[Federal Register Volume 80, Number 250 (Wednesday, December 30, 2015)]
[Notices]
[Pages 81614-81637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32812]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76753; File No. SR-MSRB-2015-03]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change, as Modified 
by Amendment No. 1 and Amendment No. 2, Consisting of Proposed New Rule 
G-42, on Duties of Non-Solicitor Municipal Advisors, and Proposed 
Amendments to Rule G-8, on Books and Records To Be Made by Brokers, 
Dealers, Municipal Securities Dealers, and Municipal Advisors

December 23, 2015.

I. Introduction

    On April 24, 2015, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change consisting of proposed new Rule 
G-42, on duties of non-solicitor municipal advisors, and proposed 
amendments to Rule G-8, on books and records to be made by brokers, 
dealers, municipal securities dealers, and

[[Page 81615]]

municipal advisors. The proposed rule change was published for comment 
in the Federal Register on May 8, 2015.\3\ The Commission received 
fifteen comment letters on the proposal.\4\ On June 16, 2015, the MSRB 
granted an extension of time for the Commission to act on the filing 
until August 6, 2015. On August 6, 2015, the Commission issued an order 
instituting proceedings (``OIP'') under Section 19(b)(2)(B) of the Act 
\5\ to determine whether to approve or disapprove the proposed rule 
change.\6\ On August 12, 2015, the MSRB responded to the comments \7\ 
and filed Amendment No. 1 to the proposed rule change.\8\ The 
Commission published notice of Amendment No. 1 on August 25, 2015.\9\ 
In response to the OIP or Amendment No. 1, the Commission received 13 
comment letters.\10\ On October 28, 2015, the MSRB granted an extension 
of time for the Commission to act on the filing until January 3, 2016. 
On November 9, 2015, the MSRB filed Amendment No. 2 to the proposed 
rule change.\11\ The Commission published notice of Amendment No. 2 on 
November 17, 2015,\12\ and the Commission received seven comment 
letters in response to Amendment No. 2.\13\ On December 16, 2015, the 
MSRB submitted a response to the comments received on the OIP, 
Amendment No. 1 and Amendment No. 2.\14\ This order approves the 
proposed rule change, as modified by Amendment No. 1 and Amendment No. 
2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 74860 (May 4, 2015), 80 FR 26752 
(May 8, 2015) (``Proposing Release''). The comment period closed on 
May 29, 2015.
    \4\ See Letters to Secretary, Commission, from Dustin McDonald, 
Director, Federal Liaison Center, Government Finance Officers 
Association (``GFOA''), dated May 22, 2015; Leslie M. Norwood, 
Managing Director and Associate General Counsel, Securities Industry 
and Financial Markets Association (``SIFMA''), dated May 28, 2015; 
Cristeena Naser, Vice President, Center for Securities, Trust & 
Investments, American Bankers Association (``ABA''), dated May 29, 
2015; Terri Heaton, President, National Association of Municipal 
Advisors (``NAMA''), dated May 29, 2015; Hill A. Feinberg, Chairman 
and Chief Executive Officer and Michael Bartolotta, Vice Chairman, 
First Southwest Company (``First Southwest''), dated May 29, 2015; 
Guy E. Yandel, EVP and Head of Public Finance, et al., George K. 
Baum & Company (``GKB''), dated May 29, 2015; David T. Bellaire, 
Executive Vice President and General Counsel, Financial Services 
Institute (``FSI''), dated May 29, 2015; Robert J. McCarthy, 
Director of Regulatory Policy, Wells Fargo Advisors LLC, (``Wells 
Fargo''), dated May 29, 2015; Tamara K. Salmon, Associate General 
Counsel, Investment Company Institute (``ICI''), dated May 29, 2015; 
W. David Hemingway, Executive Vice President, Zions First National 
Bank (``Zions''), dated May 29, 2015; Lindsey K. Bell, Millar Jiles, 
LLP (``Millar Jiles''), dated May 29, 2015; Michael Nicholas, Chief 
Executive Officer, Bond Dealers of America (``BDA''), dated May 29, 
2015; Joy A. Howard, WM Financial Strategies (``WM Financial''), 
dated May 29, 2015; Leo Karwejna, Managing Director, Chief 
Compliance Officer, The PFM Group (``PFM''), dated May 29, 2015; and 
Dustin T. McDonald, Director, Federal Liaison Center, GFOA, dated 
June 15, 2015. Staff from the Office of Municipal Securities 
discussed the proposed rule change with representatives from SIFMA 
on May 21, 2015, representatives from NAMA on June 3, 2015 and 
representatives from BDA on June 17, 2015.
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ See Exchange Act Release No. 75628 (August 6, 2015), 80 FR 
48355 (August 12, 2015). The comment period closed on September 11, 
2015.
    \7\ See Letter from Michael L. Post, MSRB, to Secretary, SEC, 
dated August 12, 2015 (``August Response Letter''), available at 
http://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-19.pdf.
    \8\ See Letter from Michael L. Post, MSRB, to Secretary, SEC, 
dated August 12, 2015, available at http://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-20.pdf.
    \9\ See Exchange Act Release No. 75737 (August 19, 2015), 80 FR 
51645 (August 25, 2015). The comment period closed on September 11, 
2015.
    \10\ See letters from Michael Nicholas, Chief Executive Officer, 
BDA, dated September 11, 2015 and November 4, 2015; John C. Melton, 
Sr., Executive Vice President, Coastal Securities (``Coastal 
Securities''), dated September 11, 2015; Jeff White, Principal, 
Columbia Capital Management, LLC (``Columbia Capital''), dated 
September 10, 2015; Joshua Cooperman, Cooperman Associates 
(``Cooperman''), dated September 9, 2015; David T. Bellaire, 
Executive Vice President & General Counsel, FSI, dated September 11, 
2015; Dustin McDonald, Director, Federal Liaison Center, GFOA, dated 
September 14, 2015; Tamara K. Salmon, Associate General Counsel, 
ICI, dated September 11, 2015; Lindsey K. Bell, Millar Jiles, dated 
September 11, 2015; Terri Heaton, President, NAMA, dated September 
11, 2015; Leslie M. Norwood, Managing Director and Associate General 
Counsel, SIFMA, dated September 11, 2015; Joy A. Howard, Principal, 
WM Financial, dated September 11, 2015; and W. David Hemingway, 
Executive Vice President, Zions, dated September 10, 2015. Staff 
from the Office of Municipal Securities discussed the proposed rule 
change with representatives from BDA on October 5, 2015 and 
representatives from SIFMA on October 15, 2015.
    \11\ See Letter from Michael L. Post, MSRB, to Secretary, SEC, 
dated November 9, 2015, available at http://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-36.pdf.
    \12\ See Exchange Act Release No. 76420 (November 10, 2015), 80 
FR 71858 (November 17, 2015). The comment period closed on December 
1, 2015.
    \13\ See Letters to Secretary, Commission, from Michael 
Nicholas, Chief Executive Officer, BDA, dated December 1, 2015; 
David T. Bellaire, Executive Vice President and General Counsel, 
FSI, dated December 1, 2015; Dustin McDonald, Director, Federal 
Liaison Center, GFOA, dated December 1, 2015; Tamara K. Salmon, 
Associate General Counsel, ICI, dated December 1, 2015; Terri 
Heaton, President, NAMA, dated December 7, 2015; Leslie M. Norwood, 
Managing Director and Associate General Counsel, SIFMA, dated 
December 1, 2015; and Spencer Wright dated December 16, 2015.
    \14\ See Letter to Secretary, Commission, from Michael L. Post, 
MSRB, dated December 16, 2015 (the ``December Response Letter'' and, 
together with the August Response Letter, the ``MSRB Response 
Letters''), available at http://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-44.pdf.
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II. Description of the Proposed Rule Change

    As described more fully in the Proposing Release, as modified by 
Amendment No. 1 and Amendment No. 2, the MSRB is proposing to adopt new 
Rule G-42, on duties of non-solicitor municipal advisors and proposed 
amendments to Rule G-8, on books and records to be made by brokers, 
dealers, municipal securities dealers, and municipal advisors (the 
``proposed rule change'').

Proposed Rule G-42

    Proposed Rule G-42 would establish the core standards of conduct 
and duties of municipal advisors when engaging in municipal advisory 
activities, other than municipal advisory solicitation activities 
(``municipal advisors''). In summary, the core provisions of Proposed 
Rule G-42 would:
     Establish certain standards of conduct consistent with the 
fiduciary duty owed by a municipal advisor to its municipal entity 
clients, which includes a duty of care and of loyalty;
     Establish the standard of care owed by a municipal advisor 
to its obligated person clients;
     Require the full and fair disclosure, in writing, of all 
material conflicts of interest and legal or disciplinary events that 
are material to a client's evaluation of a municipal advisor;
     Require the documentation of the municipal advisory 
relationship, specifying certain aspects of the relationship that must 
be included in the documentation;
     Require that recommendations made by a municipal advisor 
are suitable for its clients, or that it determine the suitability of 
recommendations made by third parties when appropriate; and
     Specifically prohibit a municipal advisor from engaging in 
certain activities, including, in summary:
    [cir] Receiving excessive compensation;
    [cir] delivering inaccurate invoices for fees or expenses;
    [cir] making false or misleading representations about the 
municipal advisor's resources, capacity or knowledge;
    [cir] participating in certain fee-splitting arrangements with 
underwriters;
    [cir] participating in any undisclosed fee-splitting arrangements 
with providers of investments or services to a municipal entity or 
obligated person client of the municipal advisor;
    [cir] making payments for the purpose of obtaining or retaining an 
engagement to perform municipal advisory activities, with limited 
exceptions; and
    [cir] entering into certain principal transactions with the 
municipal advisor's municipal entity clients, within limited 
exceptions.
    In addition, the proposed rule change would define key terms used 
in

[[Page 81616]]

Proposed Rule G-42 and provide supplementary material. The 
supplementary material would provide additional guidance on the core 
concepts in the proposed rule, such as the duty of care, the duty of 
loyalty, the impact of client action that is independent of or contrary 
to the advice of a municipal advisor, suitability of recommendations 
and ``Know Your Client'' obligations; provide context for issues such 
as the scope of an engagement, conflicts of interest disclosures, 
excessive compensation, and the applicability of the proposed rule 
change to 529 college savings plans (``529 plans'') and other municipal 
entities; provide guidance regarding the definition of ``principal 
transaction;'' recognize the continued applicability of state and other 
laws regarding fiduciary and other duties owed by municipal advisors; 
include information regarding requirements that must be met for a 
municipal advisor to be relieved of certain provisions of Proposed Rule 
G-42 in instances when it inadvertently engages in municipal advisory 
activities; and, finally, provide a narrow exception to the proposed 
prohibition on certain principal transactions with municipal entity 
clients for transactions in specified types of fixed income securities.
Standards of Conduct
    Section (a) of Proposed Rule G-42 would establish the core 
standards of conduct and duties applicable to municipal advisors. 
Subsection (a)(i) of Proposed Rule G-42 would provide that each 
municipal advisor in the conduct of its municipal advisory activities 
for an obligated person client is subject to a duty of care. Subsection 
(a)(ii) would provide that each municipal advisor in the conduct of its 
municipal advisory activities for a municipal entity client is subject 
to a fiduciary duty, which includes a duty of loyalty and a duty of 
care.
    Proposed supplementary material would provide guidance on the duty 
of care and the duty of loyalty. Paragraph .01 of the Supplementary 
Material would describe the duty of care to require, without 
limitation, a municipal advisor to: (1) Exercise due care in performing 
its municipal advisory activities; (2) possess the degree of knowledge 
and expertise needed to provide the municipal entity or obligated 
person client with informed advice; (3) make a reasonable inquiry as to 
the facts that are relevant to a client's determination as to whether 
to proceed with a course of action or that form the basis for any 
advice provided to the client; and (4) undertake a reasonable 
investigation to determine that the municipal advisor is not basing any 
recommendation on materially inaccurate or incomplete information. The 
duty of care that would be established in section (a) of Proposed Rule 
G-42 would also require the municipal advisor to have a reasonable 
basis for: any advice provided to or on behalf of a client; any 
representations made in a certificate that it signs that will be 
reasonably foreseeably relied upon by the client, any other party 
involved in the municipal securities transaction or municipal financial 
product, or investors in the municipal entity client's securities or 
securities secured by payments from an obligated person client; and, 
any information provided to the client or other parties involved in the 
municipal securities transaction in connection with the preparation of 
an official statement for any issue of municipal securities as to which 
the advisor is advising.
    Paragraph .02 of the Supplementary Material would describe the duty 
of loyalty to require, without limitation, a municipal advisor, when 
engaging in municipal advisory activities for a municipal entity, to 
deal honestly and with the utmost good faith with the client and act in 
the client's best interests without regard to the financial or other 
interests of the municipal advisor. Paragraph .02 would also provide 
that the duty of loyalty would preclude a municipal advisor from 
engaging in municipal advisory activities with a municipal entity 
client if it cannot manage or mitigate its conflicts of interest in a 
manner that will permit it to act in the municipal entity's best 
interests.
    Paragraph .03 of the Supplementary Material would specify that a 
municipal advisor is not required to disengage from a municipal 
advisory relationship if a municipal entity client or an obligated 
person client elects a course of action that is independent of or 
contrary to advice provided by the municipal advisor.
    Paragraph .04 of the Supplementary Material would specify that a 
municipal advisor could limit the scope of the municipal advisory 
activities to be performed to certain specified activities or services 
if requested or expressly consented to by the client, but could not 
alter the standards of conduct or impose limitations on any of the 
duties prescribed by Proposed Rule G-42. Paragraph .04 would provide 
that, if a municipal advisor engages in a course of conduct that is 
inconsistent with the mutually agreed limitations to the scope of the 
engagement, it may result in negating the effectiveness of the 
limitations.
    Paragraph .08 of the Supplementary Material would state, as a 
general matter, that, municipal advisors may be subject to fiduciary or 
other duties under state or other laws and nothing in Proposed Rule G-
42 would supersede any more restrictive provision of state or other 
laws applicable to municipal advisory activities.
 Disclosure of Conflicts of Interest and Other Information
    Section (b) of Proposed Rule G-42 would require a municipal advisor 
to fully and fairly disclose to its client in writing all material 
conflicts of interest, and to do so prior to or upon engaging in 
municipal advisory activities. The provision would set forth a non-
exhaustive list of scenarios under which a material conflict of 
interest would arise or be deemed to exist and that would require a 
municipal advisor to provide written disclosures to its client. 
Subsections (b)(i)(A) through (E) would provide specific scenarios that 
give rise to conflicts of interest that would be deemed to be material 
and require proper disclosure to a municipal advisor's client. Under 
the proposed rule change, a material conflict of interest would always 
include: Any affiliate of the municipal advisor that provides any 
advice, service or product to or on behalf of the client that is 
directly related to the municipal advisory activities to be performed 
by the disclosing municipal advisor; any payments made by the municipal 
advisor, directly or indirectly, to obtain or retain an engagement to 
perform municipal advisory activities for the client; any payments 
received by the municipal advisor from a third party to enlist the 
municipal advisor's recommendations to the client of its services, any 
municipal securities transaction or any municipal financial product; 
any fee-splitting arrangements involving the municipal advisor and any 
provider of investments or services to the client; and any conflicts of 
interest arising from compensation for municipal advisory activities to 
be performed that is contingent on the size or closing of any 
transaction as to which the municipal advisor is providing advice. 
Subsection (b)(i)(F) would require municipal advisors to disclose any 
other actual or potential conflicts of interest, of which the municipal 
advisor is aware after reasonable inquiry, that could reasonably be 
anticipated to impair its ability to provide advice to or on behalf of 
its client in accordance with the applicable standards of

[[Page 81617]]

conduct established by section (a) of the proposed rule.
    Under subsection (b)(i), if a municipal advisor were to conclude, 
based on the exercise of reasonable diligence, that it had no known 
material conflicts of interest, the municipal advisor would be required 
to provide a written statement to the client to that effect.
    Subsection (b)(ii) would require disclosure of any legal or 
disciplinary event that would be material to the client's evaluation of 
the municipal advisor or the integrity of its management or advisory 
personnel. A municipal advisor would be permitted to fulfill this 
disclosure obligation by identifying the specific type of event and 
specifically referring the client to the relevant portions of the 
municipal advisor's most recent SEC Forms MA or MA-I \15\ filed with 
the Commission, if the municipal advisor provides detailed information 
specifying where the client could access such forms electronically.
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    \15\ See 17 CFR 249.1300 (SEC Form MA); 17 CFR 249.1310 (SEC 
Form MA-I).
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    Paragraph .05 of the Supplementary Material would provide that the 
required conflicts of interest disclosures must be sufficiently 
detailed to inform the client of the nature, implications and potential 
consequences of each conflict and must include an explanation of how 
the municipal advisor addresses or intends to manage or mitigate each 
conflict.\16\
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    \16\ The MSRB believes that this requirement is analogous to the 
requirement of Form ADV (17 CFR 279.1) under the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-1 et seq.) that obligates an investment 
adviser to describe how it addresses certain conflicts of interest 
with its clients. See, e.g., Form ADV, Part 2, Item 5.E.1 of Part 2A 
(requiring an investment adviser to describe how it will address 
conflicts of interest that arise in regards to fees and compensation 
it receives, including the investment adviser's procedures for 
disclosing the conflicts of interest with its client). See also Form 
ADV, Part 2A Items 6, 10, 11, 14 and 17.
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    Paragraph .07 of the Supplementary Material would provide that a 
municipal advisor that inadvertently engages in municipal advisory 
activities but does not intend to continue the municipal advisory 
activities or enter into a municipal advisory relationship \17\ would 
not be required to comply with sections (b) and (c) of Proposed Rule G-
42 (relating to disclosure of conflicts of interest and documentation 
of the relationship), if the municipal advisor takes the prescribed 
actions listed under paragraph .07 promptly after it discovers its 
provision of inadvertent advice. The municipal advisor would be 
required to provide to the client a dated document that would include: 
A disclaimer stating that the municipal advisor did not intend to 
provide advice and that, effective immediately, the municipal advisor 
has ceased engaging in municipal advisory activities with respect to 
that client in regard to all transactions and municipal financial 
products as to which advice was inadvertently provided; a notification 
that the client should be aware that the municipal advisor has not 
provided the disclosure of material conflicts of interest and other 
information required under section (b); an identification of all of the 
advice that was inadvertently provided, based on a reasonable 
investigation; and a request that the municipal entity or obligated 
person acknowledge receipt of the document. The municipal advisor also 
would be required to conduct a review of its supervisory and compliance 
policies and procedures to ensure that they are reasonably designed to 
prevent inadvertently providing advice to municipal entities and 
obligated persons. The final sentence of paragraph .07 of the 
Supplementary Material would also clarify that the satisfaction of the 
requirements of paragraph .07 would have no effect on the applicability 
of any provisions of Proposed Rule G-42 other than sections (b) and 
(c), or any other legal requirements applicable to municipal advisory 
activities.
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    \17\ Under subsection (f)(vi) of Proposed Rule G-42, the MSRB 
notes that a municipal advisory relationship would be deemed to 
exist when a municipal advisor enters into an agreement to engage in 
municipal advisory activities for a municipal entity or obligated 
person, and would be deemed to have ended on the earlier of (i) the 
date on which the municipal advisory relationship has terminated 
pursuant to the terms of the documentation of the municipal advisory 
relationship required in section (c) of Proposed Rule G-42 or (ii) 
the date on which the municipal advisor withdraws from the municipal 
advisory relationship.
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Documentation of the Municipal Advisory Relationship
    Section (c) of Proposed Rule G-42 would require each municipal 
advisor to evidence each of its municipal advisory relationships by a 
writing, or writings created and delivered to the municipal entity or 
obligated person client prior to, upon or promptly after the 
establishment of the municipal advisory relationship. The documentation 
would be required to be dated and include, at a minimum: \18\
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    \18\ While no acknowledgement from the client of its receipt of 
the documentation would be required, the MSRB notes that a municipal 
advisor must, as part of the duty of care it owes its client, 
reasonably believe that the documentation was received by its 
client.
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     The form and basis of direct or indirect compensation, if 
any, for the municipal advisory activities to be performed, as provided 
in proposed subsection (c)(i);
     the information required to be disclosed in proposed 
section (b), including the disclosures of conflicts of interest, as 
provided in proposed subsection (c)(ii);
     a description of the specific type of information 
regarding legal and disciplinary events requested by the Commission on 
SEC Form MA and SEC Form MA-I, as provided in proposed subsection 
(c)(iii), and detailed information specifying where the client may 
electronically access the municipal advisor's most recent Form MA and 
each most recent Form MA-I filed with the Commission; \19\
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    \19\ The MSRB notes that compliance with this requirement could 
be achieved in the same manner, and (so long as done upon or prior 
to engaging in municipal advisory activities for the client) 
concurrently with providing to the client the information required 
under proposed subsection (b)(ii).
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     the date of the last material change to the legal or 
disciplinary event disclosures on any SEC Forms MA or MA-I filed with 
the Commission by the municipal advisor and a brief explanation of the 
basis for the materiality of the change or addition, as provided in 
proposed subsection (c)(iv);
     the scope of the municipal advisory activities to be 
performed and any limitations on the scope of the engagement, as 
provided in proposed subsection (c)(v);
     the date, triggering event, or means for the termination 
of the municipal advisory relationship, or, if none, a statement that 
there is none, as provided in proposed subsection (c)(vi); and
     any terms relating to withdrawal from the municipal 
advisory relationship, as provided in proposed subsection (c)(vii).
    Paragraph .06 of the Supplementary Material would require municipal 
advisors to promptly amend or supplement the writing(s) required by 
section (c) during the term of the municipal advisory relationship as 
necessary to reflect any material changes or additions in the required 
information. Paragraph .06 would also provide that a municipal advisor 
would not be required to provide the disclosure of conflicts of 
interest and other information required under proposed section (c)(ii) 
if the municipal advisor previously fully complied with the 
requirements of proposed section (b) to disclose such information and 
proposed subsection (c)(ii) would not require the disclosure of any 
materially different information than that previously disclosed to the 
client.

