
[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45546-45556]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18381]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72706; File No. SR-MSRB-2014-06]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Proposed New Rule G-44, on Supervisory and Compliance Obligations of 
Municipal Advisors; Proposed Amendments to Rule G-8, on Books and 
Records To Be Made by Brokers, Dealers and Municipal Securities 
Dealers; and Proposed Amendments to Rule G-9, on Preservation of 
Records

July 29, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 24, 2014, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``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 Commission a proposed rule change 
consisting of proposed new Rule G-44, on supervisory and compliance 
obligations of municipal advisors; proposed amendments to Rule G-8, on 
books and records to be made by brokers, dealers and municipal 
securities dealers; and proposed amendments to Rule G-9, on 
preservation of records (the ``proposed rule change''). The MSRB 
requests that the proposed rule change be approved with an 
implementation date six months after the Commission approval date for 
all changes except for proposed Rule G-44(d), which municipal advisors 
would be required to implement eighteen months after the Commission 
approval date.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2014-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

[[Page 45547]]

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 MSRB 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
    Following the financial crisis of 2008, Congress enacted the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act'').\3\ The Dodd-Frank Act establishes a new federal regulatory 
regime requiring municipal advisors to register with the SEC, deeming 
them to owe a fiduciary duty to their municipal entity clients and 
granting the MSRB rulemaking authority over them. The MSRB, in the 
exercise of that authority, is currently developing a comprehensive 
regulatory framework for municipal advisors. A significant element of 
that regulatory framework is proposed Rule G-44, which would establish 
supervisory and compliance obligations of municipal advisors when 
engaging in municipal advisory activities. Proposed Rule G-44 utilizes 
a primarily principles-based approach to supervision and compliance in 
order to, among other things, accommodate the diversity of the 
municipal advisor population, including small and single-person 
entities. Proposed Rule G-44 is accompanied by proposed amendments to 
Rules G-8 and G-9 to establish fundamental books-and-records 
requirements for municipal advisors, including those related to their 
supervisory and compliance obligations.
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    \3\ Public Law 111-2013, 124 Stat. 1376 (2010).
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Proposed Rule G-44
    Proposed Rule G-44 follows a widely accepted model in the 
securities industry consisting of a reasonably designed supervisory 
system complemented by the designation of a chief compliance officer 
(``CCO''). The proposed rule draws on aspects of existing supervision 
and compliance regulation under other regimes, including those for 
broker-dealers under rules of the MSRB and Financial Industry 
Regulatory Authority (``FINRA'') and for investment advisers under the 
Investment Advisers Act of 1940 (``Advisers Act'').
    In summary, proposed Rule G-44 would require:
     A supervisory system reasonably designed to achieve 
compliance with applicable securities laws;
     Written supervisory procedures;
     The designation of one or more municipal advisor 
principals to be responsible for supervision;
     Compliance processes reasonably designed to achieve 
compliance with applicable securities laws;
     An annual certification regarding those compliance 
processes;
     The designation of a CCO to administer those compliance 
processes; and
     At least annual reviews of compliance policies and 
supervisory procedures.
    The proposed amendments to Rules G-8 and G-9, in summary, would 
require each municipal advisor to make and keep records of its:
     Written supervisory procedures;
     Designations of persons as responsible for supervision;
     Written compliance policies;
     Designations of persons as CCO;
     Reviews of compliance policies and supervisory procedures; 
and
     Annual certifications regarding compliance processes.
    Paragraph (a) of proposed Rule G-44 is the core provision, which 
would require all municipal advisors to establish, implement and 
maintain a system to supervise their municipal advisory activities and 
those of their associated persons that is reasonably designed to 
achieve compliance with all applicable securities laws and regulations, 
including applicable MSRB rules (defined as ``applicable rules''). 
Paragraph (a) specifies that final responsibility for proper 
supervision rests with the municipal advisor. Subparagraph (a)(i) 
requires the establishment, implementation, maintenance and enforcement 
of written supervisory procedures reasonably designed to achieve 
compliance with applicable rules. Paragraph .01 of the Supplementary 
Material specifies several factors that municipal advisors' written 
supervisory procedures must take into consideration, including the 
advisor's size, organizational structure, nature and scope of 
activities, number of offices, disciplinary and legal history of its 
associated persons, the likelihood that associated persons may be 
engaged in relevant outside business activities, and any indicators of 
irregularities or misconduct (i.e., ``red flags''). This guidance 
allows municipal advisors to tailor their supervisory procedures to, 
among other things, their size, particular business model and 
structure. Paragraph .02 of the Supplementary Material emphasizes the 
flexibility of the proposed rule to accommodate small municipal advisor 
firms, even those with only one associated person. Proposed Rule G-
44(a)(i) also specifies requirements to promptly amend supervisory 
procedures (i) to reflect changes in applicable rules and (ii) as 
changes occur in the municipal advisor's supervisory system; and to 
communicate the procedures and amendments to the municipal advisor's 
relevant associated persons.
    Proposed Rule G-44(a)(ii) would require municipal advisors to 
designate one or more municipal advisor principals to be responsible 
for the supervision required by the proposed rule. Paragraph .03 of the 
Supplementary Material specifies the authority and specific 
qualifications required for municipal advisor principals designated as 
responsible for supervisory functions. According to the proposed rule, 
they must have the authority to carry out the supervision for which 
they are responsible, including the authority to implement the 
municipal advisor's established written supervisory procedures and take 
any other action necessary to fulfill their responsibilities. They also 
must have sufficient knowledge, experience and training to understand 
and effectively discharge their supervisory responsibilities.\4\ 
Paragraph .03 of the Supplementary Material also specifies that, even 
if not designated as a supervisory principal, whether a person has 
responsibility for supervision under the proposed rule would depend on 
whether, under the facts and circumstances of a particular case, the 
person has the requisite degree of responsibility, ability or authority 
to affect the conduct of the employee whose behavior is at issue.
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    \4\ The MSRB intends to propose amendments to MSRB Rules G-2 and 
G-3 to create the ``municipal advisor principal'' classification, 
define the term and require qualification in accordance with the 
rules of the Board. The MSRB expects those changes to become 
effective well in advance of the proposed implementation dates of 
the proposed rule change. Although the MSRB does not expect a 
municipal advisor principal examination to be in place by the time 
of the implementation dates of the proposed rule change, the MSRB 
may develop such an examination in the future. The absence of such 
an examination does not preclude the creation of the classification.
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    Paragraph (b) of proposed Rule G-44 would require municipal 
advisors to implement processes to establish, maintain, review, test 
and modify

