mean the same thing as ``suitability.'' SIFMA and MRC said that the 
MSRB should define the duty to be consistent with other suitability 
standards currently applicable to dealers.

[[Page 56829]]

     MSRB Response: The MSRB determined to address this comment 
by revising the Notice so that it would substitute the term 
``suitability'' for the term ``appropriateness'' and to provide that 
the municipal advisor must have reasonable grounds for believing that a 
recommended municipal securities transaction or municipal financial 
product is suitable for the client, based on certain information about 
the client and the product or transaction known by the municipal 
advisor.
     Comment: Address Competing Standards. SIFMA said that the 
MSRB should not impose an appropriateness standard on regulated 
entities that were already subject to a competing standard. SIFMA said 
that the Rule G-17 obligation to advise obligated person clients of 
material risks should be deemed satisfied if the municipal advisor 
complied with similar requirements under another applicable regulatory 
regime. Further, SIFMA said that this duty should be limited to 
specified transactions and not extended to ordinary course transactions 
such as bank deposits and the issuance of fixed or floating rate debt.
     MSRB Response: The MSRB disagrees in part with these 
comments and accordingly has determined not to make the changes to the 
Notice suggested by these comments, except as noted above. As noted 
above, the MSRB revised the Notice so that it would substitute the word 
``suitability'' for the term ``appropriateness'' to align what SIFMA 
suggested might be potentially conflicting regulatory regimes. Further, 
the municipal advisor would not be deemed to have automatically 
satisfied the requirements of Rule G-17 by satisfying the requirements 
of another regulatory regime. The MSRB believes that adoption of 
SIFMA's comments with respect to ordinary course transactions would 
negate a significant purpose of the Notice.
     Comment: Risk Disclosure; Duplication and Scope. Catholic 
Finance suggested that where an underwriter had proposed a specific 
transaction and had adequately disclosed the risks, the municipal 
advisor need not also disclose the risks. Catholic Finance also 
requested clarification about whether the disclosure of risks and 
material incentives had to be in writing, as well as whether the same 
disclosures needed to be repeated to experienced clients in similar, 
successive transactions.
     MSRB Response: The MSRB has determined not to make the 
changes suggested by these comments. While a municipal advisor would 
not be required to disclose the same risks that an underwriter has 
disclosed, the municipal advisor would be required to determine the 
adequacy of such disclosure and advise its client as to whether the 
municipal advisor had reasonable grounds for believing the transaction 
or product recommended by the underwriter is suitable for such client. 
Such evaluation and advice are separate from whatever disclosure the 
underwriter presents. Further, while the disclosure of material risks 
would not be required to be in writing, the municipal advisor would be 
required to disclose any incentives and any other conflicts of interest 
in writing. Finally, with respect to disclosing the same risks to 
experienced clients in similar, successive transactions, the municipal 
advisor would be expected to consider whether disclosure would be 
advisable in light of new facts or circumstances concerning the client 
or the market, or the client's choice of new or different personnel 
directed to complete the transaction.
     Comment: Determine Status of Client. Capital Strategies 
requested that the MSRB clarify a municipal advisor's obligation if the 
status of its client could not be determined until after substantial 
advisory activity had taken place, citing an instance of a client 
initially considering a tax-exempt borrowing (and therefore being 
considered obligated person) but finally deciding to obtain a bank 
loan.
     MSRB Response: This comment is more appropriately 
addressed to the SEC, which has the authority to define the term 
``obligated person'' as used in the Exchange Act.
     Comment: Limit Obligations to Terms of Contract. SIFMA and 
NAIPFA argued that a municipal advisor should be required to do only 
what the obligated person client contracted for, and SIFMA said that an 
advisor need not expressly disclaim an obligation absent an explicit 
agreement between the parties. SIFMA also said that Rule G-17 should 
not imply additional obligations when reviewing a product or 
transaction recommended to its client by another, specifically the 
obligation to review for appropriateness and to disclose material 
risks, outside of what has been specifically contracted for between the 
parties.
     MSRB Response: The MSRB has determined not to make any 
changes to the Notice as a result of this comment. The MSRB expects 
that municipal advisors that wish to limit their engagements with 
obligated persons would do so in writings (whether as part of 
engagement letters or separately) that limit the scope of their 
engagements to particularly enumerated services or which state that any 
services not specified in the writing would not be provided by the 
advisor. This should impose no measurable additional cost on the 
advisor or the obligated person.
     Comment: Clarify Due Diligence Obligations. NAIPFA 
suggested that various duties, such as a duty to investigate or to make 
reasonable inquiry, appear to be variations on due diligence 
requirements and requested that they be worded in the same manner in 
the draft Notice and a proposed interpretive notice under proposed Rule 
G-36 (on fiduciary duty of municipal advisors). NAIPFA asked that these 
be revised and clarified. SIFMA suggested that any duty to analyze 
appropriateness be limited to facts that the municipal advisor was 
required to obtain under MSRB rules, or otherwise had in its 
possession, and that no further due diligence be required.
     MSRB Response: The MSRB has determined not to make any 
changes to the Notice based on these comments. The Notice would not 
impose a ``due diligence'' obligation upon municipal advisors. However, 
to the extent that a municipal advisor makes a recommendation, the 
fulfillment of such advisor's suitability obligation as described above 
would necessitate that the advisor gather and review the information on 
which such suitability determination is based. The wording of the 
Notice differs from that of the Rule G-36 proposed notice because of 
the different duties owed by municipal advisors to their clients under 
the two notices.
Disclosure of Conflicts
     Comment: Incorporate Requirements of Advisory Contracts in 
Rule G-23. MRC suggested that the requirements to disclose conflicts 
and to obtain informed consent would be more appropriately addressed in 
MSRB Rule G-23, and that the requirements should be removed from the 
draft Notice.
     MSRB Response: The MSRB disagrees with these comments and 
has determined not to make any changes to the Notice based on these 
comments. Rule G-23 only concerns financial advisory activities of 
dealers with respect to issues of municipal securities. The Notice 
would be the appropriate place to address these disclosures by all 
municipal advisors with obligated person clients.
     Comment: Disclose Linking Fees and Engagements. Catholic 
Finance suggested that disclosure concerning forms of compensation 
include disclosures by dealer firms offering to link engagements and 
fees as a municipal advisor with a separate

