[Federal Register Volume 88, Number 30 (Tuesday, February 14, 2023)]
[Notices]
[Pages 9580-9588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03059]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96840; File No. SR-MSRB-2023-01]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Amendments to MSRB Rule G-40, on Advertising by Municipal Advisors, and 
MSRB Rule G-8, on Books and Records

February 8, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 31, 2023, the Municipal Securities 
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change 
consisting of amendments to MSRB Rule G-40, on advertising by municipal 
advisors. Specifically, the proposed rule change consists of amendments 
to MSRB Rule G-40 to (i) permit municipal advisors to use testimonials 
in advertisements, subject to certain conditions; (ii) specify 
additional supervisory obligations with respect to the use of 
testimonials; (iii) modify the definition of municipal advisory client 
to better align with MSRB Rule G-38, on solicitation of municipal 
securities business; (iv) specify the obligation to keep a record of 
any payment for a testimonial; and (v) create a conforming obligation 
under MSRB Rule G-8, on books and records to be made by brokers, 
dealers, municipal securities dealers and municipal advisors, to 
include records to correspond with the current obligation under MSRB 
Rule G-40 to maintain records relating to the supervision of 
advertisements as well as the proposed obligation to maintain records 
of any payments for a testimonial (together ``the proposed rule 
change''). The MSRB requests that the proposed rule change be approved 
with an implementation date to be announced by the MSRB in a regulatory 
notice published no later than one month following the Commission 
approval date, which implementation date shall be no later than three 
months following the Commission approval date.
    The text of the proposed rule change is available on the MSRB's 
website at https://msrb.org/2023-SEC-Filings, at the MSRB's principal 
office, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    Consistent with the MSRB's strategic goal to modernize the MSRB 
Rulebook, the proposed rule change would amend MSRB Rule G-40 to allow 
municipal advisors to use testimonials in certain circumstances, which 
would better align MSRB Rule G-40 with, to the extent appropriate, the 
principles of MSRB Rule G-21, on advertising by brokers, dealers or 
municipal securities, as well as Rule 206(4)-1 \3\ under the Investment

[[Page 9581]]

Advisers Act of 1940 (the ``Advisers Act'') \4\ adopted by the 
Commission.\5\
---------------------------------------------------------------------------

    \3\ 17 CFR 275.206(4)-1.
    \4\ 15 U.S.C. 80b-1 et seq.
    \5\ See Investment Advisers Act Release No. 5653 (Dec. 22, 
2020), the adopting release for Investment Adviser Marketing (the 
``SEC 2020 Adopting Release''), 86 FR 13024-13147 (Mar. 5, 2021).
---------------------------------------------------------------------------

Background
Advertisements Under MSRB Rule G-40
    In recognition of the fact that municipal advisors bear 
similarities with both brokers, dealers and municipal securities 
dealers (collectively and individually, ``dealers'') and investment 
advisers and to promote regulatory consistency for regulated entities 
dually registered as a dealer and as a municipal advisor, or as an 
investment adviser registered with the SEC, the MSRB established 
advertising standards for municipal advisors in 2018.\6\ These 
advertising standards were developed by aligning with, to the extent 
practicable, the then existing standards for investment advisers under 
Rule 206(4)-1 and the then existing standards for dealers under MSRB 
Rule G-21.
---------------------------------------------------------------------------

    \6\ See Exchange Act Release No. 83177 (May 7, 2018), 83 FR 
21794 (May 10, 2018), approval of proposed rule change File No. SR-
MSRB-2018-01 (``SEC approval order of MSRB Rule G-40''). The 
effective date for municipal advisors to comply with MSRB Rule G-40 
was August 23, 2019.
---------------------------------------------------------------------------

    MSRB Rule G-40 is designed to protect municipal entities, obligated 
persons and the general public by requiring a municipal advisor's 
advertisement to adhere to specific content standards based on the 
principles of fair dealing and good faith. An advertisement is 
generally defined in MSRB Rule G-40 to include any material published 
or used in any electronic or other public media, or any written or 
electronic promotional literature distributed or made generally 
available to municipal entities, obligated persons, municipal advisory 
clients or the public, including any notice, circular, report, market 
letter, form letter, telemarketing script, seminar text, press release 
concerning the services of the municipal advisor or the engagement of a 
municipal advisory client or reprint, or any excerpt of the foregoing 
or of a published article.\7\ MSRB Rule G-40 specifies content 
standards that require, among other things, that all advertisements by 
a municipal advisor be fair and balanced and provide a sound basis for 
evaluating the facts in regard to any particular municipal security or 
type of municipal security, municipal financial product, industry, or 
service.\8\ A municipal advisor may not make any false, exaggerated, 
unwarranted, promissory or misleading statement or claim in any 
advertisement or omit any material fact or qualification if the 
omission, in light of the context of the material presented, would 
cause the advertisement to be misleading.\9\ Additionally, a municipal 
advisor is prohibited from publishing false or misleading 
advertisements concerning the services of the municipal advisor or the 
engagement of a municipal advisory client or concerning the facilities, 
services, or skills of any municipal advisor.\10\
---------------------------------------------------------------------------