[[Page 45548]]

written compliance policies and supervisory procedures. Proposed Rule 
G-44(b) would specify that the reviews of compliance policies and 
supervisory procedures must be conducted at least annually. Paragraph 
.04 of the Supplementary Material would provide, however, that 
municipal advisors should consider the need, in order to comply with 
all of the other requirements of the proposed rule, for more frequent 
reviews. The paragraph also would provide guidance on what, at a 
minimum, municipal advisors should consider during their reviews of 
compliance policies and supervisory procedures. These considerations 
include any compliance matters that arose since the previous review, 
any changes in municipal advisory activities and any changes in 
applicable law.
    Paragraph (c) of proposed Rule G-44 would require municipal 
advisors to designate one individual as their CCO. Paragraph .05 of the 
Supplementary Material would explain the role of a CCO and the 
importance of that role. Specifically, a CCO is a primary advisor to 
the municipal advisor on its overall compliance scheme and the policies 
and procedures that the municipal advisor adopts in order to comply 
with applicable law. To fulfill this role, a CCO should have competence 
in the process of (1) gaining an understanding of the services and 
activities that need to be the subject of written compliance policies 
and written supervisory procedures; (2) identifying the applicable 
rules pertaining to those services and activities; (3) developing 
policies and procedures that are reasonably designed to achieve 
compliance with applicable law; and (4) developing programs to test 
compliance with the municipal advisor's policies and procedures.\5\ 
Paragraph .05 would further explain that the CCO can be a principal of 
the firm or a person external to the firm; though, in that case, the 
person must have the described competence and the municipal advisor 
retains ultimate responsibility for its compliance obligations. This 
approach to the CCO function in the proposed rule, which would give 
municipal advisors the option to outsource the CCO role, follows the 
approach applicable to investment advisers under the Advisers Act.\6\
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    \5\ These qualifications of a CCO draw on those specified in 
FINRA's CCO requirement for its member firms. See FINRA Rule 3130 
Supplementary Material .05.
    \6\ See Section 202(25) of the Advisers Act, 15 U.S.C. 80b-
2(25), and Rule 206(4)-7, 17 CFR 275.206(4)-7.
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    Paragraph .06 of the Supplementary Material specifies that the CCO, 
and any compliance officers that report to the CCO, shall have 
responsibility for and perform the compliance functions required by the 
proposed rule. Paragraph .07 of the Supplementary Material provides 
that a municipal advisor's CCO may hold any other position within the 
municipal advisor, including senior management positions, so long as 
the person can discharge the duties of CCO in light of all of the 
responsibilities of any other positions. This guidance is especially 
relevant to small municipal advisors, including sole proprietorships 
and other one-person entities. It makes clear that a single individual 
may, for example, serve under appropriate circumstances as chief 
executive officer (``CEO''), supervisory principal and CCO. In 
addition, as discussed above, the CCO may be external to the firm, such 
as an outside consultant.
    Paragraph (d) of proposed Rule G-44 would require municipal 
advisors to have their CEO(s) (or equivalent officer(s)) annually 
certify in writing that the municipal advisor has in place processes to 
establish, maintain, review, test and modify written compliance 
procedures and written supervisory procedures reasonably designed to 
achieve compliance with applicable rules. FINRA member firms that also 
are municipal advisors are already required under FINRA Rule 3130 to 
make annually a substantially similar certification with respect to 
applicable federal securities laws and regulations, including MSRB 
rules. In light of this existing FINRA requirement, proposed Rule G-
44(d) would provide for an exception from the annual certification 
requirement for municipal advisors that are subject to a substantially 
similar FINRA requirement. Paragraph .08 of the Supplementary Material 
provides that the execution of the certification and any consultation 
rendered in connection with the certification does not by itself 
establish business line responsibility.
    Paragraph (e) of proposed Rule G-44 would provide an exemption for 
banks engaging in municipal advisory activities in the exercise of bank 
fiduciary powers from Rule G-44 and the related books and records 
requirements if the municipal advisor certifies in writing annually 
that it is, with respect to those activities, subject to federal 
supervisory and compliance obligations and books and record 
requirements that are substantially equivalent to the supervisory and 
compliance obligations in Rule G-44 and the books and records 
requirements of Rule G-8(h)(iii). The ability to so certify and utilize 
this exemption is provided because it is unnecessary for a municipal 
advisor to comply with each other provision of proposed Rule G-44 if it 
is subject to substantially equivalent supervisory and compliance 
obligations as part of the extensive federal regulatory regime to which 
banks are already subject.
    Paragraph (f) of proposed Rule G-44 would provide a definition of 
the term ``municipal advisor'' for purposes of the rule as a person 
that is registered or required to be registered as a municipal advisor 
under Section 15B of the Act and rules and regulations thereunder.
Proposed Amendments to Rules G-8 and G-9
    The proposed amendments to Rules G-8 \7\ and G-9 would be the first 
revisions to those rules to address the books and records that must be 
made and preserved by municipal advisors registered or required to be 
registered with the SEC. As a fundamental element, new Rule G-8(h)(i) 
would require each municipal advisor to keep all of the general 
business records described in Exchange Act Rule 15Ba-1-8(a)(1)-(8). New 
Rule G-8(h)(v) would require each municipal advisor to make and keep 
records related to its supervisory and compliance obligations. It would 
require each municipal advisor to make and keep its written supervisory 
procedures and written compliance policies, records of designations of 
persons as CCO and of persons responsible for supervision, records of 
reviews of its written compliance policies and written supervisory 
procedures, annual certifications as to compliance processes, and, if 
applicable, certifications regarding the exemption for federally 
regulated banks.
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    \7\ Proposed Rule G-8(h) includes reserved subparagraphs (ii)-
(iv) for books and records provisions that the MSRB may propose in 
relation to other rules for municipal advisors. The MSRB will make 
conforming changes to this proposal as appropriate depending on 
relevant future rulemaking actions by the MSRB and SEC.
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    The proposed amendments to Rule G-9 would require each municipal 
advisor to preserve the books and records described in Rule G-8(h), 
including records related to the municipal advisor's supervisory and 
compliance obligations, for a period of not less than five years. This 
five-year preservation requirement would be consistent with the 
requirement of Exchange Act Rule 15Ba1-8 (on books and records to be 
made and maintained by municipal advisors).\8\ New subsection (h) to 
Rule G-9 would require, however, that records of the

[[Page 45549]]

designations of persons responsible for supervision and designations of 
persons as CCO be preserved for the period of designation of each 
person designated and for at least six years following any change in 
such designation. This six-year preservation requirement is supported 
by, among other things, the importance of such documents in later 
ascertaining the identity of responsible persons during particular 
periods of time. Moreover, it would be consistent with the current 
provisions of Rule G-9 for records of similar designations by brokers, 
dealers and municipal securities dealers.
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    \8\ See 17 CFR 240.15Ba1-8(b)(1).
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    The proposed amendments to existing Rule G-9(e) would expressly 
provide that municipal advisors may retain records using electronic 
storage media or by other similar medium of record retention, subject 
to the retrieval and reproduction requirements of Rule G-9. The 
allowance for this means of compliance would be made generally 
applicable, so as to expressly accommodate the use of electronic 
storage media by dealers as well as municipal advisors.
    Proposed Rule G-9(i) would require compliance with Exchange Act 
Rule 15Ba1-8(b)(2) and (c),\9\ regarding records related to the 
formation and cessation of business. Proposed Rule G-9(j) would require 
non-resident municipal advisors to comply with Exchange Act Rule 15Ba1-
8(f),\10\ regarding records of non-resident municipal advisors. 
Proposed Rule G-9(k) would provide that whenever a record is preserved 
by a municipal advisor on electronic storage media, if the manner of 
storage complies with Exchange Act Rule 15Ba1-8(d),\11\ it will be 
deemed to be preserved in a manner that is in compliance with the 
requirements of Rule G-9. This provision would give municipal advisors 
the choice to comply with either the SEC's or the MSRB's preservation 
requirements.
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    \9\ 17 CFR 240.15Ba1-8(b)(2) & (c).
    \10\ 17 CFR 240.15Ba1-8(f).
    \11\ 17 CFR 240.15Ba1-8(d).
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2. Statutory Basis
    Section 15B(b)(2) of the Act \12\ provides that
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    \12\ 15 U.S.C. 78o-4(b)(2).