[[Page 81618]]

Recommendations and Review of Recommendations of Other Parties
    Section (d) of Proposed Rule G-42 would provide that a municipal 
advisor must not recommend that its client enter into any municipal 
securities transaction or municipal financial product unless the 
municipal advisor has a reasonable basis to believe, based on the 
information obtained through the reasonable diligence of the municipal 
advisor, that the recommended transaction or product is suitable for 
the client. Proposed section (d) also contemplates that a municipal 
advisor may be requested by the client to review and determine the 
suitability of a recommendation made by a third party to the client. If 
a client were to request this type of review, and such review were 
within the scope of the engagement, the municipal advisor's 
determination regarding the suitability of the third-party's 
recommendation regarding a municipal securities transaction or 
municipal financial product would be subject to the same reasonable 
diligence standard--requiring the municipal advisor to obtain relevant 
information through the exercise of reasonable diligence.
    As to both types of review, the municipal advisor would be required 
under proposed section (d) to inform its municipal entity or obligated 
person client of its evaluation of the material risks, potential 
benefits, structure and other characteristics of the recommended 
municipal securities transaction or municipal financial product; the 
basis upon which the advisor reasonably believes the recommended 
transaction or product is, or (as may be applicable in the case of a 
review of a recommendation) is not, suitable for the client; and 
whether the municipal advisor has investigated or considered other 
reasonably feasible alternatives to the recommended municipal 
securities transaction or municipal financial product that might also 
or alternatively serve the client's objectives.
    Paragraph .09 of the Supplementary Material would provide guidance 
related to a municipal advisor's suitability obligations. Under this 
provision, a municipal advisor's determination of whether a municipal 
securities transaction or municipal financial product is suitable for 
its client must be based on numerous factors, as applicable to the 
particular type of client, including, but not limited to: The client's 
financial situation and needs, objectives, tax status, risk tolerance, 
liquidity needs, experience with municipal securities transactions or 
municipal financial products generally or of the type and complexity 
being recommended, financial capacity to withstand changes in market 
conditions during the term of the municipal financial product or the 
period that municipal securities to be issued are reasonably expected 
to be outstanding, and any other material information known by the 
municipal advisor about the client and the municipal securities 
transaction or municipal financial product, after the municipal advisor 
has conducted a reasonable inquiry.
    In connection with a municipal advisor's obligation to determine 
the suitability of a municipal securities transaction or a municipal 
financial product for a client, which should take into account its 
knowledge of the client, paragraph .10 of the Supplementary Material 
would require a municipal advisor to know its client. The obligation to 
know the client would require a municipal advisor to use reasonable 
diligence to know and retain essential facts concerning the client and 
the authority of each person acting on behalf of the client, and is 
similar to requirements in other regulatory regimes.\20\ The facts 
``essential'' to knowing one's client would include those required to 
effectively service the municipal advisory relationship with the 
client; act in accordance with any special directions from the client; 
understand the authority of each person acting on behalf of the client; 
and comply with applicable laws, rules and regulations.
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    \20\ The MSRB notes that similar requirements apply to brokers 
and dealers under FINRA Rule 2090 (Know Your Customer) and swap 
dealers under Commodity Futures Trading Commission (``CFTC'') Rule 
402(b) (General Provisions: Know Your Counterparty), 17 CFR 
23.402(b), found in CFTC Rules, Ch. I, Pt. 23, Subpt. H (Business 
Conduct Standards for Swap Dealers and Major Swap Participants 
Dealing with Counterparties, including Special Entities) (17 CFR 
23.400 et seq.). Notably, the CFTC's rule applies to dealings with 
special entity clients, defined to include states, state agencies, 
cities, counties, municipalities, other political subdivisions of a 
State, or any instrumentality, department, or a corporation of or 
established by a State or political subdivision of a State. See CFTC 
Rule 401(c) (defining ``special entity'') (17 CFR 23.401(c)).
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Specified Prohibitions
    Subsection (e)(i)(A) would prohibit a municipal advisor from 
receiving compensation from its client that is excessive in relation to 
the municipal advisory activities actually performed for the client. 
Paragraph .11 of the Supplementary Material would provide additional 
guidance on how compensation would be determined to be excessive. 
Included in paragraph .11 are several factors that would be considered 
when evaluating the reasonableness of a municipal advisor's 
compensation relative to the nature of the municipal advisory 
activities performed, including, but not limited to: The municipal 
advisor's expertise, the complexity of the municipal securities 
transaction or municipal financial product, whether the fee is 
contingent upon the closing of the municipal securities transaction or 
municipal financial product, the length of time spent on the engagement 
and whether the municipal advisor is paying any other relevant costs 
related to the municipal securities transaction or municipal financial 
product.
    Subsection (e)(i)(B) would prohibit municipal advisors from 
delivering an invoice for fees or expenses for municipal advisory 
activities that is materially inaccurate in its reflection of the 
activities actually performed or the personnel that actually performed 
those activities.
    Subsection (e)(i)(C) would prohibit a municipal advisor from making 
any representation or submitting any information that the municipal 
advisor knows or should know is either materially false or materially 
misleading due to the omission of a material fact, about its capacity, 
resources or knowledge in response to requests for proposals or in oral 
presentations to a client or prospective client for the purpose of 
obtaining or retaining an engagement to perform municipal advisory 
activities.
    Subsection (e)(i)(D) would prohibit municipal advisors from making 
or participating in two types of fee-splitting arrangements: (1) Any 
fee-splitting arrangement with an underwriter on any municipal 
securities transaction as to which the municipal advisor has provided 
or is providing advice; and (2) any undisclosed fee-splitting 
arrangement with providers of investments or services to a municipal 
entity or obligated person client of the municipal advisor.
    Subsection (e)(i)(E) would, generally, prohibit a municipal advisor 
from making payments for the purpose of obtaining or retaining an 
engagement to perform municipal advisory activities. However, the 
provision contains three exceptions. The prohibition would not apply 
to: (1) Payments to an affiliate of the municipal advisor for a direct 
or indirect communication with a municipal entity or obligated person 
on behalf of the municipal advisor where such communication is made for 
the purpose of obtaining or retaining an engagement to perform 
municipal advisory activities; (2) reasonable fees

[[Page 81619]]

paid to another municipal advisor registered as such with the 
Commission and MSRB for making such a communication as described in 
subsection (e)(i)(E)(1); and (3) payments that are permissible ``normal 
business dealings'' as described in MSRB Rule G-20.
Principal Transactions
    Subsection (e)(ii) of Proposed Rule G-42 would, subject to the 
exception provided in paragraph .14 of the Supplementary Material, 
prohibit a municipal advisor to a municipal entity, and any affiliate 
of such municipal advisor, from engaging with the municipal entity 
client in a principal transaction that is the same, or directly related 
to the, issue of municipal securities or municipal financial product as 
to which the municipal advisor is providing or has provided advice to 
the municipal entity client. The ban on principal transactions would 
apply only with respect to clients that are municipal entities. The ban 
would not apply to principal transactions between a municipal advisor 
(or an affiliate of the municipal advisor) and the municipal advisor's 
obligated person clients. Although such transactions would not be 
prohibited, the MSRB notes that all municipal advisors, including those 
engaging in municipal advisory activities for obligated person clients, 
are currently subject to the MSRB's fundamental fair-practice rule, 
Rule G-17.
    Paragraph .08 of the Supplementary Material would provide an 
exception to the ban on principal transactions in subsection (e)(ii) in 
order to avoid a possible conflict with existing MSRB Rule G-23, on 
activities of financial advisors. Specifically, the ban in subsection 
(e)(ii) would not apply to an acquisition as principal, either alone or 
as a participant in a syndicate or other similar account formed for the 
purpose of purchasing, directly or indirectly, from an issuer all or 
any portion of an issuance of municipal securities on the basis that 
the municipal advisor provided advice as to the issuance, because such 
a transaction is the type of transaction that is addressed, and, in 
certain circumstances, prohibited by Rule G-23.
    For purposes of the prohibition in proposed subsection (e)(ii), 
subsection (f)(ix) would define the term ``principal transaction'' to 
mean ``when acting as principal for one's own account, a sale to or a 
purchase from the municipal entity client of any security or entrance 
into any derivative, guaranteed investment contract, or other similar 
financial product with the municipal entity client.'' Further, 
paragraph .13 of the Supplementary Material would clarify that the term 
``other similar financial product,'' as used in subsection (f)(ix), 
would include a bank loan, but only if it is in an aggregate principal 
amount of $1,000,000 or more and is economically equivalent to the 
purchase of one or more municipal securities.
    Paragraph .14 of the Supplementary Material would provide an 
exception (the ``Exception'') to the ban on principal transactions for 
transactions in specified fixed income securities. As provided in 
proposed section (a) of paragraph .14 of the Supplementary Material, a 
principal transaction could be excepted from the specified prohibition 
only if the municipal advisor also is a broker-dealer registered under 
Section 15 of the Exchange Act,\21\ and each account for which the 
municipal advisor would be relying on the Exception is a brokerage 
account subject to the Exchange Act,\22\ the rules thereunder, and the 
rules of the self-regulatory organizations(s) of which the broker-
dealer is a member. In addition, the municipal advisor could not 
exercise investment discretion (as defined in Section 3(a)(35) of the 
Exchange Act) \23\ with respect to the account, unless granted by the 
municipal entity client on a temporary or limited basis.\24\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78o.
    \22\ 15 U.S.C. 78a et seq.
    \23\ 15 U.S.C. 78(c)(a)(35).
    \24\ The MSRB notes that the proposed requirements are similar 
to those found in Advisers Act Rule 206(3)-T(a)(7) and (1), 
respectively. 17 CFR 275.206(3)-3T(a)(7) and (1).
---------------------------------------------------------------------------

    Under proposed section (b) of paragraph .14 of the Supplementary 
Material, neither the municipal advisor nor any affiliate of the 
municipal advisor may be providing, or have provided, advice to the 
municipal entity client as to an issue of municipal securities or a 
municipal financial product that is directly related to the principal 
transaction, except advice as to another principal transaction that 
also meets all the other requirements of proposed paragraph .14.
    Proposed section (c) of paragraph .14 of the Supplementary Material 
would limit a municipal advisor's principal transactions under the 
Exception to sales to or purchases from a municipal entity client of 
any U.S. Treasury security, agency debt security or corporate debt 
security. In addition, the proposed Exception would not be available 
for transactions involving municipal escrow investments as defined in 
Exchange Act Rule 15Ba1-1(h) \25\ because the MSRB believes that this 
is an area of heightened risk where, historically, significant abuses 
have occurred. The terms ``U.S. Treasury security,'' ``agency debt 
security'' and ``corporate debt security,'' and related terms, 
``agency,'' ``government-sponsored enterprise,'' ``money market 
instrument'' and ``securitized product'' would be defined for purposes 
of proposed paragraphs .14 and .15 of the Supplementary Material in new 
proposed paragraph .15 of the Supplementary Material.
---------------------------------------------------------------------------

    \25\ 17 CFR 240.15Ba1-1(h).
---------------------------------------------------------------------------

    To comply with proposed section (d) of paragraph .14 of the 
Supplementary Material, a municipal advisor would have two options. 
Under the first option, which is set forth in proposed subsection 
(d)(1) of paragraph .14, a municipal advisor would be required, on a 
transaction-by-transaction basis, to disclose to the municipal entity 
client in writing before the completion of the principal transaction 
the capacity in which the municipal advisor is acting and obtain the 
consent of the client to such transaction. Consent would mean informed 
consent, and in order to make informed consent, the municipal advisor, 
consistent with its fiduciary duty, would be required to disclose 
specified information, including the price and other terms of the 
transaction, as well as the capacity in which the municipal advisor 
would be acting.\26\ ``Before completion'' would mean either prior to 
execution of the transaction, or after execution but prior to the 
settlement of the transaction.\27\
---------------------------------------------------------------------------

    \26\ See Amendment No. 2.
    \27\ These requirements are substantially similar to long-
standing interpretive guidance regarding Advisers Act Section 
206(3). 15 U.S.C. 80b-6(3).
---------------------------------------------------------------------------

    Alternatively, a municipal advisor could comply with proposed 
subsection (d)(2) of paragraph .14 by meeting six requirements, as set 
forth in proposed paragraphs (d)(2)(A) through (F) of paragraph .14 and 
summarized below. First, under proposed paragraph (d)(2)(A), neither 
the municipal advisor nor any of its affiliates could be the issuer, or 
the underwriter (as defined in Exchange Act Rule 15c2-12(f)(8)),\28\ of 
a security that is the subject of the principal transaction. Second, 
under proposed paragraph (d)(2)(B), the municipal advisor would be 
required to obtain from the municipal entity client an executed 
written, revocable consent that would prospectively authorize the 
municipal advisor directly or indirectly to act as principal for its 
own account in selling a security to or purchasing a security from the 
municipal entity

[[Page 81620]]

client, so long as such written consent were obtained after written 
disclosure to the municipal entity client explaining: (i) The 
circumstances under which the municipal advisor directly or indirectly 
may engage in principal transactions; (ii) the nature and significance 
of conflicts with the municipal entity client's interests as a result 
of the transactions; and (iii) how the municipal advisor addresses 
those conflicts.
---------------------------------------------------------------------------

    \28\ 17 CFR 240.15c2-12(f)(8).
---------------------------------------------------------------------------

    Third, under proposed paragraph (d)(2)(C), the municipal advisor, 
prior to the execution of each principal transaction, would be required 
to: (i) Inform the municipal entity client, orally or in writing, of 
the capacity in which it may act with respect to such transaction and 
(ii) obtain consent from the municipal entity client, orally or in 
writing, to act as principal for its own account with respect to such 
transaction.
    Fourth, under proposed paragraph (d)(2)(D), a municipal advisor 
would be required to send a written confirmation at or before 
completion of each principal transaction that includes the information 
required by 17 CFR 240.10b-10 or MSRB Rule G-15, and a conspicuous, 
plain English statement informing the municipal entity client that the 
municipal advisor: (i) Disclosed to the client prior to the execution 
of the transaction that the municipal advisor may be acting in a 
principal capacity in connection with the transaction and the client 
authorized the transaction and (ii) sold the security to, or bought the 
security from, the client for its own account.
    Fifth, under proposed paragraph (d)(2)(E), a municipal advisor 
would be required to send its municipal entity client, no less 
frequently than annually, written disclosure containing a list of all 
transactions that were executed in the client's account in reliance 
upon the Exception, and the date and price of the transactions.
    Sixth, under proposed paragraph (d)(2)(F), each written disclosure 
would be required to include a conspicuous, plain English statement 
regarding the ability of the municipal entity client to revoke the 
prospective written consent to principal transactions without penalty 
at any time by written notice.
    A municipal advisor's use and compliance with the requirements of 
the Exception would not be construed as relieving it in any way from 
acting in the best interests of its municipal entity client nor from 
any obligation that may be imposed by other applicable provisions of 
the federal securities laws and state law.

Definitions

    Section (f) of Proposed Rule G-42 would provide definitions of the 
terms ``affiliate of the municipal advisor,'' ``municipal advisory 
relationship,'' ``official statement,'' and ``principal transaction.'' 
Further, for several terms in Proposed Rule G-42 that have been 
previously defined by federal statute or SEC rules, proposed section 
(f) would, for purposes of Proposed Rule G-42, adopt the same meanings. 
These terms would include ``advice;'' ``municipal advisor;'' 
``municipal advisory activities;'' ``municipal entity;'' and 
``obligated person.''
Applicability of Proposed Rule G-42 to 529 College Savings Plans and 
Other Municipal Fund Securities
    Paragraph .12 of the Supplementary Material emphasizes the proposed 
rule's application to municipal advisors whose municipal advisory 
clients are sponsors or trustees of municipal fund securities.

Proposed Amendments to Rule G-8

    The proposed amendments to Rule G-8 would require each municipal 
advisor to make and keep a copy of any document created by the 
municipal advisor that was material to its review of a recommendation 
by another party or that memorializes its basis for any determination 
as to suitability.