[[Page 56830]]

engagement as underwriter on a separate transaction.
     MSRB Response. The MSRB has determined not to make any 
changes to the Notice based on these comments. The Notice would provide 
that other, associated conflicts of interest would be required to be 
disclosed and described, if applicable. This provision of the Notice 
would thus address many additional types of conflicts.
Forms of Compensation
     Comment: Disclosure of Conflicts Confusing and 
Unnecessary. Several commenters suggested that the MSRB delete Appendix 
A to the draft Notice (Disclosure of Conflicts with Various Forms of 
Compensation) and the requirement of the Notice that municipal advisors 
disclose the conflicts with various forms of compensation (B-Payne 
Group, MRC; NAIPFA; PFM). Commenters argued that the disclosure would 
be confusing and that the type of fee arrangement (specifically 
contingent fees) did not affect professional performance. MRC suggested 
that any disclosure requirements were more appropriately addressed in 
Rule G-23. NAIPFA suggested that disclosure of conflicts in forms of 
compensation be limited to the conflicts applicable to the form of 
compensation methodology at the time the compensation methodology was 
proposed. NAIPFA also suggested that ``pitches'' or other discussions 
of ideas with municipal entities prior to engagement should not require 
delivery of the disclosure. AGFS supported the proposal to require 
municipal advisors to clarify the advantages and disadvantages of 
various forms of compensation.
     MSRB Response: The MSRB has determined to revise the 
Notice so that it would address these comments. Because municipal 
advisors owe a duty of fair dealing with respect to their obligated 
person clients, the MSRB considers it essential that they disclose all 
material conflicts to their clients. The Notice has been revised so 
that it would provide that, if the obligated person client has required 
that a particular form of compensation be used, the disclosure provided 
by the municipal advisor would need only address that form of 
compensation. The revised Notice would also require that conflicts 
disclosures, including those regarding compensation, need only be 
delivered before the municipal advisor has been engaged to provide 
municipal advisory services, unless the conflicts are discovered or 
arise later.
    The MSRB has determined not to eliminate Appendix A from the 
Notice. Appendix A was included in the Notice for the benefit of small 
municipal advisors to help them avoid the need to hire an attorney to 
prepare compensation conflicts disclosure associated with common forms 
of compensation. Use of Appendix A would not be mandatory and municipal 
advisors would be free to draft their own disclosure addressing these 
conflicts.
     Comment: Disclose Fees of All Participants. B-Payne Group 
said that fees of all participants (including bond attorneys) should be 
disclosed.
     MSRB Response: In the view of the MSRB, it is appropriate 
to interpret Rule G-17 differently for arm's-length counterparty 
relationships on the one hand (such as underwriters appropriately 
maintain with issuers) and advisory relationships on the other. The 
MSRB notes that it does not have jurisdiction over bond lawyers, unless 
they are functioning as municipal advisors, and, therefore, in most 
cases, may not require them to disclose compensation conflicts.
     Comment: Due Diligence to Determine Authority of Municipal 
Official. NAIPFA suggested that, in determining the authority of an 
official of an obligated person client to enter into a contract, to 
receive various disclosures, and to deliver informed consent, a 
municipal advisor should be permitted to rely on the apparent authority 
of such official to acknowledge the conflicts disclosure, assuming the 
advisor has no reason to believe that such person lacks the requisite 
authority.
     MSRB Response: The MSRB has determined to revise the 
Notice so that it would provide that a municipal advisor is required to 
deliver written disclosures of conflicts to, and receive informed 
consent from, those officials of the obligated person whom the 
municipal advisor reasonably believes have the authority to bind the 
obligated person client by contract with the municipal advisor.
     Comment: Consent Presumed With Receipt of Written 
Agreement. NAIPFA suggested that a municipal advisor be permitted to 
presume consent if it receives an executed contract (or similar 
document), or verbal agreement that a written engagement letter (or 
similar document) has been accepted, or written or verbal 
acknowledgement that the advisor has been selected following a request 
for proposal (``RFP'') process in which the form of compensation was 
appropriately disclosed and applicable disclosure provided.
     MSRB Response: The MSRB notes that the following 
provisions of the Notice would address this comment. The Notice would 
provide: ``For purposes of Rule G-17, an obligated person client will 
be deemed to have consented to conflicts that are clearly described in 
its engagement letter or other written contract with the municipal 
advisor, if the obligated person client expressly acknowledges the 
existence of such conflicts. If the official of the obligated person 
client agrees to proceed with the municipal advisory engagement after 
receipt of the conflicts disclosure but will not provide written 
acknowledgement of such conflicts, the municipal advisor may proceed 
with the engagement after documenting with specificity why it was 
unable to obtain such written acknowledgement.'' Accordingly, the MSRB 
has determined not to make any changes to the Notice to address this 
comment.
Misrepresentations
     Comment: Disclose Only General Conflicts of Interest. 
SIFMA said that it would be difficult for an advisor to accurately 
determine its capacity, resources, and knowledge when discussing a 
potential engagement with an obligated person client or on a forward-
looking basis, and suggested that it be able to satisfy its obligation 
by providing generalized disclosures about its qualifications.
     MSRB Response: The Notice would specify, in the context of 
a response to an RFP, that the response must accurately describe the 
municipal advisor's knowledge and capabilities, and prohibits a 
municipal advisor from making false or misleading statements about its 
knowledge and capabilities, or omitting material facts about its 
knowledge and capabilities. The municipal advisor would be expected to 
base its response on its understanding about the scope of the 
engagement at that time. If the scope of the engagement changes, the 
municipal advisor would be prohibited from making false or misleading 
statements about its continued ability to perform the engagement. 
Accordingly, the MSRB has determined not to make any changes to the 
notice based on this comment.
Excessive Compensation
     Comment: Definition of Excessive Compensation. NAIPFA and 
B-Payne Group requested further clarification on the definition of 
``excessive compensation.'' NAIPFA suggested certain criteria, 
including, among other things: (i) The time and labor required, the 
novelty and difficulty of the issue involved, and the skill requisite 
to perform the municipal advisory services