    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, 
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municipal securities dealers, and municipal advisors.

    Section 15B(b)(2)(A)(i) of the Act \13\ provides that the MSRB's 
rules shall
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    \13\ 15 U.S.C. 78o-4(b)(2)(A)(i).

appropriately classify municipal securities brokers, municipal 
securities dealers, and municipal advisors (taking into account 
relevant matters, including types of business done, nature of 
securities other than municipal securities sold, and character of 
business organization), and persons associated with municipal 
securities brokers, municipal securities dealers, and municipal 
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advisors.

    Section 15B(b)(2)(C) of the Act \14\ provides that the MSRB's rules 
shall
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    \14\ 15 U.S.C. 78o-4(b)(2)(C).

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, 
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municipal entities, obligated persons, and the public interest.

    The MSRB believes that the proposed rule change is consistent with 
Sections 15B(b)(2), 15B(b)(2)(A)(i) and 15B(b)(2)(C) of the Act because 
it would require municipal advisors to adopt a supervisory structure 
and compliance processes in order to help ensure knowledge of, and 
compliance with, applicable securities laws and regulations, including 
applicable MSRB rules. The applicable securities laws include, without 
limitation, relevant provisions of the Act and Commission rules 
thereunder, including the Commission's registration, form submission 
and recordkeeping requirements for municipal advisors.\15\ Supervision 
and compliance functions are fundamental to preventing securities law 
violations from occurring, while they also promote early detection and 
prompt remediation of violations when they do occur. Such functions are 
complementary to an enforcement program designed to deter violations of 
securities laws by imposing penalties for violations after they occur. 
The MSRB believes that, for example, requiring each firm's chief 
executive officer (or equivalent officer) to provide an annual 
certification will help ensure that compliance processes are given 
sufficient attention at the highest levels of management and will help 
foster compliance, without adding a significant burden.
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    \15\ Registration of Municipal Advisors, Rel. No. 34-70462 
(Sept. 20, 2013) (``SEC Final Rule''), 78 FR 67467 (Nov. 12, 2013).
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    Section 15B(b)(2)(L)(iv) of the Act \16\ requires that rules 
adopted by the Board
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    \16\ 15 U.S.C. 78o-4(b)(2)(L)(iv).

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, 
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provided that there is robust protection of investors against fraud.

    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(L)(iv) of the Act. While the proposed rule change 
would affect all municipal advisors, including small municipal 
advisors, it would be a necessary and appropriate regulatory burden in 
order to promote compliance with MSRB rules. Proposed Rule G-44 
utilizes a primarily principles-based approach to supervision in order 
to, among other things, accommodate the diversity of the municipal 
advisor population, including small municipal advisors and sole 
proprietorships. Paragraph .02 of the Supplementary Material notes that 
even a municipal advisor with only one associated person can have a 
sufficient supervisory system under proposed Rule G-44. Under the same 
paragraph, one person may be designated as responsible for supervision 
and the rule would allow for written supervisory procedures to be 
tailored based on factors such as the size of the firm. The MSRB 
believes that all municipal advisors, regardless of size, will benefit 
from a requirement that they document with specificity how they plan to 
comply with applicable rules.
    The MSRB also believes that the proposed rule change is consistent 
with Section 15B(b)(2)(G) of the Act,\17\ which provides that the 
MSRB's rules shall
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    \17\ 15 U.S.C. 78o-4(b)(2)(G).

prescribe records to be made and kept by municipal securities 
brokers, municipal securities dealers, and municipal advisors and 
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the periods for which such records shall be preserved.

    The proposed rule change would require each municipal advisor to 
make and keep all of the general business records described in Exchange 
Act Rule 15Ba-1-8(a)(1)-(8). It also would require each municipal 
advisor to make and keep records of written supervisory procedures and 
compliance policies, designations of persons as CCO and of persons 
responsible for supervision, reviews of the adequacy of written 
compliance policies and written supervisory procedures, the annual

[[Page 45550]]

certifications as to compliance processes, and, if applicable, annual 
certifications regarding the exemption for federally regulated 
fiduciary activities of banks. The proposed rule change also contains 
preservation requirements for the required records, including a 
modernization of the rule language made generally applicable to dealers 
as well as municipal advisors, which expressly allows preservation on 
electronic storage media. The MSRB believes that the proposed 
amendments to Rules G-8 and G-9 related to recordkeeping and records 
preservation will promote compliance and facilitate enforcement of 
proposed Rule G-44, other MSRB rules, and other applicable securities 
laws and regulations.