III. Summary of Comments Received and the MSRB's Response

    As noted previously, the Commission received 15 comment letters in 
response to the Proposing Release, 13 comment letters in response to 
the OIP or Amendment No. 1 and seven comment letters in response to 
Amendment No. 2.\29\ The MSRB responded to the comment letters received 
on the Proposing Release in its August Response Letter,\30\ and the 
MSRB responded to the comment letters received on the OIP, Amendment 
No. 1 and Amendment No. 2 in its December Response Letter.\31\
---------------------------------------------------------------------------

    \29\ See supra notes 4, 10 and 13.
    \30\ See August Response Letter.
    \31\ See December Response Letter.
---------------------------------------------------------------------------

A. Standards of Conduct--Scope of Duties

    In response to the Proposing Release, SIFMA stated that the 
addition of ``without limitation'' in Proposed Rule G-42(a)(ii) raises 
significant and unnecessary ambiguities, as a fiduciary duty is 
generally understood to encompass a duty of care and duty of 
loyalty.\32\ It also stated that the language ``includes, but is not 
limited to'' in paragraph .02 of the Supplementary Material was vague, 
and suggested that the MSRB specify what other duties are included. In 
response to the comment, the MSRB, in Amendment No. 1, eliminated the 
phrase ``, without limitation,'' in Proposed Rule G-42(a)(ii). However, 
the MSRB did not make the suggested change to paragraph .02 of the 
Supplementary Material because the MSRB stated its intent to make clear 
that the proposed rule change is not an exhaustive statement of all 
aspects of the duty of loyalty.\33\
---------------------------------------------------------------------------

    \32\ See SIFMA letter dated May 28, 2015.
    \33\ See August Response Letter.
---------------------------------------------------------------------------

B. Duty of Care--Reasonable Investigation of Facts

    In response to the Proposing Release, four commenters expressed 
concern regarding the duty of care standard, as expressed in paragraph 
.01 of the Supplementary Material, which requires municipal advisors to 
undertake ``a reasonable investigation'' to avoid basing 
recommendations on ``materially inaccurate or incomplete information.'' 
\34\ All four commenters argued that a municipal advisor should be 
permitted to assume that information beyond what is publicly available 
and is provided by the client is complete and accurate. ICI and SIFMA 
argued that this requirement was inconsistent with current regulatory 
regimes as other financial professionals are not required to 
investigate information provided by clients.\35\ SIFMA expressed 
concern that this requirement would make a municipal advisor 
potentially liable to its client for that client's own 
misrepresentations.\36\ ICI argued that in the context of 529 college 
savings plans, it is not uncommon for the municipal advisor that is 
acting as a plan sponsor to rely on its state partner to provide the 
advisor with the information necessary for the advisor to fulfill its 
obligations and duties to the plan.\37\ In such circumstances, ICI 
argued, municipal advisors should be able to presume the states' 
representatives are providing materially accurate and complete 
information. GFOA supported the duty of care provisions generally but 
expressed concern that requiring a municipal advisor to investigate 
this information ``may be excessive'' and could lead to cost increases 
that could be passed on to the client.\38\ Finally,

[[Page 81621]]

NAMA requested the MSRB provide clarity by providing ``non-exclusive 
explanatory examples of what constitutes a `reasonable inquiry as to 
the facts that are relevant to a client's determination as to whether 
to proceed with a course of action.' '' \39\
---------------------------------------------------------------------------

    \34\ See letters from ICI dated May 29, 2015; GFOA dated June 
15, 2015; SIFMA dated May 28, 2015; and WM Financial dated May 29, 
2015.
    \35\ See letters from ICI dated May 29, 2015 and SIFMA dated May 
28, 2015.
    \36\ See SIFMA letter dated May 28, 2015.
    \37\ See ICI letter dated May 29, 2015.
    \38\ See GFOA letter dated June 15, 2015.
    \39\ See NAMA letter dated May 29, 2015.
---------------------------------------------------------------------------

    In its response to comments, the MSRB noted that it had previously 
responded to similar comments in the Proposing Release and that it had 
determined that the requirement would not result in an unreasonable and 
unnecessary burden for municipal advisors or their clients.\40\ In 
response to Amendment No. 1 or the OIP, Columbia Capital, ICI, NAMA, 
SIFMA and WM Financial each expressed similar concerns regarding the 
same requirement.\41\ In Columbia Capital's view, the proposed 
requirement is unreasonable because it would hold a municipal advisor 
accountable if a municipal entity or obligated person fails to provide 
the municipal advisor pertinent non-public information that might have 
impacted its advice or recommendations.\42\ ICI noted its consistent 
support of Proposed Rule G-42, but reiterated its objection to the 
requirement that a municipal advisor conduct a reasonable investigation 
of the veracity of the information provided by a municipal advisory 
client.\43\ ICI stated its view that, to date, the MSRB has failed to 
provide any rationale, or ``meaningful information'' supporting the 
necessity of the requirement, or why such investigation is in the 
public interest. In addition, ICI stated that the MSRB has not provided 
sufficient economic analysis for this requirement. NAMA believed the 
proposed rule change does not provide adequate guidance as to what a 
``reasonable investigation'' would require of a municipal advisor.\44\ 
NAMA believed, without further clarity, examination for compliance with 
the proposed rule change by financial regulators ``could lead to 
unsettling results.'' SIFMA commented that the proposed obligation is 
``unnecessary, counterproductive, and inefficient.'' \45\ In addition, 
SIFMA believed that the requirement would impose unnecessary costs on 
municipal advisor clients, who, in SIFMA's opinion, would ultimately 
bear the financial burden of having their municipal advisor investigate 
facts already known to the client. ICI and SIFMA both pointed to other 
regulatory regimes and rules where, according to the commenters, 
regulated entities (e.g., broker-dealers, swap dealers and investment 
advisers) are not required to investigate information provided by 
clients.
---------------------------------------------------------------------------

    \40\ See August Response Letter (citing Proposing Release, 80 FR 
26752, at 26763, 26773-74, 26783-84).
    \41\ See letters from Columbia Capital dated September 10, 2015; 
ICI dated September 11, 2015; NAMA dated September 11, 2015; SIFMA 
dated September 11, 2015; and WM Financial dated September 11, 2015.
    \42\ See Columbia Capital letter dated September 10, 2015.
    \43\ See ICI letter dated September 11, 2015.
    \44\ See NAMA letter dated September 11, 2015.
    \45\ See SIFMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    WM Financial supported the requirement that a municipal advisor 
should conduct reasonable investigations of publicly available 
documentation and engage in discussions with the client such that the 
municipal advisor's recommendations reflect what the advisor reasonably 
believes is in the customer's best interest.\46\ However, WM Financial 
commented that a municipal advisor should not be required to determine 
whether the information provided to it by its client is materially 
inaccurate or incomplete, and should be able to rely on publicly 
available documents as being true and accurate.
---------------------------------------------------------------------------

    \46\ See WM Financial letter dated September 11, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 2, ICI reiterated the concerns 
regarding the Proposed Rule's requirement that municipal advisors 
undertake a reasonable investigation of the accuracy and completeness 
of information on which a municipal advisor bases its 
recommendation.\47\ ICI stated that Amendment No. 2, despite the 
amendment stating otherwise, did not address its concerns regarding the 
``reasonable investigation requirement'' and the MSRB should provide 
its basis for maintaining the requirement. As included in its previous 
comment letters addressing the ``reasonable investigation'' 
requirement, ICI again stated that the MSRB has not provided a 
sufficient economic analysis of the potential impact of the requirement 
and should be required to do so with special particularity for ``advice 
rendered in connection with 529 college savings plans.''
---------------------------------------------------------------------------

    \47\ See ICI letter dated December 1, 2015.
---------------------------------------------------------------------------

    In response to these comments, the MSRB stated that the duty of 
care is a core principle underlying many of the obligations of the 
proposed rule change, and the proposed requirement to conduct a 
reasonable investigation is vital because the veracity of the 
information on which a municipal advisor bases its recommendation can 
have a significant impact on the ability of a municipal advisor to make 
informed and suitable recommendations.\48\ The MSRB further stated its 
belief that the proposed requirement is necessary to promote the 
integrity of the municipal advisory relationship and protect clients 
from the potentially costly consequences of transactions undertaken 
based on unsuitable recommendations. The MSRB reiterated that a 
municipal advisor would not be required to go to impractical lengths to 
determine the accuracy and completeness of the information on which it 
would be basing its advice and/or recommendation.\49\ Instead, the MSRB 
stated that a municipal advisor would be required to investigate using 
reasonable diligence. The MSRB further stated that it understands that 
municipal advisors currently, and regularly, follow an industry 
practice of conducting due diligence and fact finding inquiries that 
may, or, with some modest modifications, satisfy the requirement to 
undertake a ``reasonable investigation.'' In such cases, the MSRB 
believes the proposed requirement would add only nominal costs, if any.
---------------------------------------------------------------------------

    \48\ See December Response Letter.
    \49\ See id.; see also Proposing Release, 80 FR 26752, at 26753, 
26761, 26763, 26773-74 and 26784; see also August Response Letter.
---------------------------------------------------------------------------

C. Duty of Care--Preparing Official Statements

    In response to Amendment No. 1 or the OIP, SIFMA commented that 
proposed paragraph .01 of the Supplementary Material should more 
explicitly state that municipal advisors assisting in the preparation 
of any portion of an official statement in connection with a 
competitive transaction must exercise ``reasonable diligence with 
respect to the accuracy and completeness of any portion of the official 
statement as to which the municipal advisor assisted in the 
preparation.'' \50\ SIFMA stated that while the proposed rule does 
include a reference to this requirement, the rule language should more 
explicitly clarify this obligation. In response, the MSRB stated that 
the rule language, as proposed, is sufficient to alert municipal 
advisors of their obligation and that the rule language conveys the 
importance of exercising due care when providing information or advice 
in connection with the preparation of an official statement.\51\
---------------------------------------------------------------------------

    \50\ See SIFMA letter dated September 11, 2015.
    \51\ See December Response Letter.
---------------------------------------------------------------------------

D. Disclosure of Conflicts of Interest

    Three commenters expressed concerns regarding the differing timing 
of documentation required by sections

[[Page 81622]]

(b) and (c) of Proposed Rule G-42.\52\ Each of the commenters 
recommended that the timing requirement in section (b), on disclosure 
of conflicts of interest and other information, be changed to match 
that in section (c), on documentation of the municipal advisory 
relationship. BDA and GKB believe that disclosures of conflicts of 
interest only matter when municipal advisors enter into municipal 
advisory relationships.\53\ NAMA stated that the differing timing 
requirements would lead to ``confusing guidance and duplicative 
disclosures'' to clients.\54\
---------------------------------------------------------------------------

    \52\ See letters from BDA dated May 29, 2015; GKB dated May 29, 
2015; and NAMA dated May 29, 2015.
    \53\ See letters from BDA dated May 29, 2015 and GKB dated May 
29, 2015.
    \54\ See NAMA letter dated May 29, 2015.
---------------------------------------------------------------------------

    The MSRB previously considered and addressed the same or similar 
comments regarding the timing requirements of proposed sections (b) and 
(c),\55\ and determined not to make the recommended changes. The MSRB 
reasoned that the suggested change would conflict with the intention of 
having municipal advisors disclose conflicts of interest prior to or at 
least upon engaging in municipal advisory activities and could cause 
municipal advisors to delay making the required disclosures until the 
municipal advisory relationship has been reduced to writing, which 
could be a significant amount of time after the client has received and 
considered, and potentially acted on, advice or recommendations from 
the municipal advisor.\56\ However, in Amendment No. 1, the MSRB 
streamlined the steps needed to comply with proposed sections (b) and 
(c) in proposed paragraph .06 of the Supplementary Material. Under 
proposed paragraph .06, a municipal advisor would not be required to 
provide the disclosure of conflicts of interest and other information 
required under proposed subsection (c)(ii), if the municipal advisor 
previously fully complied with the requirements of section (b) to 
disclose such information and subsection (c)(ii) would not require the 
disclosure of any materially different information than that previously 
disclosed.
---------------------------------------------------------------------------

    \55\ See Proposing Release, 80 FR 26752, at 26769-70.
    \56\ See August Response Letter.
---------------------------------------------------------------------------

    Columbia Capital commented that it supports the requirement in 
proposed section (b) that a municipal advisor disclose material 
conflicts of interest prior to or upon engaging in municipal advisory 
activities.\57\ However, Columbia Capital suggested modifying the rule 
language to state that a municipal advisor must provide such 
disclosures ``at any time requested by the municipal entity or 
obligated person, but not later than engaging in'' municipal advisory 
activities. Columbia Capital believed this would provide more clarity 
regarding the requirement, without changing the substance, and thereby 
promote better compliance with the proposed section. In response, the 
MSRB stated that the suggested language would not necessarily provide 
more clarity to municipal advisors or better aide in compliance with 
the proposed requirement than the current rule language. The MSRB 
believes that it would be desirable to maintain the proposed rule 
language of section (b) because it more clearly coordinates with the 
language in proposed section (c) \58\ regarding the documentation of 
the municipal advisory relationship and would, therefore, better assist 
municipal advisors in complying with the different timing requirements 
of both sections. The MSRB further responded that section (b) 
contemplates that disclosures may be made at any time prior to engaging 
in municipal advisory activities, and therefore nothing in the proposed 
rule change would prevent a municipal advisor and its client from 
agreeing that the disclosures would be made when requested by the 
client, so long as the disclosures are made in compliance with all of 
the terms of proposed section (b) and other applicable rules.
---------------------------------------------------------------------------

    \57\ See Columbia Capital letter dated September 10, 2015.
    \58\ Proposed section (c) would require a municipal advisor to 
``evidence each of its municipal advisory relationships by a writing 
or writings created and delivered to the municipal entity or 
obligated person client prior to, upon or promptly after the 
establishment of the municipal advisory relationship.'' (emphasis 
added).
---------------------------------------------------------------------------

    NAMA suggested merging the two ``catch-all provisions'' in 
subsections (b)(i)(A) and (b)(i)(G) of Proposed Rule G-42 because it is 
not clear what the difference is between the two paragraphs.\59\ In 
response, the MSRB combined the disclosures required under paragraphs 
(b)(i)(A) and (b)(i)(G) in new paragraph (b)(i)(F) of Proposed Rule G-
42.\60\
---------------------------------------------------------------------------

    \59\ See NAMA letter dated May 29, 2015.
    \60\ See Amendment No. 1.
---------------------------------------------------------------------------

    In response to the Proposing Release, WM Financial stated that 
contingent fees that are based on the completion of a transaction, but 
not on the size of a transaction, are not a conflict of interest.\61\ 
It argued that contingent fee arrangements benefit municipal entities 
by insuring their government funds will not be drawn upon for payment 
of fees if the transaction is not completed. Accordingly, WM Financial 
requested that the proposed rule change not require a ``conflict of 
interest'' disclosure for contingent fees that do not inherently create 
conflicts of interest. In response to Amendment No. 1 or the OIP, WM 
Financial further commented that contingent fee arrangements do not 
give rise to material conflicts of interest requiring disclosure in 
every case, and disclosure should not be required of contingent fee 
arrangements that do not inherently create conflicts of interest.\62\ 
WM Financial believed that such arrangements also serve a useful and 
beneficial function for municipal entity clients (e.g., for clients 
with relatively small budgets) in that ``governmental funds will not be 
drawn upon for payment of fees if the transaction is not completed.''
---------------------------------------------------------------------------

    \61\ See WM Financial letter dated May 29, 2015.
    \62\ See WM Financial letter dated September 11, 2015.
---------------------------------------------------------------------------

    Columbia Capital commented that every type of fee structure 
``creates a set of incentives and disincentives that can be detrimental 
to the municipal entity or obligated person,'' and specifying 
contingent compensation arrangements in the proposed rule implies that 
contingent compensation arrangements are more problematic or imbued 
with greater conflicts of interest than other compensation 
arrangements.\63\ Columbia Capital suggested that the proposed rule be 
modified to require municipal advisors to disclose how they are 
compensated and to discuss incentives and disincentives that result 
from such compensation arrangements and structures.
---------------------------------------------------------------------------

    \63\ See Columbia Capital letter dated September 10, 2015.
---------------------------------------------------------------------------

    In response to these comments, the MSRB stated that requiring 
municipal advisors to disclose conflicts of interest that could arise 
from, or are inherent in, contingent compensation is an appropriate and 
necessary measure to protect municipal entity and obligated person 
clients.\64\ The MSRB noted that, in connection with underwriters, the 
MSRB requires analogous disclosures in an analogous context. Pursuant 
to Rule G-17, the MSRB requires a dealer acting as an underwriter to 
disclose to an issuer whether its underwriting compensation will be 
``contingent on the closing of a transaction or the size of a 
transaction,'' because, as the MSRB has stated, such circumstances may 
present a conflict of interest as a result of the underwriter's 
financial incentive

[[Page 81623]]

to recommend a transaction that is ``unnecessary or to recommend that 
the size of the transaction be larger than is necessary.'' \65\ The 
MSRB believes that the scenarios in which proposed paragraph (b)(i)(E) 
would apply are substantially similar, are subject to the same 
concerns, and warrant the application of similar disclosure 
requirements to help make transparent potential conflicts of interest. 
The MSRB stated that the purpose of the disclosure requirement, is, of 
course, to allow a municipal advisor's client to make an informed 
decision based on relevant facts and circumstances, and, as the MSRB 
previously explained, municipal advisors would have the opportunity to 
provide a client with additional context about the benefits and 
drawbacks of other fee arrangements in relation to a contingent fee 
arrangement so that the client could choose a fee arrangement that it 
understands, with which it is comfortable, and that serves its 
needs.\66\ The MSRB further stated that it does not disagree that other 
fee arrangements also may give rise to conflicts, and noted that other 
terms of proposed section (b) require broad disclosure of all actual 
and potential material conflicts of interest. In addition, as the MSRB 
has emphasized, it does not endorse, nor discourage, the use of any 
particular lawful compensation arrangement.
---------------------------------------------------------------------------

    \64\ See December Response Letter.
    \65\ See id. (citing MSRB Interpretive Notice Concerning the 
Application of MSRB Rule G-17 to Underwriters of Municipal 
Securities, dated August 2, 2012).
    \66\ See Proposing Release, 80 FR 26752, at 26764-65; see also 
August Response Letter.
---------------------------------------------------------------------------

E. Documentation of Municipal Advisory Relationship

    GFOA and NAMA expressed concerns with disclosing information 
regarding legal or disciplinary events through reference to the 
municipal advisor's most recent Form MA and Form MA-I.\67\ Both 
commenters stated it was difficult or burdensome for clients to find 
the relevant Form MA and Form MA-I documents in the SEC's EDGAR system. 
GFOA requested the proposed rule be amended to require municipal 
advisors to provide copies of Form MA-Is directly to their clients as 
part of the documentation of the relationship, rather than providing 
the location of the forms.\68\ GFOA also suggested that municipal 
advisors be required to notify clients of changes to Form MA that are 
material and to provide clients with the updated Form MA with an 
explanation of how any changes made to the form materially pertain to 
the nature of the relationship between the municipal advisor and the 
client.
---------------------------------------------------------------------------