[[Page 56831]]

properly; (ii) the fee customarily charged in the locality for similar 
municipal advisory services; (iii) the amount involved and the results 
obtained; (iv) the nature and length of the professional relationship 
with the client; (v) the experience, reputation, and ability of the 
municipal advisor or municipal advisors performing the services; and 
(vi) whether the fee is fixed or contingent. B-Payne Group objected to 
any evaluation of whether its fees were excessive, arguing that no 
regulator was in a position to evaluate the reasonableness of the 
municipal advisor's fee.
     MSRB Response: The MSRB has determined to revise the 
Notice so that it would address these comments. The Notice would 
describe excessive compensation as compensation that is so 
disproportionate to the nature of the municipal advisory services 
performed as to indicate that the municipal advisor is engaging in an 
unfair practice in violation of Rule G-17. The MSRB would revise the 
Notice so that it would provide that ``The MSRB recognizes that what is 
considered reasonable compensation for a municipal advisor will vary 
according to the municipal advisor's expertise, the complexity of the 
financing, whether the fee is contingent upon the closing of the 
transaction, and the length of time spent on the engagement, among 
other factors.'' As this language recognizes, many factors can 
appropriately affect the amount of the fee, and the specific factors 
listed in the Notice would not be exclusive. Thus, it may be that the 
various other factors noted by commenters could have an impact on the 
compensation paid to a municipal advisor. In all cases, the municipal 
advisor should be able to support the legitimacy of its fees.
Solicitation of a Muncipal Entity
Disclosure of Material Facts; Gifts
     Comment: Extent of Disclosure May Be of Questionable 
Value. SIFMA suggested that the requirement to disclose all 
relationships with influential employees, board members, or affiliates 
of the municipal entity may be extensive and of questionable value. 
Further, SIFMA noted that a solicitor may not be in the best position 
to disclose all material risks and characteristics, and that such 
effort will be duplicative of the provider's (its client's) obligation 
once it has been retained an a municipal advisor.
     MSRB Response: The MSRB disagrees with this comment, 
especially given the relationship-driven business that enforcement 
actions have revealed. See, e.g., endnote 15 to the Notice. 
Accordingly, the MSRB has determined not to make any changes to the 
Notice to address these comments.
     Comment: Address Gifts in Rule G-20. SIFMA suggested that 
the MSRB should address the issue of gifts in MSRB Rule G-20, as it has 
done for similar prohibitions on dealers.
     MSRB Response: The MSRB notes that the provisions in the 
Notice regarding Rule G-20 would only be reminders of existing MSRB 
guidance under Rule G-17, which is equally applicable to municipal 
advisors. Accordingly, the MSRB has determined not to make any changes 
to the Notice to address this comment.
     Comment: Limit Duties of Affiliated Solicitors. SIFMA said 
that the duties attendant on solicitors should not apply to solicitors 
affiliated with municipal advisors, and such solicitors should not be 
considered to be engaged in municipal advisory activities when 
soliciting on behalf of their municipal advisor affiliates.
     MSRB Response: The MSRB notes that affiliated solicitors 
are not included in the definition of ``municipal advisor'' under 
Section 15B(e)(4) of the Exchange Act and that Rule G-17 and the Notice 
would not apply to such solicitors. The Notice has been revised to 
refer to solicitations on behalf of ``unrelated'' third parties.
     Comment: Clarify Referrals and Solicitations. Catholic 