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

    Section 15B(b)(2)(C) of the Act requires that MSRB rules not be 
designed to impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. In determining 
whether this standard has been met, the MSRB has been guided by the 
Board's recently-adopted policy to more formally integrate economic 
analysis into the rulemaking process. In accordance with this policy 
the Board has evaluated the potential impacts of the proposed rule 
change, including in comparison to reasonable alternative regulatory 
approaches.
    The MSRB does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act, since the supervision and compliance 
requirements, or substantially equivalent federal requirements, and the 
books and records requirements would apply equally to all municipal 
advisors to the extent their municipal advisory activities are not 
already supervised under existing Rule G-27.\18\ The MSRB has 
considered whether it is possible that the costs associated with the 
supervision and compliance requirements of the proposed rule, relative 
to the baseline, may affect the competitive landscape by leading some 
municipal advisors to exit the market, curtail their activities or 
consolidate with other firms. For example, some municipal advisors may 
determine to consolidate with other municipal advisors in order to 
benefit from economies of scale (e.g., by leveraging existing 
compliance resources of a larger firm) rather than to incur separately 
the costs associated with the proposed rule.
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    \18\ Rule G-27 is the MSRB's supervisory rule applicable to 
brokers, dealers and municipal securities dealers.
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    It is also possible that the competitive landscape can be affected 
by leading some municipal advisors, particularly small municipal 
advisors, to exit the market. Such exits from the market may lead to a 
reduced pool of municipal advisors. However, as the SEC recognized in 
its final rule on the permanent registration of municipal advisors, the 
market for municipal advisory services is likely to remain competitive 
despite the potential exit of some municipal advisors (including small 
entity municipal advisors), consolidation of municipal advisors, or 
lack of new entrants into the market.\19\
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    \19\ See SEC Final Rule at 505, 78 FR 67467, at 67608.
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    It is also possible that competition for municipal advisory 
services can be affected by whether incremental costs associated with 
requirements of the proposed rule are passed on to advisory clients. 
The amount of costs passed on may be influenced by the size of the 
municipal advisory firm. For smaller municipal advisors with fewer 
clients, the incremental costs associated with the requirements of the 
proposed rule may represent a greater percentage of annual revenues, 
and, thus, such advisors may be more likely to pass those costs along 
to their advisory clients. As a result, the competitive landscape may 
be altered by the potentially impaired ability of smaller firms to 
compete for advisory clients.
    The Dodd-Frank Act provides that MSRB rules may 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 MSRB is sensitive to the 
potential impact of the requirements contained in proposed Rule G-44 
and the proposed amendments to Rules G-8 and G-9 on small municipal 
advisors. The MSRB understands that some small municipal advisors and 
sole proprietors, unlike larger municipal advisory firms, may not 
employ full-time compliance staff and that the cost of ensuring 
compliance with the requirements of the proposed rule may be 
proportionally higher for these smaller firms. The MSRB believes that 
the proposed rule change is consistent with the Dodd-Frank Act's 
provision with respect to burdens imposed on small municipal advisors.
    The MSRB solicited comment on the potential burdens of the proposed 
rule change in a notice requesting comment on a draft Rule G-44 and 
draft amendments to Rules G-8 and G-9, and a separate notice requesting 
comment on additional draft amendments to Rules G-8 and G-9 that were 
initially published in connection with draft MSRB Rule G-42, which 
notices incorporated the MSRB's preliminary economic analyses.\20\ The 
specific comments and responses thereto are discussed in Part 5.
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    \20\ MSRB Notice 2014-04 (Feb. 25, 2014) (``Request for 
Comment''); MSRB Notice 2014-01 (Jan. 9, 2014).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The MSRB received twelve comment letters in response to the Request 
for Comment,\21\ and two comment letters specifically addressing the 
relevant draft record-keeping requirements published in connection with 
draft MSRB Rule G-42.\22\ The comment letters are summarized below by 
topic.
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    \21\ Comments were received in response to the Request for 
Comment from: American Bankers Association: Letter from Cristeena G. 
Naser, Vice President and Senior Counsel, dated May 1, 2014 
(``ABA''); Bond Dealers of America: Letter from Michael Nicholas, 
Chief Executive Officer, dated April 28, 2014 (``BDA''); Edwin C. 
Blitz Investments, Inc.: Email from Edwin Blitz dated March 18, 2014 
(``Blitz''); Investment Company Institute: Letter from Tamara K. 
Salmon, Senior Associate Counsel, dated April 15, 2014 (``ICI''); 
LIATI Group, LLC: Email from Weldon Fleming dated March 10, 2014 
(``LIATI''); MSA Professional Services, Inc.: Letter from Gilbert A. 
Hantzsch, Chief Executive Officer, dated April 28, 2014 (``MSA''); 
National Association of Independent Public Finance Advisors: Letter 
from Jeanine Rodgers Caruso, President, dated April 28, 2014 
(``NAIPFA''); Raftelis Financial Consultants, Inc.: Letter from 
Alexis F. Warmath, Vice President, and Christopher P.N. Woodcock, 
President, Woodcock & Associates, Inc., dated April 28, 2014 
(``Raftelis''); Roberts Consulting, LLC: Email from Jonathan Roberts 
dated March 13, 2014 (``Roberts''); Securities Industry and 
Financial Markets Association: Letter from David L. Cohen, Managing 
Director, Associate General Counsel, dated April 25, 2014 
(``SIFMA''); Tibor Partners, Inc.: Email from William Johnston dated 
February 25, 2014 (``Tibor''); and Yuba Group: Letter from Linda 
Fan, Managing Partner, dated April 28, 2014 (``Yuba'').
    \22\ Cooperman Associates: Letter from Joshua G. Cooperman dated 
March 10, 2014 (``Cooperman''); and Lamont Financial Services: 
Letter from Robert A. Lamb, President, dated March 10, 2014 
(``Lamont'').
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Support for the Proposed Rule
    SIFMA states that it supports the MSRB's efforts to ensure that 
municipal advisors adopt a supervisory structure for engaging in 
municipal advisory activities and are properly supervised. SIFMA 
supports the required elements of supervisory systems contained in 
proposed Rule G-44 as it follows a widely accepted model in the 
securities industry. NAIPFA comments that the

[[Page 45551]]