    \67\ See letters from GFOA dated June 15, 2015 and NAMA dated 
May 29, 2015.
    \68\ See GFOA letter dated June 15, 2015.
---------------------------------------------------------------------------

    In response to the comments, the MSRB noted that the provision in 
proposed section (b) allowing the municipal advisor to provide legal or 
disciplinary event disclosures by identifying the specific type of 
event and referencing the relevant portions of the municipal advisor's 
most recent Forms MA or MA-I is permissive, not mandatory.\69\ Also in 
response to GFOA's comment, the MSRB revised Proposed Rule G-42(c)(iv) 
to require municipal advisors to provide the client not only the date 
of the last material change or addition to the legal or disciplinary 
event disclosures on any Form MA or Form MA-I, but also to provide a 
brief explanation of the basis for the materiality of each change or 
addition.\70\ The MSRB stated that this explanation would allow a 
client to assess the effect that such changes may have on the municipal 
advisory relationship and evaluate whether it should seek or review 
additional information.\71\
---------------------------------------------------------------------------

    \69\ See August Response Letter.
    \70\ See Amendment No. 1.
    \71\ See August Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, SIFMA objected to the 
revisions to subsection (c)(iv), requiring municipal advisors to 
provide a brief explanation of the basis for the materiality of each 
change or addition, on the grounds that it would be ``unnecessary and 
overly burdensome, outweighing any potential benefit.'' \72\ SIFMA 
agreed that municipal advisory clients should have access to 
information regarding a municipal entity's legal and disciplinary 
events, and that clients should receive notifications of material new 
disclosures. However, in SIFMA's view, the additional requirement would 
not create any benefit for a municipal advisor's client and would 
result in ``additional paperwork burdens'' for the municipal advisor. 
SIFMA added that Form MA and MA-I disclosures, in a manner similar to 
SEC Forms BD and ADV and the Financial Industry Regulatory Authority 
(``FINRA'') Form U4, already require an explanation of the events that 
would also be required to be disclosed and explained under proposed 
subsection (c)(iv). In response to SIFMA's comments, the MSRB stated 
that requiring a municipal advisor to provide a brief explanation of 
the basis for the materiality of each change or addition would allow a 
municipal entity client to assess the effect that such changes may have 
on the municipal advisory relationship and evaluate whether it should 
seek or review additional information.\73\ When developing this 
amendment, the MSRB stated that it gave due consideration to comments 
submitted by GFOA suggesting changes to the information disclosures 
that GFOA believed would allow issuers to focus more efficiently on 
disclosures that would be material to them and affect them directly.
---------------------------------------------------------------------------

    \72\ See SIFMA letter dated September 11, 2015.
    \73\ See December Response Letter.
---------------------------------------------------------------------------

    NAMA requested the MSRB provide more clarity about the term 
``detailed information'' in the requirement in subsection (c)(iii) that 
the municipal advisor provide ``detailed information specifying where 
the client may electronically access the municipal advisor's most 
recent Form MA and each most recent Form MA-I filed with the 
Commission.'' \74\ NAMA suggested the MSRB provide non-exclusive 
examples; for example, allowing municipal advisors to provide clients 
with a link to the municipal advisor's EDGAR page. In response to the 
comment, the MSRB stated that a municipal advisor would be able to 
satisfy this aspect of its disclosure obligation by, for example, 
providing its client with a functioning Uniform Resource Locator 
(``URL'') to the municipal advisor's most recent Form MA or MA-I filed 
with the SEC through the EDGAR system.\75\ The MSRB noted that this was 
only an example and does not preclude other methods of compliance.
---------------------------------------------------------------------------

    \74\ See NAMA letter dated May 29, 2015.
    \75\ See August Response Letter.
---------------------------------------------------------------------------

F. Documentation Related to Recommendations

    BDA and First Southwest expressed concern that documentation 
requirements for recommendations are too burdensome.\76\ First 
Southwest estimated that municipal advisors may spend between 20% and 
30% of their time writing letters to document compliance, providing a 
laundry list of consequences that would dilute the advice given, 
``similar to the way G-17 letters from underwriters have become boiler 
plate disclosures and have lost significance.'' \77\ BDA suggested that 
the proposed rule should specifically state that such communication to 
clients under section (d) may be oral and is not required to be in 
writing.\78\ BDA was concerned that informing a client of risks, 
benefits or other aspects of a transaction in writing may not be in the

[[Page 81624]]

client's best interest because that writing could be obtainable through 
Freedom of Information Act requests and other means.
---------------------------------------------------------------------------

    \76\ See letters from BDA dated May 29, 2015 and First Southwest 
dated May 29, 2015.
    \77\ See First Southwest letter dated May 29, 2015.
    \78\ See BDA letter dated May 29, 2015.
---------------------------------------------------------------------------

    In response, the MSRB stated that the documentation required by 
Proposed Rule G-8(h)(iv) is an appropriately tailored recordkeeping 
requirement that will assist regulatory examiners in assessing the 
compliance of municipal advisors with Proposed Rule G-42.\79\ In 
addition, the MSRB stated its belief that the recordkeeping 
requirements will not be overly burdensome because municipal advisors 
would be required to maintain only the documents created by the 
municipal advisor that were material to its review of a recommendation 
by another party or that memorialize the basis for any conclusions as 
to suitability.
---------------------------------------------------------------------------

    \79\ See August Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, BDA, Columbia Capital, 
NAMA and SIFMA expressed concern over the documentation requirement 
under Proposed Rule G-8(h)(iv), which would require a municipal advisor 
to keep a copy of any document created by a municipal advisor ``that 
was material to its review of a recommendation by another party or that 
memorializes the basis for any determination as to suitability.'' \80\ 
BDA, Columbia Capital and SIFMA expressed concern about the examination 
of municipal advisors by financial regulators (such as the SEC and 
FINRA), including the question of how the regulators would determine 
whether a municipal advisor had complied with the proposed requirements 
related to recommendations and documentation retention. The commenters 
stated that the proposed rule change should provide additional guidance 
on the documentation to be maintained. BDA stated that a transaction on 
which a municipal advisor is advising may take place over the course of 
years, and that it would be difficult for a municipal advisor to have a 
financial regulatory examiner come in after the completion of a 
transaction and examine the municipal advisor's documentation process. 
BDA noted that ``it just takes one element of omission to find a firm 
at fault.'' \81\ Finally, BDA commented that, without additional 
guidance about how a municipal advisor would comply with the proposed 
provisions addressing recommendations, a discrepancy may occur between 
information the examiner desired to review and that which the municipal 
advisor could provide.
---------------------------------------------------------------------------

    \80\ See letters from BDA dated September 11, 2015; Columbia 
Capital dated September 10, 2015; NAMA dated September 11, 2015; and 
SIFMA dated September 11, 2015.
    \81\ See BDA letter dated September 11, 2015.
---------------------------------------------------------------------------

    Columbia Capital commented that it would be very difficult for a 
municipal advisor to ``document the rationale for every point of advice 
in a municipal advisory relationship, including documenting the 
rationale for every conceivable path not taken.'' \82\ Columbia Capital 
stated that, without additional specificity, a municipal advisor's 
recommendation could be subject to unreasonable scrutiny by examiners 
that would not adequately take into account the totality of the 
circumstances that impacted the formation of the recommendation 
provided by the municipal advisor. SIFMA also commented that it is 
unclear as to what documentation should be maintained to ``demonstrate 
in a regulatory examination'' that which the municipal advisor relied 
upon in making a suitability determination.\83\
---------------------------------------------------------------------------

    \82\ See Columbia Capital letter dated September 11, 2015.
    \83\ See SIFMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    In addition, Columbia Capital stated its belief that the 
recordkeeping requirements ``might actually conflict with [a firm's] 
fiduciary duty where [the] client desires to maintain such internal 
dialogue in confidence'' but where the client (in particular public 
clients) is subject to open records laws that may frustrate that 
desire. NAMA stated that the proposed rule is unclear as to whether the 
document requirements apply to the financing ``as a whole'' or whether 
they apply to ``every facet of a transaction'' which could span several 
months.\84\ SIFMA stated that the proposed documentation requirement is 
``vastly more burdensome'' than the documentation requirement currently 
applicable to investment advisers.
---------------------------------------------------------------------------

    \84\ See NAMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    In response to comments, the MSRB reiterated its belief that 
Proposed Rule G-8(h)(iv) is an appropriately tailored recordkeeping 
requirement that will assist regulatory examiners in assessing the 
compliance of municipal advisors with Proposed Rule G-42.\85\ The MSRB 
stated that the recordkeeping requirement will not be overly burdensome 
because municipal advisors would be required to maintain only the 
documents created by the municipal advisor that: (a) Were material to 
its review of a recommendation by another party or (b) memorialize the 
basis for any conclusions as to suitability of a recommendation the 
municipal advisor provided. By limiting the proposed recordkeeping 
requirement to documents that were material to the review of a 
recommendation or that memorialize the basis for a suitability 
determination as to a recommendation, the MSRB stated it does not 
believe that the proposed rule would require, as suggested by Columbia 
Capital, a municipal advisor ``to document the rationale for every 
point of advice'' and ``the rationale for every conceivable path not 
taken.'' In the Proposing Release, the MSRB discussed communications 
between municipal advisors and their clients, noting that certain 
communications would constitute recommendations of a municipal 
securities transaction or municipal financial product and others, 
advice.\86\ The MSRB clarified that only the former triggers a 
suitability determination under the proposed rule. Therefore, if a 
municipal advisor's communication with its municipal entity or 
obligated person client is advice but not a recommendation, the 
proposed documentation requirement would not apply.
---------------------------------------------------------------------------

    \85\ See December Response Letter.
    \86\ See id. (citing Proposing Release, 80 FR 26752, at 26756).
---------------------------------------------------------------------------

    With regard to Columbia Capital's concerns about a municipal 
advisor maintaining a level of confidentiality as may be requested by a 
client, the MSRB stated that the proposed rule would not create the 
conflict discussed because Proposed Rule G-8(h)(iv) would not require a 
municipal advisor to deliver documents that must be maintained by the 
municipal advisor to the client or into the possession of a party not 
privy to, or contemplated under, the municipal advisory 
relationship.\87\ Under Proposed Rule G-42(d), a municipal advisor 
would be required to ``inform'' its client, in a manner that comports 
with its duty of care and the expressed terms of its agreement with its 
client, of certain aspects of its recommendations, and, the municipal 
advisor and its client would have some discretion as to the manner in 
which that information is provided. The MSRB stated its belief that the 
discretion provided for in the proposed rule will allow a municipal 
advisor to reasonably accommodate a request by a municipal advisory 
client such as that described by Columbia Capital and also comply with 
its fiduciary obligations.
---------------------------------------------------------------------------

    \87\ See December Response Letter.
---------------------------------------------------------------------------

G. Suitability Analysis

    NAMA supported section (d)'s requirements to inform clients about 
reasons for a recommendation, however, it stated that greater clarity 
through a non-exclusive list of examples of how regulated entities 
could comply with the

[[Page 81625]]

regulation was needed.\88\ Specifically, NAMA suggested the MSRB 
provide examples of how a municipal advisor should perform its 
reasonable diligence to satisfy the criteria listed in section (d). 
NAMA also requested guidance on section (d)(iii), regarding informing a 
client whether the municipal advisor investigated or considered 
reasonably feasible alternatives because NAMA was concerned that a 
municipal advisor would be required to provide a list that was 
exhaustive and non-germane to the client.
---------------------------------------------------------------------------

    \88\ See NAMA letter dated May 29, 2015.
---------------------------------------------------------------------------

    PFM requested the MSRB provide a more concise definition of the 
term ``suitable'' to enable municipal advisors to comply with the 
requirements and stated that the ``perfunctory list of generic 
factors'' for consideration in paragraph .08 of the Supplementary 
Material failed to provide municipal advisors with a clear definition 
of such an important term.\89\
---------------------------------------------------------------------------

    \89\ See PFM letter dated May 29, 2015.
---------------------------------------------------------------------------

    The MSRB responded to the comments by stating that it chose not to 
take a more prescriptive or descriptive approach to determining 
suitability in the proposed rule change because it would risk creating 
inflexible requirements that would fail to adequately account for the 
diversity of municipal advisors, the activities in which they engage 
and the varying needs of clients.\90\ In response to NAMA's request for 
additional guidance on proposed subsection (d)(iii), the MSRB stated 
that the language in that subsection would not require a municipal 
advisor to provide its client with an exhaustive list of ``alternative 
financings'' particularly if such alternative financings are not 
germane to the client. The MSRB stated that the provision also would 
not require the municipal advisor to conduct a suitability analysis on 
any ``reasonably feasible alternative'' considered or investigated by 
the municipal advisor. Instead, the MSRB noted that the municipal 
advisor would be obligated only to inform clients whether or not it 
considered or investigated reasonably feasible alternatives, and the 
decision whether to have the municipal advisor discuss the alternatives 
it considered or investigated would be left to the discretion of the 
municipal advisor and its client.
---------------------------------------------------------------------------

    \90\ See August Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, SIFMA commented that it 
is unclear when a communication constitutes a ``recommendation'' (thus 
triggering a suitability analysis under the proposed rule change), as 
opposed to ``advice'' or, as SIFMA referenced, ``ancillary advice.'' 
\91\ According to SIFMA's comment, in order to ``design effective 
policies and procedures, and to evidence compliance with this 
obligation'' municipal advisors need to be certain of when their 
suitability obligation applies. In SIFMA's view, because of the 
uncertainty created by the proposed rule regarding ``what is a 
recommendation versus what is ancillary advice,'' FINRA and SEC 
examiners also would need additional guidance to properly examine for 
compliance with the rule.
---------------------------------------------------------------------------

    \91\ See SIFMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    In response to SIFMA's comments, the MSRB stated that the proposed 
rule would adopt, and apply to municipal advisors, the existing MSRB 
interpretive guidance regarding the general principles currently 
applicable to dealers for determining whether a particular 
communication constitutes a recommendation of a securities 
transaction.\92\ In conformance with that interpretive guidance, the 
MSRB noted that it has stated that a municipal advisor's communication 
to its client that could reasonably be viewed as a ``call to action'' 
to engage in a municipal securities transaction or enter into a 
municipal financial product would be considered a recommendation and 
would obligate the municipal advisor to conduct a suitability analysis 
of its recommendation that adheres to the requirement established by 
the proposed rule. The MSRB also noted that it previously has stated 
that, depending on all of the facts and circumstances, communications 
by a municipal advisor to a client that relate to, but are not 
recommendations of, a municipal securities transaction or municipal 
financial product might constitute advice (and therefore trigger many 
other provisions of the proposed rule change) but would not trigger the 
suitability obligation set forth in proposed section (d). The MSRB 
stated that providing a more prescriptive definition of the term 
``recommendation'' is unnecessary and that the proposed rule, along 
with the related and referenced interpretive guidance that has been in 
place for dealers for over a decade, will provide municipal advisors, 
and SEC and FINRA examiners with sufficient guidance on this subject.
---------------------------------------------------------------------------

    \92\ See December Response Letter (citing Proposing Release, 80 
FR 26752, at 26756 n. 18 (citing MSRB Rule G-19 and MSRB Notice 
2002-30 (September 25, 2002), Notice Regarding Application of Rule 
G-19, on Suitability of Recommendations and Transactions, to Online 
Communications)).
---------------------------------------------------------------------------

    In response to the Proposing Release, GFOA expressed concern that 
the language in subsection (d)(ii) implies that municipal advisors 
would be permitted to make a recommendation to a client that is 
unsuitable, which seemed contrary to the proposed rule's duty of care 
and loyalty requirements.\93\ In Amendment No. 1, the MSRB revised the 
language in subsection (d)(ii) in response to GFOA's comment.\94\
---------------------------------------------------------------------------

    \93\ See GFOA letter dated June 15, 2015.
    \94\ See August Response Letter.
---------------------------------------------------------------------------

H. Sophisticated Municipal Issuers

    First Southwest requested an exemption to the suitability standard 
in proposed section (d) and paragraph .08 of the Supplementary Material 
for ``sophisticated municipal issuers.'' \95\ First Southwest stated 
that certain issuers are capable of independently evaluating risks in 
issuing municipal securities, and exercising independent judgment in 
evaluating recommendations of a municipal advisor. In response to the 
comment, the MSRB noted that when the SEC adopted the final municipal 
advisor registration rule \96\ it did not include an exemption from 
registration as a municipal advisor for persons providing advice to 
clients of a certain sophistication.\97\ The MSRB stated its belief 
that it would be premature to categorically exclude certain clients 
from the protections of the proposed rule given that municipal advisors 
have become subject only recently to the SEC's regulatory framework 
governing their registration and the MSRB's developing regulatory 
framework for municipal advisors.
---------------------------------------------------------------------------

    \95\ See First Southwest letter dated May 29, 2015.
    \96\ See Registration of Municipal Advisors, Exchange Act 
Release No. 70462 (September 20, 2013), 78 FR 67467 (November 12, 
2013) (``SEC Final Rule'').
    \97\ See August Response Letter.
---------------------------------------------------------------------------

I. Inadvertent Advice

    SIFMA suggested that the safe harbor in paragraph .06 \98\ of the 
Supplementary Material for inadvertent advice be expanded to include 
the prohibition on principal transactions.\99\ SIFMA argued that firms 
would be unlikely to rely on the safe harbor unless it also provided an 
exemption for inadvertent advice triggering the prohibition on 
principal transactions.
---------------------------------------------------------------------------

    \98\ Proposed paragraph .06 was renumbered in Amendment No. 1 as 
proposed paragraph .07.
    \99\ See SIFMA letter dated May 28, 2015.
---------------------------------------------------------------------------

    In response to these comments, the MSRB stated that section (d) of 
Proposed Rule G-42 applies only in the case where a municipal advisor 
makes a recommendation of a municipal securities transaction or 
municipal

[[Page 81626]]

financial product, or where within the scope of the engagement and at 
the client's request, the municipal advisor reviews a recommendation of 
a third party.\100\ The MSRB believes these limitations will address 
SIFMA's concerns to some degree. In addition, the MSRB stated that 
other commenters expressed concern that if the safe harbor were to 
relieve municipal advisors from compliance with proposed subsection 
(e)(ii), on principal transactions, the provision might be 
misinterpreted or misused in a manner contrary to the purposes of the 
SEC's registration regime and the fiduciary duty owed to municipal 
entity clients.
---------------------------------------------------------------------------

    \100\ See August Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, Columbia Capital 
expressed concern regarding the inadvertent advice exemption, stating 
it is ``rife for abuse'' and that the MSRB should define 
``inadvertent'' very narrowly.\101\ WM Financial argued that the 
inadvertent advice provision creates a loophole that would allow broker 
dealers to serve as financial advisors (without a fiduciary duty) and 
then switch to serving as an underwriter by claiming that such advice 
was inadvertent.\102\ WM Financial suggested that any entity relying on 
the inadvertent advice provision should be required to file the 
required documentation not only with the issuer, but also with the 
MSRB, and that the filing should be made public. In addition, WM 
Financial suggested that any entity relying on the inadvertent advice 
provision be allowed to rely on the exception only one time in any 
calendar year.
---------------------------------------------------------------------------