Finance requested clarification on whether referrals to it from prior 
clients constituted solicitation, and whether services performed as 
part of its exempt purpose and for its constituents at reduced or no 
compensation, or loans made to its constituents at subsidized rates, 
would constitute gifts under Rule G-17.
     MSRB Response: The MSRB has determined not to make any 
changes to the Notice based on this comment. The MSRB notes that the 
definition of ``solicitation of a municipal entity or obligated 
person'' found in Section 15B(e)(9) of the Exchange Act does not apply 
to solicitations for which compensation is neither directly nor 
indirectly received. Under amendments to MSRB Rule G-20 proposed by the 
MSRB, the rule would only restrict gifts made to natural persons.
Other Comments
     Comment: Manner of Regulation and Cost of Compliance. B-
Payne Group expressed the view that the MSRB should regulate municipal 
advisors by getting ``experienced personnel on the ground in regional 
markets and charge them with staying on top of situations,'' rather 
than regulating municipal advisors as the MSRB regulates dealers. It 
argued for exemptions from MSRB rules for small municipal advisors and 
said the cost of compliance for such advisors would outweigh the 
regulatory benefit. Other parts of the comment letter addressed matters 
that were outside the scope of the request for comment on draft Rule G-
17 (e.g., professional qualifications testing, training for local 
finance officials) and are not summarized here.
     MSRB Response: For regulation of municipal advisors to be 
fair, all municipal advisors must know what rules apply to them. Rule 
G-17 requires municipal advisors to conduct their municipal advisory 
activities in a fair manner, and the proposed rule change would provide 
guidance to municipal advisors on what that duty of fair dealing means 
so they can tailor their conduct accordingly. Without such guidance, 
``experienced personnel on the ground'' would likely enforce the 
Exchange Act in an inconsistent manner, which the MSRB doubts that B-
Payne Group would consider fair.
    The MSRB recognizes that there are costs of compliance with its 
rules. That is the reason the MSRB has included Appendix A to the 
Notice. By using Appendix A to provide disclosure concerning 
compensation conflicts, small municipal advisors will satisfy the 
compensation disclosure requirement of the Notice without having to 
retain legal counsel to assist them in the preparation of such 
disclosure.
     Comment: Implementation Period. SIFMA suggested that 
because Rule G-17 would subject municipal advisors to rules they are 
not currently subject to, the MSRB should consider providing for an 
implementation period of no less than one year.
     MSRB Response. The MSRB recognizes that some municipal 
advisors may be subject to rules that are not currently applicable. 
However, the appropriate implementation period will depend upon the 
provisions of the SEC's rule relating to municipal advisors.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

[[Page 56832]]

    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Interested persons are also 
invited to submit views and arguments as to whether they can 
effectively comment on the proposed rule change prior to the date of 
final adoption of the Commission's permanent rules for the registration 
of municipal advisors. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2011-15 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2011-15. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the MSRB's offices. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2011-15 and should be submitted on 
or before October 5, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23383 Filed 9-13-11; 8:45 am]
BILLING CODE 8011-01-P