proposed rule strikes an appropriate balance between a principles-based 
and a prescriptive approach and encourages the MSRB to retain the 
overall tone and structure of the proposed rule. ICI supports the 
proposal and comments that its requirements are consistent with those 
imposed on other securities professionals.
Flexibility for Smaller Municipal Advisors
    BDA comments that the proposed rule is too flexible in allowing 
small firms to determine and carve out an accommodation for themselves. 
BDA further states that the MSRB should set forth minimum standards 
that all municipal advisor firms must meet when establishing 
supervisory and compliance procedures, but allow firms to decide how to 
implement them. BDA states that small firms should not be allowed to 
diminish their obligations. Similarly, MSA states that the proposed 
rules appear to hold larger firms to a higher standard than smaller 
firms and recommends a prescriptive approach that places clear 
regulatory requirements on all firms, regardless of size. In contrast, 
NAIPFA comments that the proposed rule appropriately accommodates small 
and single person municipal advisors by, among other things, allowing 
supervisory systems to be tailored to the size of the firm. Yuba 
comments that the proposed rule is biased towards larger firms and does 
not make adequate accommodations for smaller and single-person firms 
since larger firms are able to spread the actual and opportunity costs 
of compliance over a larger number of clients and employees. MSA asks 
whether large firms will be held to a stricter compliance standard than 
small firms with respect to the development and implementation of 
policies and procedures.
    The MSRB acknowledges that the proposed rule change contains 
standards that may vary based on firm size. The MSRB believes that the 
appropriateness of supervisory procedures is dependent on a firm's size 
since, for example, procedures that may be appropriate for a two-person 
firm would likely not be effective for a much larger firm. The proposed 
rule change deliberately gives firms flexibility to tailor their 
supervisory system to their particular firm. The MSRB believes that the 
proposed rule change strikes an appropriate balance between burdens on 
small advisors and flexibility for small advisors. This balance is 
evident from the comments, some of which state that the proposed rule 
is too burdensome for small advisors, while others state that the 
proposed rule gives small advisors too much flexibility.
Sole-Proprietorships
    NAIPFA comments that the MSRB may want to consider exempting single 
person firms from developing a compliance manual. According to NAIPFA, 
since sole-proprietors will be obligated to monitor their own 
activities and will be disproportionately burdened by the proposed 
rule, requiring them to undertake such activities will not result in 
any appreciable benefit to municipal entities or obligated persons. 
Tibor comments that it is a one-man operation with one client and that 
the proposed rule will ultimately deprive its client from access to 
valuable advice. Roberts asks what written policies on supervision sole 
proprietors can have and asks why it is necessary for a sole proprietor 
to assign the responsibility for the management of monitoring this 
supervision to the sole individual at the firm. Roberts also asks what 
the sole-proprietor should do in any self-imposed self-evaluation and 
why deal files are not enough.
    The MSRB acknowledges that the costs associated with the proposed 
rule could fall disproportionately on small municipal advisors, 
including sole-proprietorships; however, to address this concern, the 
proposed rule change states that a municipal advisor with few 
personnel, or even only one associated person, can have a sufficient 
supervisory system and that written supervisory procedures can be 
tailored to the firm's size. Requiring sole-proprietors to have a 
supervisory system in place is important because oversight of a firm's 
municipal advisory activities is essential regardless of firm size. 
Proposed Rule G-44 deliberately does not contain specific prescriptions 
as to the procedures a sole proprietor should have as such detail would 
undermine the flexibility of the proposed rule and the primarily 
principles-based approach utilized. Under the proposed rule's flexible 
principles, procedures would be required to be reasonably designed to 
achieve compliance, and such reasonableness will depend in part on the 
municipal advisor's size and particular business model. The MSRB 
believes, as noted, that all municipal advisors, regardless of size, 
will benefit from a requirement that they document with specificity how 
they plan to comply with applicable rules. Developing appropriate 
systems and documenting and following written procedures is a well 
established practice among businesses, regardless of size, for 
facilitating compliance with regulation in a broad range of other areas 
(e.g., taxes, human resources).
Self-Certification
    BDA states that Rule G-44 should require all municipal advisors to 
complete a periodic self-certification regarding the meeting of 
professional qualification standards by its associated persons, as well 
as to certify the municipal advisor's ability to comply, and history of 
complying, with all applicable regulatory requirements. BDA states that 
it is critical for municipal advisors to self-certify that they are 
meeting the same professional qualification standards as broker-dealers 
regardless of size much like rules for broker-dealers and comments 
that, since self-certification is already required of broker-dealers, 
municipal advisors that are already broker-dealers should not be unduly 
burdened. MSA comments that periodic self-certifications seem practical 
and feasible but that certification metrics should be outlined by the 
MSRB for consistency among all regulated firms, regardless of size. In 
contrast, NAIPFA sees no value in requiring municipal advisor 
representatives to complete a periodic self-certification since it 
would appear to simply create an additional regulatory burden without 
any appreciable benefits. NAIPFA opposes the creation of a self-
certification requirement unless an objective basis can be provided 
showing that it would result in a decrease in the number of compliance 
violations.
    The MSRB has revised the proposal to create a self-certification in 
response to the BDA and MSA comments, though the proposed requirement 
is less broad. The commenters referenced a certification regarding the 
meeting of professional qualification standards and the ability to 
comply, and history of complying, with all applicable regulatory 
requirements. The proposed self-certification, like that in FINRA Rule 
3130, is with regard to processes to establish, maintain, review, test 
and modify written supervisory procedures reasonably designed to 
achieve compliance with applicable rules. The MSRB does not believe it 
is feasible or should be necessary to show in advance, as NAIPFA 
suggests, that the proposed self-certification will result in a 
decrease in the number of compliance violations.
Outsourcing CCO Function
    NAIPFA comments that municipal advisors should be able to outsource 
the CCO function and that there should be no requirement that the CCO 
be either a principal or associated person of a

[[Page 45552]]

municipal advisor. SIFMA does not object to the proposal's flexibility 
with respect to outsourcing the CCO function. Raftelis comments that 
the ability of municipal advisors to outsource the CCO function may be 
essential for fairly small firms to be able to address the proposed 
rule's requirements. BDA asks the MSRB to make clear within the 
language of proposed Rule G-44 that the firm remains ultimately 
responsible for any decisions made by the CCO, whether the position is 
outsourced or not. BDA acknowledges that this is included in Paragraph 
.05 of the Supplementary Material but states that it should be included 
in rule text beyond the Supplementary Material. MSA agrees that the 
ability to outsource the CCO position could help promote and improve 
the fiduciary duties required of municipal advisors, but questions 
whether municipal advisors will elect to use outside CCOs due to 
liability and exposure concerns since compliance ultimately falls to 
the municipal advisor firms.
    No commenters opposed the option provided in the proposed rule to 
outsource the CCO role. The MSRB believes that the statement in 
paragraph .05 of the Supplementary Material that the municipal advisor 
retains ultimate responsibility for its compliance obligations is 
adequate; therefore, the MSRB is not revising the rule text in response 
to BDA's comment.
Recordkeeping Requirements
    SIFMA supports the proposed amendments to Rules G-8 and G-9 related 
to municipal advisor supervisory and compliance obligations and 
comments that the proposed recordkeeping and retention requirements are 
reasonable and are in line with existing MSRB requirements. NAIPFA 
requests that proposed Rule G-9(h) be amended to state that the records 
described in Rule G-8(h)(iii)(B) and (D) are required to be preserved 
only for the duration of a person's designation as a supervisor and/or 
CCO and for at least five years following any change in such 
designation to harmonize this portion of Rule G-9 with similar portions 
of Exchange Act Rule 15Ba1-8 \23\ relating to items such as the 
requirement that firms retain records relating to the ``names of 
persons who are currently, or within the past five years were, 
associated with the municipal advisor.'' NAIPFA further comments that 
since Exchange Act Rule 15Ba1-8 mandates a five-year retention period 
following a person's disassociation, it would make sense to impose a 
similar five-year retention requirement under proposed rule G-9(h). 
Finally, NAIPFA states that establishing a six-year retention 
requirement when all other similar retention requirements are five 
years creates an inconsistent and overly complex regulatory regime with 
no appreciable benefit. MSA observed it would be premature to attempt 
to quantify record-keeping costs at this time as there are still 
unanswered questions regarding what types of information will be 
required for regulatory retention compliance.
---------------------------------------------------------------------------

    \23\ 17 CFR Sec.  240.15Ba1-8.
---------------------------------------------------------------------------