    \101\ See Columbia Capital letter dated September 10, 2015.
    \102\ See WM Financial letters dated May 29, 2015 and September 
11, 2015.
---------------------------------------------------------------------------

    In response to the comments, the MSRB noted that the inadvertent 
advice exemption would only apply when a municipal advisor 
inadvertently engages in municipal advisory activities but does not 
intend to continue the municipal advisory activities or enter into a 
municipal advisory relationship.\103\ The MSRB further explained that 
the proposed paragraph would only relieve the municipal advisor from 
complying with proposed sections (b) and (c) (relating to disclosure of 
conflicts of interest and documentation of the relationship) of 
Proposed Rule G-42, and not any other requirements. The MSRB believes 
that proposed paragraph .07 is sufficiently clear with regard to the 
narrow relief it allows and that the obligations that municipal 
advisors would be required to undertake to obtain that relief are 
adequate to curb the types of abuse about which commenters have 
expressed concern.
---------------------------------------------------------------------------

    \103\ See December Response Letter.
---------------------------------------------------------------------------

J. Prohibition on Delivering Inaccurate Invoices

    SIFMA expressed support for the prohibition on delivering 
inaccurate invoices, but requested the addition of materiality and 
knowledge qualifiers (i.e., a municipal advisor may not intentionally 
deliver a materially inaccurate invoice), so that immaterial or 
unintentional errors would not be prohibited.\104\ In response to the 
comment, the MSRB modified Proposed Rule G-42(e)(i)(B) to prohibit 
``delivering an invoice . . . for municipal advisory activities that is 
materially inaccurate in its reflection of the activities actually 
performed or the personnel that actually performed those activities'' 
and to delete the words ``do not accurately reflect'' within the same 
provision.\105\ The MSRB declined to add a state-of-mind requirement as 
SIFMA requested because it would not sufficiently protect municipal 
entity and obligated person clients.
---------------------------------------------------------------------------

    \104\ See SIFMA letter dated May 28, 2015.
    \105\ See Amendment No. 1; see also August Response Letter.
---------------------------------------------------------------------------

K. Prohibited Principal Transactions

    In response to the Proposing Release, ten commenters expressed a 
variety of concerns with the prohibition on certain principal 
transactions in Proposed Rule G-42(e)(ii).\106\ In response to 
Amendment No. 1 or the OIP, seven commenters addressed the proposed 
prohibition on certain principal transactions.\107\ In Amendment No. 2, 
the MSRB incorporated the Exception to the principal transaction ban in 
response to the comments received. In response to Amendment No. 2, six 
commenters addressed the Exception.\108\
---------------------------------------------------------------------------

    \106\ See letters from SIFMA dated May 28, 2015; Zions dated May 
29, 2015; ABA dated May 29, 2015; BDA dated May 29, 2015; GKB dated 
May 29, 2015; Millar Jiles dated May 29, 2015; FSI dated May 29, 
2015; GFOA dated June 15, 2015; Wells Fargo dated May 29, 2015; and 
NAMA dated May 29, 2015.
    \107\ See letters from BDA dated September 11, 2015 and December 
1, 2015; Coastal Securities dated September 11, 2015; FSI dated 
September 11, 2015; GFOA dated September 14, 2015; Millar Jiles 
dated September 11, 2015; SIFMA dated September 11, 2015; and Zions 
dated September 10, 2015.
    \108\ See letters from BDA dated December 1, 2015; FSI dated 
December 1, 2015; GFOA dated December 1, 2015; NAMA dated December 
1, 2015; SIFMA dated December 1, 2015; and Spencer Wright dated 
December 16, 2015.
---------------------------------------------------------------------------

1. Consistency With Exchange Act
    BDA, FSI, Millar Jiles, SIFMA and Zions commented that, if no 
exception to the proposed principal transaction ban were added, the 
Proposed Rule would be inconsistent with one or more of the following 
provisions of the Exchange Act: \109\ Section 15B(b)(2)(L),\110\ 
Section 15B(b)(2)(L)(i),\111\ Section 15B(b)(2)(C),\112\ and Section 
3(f).\113\ The commenters suggested exceptions to the proposed ban or 
other changes, including an exception modeled on those found in other 
regulatory regimes, an exception when advice is provided to a municipal 
entity client that is incidental to securities execution services, an 
exception limited to riskless principal transactions in certain fixed 
income securities, an exception when the municipal entity is otherwise 
represented with respect to the principal transaction by another 
registered municipal advisor, an exception for affiliates or remote 
businesses, and modifications to narrow the scope of the prohibition.
---------------------------------------------------------------------------

    \109\ See letters from BDA dated September 11, 2015; FSI dated 
September 11, 2015; Millar Jiles dated September 11, 2015; SIFMA 
dated September 11, 2015; and Zions dated September 10, 2015 
(raising concerns regarding the following provisions of the Exchange 
Act, in connection with the principal transaction ban: Section 
15B(b)(2)(L) (SIFMA and Zions); Section 15B(b)(2)(L)(i) (BDA, FSI, 
SIFMA and Zions); Section 15B(b)(2)(C) (FSI, SIFMA and Zions); and 
Section 3(f) (Millar Jiles and SIFMA)).
    \110\ 15 U.S.C. 78o-4(b)(2)(L).
    \111\ 15 U.S.C. 78o-4(b)(2)(L)(i).
    \112\ 15 U.S.C. 78o-4(b)(2)(C).
    \113\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The MSRB responded to the foregoing comments by incorporating the 
Exception to the principal transaction ban, as discussed below under 
``Exception to Principal Transaction Ban.''
2. Comparison With Similar Regulatory Regimes
    In response to the Proposing Release, SIFMA and Zions expressed 
concerns that the prohibition on principal transactions is overbroad 
and inconsistent with existing regulatory regimes regarding financial 
professionals.\114\ Both commenters argued that restrictions on 
principal transactions for municipal advisors and their affiliates 
should be consistent with those on investment advisers, who are 
permitted to engage in principal transactions provided they make 
relevant disclosures and obtain client consent.
---------------------------------------------------------------------------

    \114\ See letters from SIFMA dated May 28, 2015 and Zions dated 
May 29, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, BDA, Coastal Securities, 
FSI, Millar Jiles, SIFMA and Zions commented that the principal 
transaction ban should be revised to

[[Page 81627]]

permit municipal advisors to engage in principal transactions with 
their municipal entity clients, provided that disclosure of conflicts 
is made to the client and the client consents.\115\ Commenters 
suggested that the MSRB consider incorporating an exception to the 
proposed ban modeled on, or similar to, Section 206(3) of the 
Investment Advisers Act of 1940 (``Advisers Act'') \116\ or Advisers 
Act Rule 206(3)-3(T),\117\ available to firms dually registered as a 
broker-dealer and investment adviser.\118\ FSI and Millar Jiles stated 
that a ban on principal transactions was unnecessary in view of the 
fiduciary relationship between a municipal advisor and its municipal 
entity client. Zions commented that the proposed ban is inconsistent 
with the federal regulation of investment advisers, and stated that the 
MSRB has no basis for treating municipal advisors differently than 
investment advisers when setting fiduciary duty standards, and 
municipal advisors should be permitted to engage in principal 
transactions with their municipal entity clients, provided that advice 
and consent requirements are met. FSI suggested an exception to the ban 
could include certain disclosure and client consent provisions similar 
to Advisers Act Temporary Rule 206(3)-3T that permits investment 
advisers that are also broker-dealers to act in a principal capacity in 
transactions with certain advisory clients.\119\ FSI also suggested the 
proposed exception be limited to certain fixed-income securities as 
defined by Rule 10b-10(d)(4).
---------------------------------------------------------------------------

    \115\ See letters from BDA dated September 11, 2015; Coastal 
Securities dated September 11, 2015; FSI dated September 11, 2015; 
Millar Jiles dated September 11, 2015; SIFMA dated September 11, 
2015; and Zions dated September 10, 2015.
    \116\ 15 U.S.C. 80b-6(3) (``Section 206(3)'').
    \117\ 17 CFR 275.206(3)-3T (``IA Rule'').
    \118\ See, e.g., letters from BDA dated September 11, 2015; FSI 
dated September 11, 2015; Millar Jiles dated September 11, 2015; 
SIFMA dated September 11, 2015; and Zions dated September 10, 2015.
    \119\ See FSI letter dated May 29, 2015.
---------------------------------------------------------------------------

    The MSRB responded to the foregoing comments by incorporating the 
Exception to the principal transaction ban, as discussed below under 
``Exception to Principal Transaction Ban.''
3. Advice Incidental to Securities Execution Services
    FSI, GFOA and SIFMA requested an exemption to the principal 
transaction prohibition when advice is provided to a municipal entity 
client that is incidental to or ancillary to a broker-dealer's 
execution of securities transactions, including transactions involving 
municipal bond proceeds or municipal escrow funds.\120\ GFOA expressed 
concern that the proposed prohibition could force small governments to 
establish ``a more expensive fee-based arrangement with an investment 
adviser in order to receive this very limited type of advice on 
investments that are not risky.'' \121\
---------------------------------------------------------------------------

    \120\ See letters from FSI dated September 11, 2015; GFOA dated 
June 15, 2015; and SIFMA dated May 28, 2015.
    \121\ See GFOA letter dated June 15, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, BDA, FSI, GFOA, and 
SIFMA also suggested that the MSRB consider an exception to the ban for 
limited advice that is incidental to securities execution 
services.\122\ GFOA acknowledged that the ban makes sense in the 
context of a traditional financial advisor, however, GFOA was concerned 
about what it viewed to be a removal of the issuer from the conflicts 
of interest process and the lack of an exception to the proposed ban 
regarding the investment of proceeds of municipal securities and 
municipal escrow investments.\123\ FSI stated that a ban on 
transactions, where the advice is incidental to the securities 
execution services, would impose an unnecessary burden on competition, 
and suggested an exception be incorporated for transactions executed in 
such circumstances.\124\ FSI also suggested that the exception could be 
limited to transactions in certain fixed income securities or, 
alternatively, limited to riskless principal transactions in certain 
fixed income securities. Commenters, including BDA, FSI, GFOA, Millar 
Jiles, SIFMA and Zions, noted the importance, in their view, of: (i) 
Preserving municipal entities' choice and access to services and 
products at favorable prices; (ii) preserving municipal entities' 
access to financial advisors with whom such municipal entities have 
relationships; and (iii) avoiding increased costs to municipal 
entities.\125\
---------------------------------------------------------------------------

    \122\ See letters from BDA dated November 4, 2015; FSI dated 
September 11, 2015; GFOA dated September 14, 2015; and SIFMA dated 
September 11, 2015.
    \123\ See GFOA letter dated June 15, 2015.
    \124\ See FSI letters dated May 29, 2015 and September 11, 2015.
    \125\ See letters from BDA dated September 11, 2015 and November 
4, 2015; FSI dated September 11, 2015; GFOA dated September 14, 
2015; Millar Jiles dated September 11, 2015; SIFMA dated September 
11, 2015; and Zions dated September 10, 2015.
---------------------------------------------------------------------------

    The MSRB responded to the foregoing comments by incorporating the 
Exception to the principal transaction ban, as discussed below under 
``Exception to Principal Transaction Ban.''
4. Scope of Principal Transaction Ban: ``Directly Related To''
    BDA, GKB and SIFMA expressed concern that the language in 
subsection (e)(ii) limiting the principal transaction prohibition to 
transactions ``directly related to the same municipal securities 
transaction or municipal financial product'' is vague or overly 
broad.\126\ One of the commenters proposed alternative language 
prohibiting a principal transaction ``if the structure, timing or terms 
of such principal transaction was established on the advice of the 
municipal advisor. . . .'' \127\ The commenter also requested 
clarification regarding the application of the principal transaction 
ban to several specific scenarios.\128\
---------------------------------------------------------------------------

    \126\ See letters from BDA dated May 29, 2015; GKB dated May 29, 
2015; and SIFMA dated May 28, 2015.
    \127\ See letters from BDA dated May 29, 2015 and GKB dated May 
29, 2015.
    \128\ See BDA letter dated May 29, 2015.
---------------------------------------------------------------------------

    SIFMA argued that any prohibition should be more narrowly tailored 
to prevent principal transactions directly related to the advice 
provided by the municipal advisor.\129\ SIFMA believed that, as 
written, the prohibition would prevent a firm from acting as 
counterparty on a swap after having advised a municipal entity client 
on investing proceeds from a connected issuance of municipal 
securities. SIFMA proposed alternative language prohibiting principal 
transactions ``directly related to the advice rendered by such 
municipal advisor.'' SIFMA also requested clarification regarding when 
a ban would end because as written, the prohibition would require firms 
to check for advisory relationships that may have ended long before the 
proposed principal transaction takes place.
---------------------------------------------------------------------------

    \129\ See SIFMA letter dated May 28, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, SIFMA commented that the 
MSRB failed to consider a suggestion to amend the ban to limit its 
scope to principal transactions that are directly related to the advice 
provided by the municipal advisor.\130\
---------------------------------------------------------------------------

    \130\ See SIFMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    In response to the comments, the MSRB determined not to narrow, 
broaden or otherwise modify the standard in this regard.\131\ The MSRB 
stated its belief that the alternative rule text suggested by SIFMA 
would not be a more effective or efficient means for achieving the 
stated objective of the proposed ban, which is to eliminate a category 
of particularly acute conflicts of interest that would arise in a

[[Page 81628]]

fiduciary relationship between a municipal advisor and its municipal 
entity client. In this context, the MSRB noted that the suggested 
change could leave transactions that have a high risk of self-dealing 
insufficiently addressed.
---------------------------------------------------------------------------

    \131\ See MSRB Response Letters.
---------------------------------------------------------------------------

    The MSRB modified the proposed ban to incorporate the Exception, 
discussed below under ``Exception to Prohibited Principal 
Transactions.'' In light of the MSRB's incorporation of the Exception, 
the MSRB stated its belief that it is not appropriate to further modify 
the ban at this time.\132\
---------------------------------------------------------------------------

    \132\ See December Response Letter.
---------------------------------------------------------------------------

5. Affiliates or ``Remote Businesses''
    In response to the Proposing Release, SIFMA and Wells Fargo 
addressed concerns regarding the impact of the principal transaction 
prohibition on affiliates of municipal advisors.\133\ Wells Fargo 
stated that the MSRB should exempt municipal advisor affiliates 
operating with information barriers, and stated that if an affiliate 
has no actual knowledge of the municipal advisory relationship between 
the municipal entity client and the municipal advisor due to 
information barriers and governance structures, the risk of a conflict 
of interest is significantly diminished.\134\ SIFMA proposed the 
addition of a knowledge standard (i.e., to prohibit a municipal advisor 
and any affiliate from knowingly engaging in a prohibited principal 
transaction), arguing that such a knowledge standard is consistent with 
Section 206(3) of the Advisers Act.\135\ SIFMA suggested that an 
investment vehicle such as a mutual fund that is advised by a municipal 
advisor or its affiliate should not itself be an ``affiliate'' of the 
municipal advisor solely on the basis of the advisory relationship. 
Otherwise, SIFMA argued the investment fund may be unable to invest in 
a municipal security if an affiliate of the fund's advisor acted as a 
municipal advisor on the transaction. SIFMA stated that the ban in this 
type of situation is unnecessary because mutual funds and similar 
vehicles have independent boards and their affiliates do not have 
significant equity stakes in the funds they advise.
---------------------------------------------------------------------------

    \133\ See letters of SIFMA dated May 28, 2015 and Wells Fargo 
dated May 29, 2015.
    \134\ See Wells Fargo letter dated May 29, 2015.
    \135\ See SIFMA letter dated May 28, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, SIFMA commented that the 
MSRB failed to consider limiting the application of the ban to 
affiliates of a municipal advisor that have no knowledge of the 
municipal advisory engagement, or more broadly to affiliates and 
business units of the municipal advisor that have no such 
knowledge.\136\ SIFMA commented that the proposed rule would 
``significantly harm competition'' because it would lead to municipal 
advisor firms exiting the municipal advisory marketplace. SIFMA 
commented that a decrease in municipal advisors may result in the 
remaining firms increasing their fees and a deterioration in the 
quality of the services provided by municipal advisory firms.
---------------------------------------------------------------------------

    \136\ The MSRB responded to a prior comment by SIFMA regarding 
this matter, stating that SIFMA's suggestion to add a knowledge 
qualifier would be overly stringent, which could hinder regulatory 
examinations and enforcement. See August Response Letter.
---------------------------------------------------------------------------

    In response to the comments, the MSRB stated its belief that the 
proposed ban, as to affiliates, is appropriately targeted given the 
acute nature of the conflicts of interest presented and the risk of 
self-dealing by affiliates in transactions that are ``directly 
related'' to the municipal securities transaction or municipal 
financial product as to which the affiliated municipal advisor has 
provided advice.\137\ The MSRB believes that the concerns expressed by 
various commenters, including the concerns regarding the potential 
impact on competition in the municipal advisory marketplace, will be 
substantially mitigated, if they at all manifest, by the MSRB's 
inclusion of the Exception to the principal transaction ban.
---------------------------------------------------------------------------

    \137\ See December Response Letter.
---------------------------------------------------------------------------

6. Bank Loans
    Several commenters expressed concerns with proposed paragraph .11 
of the Supplementary Material under which a bank loan would be subject 
to the prohibition on principal transactions if the loan was ``in an 
aggregate principal amount of $1,000,000 or more and economically 
equivalent to the purchase of one or more municipal securities.'' \138\
---------------------------------------------------------------------------

    \138\ See letters from ABA dated May 29, 2015; Millar Jiles 
dated May 29, 2015; BDA dated May 29, 2015; and Zions dated May 29, 
2015.
---------------------------------------------------------------------------

    ABA expressed a general concern that banking organizations that are 
required to operate through a variety of affiliates and subsidiaries 
would fall within the scope of the ``common control'' definition in the 
statute and the prohibition would prevent a banking organization from 
providing ordinary bank services to a municipal entity.\139\ ABA also 
requested the prohibition be amended to exclude bank loans made by an 
affiliate from the definition of ``other similar financial products'' 
if the bank enters into the loan after the municipal entity solicits 
bidders for such loan using a request for proposal and the bank intends 
to hold the loan on its books until maturity. ABA believed that there 
should be few concerns regarding conflicts if a loan is entered into by 
an affiliate of a municipal advisor and a municipal entity would be 
free to choose its lender based on factors most appropriate for the 
municipality and its taxpayers. In addition, ABA stated that the 
potential conflicts of interest should be substantially mitigated if a 
bank holds a loan on its books to maturity because in such cases, the 
commenter believes the interest of the municipal entity and the bank 
are aligned in that each party wants funding that serves the particular 
needs of the municipal entity and both parties must be satisfied that 
the loan can be repaid and desire that it be repaid.\140\
---------------------------------------------------------------------------

    \139\ See ABA letter dated May 29, 2015.
    \140\ Id.; see also Zions letter dated May 29, 2015.
---------------------------------------------------------------------------