    As discussed in the Request for Comment, there is a six-year 
retention period for records relating to designations of persons 
responsible for supervision and as CCO to be consistent with the 
current provisions of Rule G-9 for records of similar designations by 
brokers, dealers and municipal securities dealers. This longer 
requirement is also supported by the importance of such records in 
ascertaining the identity of responsible persons during particular 
periods of time. The proposed rule change requires the other records 
related to municipal advisor supervisory and compliance obligations to 
be preserved for five years to be consistent with the preservation 
requirements of Exchange Act Rule 15Ba1-8. Therefore, the MSRB is not 
proposing any revisions in response to NAIPFA's comments on the 
retention periods.
    On the subject of the fundamental record-keeping requirements 
initially proposed in connection with draft MSRB Rule G-42, Cooperman 
requested that the MSRB provide a draft of a prototype baseline 
policies and procedures guide that smaller financial advisor firms can 
adopt or modify, as needed. Cooperman also requested that the MSRB 
clarify that maintenance of documents and emails on a firm's email site 
or through its internet service provider will comply with records 
retention requirements. Lamont asked whether all emails and client 
records should be saved in the same folder in electronic media. In 
addition, Lamont stated that costs will be substantial and not 
necessarily spread among all clients, that recordkeeping will be 
extremely time consuming and will result in lost productivity, and that 
the costs will impact small profit margins in the short term ``before 
prices can be adjusted by the [municipal advisor] and the client.''
    The MSRB has declined at this time to provide a policies and 
procedures guide in part because it may be impracticable for the MSRB 
to develop policies and procedures that would appropriately address the 
scope and diversity of business models and particular practices of the 
numerous municipal advisor firms. With regard to records retention, the 
proposed amendments to Rule G-9 contain relatively principles-based 
requirements, including the standard that records be available for 
ready retrieval, inspection and production of copies. The draft 
amendments to Rule G-9 would not prescribe the specific details of how 
or where electronic records must be preserved. Additionally, if a 
municipal advisor would prefer to comply with the SEC's electronic 
record retention requirements (SEC Rule 15Ba1-8(d)), as interpreted by 
the SEC, the proposed amendments to Rule G-9 would provide that 
alternative. The issue of compliance costs being passed on to municipal 
entity and obligated person clients is addressed separately below.
Comparison to Rule G-27
    SIFMA states that it commends the MSRB for proposing a supervisory 
regime of similar robustness to the requirements of Rule G-27, 
resulting in a level playing field for all municipal advisors. SIFMA 
comments that municipal advisors should consider as a business practice 
some of the specific requirements contained in Rule G-27 that are not 
in the proposed rule. BDA states that the draft rule sets a lower 
baseline than Rule G-27 and some of the requirements imposed on 
municipal securities dealers in Rule G-27 should be extended to 
municipal advisors.
    The MSRB recognizes that the approach taken in the proposed rule is 
different than that in Rule G-27. Rule G-27 reflects evolving broker-
dealer industry practices and many of its more prescriptive elements 
reflect the fact that many dealers, unlike municipal advisors in their 
capacity as municipal advisors, hold customer funds and securities for 
safekeeping. In any event, complete parallelism between Rules G-44 and 
G-27 is not possible given that broker-dealers do not owe a fiduciary 
duty and therefore are subject to different underlying standards of 
conduct. BDA did not provide any details regarding which aspects of 
Rule G-27 should be applied to municipal advisors and why it would be 
appropriate to do so. The MSRB does not believe that it is appropriate 
at this time to apply any additional provisions from Rule G-27 to 
municipal advisors and is, therefore, not amending the proposed rule in 
response to these comments.

[[Page 45553]]

Economic Analysis--General
    SIFMA comments that the MSRB's preliminary economic analysis 
incorporated in the request for comment justifies the supervisory and 
recordkeeping requirements in the proposed rule. MSA comments that 
there is little publicly available information about the municipal 
advisor industry and, as such, benefits to municipal entities would 
seem clear as they relate to required informational transparency and 
the requirement of a supervisory structure. However, MSA states that 
explaining the costs and benefits of regulatory compliance to the 
benefiting municipalities is an element that has not received adequate 
attention.
    The MSRB has engaged in, and will continue to engage in, education 
and outreach initiatives to municipal entities, obligated persons and 
the general public regarding the MSRB's regulation of municipal 
advisors.
    NAIPFA comments that there is a lack of objective evidence 
indicating that firms have engaged in widespread violations of their 
fiduciary duties, and therefore a need does not exist for the MSRB to 
articulate supervisory or compliance obligations at this time since the 
costs (including significant impacts on competition, market efficiency, 
and capital formation), time and effort that will be required to be 
expended by municipal advisors will likely outweigh any incremental 
benefits that may be realized by municipal entities and obligated 
persons. Raftelis comments that the requirement to maintain written 
records of supervisory and compliance policies and procedures may be 
unnecessary, may not provide any additional benefits, and may be overly 
burdensome and costly. Raftelis comments that with respect to the 
specific services provided by firms that serve the water and wastewater 
utility industry and whose role as a municipal advisor is fairly 
limited, the benefits of the proposed rules will be small and there is 
a risk that information and services relied on by government-owned 
utilities to facilitate the process of borrowing money may become more 
expensive and less readily available.
    Proposed Rule G-44 is intended to prevent unlawful conduct and to 
help detect and promptly address unlawful conduct when it does occur. 
The need for proposed Rule G-44 arises from the MSRB's regulatory 
oversight of municipal advisors as provided under the Dodd-Frank Act. 
The Dodd-Frank Act establishes a federal regulatory regime that 
requires municipal advisors to register with the SEC and grants the 
MSRB broad rulemaking authority over municipal advisors. The MSRB, in 
the exercise of that authority, is in the process of developing a 
regulatory framework for municipal advisors. Supervision and compliance 
functions play an important role in promoting and fostering compliance 
by municipal advisors with all applicable securities laws, including 
applicable MSRB rules. Supervision and compliance functions are 
designed to prevent violations from occurring, while they also promote 
early detection and prompt remediation of violations when they do 
occur. Such functions are complementary to an enforcement program 
designed to deter violations of securities laws by imposing penalties 
for violations after they occur.
    For similar reasons, the regulation of supervisory and compliance 
functions is well established within the financial services industry. 
The model of requiring a reasonably designed supervisory system 
complemented by the designation of a CCO to be responsible for 
compliance processes is a widely accepted regulatory model across the 
financial services industry. To achieve comparable levels of compliance 
with applicable securities laws as seen with other financial services 
professionals, there is a need for a MSRB rule establishing municipal 
advisors' supervisory and compliance obligations.
    The MSRB believes that the proposed rule change will help to 
prevent violations of fiduciary duties and does not believe that prior 
evidence of such violations is necessary to support implementation of 
the proposed rule change. Proposed Rule G-44 follows a widely accepted 
model in the securities industry of a reasonably designed supervisory 
system complemented by the designation of a CCO and draws on aspects of 
existing supervision and compliance regulation under related regimes.
Economic Analysis--Small Firms and Sole Proprietorships
    Many of the comments on the proposed rule and proposed amendments 
were directed to the costs of compliance for small municipal advisors. 
Yuba, a seven-person firm, provided specific cost estimates related to 
complying with draft Rules G-42 and G-44 during the first six months of 
2014 that exceeded $125,000, or nearly $18,000 per person. Yuba states 
that the opportunity cost of time spent on compliance is time that is 
not available for client matters, which directly impacts the firm's 
bottom line negatively. Yuba encourages the MSRB to evaluate the 
potential impact and costs of compliance on small firms both with 
respect to increased out-of pocket costs and the opportunity cost of 
the firm's time. Yuba further states that, with fewer people and no 
other business lines than their advisory work, smaller firms will be 
impacted much more than larger firms. Yuba recommends that the MSRB 
better accommodate smaller firms by consolidating regulatory 
communications and rules into fewer publications and webinars.
    Roberts, a sole proprietorship municipal advisory firm, states that 
the supervision requirement for a one-person firm creates an undue 
burden as the supervision would require Roberts to supervise himself. 
Roberts comments that a larger organization can spread the costs, time, 
and attorney's fees to produce a procedures manual and still be able to 
source and do a deal for profit. Roberts also comments that the MSRB 
needs to consider the rules in the context of the whole when 
determining the burden because one rule in isolation is not an undue 
burden but the totality of all of the rules will cause sole proprietors 
to struggle.
    LIATI has two persons involved in municipal advisory activities and 
comments that the imposition of a supervisory scheme similar to that 
required by FINRA will be a major cost in terms of time and money to 
initiate and maintain.
    As discussed above, the MSRB has acknowledged that the costs 
associated with the proposed rule change could fall disproportionately 
on small municipal advisory firms. To address this concern, the 
proposed rule allows for small advisors, and advisors with other 
particular traits, to reasonably vary their supervisory procedures as 
appropriate. Proposed Rule G-44 states that a municipal advisor with 
few personnel, or even only one associated person, can have a 
sufficient supervisory system under the proposed rule, that written 
supervisory procedures can be tailored to the firm's size, and that the 
CCO role may be outsourced. As new municipal advisor rules are 
proposed, the MSRB has carefully considered, and will continue to 
carefully consider, the burden of municipal advisor regulation as a 
whole.
Costs Passed to Municipal Entities and Obligated Persons
    NAIPFA comments that the costs of implementing the proposed rules 
will directly or indirectly be passed to municipal entities and 
obligated persons. MSA comments that the development and implementation 
of policies and procedures, annual filing