    Similarly, Millar Jiles suggested that a municipal advisor should 
be able to satisfy its fiduciary obligation to a municipal entity by 
procuring bids for the proposed financing (and thus make a principal 
bank loan through an affiliated entity permissible), stating that if 
the affiliate of the municipal advisor were the lowest bidder, the 
municipality would be penalized by being forced to borrow at a higher 
rate under the proposed rule change.\141\
---------------------------------------------------------------------------

    \141\ See Millar Jiles letter dated May 29, 2015.
---------------------------------------------------------------------------

    The MSRB responded that even if both elements (i.e., the use of an 
RFP and intent to hold a loan to maturity) were incorporated as 
conditions to exclude certain principal transactions from the 
prohibition in Proposed Rule G-42(e)(ii), the conflicts of interest are 
not sufficiently mitigated to eliminate the concerns of overreaching 
and self-dealing and other actions inconsistent with the fiduciary duty 
between a municipal and its client.\142\ The MSRB reasoned that the 
bank and borrower are counterparties with conflicting interests, and a 
lender's intent at one point in time to hold a loan on its books until 
maturity would provide insufficient controls or checks over conflicts 
of interest inherent in the transaction. The MSRB explained that at any 
time after making the loan, a bank would be free to change its intent 
and sell the loan if doing so was in the bank's best interest. The MSRB 
also stated its belief that an RFP process does not protect a municipal 
entity sufficiently from conflicts of interest because, for example, a 
municipal advisor may be able to inappropriately influence the 
municipal entity client to obtain a loan instead of issuing a municipal 
security,

[[Page 81629]]

or to influence the RFP process or requirements to favor the selection 
of the municipal advisor's bank affiliate as lender.
---------------------------------------------------------------------------

    \142\ See August Response Letter.
---------------------------------------------------------------------------

    Zions argued that bank loans ``should be excluded in their 
entirety'' from Proposed Rule G-42.\143\ Zions believed that it would 
be paradoxical to allow individuals and private businesses to borrow 
money from banks that are fiduciaries, but to prevent municipal 
entities from doing the same. Alternatively, Zions requested that MSRB 
increase the threshold loan amount in paragraph .11 of the 
Supplementary Material to align with the bank qualified exemption 
amount in the Internal Revenue Code, which it states is currently $10 
million.
---------------------------------------------------------------------------

    \143\ See Zions letter dated May 29, 2015.
---------------------------------------------------------------------------

    In response to Zions's comments, the MSRB noted that proposed 
paragraph .12, on principal transactions--other similar financial 
products, is limited substantially and would target only those loans 
that would be the same as, or directly related to, the municipal 
securities transaction or municipal financial product as to which the 
municipal advisor is providing or has provided advice and which would 
be considered ``economically equivalent to the purchase of one or more 
municipal securities.'' \144\ The MSRB also responded to the comments 
regarding increasing the threshold from $1 million to $10 million by 
stating the same threshold is used in other aspects of the regulation 
of municipal securities such as SEC Rule 15c2-12,\145\ and that after 
the MSRB has experience with the rule as in effect, the MSRB may 
solicit information regarding whether the threshold should be modified.
---------------------------------------------------------------------------

    \144\ See August Response Letter.
    \145\ 17 CFR 240.15c2-12(a).
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, Zions commented that the 
principal transaction ban is overly broad and inconsistent with federal 
banking laws, and, as an alternative to generally permitting principal 
transactions (subject to disclosure and consent requirements), bank 
loans should be excluded in their entirety from the ban.\146\ Zions 
commented that banks, as highly regulated entities, should be allowed 
to continue offering traditional banking services to municipal 
entities, including as principal. Zions further commented that 
determining on a case-by-case basis whether a particular transaction is 
economically equivalent to the purchase of one or more municipal 
securities is unnecessarily complex and costly for products that are 
already thoroughly regulated. As an example of the complexity of 
applying the standard, Zions stated that the written evidence of 
indebtedness from municipal entities must have virtually the same 
structure and provisions that would be in place for a municipal 
security. Zions stated that the only clear way to distinguish between 
direct bank loans and municipal securities is to look at the intent of 
the acquirer at the time of acquisition. In Zions's view, if the 
indebtedness is acquired with an intent to distribute, the instrument 
should be deemed a security, but if a bank acquires the indebtedness 
directly for its own portfolio with no intent to distribute, the 
instrument is, and should be treated as, a bank loan. If bank loans are 
potentially subject to the ban, Zions suggested, as an alternative, 
that the threshold bank loan amount be higher than $1 million. Zions 
believed that the threshold amount should be consistent with, and 
pegged to, the $10 million threshold for bank-qualified obligations 
under Section 265 of the Internal Revenue Code.\147\ In addition, Zions 
commented that, for the Proposed Rule to be consistent with the 
Exchange Act, the proposed threshold should be raised to $10 million. 
Zions also commented that unless the threshold amount was increased, 
the proposed ban would be inconsistent with the goals of the Community 
Reinvestment Act (``CRA'').\148\ Zions believed that the ban may 
prevent municipal advisors, such as Zions, from issuing direct loans to 
smaller and more remote municipal entities and/or cause banks to 
provide services to underserviced municipalities in less than all three 
of the required categories of the CRA (i.e., lending, investments and 
financial services).
---------------------------------------------------------------------------

    \146\ See Zions letter dated September 10, 2015.
    \147\ 26 U.S.C. 265 et seq.
    \148\ 12 U.S.C. 2901 et seq.
---------------------------------------------------------------------------

    In response to Zions's comments, the MSRB stated that the concerns 
are addressed to some extent by the bank exemption from the definition 
of ``municipal advisor.'' \149\ In addition, the MSRB stated that even 
in situations where a bank's provision of advice were not exempt and 
Proposed Rule G-42 and the ban applied, Zions's concerns referenced 
above and its concern regarding the impact to smaller communities or 
projects in such communities as a result of the proposed ban, should be 
substantially ameliorated because the MSRB has added the Exception. The 
MSRB explained that bank loans were included in the ban and should 
remain as a ``similar financial product'' because, as a matter of 
market practice, bank loans serve as a financing alternative to the 
issuance of municipal securities and pose a comparable, acute potential 
for self-dealing and other breaches of the fiduciary duty owed by a 
municipal advisor to a municipal entity client. The MSRB also stated 
that it does not find support in the comments for importing into the 
proposed term ``Other Similar Financial Products'' an unrelated dollar 
threshold (i.e., $10 million) from a statutory provision regarding the 
bank qualification of municipal securities, in lieu of the proposed $1 
million threshold.
---------------------------------------------------------------------------

    \149\ See December Response Letter (citing 17 CFR 240.15Ba1-
1(d)(e)(iii)).
---------------------------------------------------------------------------

    In response to Zions's comments that the principal transaction ban 
should be eliminated because of its possible impact on the CRA, the 
MSRB noted that the proposed prohibition on principal transactions is 
narrowly targeted and would have a limited impact on a municipal 
advisor or its affiliate providing loans and financial services, 
generally. The MSRB also stated that Zions's comments do not 
demonstrate--and the MSRB is not aware of any indication--that Congress 
intended the requirements of the CRA to take precedence over other 
statutory and regulatory requirements.
    BDA commented on the language of paragraph .11 of the Supplementary 
Material, arguing that the phrase ``economically equivalent'' is ``too 
ambiguous and does not provide clarity.'' \150\ BDA acknowledged this 
phrase appeared intended to develop a standard that does not require 
the determination of when a bank loan constitutes a security, and 
acknowledged difficulties applying the Reves \151\ test to make such a 
determination. However, BDA argued that this language will ``compound 
the confusion'' and requested that the MSRB be clear about which 
structural components of a direct purchase structure would cause it to 
fall within the scope of the transaction ban.
---------------------------------------------------------------------------

    \150\ See BDA letter dated May 29, 2015.
    \151\ Reves v. Ernst & Young, 494 U.S. 56 (1990).
---------------------------------------------------------------------------

    The MSRB responded that not all loans of $1 million or more would 
be considered an ``other similar financial product,'' and that 
determination would depend on the facts and circumstances regarding a 
particular loan, including structure and marketing.\152\ In response to 
BDA's comment about applying the Reves test, the MSRB stated that Reves 
would not be the appropriate test to determine whether a bank loan is 
considered an ``other similar financial product,'' because the defined 
term is drafted intentionally to include bank

[[Page 81630]]

loans other than those that are a security.
---------------------------------------------------------------------------

    \152\ See August Response Letter.
---------------------------------------------------------------------------

    Millar Jiles also expressed confusion regarding the ``economically 
equivalent'' language.\153\ Millar Jiles requested clarity regarding 
the time period over which bank loans should be aggregated in order to 
determine whether a series of loans meets the ``aggregate principal 
amount'' threshold specified in paragraph .11 of the Supplementary 
Material. Millar Jiles also noted that the typical bank loan to a 
municipal entity is for the purchase of equipment and is payable over a 
term of less than five years, while the typical municipal security is 
secured by a pledge of revenues and is payable over a much longer term. 
Millar Jiles asked whether a bank loan of $1,500,000 which is secured 
by real or personal property and which is payable over a term of five 
years or less would be ``economically equivalent to the purchase of one 
or more municipal securities.''
---------------------------------------------------------------------------

    \153\ See Millar Jiles letter dated May 29, 2015.
---------------------------------------------------------------------------

    In response to Millar Jiles's comments, the MSRB stated that 
whether one or more loans would be aggregated to reach the $1 million 
threshold would depend on the facts and circumstances surrounding the 
transactions, including but not limited to factors such as how close in 
time to the other the loans occurred, the purpose of each loan and the 
similarity of purpose among the loans, and whether such loans are 
components of a more comprehensive plan of financing. The MSRB 
clarified that no single factor would be determinative in such an 
analysis.
7. Separate Registered Municipal Advisor
    SIFMA suggested the proposed subsection (e)(ii) be revised to 
permit an otherwise prohibited principal transaction where the 
municipal entity is represented by more than one municipal advisor, 
including a separate registered municipal advisor with respect to the 
principal transaction.\154\ SIFMA argued this exemption would be 
comparable to the independent registered municipal advisor exemption, 
and would permit municipal entities to contract with a counterparty of 
their choice. SIFMA also noted this would be especially beneficial to 
municipal entities who may hire several municipal advisors for 
different elements of the same transaction.
---------------------------------------------------------------------------

    \154\ See SIFMA letters dated May 28, 2015 and September 11, 
2015.
---------------------------------------------------------------------------

    The MSRB concluded that the incorporation at this stage of an 
exception to the ban like that suggested by SIFMA would be premature, 
add additional and unnecessary complexity, and be potentially 
burdensome to administer.\155\ To provide appropriate protection to 
municipal entities while including an exception such as that suggested 
by SIFMA, it likely would be necessary to impose a number of 
conditions, as the MSRB previously noted.\156\ The MSRB believes that 
the Exception to the proposed ban is the more appropriate approach to 
maintain the necessary protections for municipal entities, investors 
and the public while helping to ensure that issuers will continue to 
have access to a competitive market for municipal advisory and other 
financial services. The MSRB believes the Exception will provide a 
useful, practical path for a municipal advisor that is otherwise 
prohibited from engaging in certain principal transactions with its 
municipal entity client to do so, subject to the stated terms and 
conditions, and the MSRB has proposed the Exception to be responsive to 
the comments from a range of commenters, including SIFMA.
---------------------------------------------------------------------------

    \155\ See December Response Letter.
    \156\ See August Response Letter (identifying some of the 
substantial additional relationship documentation that likely would 
be required).
---------------------------------------------------------------------------

8. Governing Body Approval
    In response to Amendment No. 1 or the OIP, BDA suggested that the 
principal transaction ban be amended not only for municipal advisors 
providing advice in connection with the trading as principal of 
securities, but also to allow most principal transactions if the 
transaction is approved by the governing body of the municipal entity 
client after the governing body has been fully informed about any 
actual or potential conflicts of interest associated with the principal 
transaction.\157\
---------------------------------------------------------------------------

    \157\ See BDA letter dated November 4, 2015.
---------------------------------------------------------------------------

    In response to BDA's comment, the MSRB stated that BDA's proposed 
exception was quite broadly drawn and may, in many instances, not 
address the type of self-dealing transactions and the resulting abuses 
from self-dealing that the statutory requirements and the developing 
regulatory framework for municipal advisors were intended to 
address.\158\ Even if both conditions (i.e., disclosure of potential 
and actual conflicts of interest and a vote approving the transaction) 
were incorporated in an exception of the scope suggested by BDA, the 
MSRB believes that the conflicts of interest of the municipal entity's 
counter-party--its own municipal advisor--would be fully present, and 
not sufficiently mitigated to eliminate or substantially reduce the 
concerns of overreaching and self-dealing and other actions 
inconsistent with the fiduciary duty of the municipal advisor. The MSRB 
believes that the Exception to the proposed principal transaction ban 
is responsive to the concerns raised by the BDA generally.
---------------------------------------------------------------------------

    \158\ See December Response Letter.
---------------------------------------------------------------------------

9. Exception to Principal Transaction Ban
    In response to Amendment No. 2, the SEC received six comment 
letters on the principal transaction ban and the proposed 
Exception.\159\ NAMA supported the proposed rule change, as amended by 
Amendment No. 1 and Amendment No. 2, and urged the SEC to approve it 
``without further erosion of the important principal transaction ban 
that is in place to protect issuers.'' \160\ NAMA stated its belief 
that the Exception is sufficient to accomplish the proposed rule's 
objective ``in light of the difficulties principal transactions 
raise.''
---------------------------------------------------------------------------

    \159\ See letters from BDA dated December 1, 2015; FSI dated 
December 1, 2015; GFOA dated December 1, 2015; NAMA dated December 
7, 2015; SIFMA dated December 1, 2015; and Spencer Wright dated 
December 16, 2015.
    \160\ See NAMA letter dated December 7, 2015.
---------------------------------------------------------------------------

    SIFMA commented that the Exception shows movement toward a more 
workable construct than the complete principal transaction ban, but 
that ``importing into the Exception all of the procedural accoutrements 
of Section 206(3) and Rule 206(3)-3T, adopted in another context,'' has 
resulted in the Exception being unreasonably limited and unworkable in 
practice.\161\ SIFMA also commented that the Exception's requirements 
for the alternative under proposed paragraph .14(d)(2) of the 
Supplementary Material to obtain additional transaction-by-transaction 
consent undermines the utility of obtaining advance written consent, 
and presents challenging issues of documentation and recordkeeping. 
SIFMA stated that it would present unworkable challenges to the 
municipal advisor and municipal entities that may seek to execute 
ordinary course transactions ``several times per day or more.'' SIFMA 
stated that the procedural requirements included in proposed paragraph 
.14(d)(2), in the context of Advisers Act Rule 206(3)-3T,\162\ have 
discouraged broker-dealers from relying on that rule and have limited 
its ultimate utility.
---------------------------------------------------------------------------

    \161\ See SIFMA letter dated December 1, 2015.
    \162\ 17 CFR 275.206(3)-3T.
---------------------------------------------------------------------------

    BDA acknowledged that the Exception has addressed what it termed 
``marginal considerations surrounding

[[Page 81631]]

the principal transactions ban,'' but, in its view, an exception would 
not be ``meaningful and useful'' unless the municipal advisor could 
``provide[] advice to the municipal entity in connection with the 
issuance of municipal securities the proceeds of which are being 
invested.'' \163\ BDA also commented that the consent and disclosure 
requirements are too burdensome to be useful, and, as a practical 
matter, the provisions would require transaction-by-transaction written 
consent since the alternative (to obtaining such consents) is too 
extensive to make it worth a dealer's effort. BDA recognized that the 
MSRB followed the principles in the investment adviser context, but 
believed that the approach ``does not take into consideration the vast 
differences between brokerage operations and investment advisory 
operations.''
---------------------------------------------------------------------------

    \163\ See BDA letter dated December 1, 2015.
---------------------------------------------------------------------------

    In response to these comments, the MSRB first explained that the 
issues raised by the Exception arise with respect to a limited universe 
of municipal advisory activities--namely, advising with respect to the 
investment of proceeds of municipal securities or municipal escrow 
investments.\164\ Next, the MSRB explained that advising with respect 
to the investment of municipal bond proceeds or municipal escrow 
investments falls under the municipal advisor regulatory regime only if 
no exclusion or exemption is available. The MSRB stated:
---------------------------------------------------------------------------

    \164\ See December Response Letter.

    If the firm is an investment adviser registered under the 
Advisers Act, the giving of investment advice on the investment of 
proceeds of municipal securities and municipal escrow investments 
can be excluded. If the municipal entity makes a qualifying request 
for proposals (``RFP'') or request for qualifications (``RFQ'') on 
the investment of proceeds of municipal securities or on municipal 
escrow investments, or a qualifying mini-RFP or mini-RFQ, the giving 
of advice in response can be exempt. If the municipal entity relies 
on the advice of an independent registered municipal advisor 
(``IRMA'') with respect to the same aspects of the investment of 
proceeds of municipal securities or municipal escrow investments, 
the firm's giving of advice can be exempt, subject to certain 
procedural requirements. Additionally, if a firm selling investments 
provides general information but no SEC-defined ``advice,'' then the 
firm need not rely on any exclusion or exemption at all.\165\
---------------------------------------------------------------------------

    \165\ See id. (citations omitted).

    The MSRB explained that it is generally only beyond all of these 
scenarios that a firm could be subject to Proposed Rule G-42 and the 
principal transaction ban based on the providing of advice on the 
investment of bond proceeds or municipal escrow investments.
    The MSRB further responded to commenters' concerns by stating that 
it crafted the Exception to the principal transaction ban drawing on 
Section 206(3) of the Advisers Act \166\ and the IA Rule. The MSRB 
explained that its approach was influenced by a number of 
considerations, and stated that highly important among them were the 
recurring urgings by commenters during the development of Proposed Rule 
G-42 that the MSRB look to the regulatory regime applicable to 
investment advisers that provides such advisers the ability to engage 
in principal transactions with their clients, subject to requirements 
that include providing full disclosure and obtaining informed consent. 
The MSRB also noted that the IA Rule has been consistently considered 
by representatives of the industry, including SIFMA, to be operating as 
intended, well protecting investors, and extensively relied upon.
---------------------------------------------------------------------------

    \166\ 15 U.S.C. 80b-6(3).
---------------------------------------------------------------------------

    GFOA expressed a concern that the procedural requirements of the 
Exception would be too complex or burdensome and render the relief 
intended to be granted ``illusory.'' \167\ GFOA stated that this has 
proved to be the case with similar requirements that apply to principal 
transactions by investment advisers. GFOA acknowledged, however, that 
in some respects it would ``need feedback from dealers before reaching 
[a] conclusion'' regarding the workability of the Exception, 
recognizing that its members are, of course, not broker-dealers.
---------------------------------------------------------------------------

    \167\ See GFOA letter dated December 1, 2015.
---------------------------------------------------------------------------

    In response to GFOA's comments, the MSRB stated that it is clear 
from repeated commentary by representatives of broker-dealers and 
supporting data, that similar provisions for investment advisers have 
been manageable and relied upon extensively, providing an ample basis 
to believe that the similar approach in proposed paragraph .14(d)(2) of 
the Supplementary Material will be useful and workable for a 
significant portion of those firms that wish to use an option under the 
Exception.
    GFOA asked whether the consent required to be obtained under 
proposed paragraph .14(d)(1) of the Supplementary Material may be oral 
as opposed to written. The MSRB responded that oral consent would be 
sufficient under proposed paragraph .14(d)(1).\168\
---------------------------------------------------------------------------

    \168\ See December Response Letter.
---------------------------------------------------------------------------

    GFOA also asked whether certain communications that would be 
required to be made in writing under the Exception may be made through 
email. In response, the MSRB stated that such communications may be 
made by email, provided the municipal advisor satisfies the same 
procedural conditions that the SEC applies to an investment adviser 
when communicating with customers via email as set forth in SEC 
guidance regarding the use of electronic media.\169\
---------------------------------------------------------------------------

    \169\ See id. (citing Securities Act Release No. 7288 (May 9, 
1996), 61 FR 24644 (May 15, 1996), SEC Interpretation of Use of 
Electronic Media by Broker-Dealers, Transfer Agents, and Investment 
Advisers for Delivery of Information (listing Section 206(3) as a 
provision to which the interpretation applies), available at: 
https://www.sec.gov/rules/interp/33-7288.txt).
---------------------------------------------------------------------------

    GFOA asked whether a broker-dealer that has provided advice to a 
municipal entity based on one of the exclusions or exemptions to the 
definition of ``municipal advisor'' (e.g., the underwriter exclusion) 
would be able to sell investments of bond proceeds to that municipal 
entity as principal, assuming that the requirements of proposed 
paragraph .14 are met. The MSRB stated that it assumes that, although 
not stated explicitly by GFOA, the firm in this scenario also would be 
providing advice on the investment of bond proceeds, without the 
availability of an exclusion or exemption for that advice. Otherwise, 
as the MSRB explained, the firm would not be a municipal advisor to the 
municipal entity and subject to Rule G-42 and the principal transaction 
ban. A firm in this scenario would not be specifically prohibited by 
the principal transaction ban from selling investments of bonds 
proceeds to a municipal entity as principal, assuming all of the 
limitations and conditions of proposed paragraph .14 are met.
    GFOA asked why a broker-dealer that is a municipal advisor must, 
under MSRB Rule G-3,\170\ pass the municipal advisor representative 
professional qualifications examination (Series 50) to sell 
``Treasuries, agencies, and corporate debt securities when bond 
proceeds are invested, while the Series 7 suffices for the same broker 
to sell the same securities to a municipal entity when the funds 
invested are not bond proceeds.'' In response to this question, the 
MSRB explained the definition of ``municipal advisor'' in the SEC Final 
Rule and recounted the purpose of the

[[Page 81632]]

rulemaking on Rule G-3, on professional qualification 
requirements.\171\
---------------------------------------------------------------------------

    \170\ MSRB Rule G-3(d)(ii)(A) provides that: ``Every municipal 
advisor representative shall take and pass the Municipal Advisor 
Representative Qualification Examination [(also known as the Series 
50 Examination)] prior to being qualified as a municipal advisor 
representative. The passing grade shall be determined by the 
Board.''
    \171\ See December Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 2, SIFMA expressed a concern that the 
Exception would be available, according to proposed paragraph .14(a) of 
the Supplementary Material, only to a firm that is a registered broker-
dealer and only for accounts subject to the Exchange Act, and the rules 
thereunder, and the rules of self-regulatory organization(s) of which 
it is a member.\172\ SIFMA stated that the registration requirement is 
``unnecessary'' and that the policy rationale for requiring the 
relevant account to be subject to Exchange Act regulation is 
``unclear.'' SIFMA recognized that the SEC included these same 
requirements in the IA Rule, but commented that these requirements only 
exist in that rule due to the historical context in which the decision 
in Financial Planning Association v. SEC (``FPA'') \173\ effectively 
required certain brokerage accounts to be treated as advisory accounts. 
SIFMA suggested that the Exception should be available to a firm that 
relies on an exemption from broker-dealer registration, such as a bank. 
In response to SIFMA's comment, the MSRB stated that the SEC's adopting 
release for the IA Rule indicates that, although historical context 
gave the SEC occasion to consider the IA Rule, the SEC also explained 
that:
---------------------------------------------------------------------------

    \172\ See SIFMA letter dated December 1, 2015.
    \173\ Financial Planning Association v. SEC, 482 F.3d 481 (D.C. 
Cir. 2007).

[A] principal consideration in including the requirements was that 
broker-dealers and their employees ``must comply with the 
comprehensive set of Commission and self-regulatory organization 
sales practice and best execution rules that apply to the 
relationship between a broker-dealer and its customer . . . .'' 
\174\
---------------------------------------------------------------------------

    \174\ See December Response Letter (citing Advisers Act Release 
No. 2653 (September 24, 2007), at 28, 72 FR 55022, at 55029 
(September 28, 2007) (Temporary Rule Regarding Principal Trades with 
Certain Advisory Clients); see also Advisers Act Release No. 3128 
(December 28, 2010), at 22, 75 FR 82236, at 82241 (December 30, 
2010) (Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients) (``The condition that advisers seeking to rely on 
the rule must also be registered as broker-dealers and that each 
account with respect to which an adviser seeks to rely on the rule 
must be a brokerage account subject to the Exchange Act, and the 
rules thereunder, and the rules of the self-regulatory 
organization(s) of which it is a member, reflect what we believe is 
an important element of our balancing between easing regulatory 
burdens (by affording advisers an alternative means of compliance 
with section 206(3) of the Act) and meeting our investor protection 
objectives.'')).

    The MSRB stated that it similarly considers it necessary that 
transactions in reliance on the Exception be executed under this 
comprehensive set of investor protections. In response to SIFMA's 
concern regarding banks, the MSRB notes that the SEC has provided an 
exemption from the municipal advisor definition for banks providing 
advice on multiple subjects, which could mean that a bank engaging in 
particular principal transactions would not be subject to Proposed Rule 
G-42 at all.
    FSI and SIFMA expressed concerns regarding the requirement, as part 
of the option under proposed paragraph .14(d)(2), that the municipal 
advisor provide its client with an annual summary statement.\175\ SIFMA 
commented that the annual disclosure requirement and the special 
confirmation disclosure requirements are unwieldy and duplicative.\176\ 
SIFMA also commented that both of these would require firms to 
implement costly operational changes. SIFMA further commented that it 
is unclear that municipal entity clients would benefit from these 
disclosures, having previously provided (and not having revoked) their 
consent to principal transactions, and receiving the ordinary 
confirmation disclosure required under Exchange Act Rule 10b-10 that 
would disclose the capacity in which the broker-dealer acted.
---------------------------------------------------------------------------

    \175\ See letters from FSI dated December 1, 2015 and SIFMA 
dated December 1, 2015.
    \176\ See SIFMA letter dated December 1, 2015.
---------------------------------------------------------------------------

    The MSRB first noted that a municipal advisor that considers the 
alternative provided under proposed paragraph .14(d)(1) comparatively 
more cost-effective, may make transaction-by-transaction written 
disclosure and obtain written or oral consent under that provision and 
not be subject to the additional procedural requirements under proposed 
paragraph.14(d)(2) to make use of the Exception.\177\ Second, the MSRB 
explained that the annual summary statement requirement is designed to 
ensure that clients receive a periodic record of the principal trading 
activity in their accounts and are afforded an opportunity to assess 
the frequency with which their adviser engages in such trades. It 
stated that when the requirement was adopted as part of the IA Rule in 
2007, the concept of an annual summary of transactions involving 
particular conflicts of interest was not novel, as it was derived from 
the cross-trade rule under the Advisers Act. The MSRB stated its belief 
that an annual summary of all principal transactions, which are 
executed subject to conflicts of interest where certain disclosures 
have been made and consents obtained, would be particularly beneficial 
to officials of municipal entities, including newly elected or 
appointed officials who, upon their election or appointment, may be 
required to review thoroughly and expeditiously the municipal entity's 
prior transactions and relationships with financial intermediaries to 
determine whether the same course with the same intermediaries should 
continue.
---------------------------------------------------------------------------

    \177\ See December Response Letter.
---------------------------------------------------------------------------

    The MSRB also responded that the confirmation disclosure 
requirement, like the similar requirement under the IA Rule, is 
designed to ensure that clients are given a written notice and reminder 
of each transaction that the municipal advisor effects on a principal 
basis and that conflicts of interest are inherent in such transactions. 
The MSRB explained that, like under the IA Rule, a firm relying on 
proposed paragraph .14(d)(2) need not send a duplicate confirmation and 
may include additional required disclosures on a confirmation otherwise 
sent to a customer with respect to a particular principal transaction.
    BDA commented that the option under proposed paragraph .14(d)(2) 
would not be meaningful or useful in part because, under proposed 
paragraph.14(d)(2)(A), neither the firm nor any affiliate would be 
permitted to be, at the time of a sale, an underwriter of the 
security.\178\ The MSRB responded that it believes this is an important 
municipal entity protection measure in scenarios where the municipal 
advisor is not making transaction-by-transaction written 
disclosure.\179\
---------------------------------------------------------------------------

    \178\ See BDA letter dated December 1, 2015.
    \179\ See December Response Letter.
---------------------------------------------------------------------------

    SIFMA and FSI objected to the exclusion from the Exception of 
transactions in connection with municipal escrow investments, and 
suggested that the Exception be extended.\180\ The MSRB explained that 
the Exception does not so extend because the MSRB believes this is an 
area of heightened risk where, historically, significant abuses have 
occurred.\181\
---------------------------------------------------------------------------

    \180\ See letters from FSI dated December 1, 2015 and SIFMA 
dated December 1, 2015.
    \181\ See December Response Letter.
---------------------------------------------------------------------------

    SIFMA commented that the Exception should extend to the purchase 
and sale of money market instruments, commercial paper, certificates of 
deposit and other deposit instruments.\182\ In SIFMA's view, there is 
no municipal entity protection reason to exclude them. Similarly, 
Spencer Wright

[[Page 81633]]

commented that a ban on offering money market securities would 
adversely affect governments and limit their investment choices.\183\
---------------------------------------------------------------------------

    \182\ See SIFMA letter dated December 1, 2015.
    \183\ See Spencer Wright letter dated December 16, 2015.
---------------------------------------------------------------------------

    The MSRB responded that the designated class of securities for 
purposes of the Exception is intended to address comments previously 
submitted that an absolute ban on principal transactions in fixed 
income securities, which are frequently sold by broker-dealers as 
principal or riskless principal, would be particularly problematic and 
such a ban would impose a substantial burden on municipal 
entities.\184\ The MSRB also explained that municipal entities seeking 
to purchase or sell money market instruments and receive related advice 
would have sufficient access and flexibility to choose among various 
providers. In addition, the MSRB stated that it limited the fixed 
income securities for which the Exception is available to generally 
relatively liquid fixed income securities trading in relatively 
transparent markets, in order to raise significantly less risk for 
municipal entity clients. The MSRB does not believe it is appropriate 
to amend it to include this group of fixed income securities prior to 
implementing the Exception and reviewing its impact on the market.
---------------------------------------------------------------------------

    \184\ See December Response Letter.
---------------------------------------------------------------------------

    SIFMA commented that it was unclear whether the Exception would 
extend to the affiliates of a municipal advisor, and that there does 
not appear to be any reason to permit a municipal advisor (if also a 
broker-dealer) to benefit from the Exception, and not similarly allow 
an affiliate (if also a broker-dealer, or if exempt from registration 
as a broker-dealer) to benefit from the Exception.\185\ In response, 
the MSRB stated that the language of proposed paragraph .14 of the 
Supplementary Material makes clear that the use of the Exception would 
be limited to the municipal advisor and would not extend to its 
affiliates.\186\ The MSRB explained that the Exception was designed to 
provide municipal entities access to services from known financial 
intermediaries with whom they have a relationship, and simultaneously 
to address and mitigate certain conflicts of interest when a single 
entity would provide advice that constitutes municipal advisory 
activity to its municipal entity client and also engage in a principal 
transaction with such client.
---------------------------------------------------------------------------

    \185\ See SIFMA letter dated December 1, 2015.
    \186\ See December Response Letter.
---------------------------------------------------------------------------

    SIFMA, in response to Amendment No. 2, commented that it would be 
impractical for a firm relying on the Exception to comply with the 
conflicts disclosure and relationship documentation requirements of 
proposed sections (b) and (c), particularly on a transaction-by-
transaction basis.\187\ In response, the MSRB stated that the duties 
and obligations of a municipal advisor under Proposed Rule G-42 
regarding the disclosures of conflicts of interest and other 
information and municipal advisory relationship documentation should 
not be waived or diminished because a municipal advisor uses the 
Exception under proposed paragraph .14.\188\ The MSRB further explained 
that the ban, to which the Exception relates, only would apply in the 
case of clients that are municipal entities, meaning the disclosures 
and documentation at issue will always be in support of the fulfillment 
of a fiduciary duty. In addition, the MSRB stated that the proposed 
requirements under proposed sections (b) and (c) to provide disclosure 
of conflicts of interest and other information to a client and document 
the municipal advisory relationship, respectively, are separate and 
distinct requirements from the disclosures and consent conditions in 
proposed paragraph .14.
---------------------------------------------------------------------------

    \187\ See SIFMA letter dated December 1, 2015.
    \188\ See December Response Letter.
---------------------------------------------------------------------------

L. Consistency With Statutory Standards

    In response to Amendment No. 1 or the OIP, several commenters 
expressed the view that the proposed rule change was inconsistent with 
certain provisions of the Exchange Act.\189\ Cooperman, NAMA and SIFMA 
commented that the proposed rule change is inconsistent with Section 
15B(b)(2)(L)(iv) of the Exchange Act,\190\ which requires that the MSRB 
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, and municipal entities, provided that there is robust 
protection against fraud. Cooperman suggested that the MSRB could ease 
the burden on smaller municipal advisors by providing more specific 
guidance as to the scope of the requirements and restrictions in the 
proposed rule change. NAMA believed that as a result of the proposed 
rule change, municipal advisors would have to devote significant time 
and resources to establish procedures to comply with what it termed 
``vague and broad'' rules. In NAMA's view this will be particularly 
burdensome for smaller municipal advisors. SIFMA also commented that 
municipal entity clients (in particular small municipal entity clients) 
would be acutely and adversely affected by the proposed rule change 
because, in its view, the number of municipal advisors with which the 
municipal entity could engage would be limited to the point that the 
municipal entity would not have adequate access to a municipal advisor 
or would only have the requisite access at an unnecessarily high cost 
to the municipal entity client.
---------------------------------------------------------------------------

    \189\ See letters from Cooperman dated September 9, 2015; NAMA 
dated September 11, 2015; and SIFMA dated September 11, 2015.
    \190\ See 15 U.S.C. 78o-4(b)(2)(L)(iv).
---------------------------------------------------------------------------

    In response to Amendment No. 2, NAMA subsequently commented that it 
``supports the current proposed Rule and urges the SEC to approve it in 
its current form without further erosion of the important principal 
transaction ban that is in place to protect investors.'' \191\
---------------------------------------------------------------------------

    \191\ See NAMA letter dated December 7, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, SIFMA stated that 
Proposed Rule G-42 was inconsistent with Section 15B(b)(2)(C) of the 
Exchange Act \192\ as to the requirement that an MSRB rule not ``impose 
any burden on competition not necessary or appropriate.'' \193\ In its 
view, the proposed rule change is overly burdensome, overly broad, 
introduces unnecessary costs, and would lead to an inappropriate 
reduction in competition in the municipal advisory marketplace. In 
addition, SIFMA indicated that it has observed municipal advisors 
exiting the municipal advisory business in anticipation of the 
implementation of the proposed rule change and that this has already 
resulted in reduced competition in the municipal advisory industry. 
SIFMA stated that the proposed rule change, in its view, would result 
in less competition in the municipal advisory industry, increased costs 
to issuers and fewer services available to issuers of municipal 
securities. SIFMA also commented that the MSRB could ``achieve the same 
objectives without burdening competition'' by revising Proposed Rule G-
42 consistent with SIFMA's prior comments.
---------------------------------------------------------------------------

    \192\ See 15 U.S.C. 78o-4(b)(2)(C).
    \193\ See SIFMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, Cooperman, GFOA, ICI and 
SIFMA questioned the adequacy of the MSRB's economic analysis of the 
proposed rule change.\194\ Cooperman

[[Page 81634]]

believed that the MSRB did not follow its own policy to conduct an 
economic analysis with respect to Proposed Rule G-42. Cooperman also 
believed that the MSRB did not gather data on the economic impact of 
the regulatory regime under Proposed Rule G-42. Rather, according to 
Cooperman, the MSRB reached its conclusions based on ``unsubstantiated 
broad brush economic consequences.'' \195\ GFOA and SIFMA similarly 
stated their views that the MSRB provided no economic analysis in 
concluding that the benefits of Proposed Rule G-42 outweigh the 
potential costs. ICI commented that the MSRB failed to analyze the 
potential economic impact of, and asked if there were an unreasonable 
or unnecessary burden in connection with, the proposed requirement that 
a municipal advisor undertake a reasonable investigation to determine 
that it is not basing any recommendation on materially inaccurate or 
incomplete information, which includes information provided by the 
municipal advisor's client.
---------------------------------------------------------------------------

    \194\ See letters from Cooperman dated September 9, 2015; GFOA 
dated September 14, 2015; ICI dated September 11, 2015; and SIFMA 
dated September 11, 2015.
    \195\ See Cooperman letter dated September 9, 2015.
---------------------------------------------------------------------------

    In response to the comments regarding the MSRB's economic analysis, 
the MSRB noted in its December Response Letter that throughout the 
development of the proposed rule change the MSRB rigorously followed 
its Policy on the Use of Economic Analysis in MSRB Rulemaking (``MSRB 
Policy'').\196\ In particular, the MSRB stated that it sought relevant 
data from industry participants and commenters on multiple occasions in 
accordance with the MSRB Policy's reference to the SEC's Current 
Guidance on Economic Analysis in SEC Rulemakings (``SEC 
Guidance''),\197\ which ``stresses the need to attempt to quantify 
anticipated costs and benefits . . . '' (emphasis added) but notes that 
``data is necessary'' to do so. Despite these requests, the MSRB stated 
that it received no data--imperfect or otherwise--or other information, 
which would support any additional quantification of the impact of the 
proposed rule change. In the proposed rule change, the MSRB noted this 
lack of data to explain why further quantification could not be 
supported.\198\ In the absence of relevant data, consistent with the 
MSRB Policy and SEC Guidance, the MSRB noted that it conducted a 
qualitative evaluation of the benefits and costs of the proposed rule 
change based significantly on the SEC's analysis of the municipal 
advisor market included in the SEC's Final Rule.\199\ In its analysis, 
the MSRB concluded that the market for municipal advisors likely would 
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.
---------------------------------------------------------------------------