[[Page 45554]]

and/or certification requirements, and the preservation of client 
records will result in additional costs that will be passed to 
municipalities. Raftelis comments that costs imposed on municipal 
advisors as a result of the proposed rules will almost certainly be 
passed on to municipal entities or obligated persons. Raftelis also 
states its belief that the proposed rules will add at least five 
percent to the cost of providing debt issuance support services for its 
clients, while providing little benefit to the client.
    The MSRB is sensitive to the potential that the costs of the 
proposed rule change may be passed on to municipal entities and 
obligated persons and this is a factor that the MSRB has considered as 
part of its economic analysis. The MSRB believes that any increase in 
municipal advisory fees charged to advisory clients attributable to the 
incremental costs of the proposed rule compared with the baseline state 
may be, in the aggregate, minimal in that the cost per municipal 
advisory firm likely would be spread across the number of advisory 
engagements for each firm. The MSRB believes that the benefits to 
municipalities and obligated persons of the proposed rule change 
outweigh the potential for increased costs being passed on to these 
entities. The MSRB will continue to consider the impact that increased 
costs will have on municipal entities and obligated persons as it 
continues to develop a regulatory framework for municipal advisors.
Prescriptive vs. Principles-Based Approach
    Raftelis comments that, although it seems unlikely that a more 
prescriptive approach would be helpful or advantageous to municipal 
entities, the current principles-based approach is made less effective 
due to the ambiguous nature of the language and lack of applicable and 
useful guidance. Raftelis further comments that, given the broad nature 
of the types of services and types of firms that may be impacted by the 
proposed rule change, it will be extremely difficult to provide 
reasonable guidance that covers all situations.
    The MSRB agrees that the proposed principles-based approach is 
appropriate considering the broad array of firms and types of services 
impacted by these rules. The MSRB believes that stating more specific 
obligations in the rule or guidance, however, would undermine the 
flexibility to create supervisory systems that are reasonably based on, 
among other things, the municipal advisor's size, organizational 
structure, nature and scope of activities, and number of offices. The 
proposed principles-based approach affords municipal advisors 
flexibility in determining the lowest-cost means to meet regulatory 
objectives.
Bank Trust Departments and Trust Companies
    ABA comments that, with respect to municipal advisory activities of 
bank trust departments and trust companies (``bank fiduciaries''), the 
MSRB should consider the fiduciary regulatory regimes of federal and 
state bank regulators as a baseline for compliance and states that the 
regulatory regime applicable to bank fiduciaries promotes compliance 
with applicable securities laws by requiring bank fiduciaries to 
develop and implement compliance and supervisory policies. ABA believes 
the regulatory regime applicable to bank fiduciaries satisfies the 
principles underlying the proposed rule and that compliance with this 
regulatory regime should be deemed to constitute compliance with the 
proposed rule as this would further the rule's purpose and avoid 
overlaying an unnecessary and costly securities-based compliance 
program on a banking-law compliance regime. ABA believes that the 
imposition of this costly regulatory regime will provide no additional 
protections for municipal entities that are bank fiduciary clients and 
will require bank fiduciaries to undertake costly reviews to determine 
where there are duplicative or contradictory procedures between the two 
systems.
    All municipal advisors should be required, at a minimum, to adhere 
to federal supervisory and compliance obligations that are 
substantially equivalent to those set forth in the proposed rule change 
regardless of their other business activities and regulatory 
obligations. In response to this comment, the MSRB has revised proposed 
Rule G-44 so that a bank fiduciary that certifies annually pursuant to 
proposed Rule G-44(e) that it is subject to federal supervisory and 
compliance obligations and books and records requirements that are 
substantially equivalent to the supervisory and compliance obligations 
of Rule G-44 and the books and records requirements of Rule G-8(h)(iii) 
would be exempt from the other provisions of Rule G-44 and Rule G-
8(h)(iii). Bank fiduciaries would remain subject to all other 
applicable MSRB rules.
Requests for More Guidance
    NAIPFA comments that it is unclear what the last portion of 
paragraph .02 of the Supplementary Material requires in terms of the 
development of a compliance policy and requests that additional 
substantive guidance be provided that addresses how a single associated 
person's procedures should be prepared in line with this provision.\24\ 
Proposed Rule G-44 requires municipal advisors to develop written 
supervisory procedures that are ``reasonably designed to ensure that 
the conduct of the municipal advisory activities of the municipal 
advisor and its associated persons are in compliance with applicable 
rules.'' Raftelis comments that this language is insufficient and asks 
how municipal advisors know if the written policies and procedures are 
reasonable and sufficient. Raftelis asks whether the MSRB will provide 
samples of written procedures and rules to provide a guide for 
addressing this requirement and also asks who is responsible for 
determining if the written policies and procedures are adequate and if 
they will be reviewed by someone at the MSRB and approved. Raftelis 
comments that the lack of guidance on what the written policies need to 
address increases the burden and cost of compliance. Raftelis further 
states that similar comments and concerns are raised by the requirement 
for conducting a periodic review and update of the written policies and 
procedures. MSA states that paragraph .01 of the Supplementary Material 
may not provide enough structure and a more objective, metric-based 
approach would be preferable; one which clearly defines the appropriate 
number of municipal advisor representatives required to fulfill 
regulatory responsibilities. MSA requests direction and clarification 
from the MSRB and specifically asks whether the MSRB will be releasing 
an outline with guidelines or requirements for each policy and 
procedures manual. Finally, Raftelis states that the proposed rule does 
not provide adequate guidance for smaller firms that provide a limited 
and specialized set of services that fall under the municipal advisor 
definition.
---------------------------------------------------------------------------