    \196\ See MSRB, Policy on the Use of Economic Analysis in MSRB 
Rulemaking, http://msrb.org/About-MSRB/Financial-and-Other-Information/Financial-Policies/Economic-Analysis-Policy.aspx.
    \197\ See SEC Memorandum Re: Current Guidance on Economic 
Analysis in SEC Rulemakings (dated March 16, 2012), https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf.
    \198\ See Proposing Release, 80 FR 26752, at 26784 (``No 
commenter provided specific cost information or data that would 
support an improved estimate of the costs of compliance.'').
    \199\ See SEC Final Rule, 78 FR 67467, at 67608.
---------------------------------------------------------------------------

    The MSRB believes that commenters' observations that, as a result 
of the proposed rule change, some municipal advisors may have exited 
the market and some issuers may be experiencing less competition do not 
provide a basis for revising the MSRB's prior assessments of the 
potential impacts of the proposed rule change for several reasons.\200\ 
First, commenters have not provided data to support their observations. 
Second, to the extent municipal advisors have exited the market, 
commenters have not provided evidence to support a conclusion that they 
have done so in anticipation of a proposed rule change rather than, for 
example, in reaction to the Dodd-Frank Act itself, the subsequent 
registration requirements, or the professional qualification 
requirements, all of which were properly included in the baseline 
against which the impacts of the proposed rule change were assessed. 
Finally, the commenters have not provided evidence that the exit of any 
municipal advisor has in fact decreased competition, increased cost or 
resulted in reduced advisory services.
---------------------------------------------------------------------------

    \200\ See December Response Letter.
---------------------------------------------------------------------------

    With regard to the impact of the proposed rule change on small 
municipal advisors, the MSRB discussed the potential burdens on smaller 
advisory firms at length and concluded that the likely costs 
represented only those necessary to achieve the purposes of the 
Exchange Act.\201\ The MSRB is not aware of alternatives--and 
commenters have not proposed any--that would reduce the burden on small 
municipal advisor firms while achieving the same regulatory objectives, 
including what the MSRB believes is the appropriate balance between 
principles-based provisions and more specifically prescriptive 
provisions.
---------------------------------------------------------------------------

    \201\ See Proposing Release, 80 FR 26752, at 26759-60 (statement 
on burden on competition); see also id. at 26784-85 (economic 
analysis).
---------------------------------------------------------------------------

    Also in response to Amendment No. 1 or the OIP, several commenters 
indicated their view that the proposed rule change was inconsistent 
with the Exchange Act in connection with the principal transaction ban 
if such ban remained as proposed, without any exceptions or 
modifications. The MSRB, in Amendment No. 2, addressed the primary 
concerns by adding the Exception. The MSRB believes that the Exception 
is responsive to the commenters' concerns that, in connection with the 
proposed ban, Proposed Rule G-42 is inconsistent with the Exchange 
Act.\202\
---------------------------------------------------------------------------

    \202\ See letters from BDA dated September 11, 2015; FSI dated 
September 11, 2015; Millar Jiles dated September 11, 2015; SIFMA 
dated September 11, 2015; and Zions dated September 10, 2015, 
containing statements that the Proposed Rule, with the proposed 
principal transaction ban, is inconsistent with one or more of the 
following Exchange Act provisions: Section 15B(b)(2)(L); Section 
15B(b)(2)(L)(i); Section 15B(b)(2)(C); and Section 3(f).
---------------------------------------------------------------------------

M. Relationship Between MSRB Rule G-23 and the Prohibition on Principal 
Transactions

    In response to the Proposing Release, BDA and NAMA stated that the 
reference to MSRB Rule G-23 in paragraph .08 of the Supplementary 
Material was unnecessary or enhances the possible conflict between 
Proposed Rule G-42 and Rule G-23.\203\ BDA interpreted the prohibition 
in Rule G-23 as subsumed by the more stringent provisions of Proposed 
Rule G-42.\204\ NAMA believed the additional activities or principal 
transactions that should be prohibited under Proposed Rule G-42 (namely 
advice with respect to municipal derivatives or the investment of 
proceeds) don't conflict with Rule G-23, but merely supplement the 
prohibitions in Rule G-23 by extending the list of prohibitions found 
in Rule G-23.\205\
---------------------------------------------------------------------------

    \203\ See letters from BDA dated May 29, 2015 and NAMA dated May 
29, 2015.
    \204\ See BDA letter dated May 29, 2015.
    \205\ See NAMA letter dated May 29, 2015.
---------------------------------------------------------------------------

    In response to comments, the MSRB stated that the effect of the 
final sentence in proposed paragraph .08 is intentionally quite 
limited.\206\ The MSRB clarified that as to a person acting in 
compliance with Rule G-23, the final sentence in proposed paragraph .08 
provides an exception, but only to the specific prohibition on 
principal transactions in Proposed Rule G-42(e)(ii). The MSRB stated 
that proposed subsection (e)(ii) would not

[[Page 81635]]

prohibit a type of principal transaction that is already addressed and 
prohibited, to a certain extent, under Rule G-23, although other 
provisions of Rule G-42 must be considered as they do apply to the same 
principal transaction.
---------------------------------------------------------------------------

    \206\ See August Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, NAMA reiterated its 
comments that the reference to Rule G-23 should be deleted from 
proposed paragraph .08 because the MSRB's statements regarding that 
provision in its August Response Letter were unnecessarily 
complicated.\207\ In addition, NAMA believed such statements raise a 
question that the MSRB may believe that conduct permitted by Rule G-23 
would be otherwise prohibited by Proposed Rule G-42 (apart from 
Proposed Rule G-42(e)(ii)).
---------------------------------------------------------------------------

    \207\ See NAMA letter dated September 11, 2015.
---------------------------------------------------------------------------

    In response to NAMA's comments, the MSRB reiterated its earlier 
response regarding the limited effect of the reference to G-23 in 
paragraph .08 of the Supplementary Material.\208\ The MSRB explained 
that where certain conduct is not prohibited under Rule G-23 (as an 
exception to the general prohibition therein), Proposed Rule G-
42(e)(ii) (the principal transaction provision) alone would not 
prohibit such conduct. The MSRB stated that nevertheless, other parts 
of Proposed Rule G-42 and statutory provisions must be considered to 
determine whether the conduct, although not prohibited by Rule G-23 and 
not specifically prohibited under Proposed Rule G-42(e)(ii), would 
violate another provision of Proposed Rule G-42 or other applicable 
MSRB rules or other applicable laws or regulations.\209\ In this 
respect, the type of principal transaction excepted by the final 
sentence of paragraph .08 from Proposed Rule G-42(e)(ii) is no 
different than any other principal transaction that is not specifically 
prohibited by subsection (e)(ii). The MSRB restated that merely because 
a principal transaction is not specifically prohibited by the principal 
transaction ban does not necessarily mean it is permitted.
---------------------------------------------------------------------------

    \208\ See December Response Letter.
    \209\ See Proposing Release, 80 FR 26752, at 26782-83; see also 
August Response Letter.
---------------------------------------------------------------------------

N. Request for Prospective Application of Proposed Rule G-42 
Requirements

    ICI and SIFMA requested the proposed rule change only apply 
prospectively to municipal advisory relationships entered into, or 
recommendations of municipal securities transactions or municipal 
financial products to an existing municipal entity or obligated person 
client made, after the effective date of the proposed rule change.\210\ 
ICI noted this was relevant with respect to 529 plans ``due to the 
nature of the advisor's relationship with the plan and duration of 
existing 529 plan contracts.'' \211\ SIFMA argued that reviewing and 
likely supplementing the documentation for all existing municipal 
advisory relationships will be overly burdensome for both municipal 
advisors and their clients.\212\
---------------------------------------------------------------------------

    \210\ See letters from ICI dated May 29, 2015 and SIFMA dated 
May 28, 2015.
    \211\ See ICI letter dated May 29, 2015.
    \212\ See SIFMA letter dated May 28, 2015.
---------------------------------------------------------------------------

    The MSRB responded that the proposed rule would not require the 
creation of new contractual relationships or the modification of 
existing contracts or agreements between municipal advisors and their 
clients when the rule takes effect.\213\ It clarified that if municipal 
advisors have already delivered documentation meeting some or all of 
the requirements of proposed section (c), on documentation of municipal 
advisory relationship, then municipal advisors would be able to rely on 
such documents to satisfy some or all of their obligations under 
section (c). The MSRB also stated that documents in place prior to the 
effective date that are in some way deficient are not required to be 
withdrawn but may be supplemented by the municipal advisor by the 
delivery of additional documentation that satisfies any remaining 
requirements of the proposed rule. The MSRB also clarified that 
requirements of section (d), on recommendations and review of 
recommendations of other parties, would apply only to recommendations 
made or reviewed after the proposed rule change becomes effective. 
Finally, the MSRB stated that municipal advisors will become subject to 
the applicable standards of conduct with regard to all of their 
municipal advisory activities, regardless of whether the relevant 
engagement began prior to the effective date of the rule.
---------------------------------------------------------------------------

    \213\ See August Response Letter.
---------------------------------------------------------------------------

    In response to Amendment No. 1 or the OIP, ICI reiterated its 
comment that the proposed rule should only apply prospectively when a 
municipal advisor either enters into a new advisory relationship with a 
municipal client or when it recommends a new municipal securities 
transaction or new municipal financial product to an existing municipal 
client.\214\ ICI recommended that the MSRB further clarify ``how each 
of the new obligations the rule and its Supplementary Material impose 
on municipal advisors will apply to existing contracts, relationships, 
and municipal advisory activities.''
---------------------------------------------------------------------------

    \214\ See ICI letter dated September 11, 2015.
---------------------------------------------------------------------------

    The MSRB responded stating that all provisions of the proposed rule 
would, if approved, apply only prospectively.\215\ As previously stated 
by the MSRB, the requirements of the proposed rule, including its 
Supplementary Material, would apply prospectively to any activity that 
is within the definition in the proposed rule of ``municipal advisory 
activities'' if that activity is engaged in on or after the date of 
implementation (the ``effective date'') of Rule G-42. The MSRB further 
clarified that the proposed rule will apply to all municipal advisory 
relationships that are in existence on or after the effective date, 
regardless of when a municipal advisor and client may have entered into 
a particular relationship. The MSRB also noted that in accordance with 
MSRB Rule G-44 (Supervisory and Compliance Obligations of Municipal 
Advisors), which is currently in effect, on the effective date of Rule 
G-42, if approved, each municipal advisor would be required to have 
established written supervisory procedures reasonably designed to 
ensure that the municipal advisor and its associated persons are in 
compliance with Rule G-42 on and after its effective date.
---------------------------------------------------------------------------

    \215\ See December Response Letter.
---------------------------------------------------------------------------

O. Use of Supplementary Material in Proposed Rule G-42

    PFM suggested that all supplementary material be removed and moved 
to separate written interpretative guidance to afford the subjects more 
``fittingly robust regulatory guidance.'' \216\ PFM was concerned that 
the supplementary material which does not allow for ``more succinct 
definitional direction'' would lead to inconsistent application by 
registrants and ``the potential for unintended consequences as a matter 
of the statute itself.'' In response to the comment, the MSRB stated 
that the structure of the proposed rule is intentionally consistent 
with the structure used by FINRA and other self-regulatory 
organizations and the MSRB has not to date observed the types of issues 
or concerns raised by PFM.\217\
---------------------------------------------------------------------------

    \216\ See PFM letter dated May 29, 2015.
    \217\ See August Response Letter.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
as modified by Amendment No. 1 and Amendment No. 2, as well as the

[[Page 81636]]

comment letters received and the MSRB Response Letters. The Commission 
finds that the proposed rule change, as amended by Amendment No. 1 and 
Amendment No. 2, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to the MSRB.
    In particular, the proposed rule change, as amended, is consistent 
with Sections 15B(b)(2), 15B(b)(2)(C), and 15B(b)(2)(L)(i) of the Act. 
Section 15B(b)(2) of the Act provides that the MSRB shall propose and 
adopt rules to effect the purposes of that 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.\218\ Section 15B(b)(2)(C) of the Act requires that the MSRB's 
rules 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.\219\ Section 
15B(b)(2)(L)(i) of the Act requires, with respect to municipal 
advisors, the MSRB to prescribe means reasonably designed to prevent 
acts, practices, and courses of business as are not consistent with a 
municipal advisor's fiduciary duty to its clients.\220\
---------------------------------------------------------------------------

    \218\ 15 U.S.C. 78o-4(b)(2).
    \219\ See 15 U.S.C. 78o-4(b)(2)(C).
    \220\ 15 U.S.C. 78o-4(b)(2)(L)(i).
---------------------------------------------------------------------------

    The proposed rule change, as amended, is consistent with Sections 
15B(b)(2), 15B(b)(2)(C), and 15B(b)(2)(L)(i) of the Act because it 
establishes standards of conduct and duties for municipal advisors when 
engaging in municipal advisory activities. Specifically, the proposed 
rule change provides that each municipal advisor in the conduct of its 
municipal advisory activities for an obligated person client is subject 
to a duty of care. The proposed rule change also provides that each 
municipal advisor to a municipal entity client is subject to a 
fiduciary duty that includes a duty of loyalty and a duty of care. 
Paragraphs .01 and .02 of the Supplementary Material provide guidance 
on the duty of care and the duty of loyalty, respectively, to assist 
municipal advisors in complying with such duties. In addition, the 
proposed rule change includes means to help prevent breaches of these 
duties by municipal advisors, including the requirements for the 
information that must be included in the documentation of the municipal 
advisory relationship; specified activities (such as certain principal 
transactions and excessive compensation) that would be explicitly 
prohibited; and disclosure requirements that must accompany a municipal 
advisor's recommendation regarding a municipal security or a municipal 
financial product. The Commission believes these requirements are 
reasonably designed to prevent acts, practices and courses of business 
as are not consistent with a municipal advisor's fiduciary duty.
    The proposed rule change, as amended, would help protect municipal 
entities and obligated persons by promoting higher ethical and 
professional standards of the municipal advisors they employ to assist 
with issuances of municipal securities and transactions in municipal 
financial products. By requiring municipal advisors to provide detailed 
disclosures of material conflicts of interest and certain other 
information prior to or upon the establishment of the municipal 
advisory relationship, the proposed rule change will help ensure 
municipal entity and obligated person clients have access to sufficient 
information to make meaningful choices, based on the merits of the 
municipal advisor. The Commission believes the disclosure requirements 
also could incentivize municipal advisors not to engage in 
misconduct.\221\ In addition, the suitability requirements in section 
(d) of the proposed rule and the related Supplementary Material will 
help protect municipal entities and obligated persons from the 
potentially costly consequences of transactions undertaken based on 
unsuitable recommendations. The proposed amendments to Rule G-8(h) will 
assist in the enforcement of Proposed Rule G-42 and will allow 
organizations that examine municipal advisors to more precisely monitor 
and promote compliance with the proposed rule change.
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    \221\ See also SEC Final Rule, 78 FR 67467, at 67602, 67606, 
67618 and 67622 (discussing the disclosure requirements of the 
municipal advisor registration regime and incentives of municipal 
advisors not to engage in misconduct).
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    The Commission also finds that the proposed rule change, as 
amended, is consistent with Section 15B(b)(2)(L)(iv) of the Act, in 
that it does 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.\222\ While the proposed rule change would affect all municipal 
advisors, including small municipal advisors, it is a necessary and 
appropriate regulatory burden in order to promote compliance with the 
fiduciary duty and the duty of care. Municipal entities and obligated 
persons will have access to more information about municipal advisors 
and will be able to make better, more informed choices with lower 
search costs. The availability of additional, objective information and 
the fostering of merit-based competition among municipal advisors 
should lead to enhanced issuer protections and improved outcomes. These 
improvements likely would enhance investor confidence in the integrity 
of the municipal securities market. While the proposed rule change 
would burden some small municipal advisors, the Commission believes 
that such burden is outweighed by these benefits. In addition, the 
proposed rule change will provide a benefit to all municipal advisors, 
including small municipal advisors, that could otherwise face 
uncertainty regarding the duties and standards of conduct required in 
order to comply with the relevant provisions of the Exchange Act.
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    \222\ See 15 U.S.C. 78o-4(b)(2)(L)(iv).
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    In addition, the Commission finds that the proposed rule change, as 
amended, is consistent with Section 15B(b)(2)(G) of the Act which 
provides that the MSRB's rules shall prescribe records to be made and 
kept by municipal advisors and the periods for which such records shall 
be preserved.\223\ The proposed rule change, through the proposed 
amendments to Rule G-8(h), would require that a municipal advisor make 
and keep records of any document created by the municipal advisor that 
was material to its review of a recommendation by another party or that 
memorializes the basis for any determination as to suitability. 
Existing Rule G-9(h) would require that the books and records

[[Page 81637]]

required by the proposed rule change be preserved for a period of not 
less than five years.
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    \223\ See 15 U.S.C. 78o-4(b)(2)(G).
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    In approving the proposed rule change, as amended, the Commission 
has considered the proposed rule's impact on efficiency, competition, 
and capital formation.\224\ The Commission believes the proposed rule 
change takes into account competitive concerns that could arise as a 
result of the costs associated with complying with the standards of 
conduct and duties that could lead some municipal advisors to exit the 
market, curtail their activities or consolidate with other firms. The 
MSRB has made efforts to minimize costs in response to commenters 
including: (i) Narrowing the scope of the conflicts that must be 
disclosed, (ii) specifying a less burdensome method for disclosing 
conflicts and disciplinary actions and documenting the municipal 
advisory relationship, (iii) clarifying the obligations owed by 
municipal advisors to obligated persons, (iv) including a limited safe 
harbor to relieve municipal advisors that inadvertently engage in 
municipal advisory activities from compliance with section (b) of 
Proposed Rule G-42, on disclosure of conflicts of interest and other 
information, and section (c) of Proposed Rule G-42, on documentation of 
the municipal advisory relationship, and (v) allowing certain municipal 
advisors to engage in principal transactions in a range of fixed income 
securities for the investment of bond proceeds. Moreover, the 
Commission continues to believe ``that the market for municipal 
advisory services is likely to remain competitive despite the potential 
exit of municipal advisors, consolidation of municipal advisors, or 
lack of new entrants into the market.'' \225\
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    \224\ 15 U.S.C. 78c(f).
    \225\ SEC Final Rule, 78 FR 67467, at 67608.
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    As noted above, the Commission received 35 comment letters on the 
filing. The Commission believes that the MSRB, through its responses 
and through proposed changes in Amendment No. 1 and Amendment No. 2, 
has addressed commenters' concerns.
    For the reasons noted above, including those discussed in the MSRB 
Response Letters, the
    Commission believes that the proposed rule change, as amended by 
Amendment No. 1 and Amendment No. 2, is consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\226\ that the proposed rule change (SR-MSRB-2015-03), as modified 
by Amendment No. 1 and Amendment No. 2, be, and hereby is, approved.
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    \226\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\227\
Brent J. Fields,
Secretary.
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    \227\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2015-32812 Filed 12-29-15; 8:45 am]
BILLING CODE 8011-01-P