    \24\ Paragraph .02 of the Supplementary Material provides, in 
pertinent part: ``In the case of a municipal advisor with a single 
associated person, the written supervisory procedures must address 
the manner in which, in the absence of separate supervisory 
personnel, such procedures are nevertheless reasonably designed to 
achieve compliance with applicable rules.''
---------------------------------------------------------------------------

    The MSRB intends proposed rule G-44 to allow firms a degree of 
flexibility to develop written supervisory procedures that are 
appropriate for their particular business. There are no plans at this 
time to review and pre-approve firms' written supervisory procedures 
and each municipal advisor is

[[Page 45555]]

ultimately responsible for ensuring that its written policies and 
procedures are adequate. Additionally, the MSRB is not providing an 
outline of guidelines or requirements as doing so would undermine the 
flexibility of the principles-based approach utilized by the proposed 
rule and could not foresee all possible facts and circumstances that 
could arise among an extremely diverse population of municipal advisors 
operating in a complex market.
    Raftelis asks how large a firm has to be, or how large a municipal 
advisory practice has to be, before it is necessary to designate 
additional principals as having supervisory roles. MSA asks what the 
proper ratio of certified municipal advisor representatives is for 
appropriate compliance with municipal advisor activities.
    Proposed Rule G-44(a) would require a supervisory system reasonably 
designed to achieve compliance with all applicable rules. Each 
municipal advisor would be expected to use its judgment to determine 
how many supervisory principals and municipal advisor representatives 
are needed for the particular firm to meet this standard.
    MSA asks whether the additional experience, training, and knowledge 
metrics referenced for municipal advisor principals will be identified 
in subsequent MSRB notices. MSA also asks what metrics the MSRB will 
use to determine experience, training and knowledge outside of the 
qualification requirements referenced in MSRB Notice 2014-08.
    Under paragraph .03 of the Supplementary Material, municipal 
advisor principals must have sufficient knowledge, experience and 
training ``to understand and effectively discharge their [supervisor] 
responsibilities.'' The MSRB does not currently plan to issue 
additional guidance regarding this general requirement, which will 
depend on the particular facts and circumstances. Municipal advisors 
must use judgment to determine whether a designated supervisory 
principal's knowledge, experience and training are sufficient.
    MSA asks whether a CCO and/or designated municipal advisor 
principal can also serve in a functional municipal advisor 
representative capacity, whether the duties of the CCO and municipal 
advisor professional can be vested in the same person, and whether a 
person can serve as CCO and municipal advisor principal for a firm.
    Under paragraph .07 of the Supplementary Material, a CCO may hold 
any other position within a municipal advisor, including being 
designated as a supervisory principal, provided that the person can 
discharge the duties of CCO in light of all of the responsibilities of 
any other positions. A CCO or municipal advisor principal may serve in 
a functional municipal advisor representative capacity.
    MSA asks, if a firm decides to outsource the CCO function, whether 
that entity is operating under the municipal advisor registration of 
the firm, or whether he or she must be registered as an individual 
municipal advisor.
    If a firm outsources the CCO functions, the CCO is not required on 
that basis alone to be associated with the municipal advisor and is 
also not required to be separately registered as a municipal advisor if 
the individual is not engaging in municipal advisory activities as 
defined by the Act and the rules and regulations thereunder.
    MSA observed that a previous MSRB proposal contained a provision 
that stated that, if a firm chooses to subcontract with an independent 
municipal advisor on behalf of its clients, said municipal advisor 
could not have been associated with the firm for two years. MSA asks if 
the same provisions apply to the CCO position. MSA states that this 
requirement, if enforced, may prevent access and participation to the 
municipal advisory services market by qualified professionals who could 
provide the municipal advisory services at a reduced cost and asks the 
MSRB to explain the rationale and intent behind the two-year duration.
    The previously proposed Rule G-44 that was filed with the SEC and 
withdrawn in 2011 has no force or effect and the current proposal does 
not include a provision similar to that described by MSA.
Implementation Date
    BDA states that the MSRB should delay implementation of all of its 
municipal advisor rules and regulations until they have all been 
approved by the SEC. BDA further comments that an implementation date 
of six months following SEC approval of the last of the rules is fair. 
BDA states that this is particularly important for a rule like G-44 
which will require firms to use the information in other rules to 
establish a complete supervisory system. NAIPFA comments that the MSRB 
may wish to consider refraining from implementing the proposed rule at 
this time. ICI recommends that the MSRB provide municipal advisors with 
a sufficient period of time to be fully compliant with the requirements 
since municipal advisors will need to adopt or revise existing 
compliance and supervisory systems to comply with the new rule and hire 
or appoint necessary qualified personnel. ICI states that the MSRB 
should provide advisors with a minimum of twelve months to comply with 
the new rule to avoid unduly straining the resources of such advisors. 
NAIPFA requests that the proposed rule have a compliance date that is 
at least ninety days following the date on which it is effective. SIFMA 
requests that the MSRB provide for a reasonable compliance period of no 
less than six months.
    The MSRB will not delay implementation of the proposed rules until 
all municipal advisor rules have been approved by the SEC. Municipal 
advisors are currently subject to a host of applicable federal 
securities laws, and benefits would flow from having in place 
supervisory and compliance obligations reasonably designed to ensure 
compliance with those laws. Moreover, the MSRB believes that it is 
important for firms to have a supervisory system and compliance 
processes in place that can be updated as new rules are adopted. The 
MSRB further believes that an implementation period of six months 
following the SEC's approval of proposed Rule G-44 and the proposed 
amendments to Rules G-8 and G-9 will provide sufficient time for firms 
to develop supervisory systems and compliance processes to comply with 
the proposed rule change, except for proposed Rule G-44(d). This 
general period meets SIFMA's request and is longer than NAIPFA's 
requested implementation period. The MSRB would expect municipal 
advisors to comply with proposed Rule G-44(d), on annual certifications 
as to compliance processes, by a date eighteen months following SEC 
approval.

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 of up to 90 days (i) as 
the Commission may designate 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:
    (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,

[[Page 45556]]

including whether the proposed rule change is consistent with the Act. 
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 email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2014-06 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MSRB-2014-06. This file 
number should be included on the subject line if email 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the MSRB. 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-2014-06 and should be 
submitted on or before August 26, 2014.

    For the Commission, pursuant to delegated authority.\25\
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    \25\ 17 CFR Sec.  200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18381 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P