    \7\ See MSRB Rule G-40(a)(i).
    \8\ See MSRB Rule G-40(a)(iv)(A).
    \9\ See MSRB Rule G-40(a)(iv)(B).
    \10\ See MSRB Rule G-40(a)(iv)(B).
---------------------------------------------------------------------------

    In establishing MSRB Rule G-40, the MSRB determined to prohibit 
municipal advisors, directly or indirectly, from publishing, 
circulating or distributing any advertisement which refers, directly or 
indirectly, to any testimonial of any kind concerning the municipal 
advisor or concerning the advice, analysis, report or other service 
rendered by the municipal advisor.\11\ At that time, the MSRB expressed 
the view that a testimonial in a municipal advisor's advertisement 
would present significant issues, including the possibility of being 
misleading.\12\ As a basis for this view, the MSRB noted that the 
Commission had taken a similar position in adopting Advisers Act Rule 
206(4)-1 in 1961 (the ``Initial IA Advertising Rule'' or ``Initial Rule 
206(4)-1''), determining that the use of a testimonial by an investment 
adviser would constitute a fraudulent, deceptive, or manipulative act, 
practice, or course of action.\13\ Believing that doing so would help 
ensure consistent regulation between regulated entities subject to a 
fiduciary standard, the MSRB determined to act consistently with the 
language of Initial Rule 206(4).\14\
---------------------------------------------------------------------------

    \11\ See MSRB Rule G-40(a)(iv)(G).
    \12\ See Exchange Act Release No. 82616 (Feb. 1, 2018), 83 FR 
5474 (Feb. 7, 2018), notice of proposed rule change File No. SR-
MSRB-2018-01) (``Notice of proposed Rule G-40'').
    \13\ See Investment Advisers Act Release No. 121 (Nov. 1, 1961) 
(the ``1961 Advertising Rule Adopting Release''), 26 FR 10548 (Nov. 
9, 1961). The Commission adopted the Advertising Rule in 1961 to 
target advertising practices that the Commission believed were 
likely to be misleading.
    \14\ See Notice of Proposed MSRB Rule G-40, 83 FR 5474, 5478 
n.26, 5488 & n.119.
---------------------------------------------------------------------------

Testimonials Under MSRB Rule G-21
    In establishing MSRB Rule G-40, the MSRB also sought, to the extent 
practicable, to harmonize with its existing rule governing the 
advertisements of dealers, MSRB Rule G-21. While not identical, the two 
MSRB rules are analogous in that they both are based on principles of 
fair dealing and maintain rigorous content standards. However, MSRB 
Rule G-40 currently prohibits a municipal advisor from using a 
testimonial in an advertisement. This prohibition is based in part on 
the fiduciary duty that a non-solicitor municipal advisor (as opposed 
to a dealer) owes its municipal entity clients.\15\
---------------------------------------------------------------------------

    \15\ See generally Notice of Proposed MSRB Rule G-40.
---------------------------------------------------------------------------

    MSRB Rule G-21 permits a dealer to use a testimonial in an 
advertisement if certain conditions are met. Specifically, if a 
dealer's advertisement contains a testimonial, then the person 
providing the testimonial concerning a technical aspect of investing 
must have the knowledge and experience to form a valid opinion.\16\ 
Additionally, if an advertisement contains a testimonial about the 
investment advice or investment performance of the dealer, the 
advertisement must prominently disclose (i) the fact that the 
testimonial may not be representative of the experience of other 
customers; (ii) the fact that the testimonial is no guarantee of future 
performance or success; and (iii) if more than $100 in value is paid 
for the testimonial, the fact that it is a paid testimonial.\17\
---------------------------------------------------------------------------

    \16\ MSRB Rule G-21(a)(iii)(G)(1).
    \17\ MSRB Rule G-21(a)(iii)(G)(2).
---------------------------------------------------------------------------

Testimonials Under Advisers Act Rule 206(4)-1
    In establishing MSRB Rule G-40 in 2018, the MSRB recognized that 
the Commission was considering modernizing the Initial IA Advertising 
Rule and noted that it would monitor developments related to the 
testimonial ban.\18\ On December 22, 2020, the Commission adopted 
amendments to modernize and consolidate the Initial IA Advertising Rule 
and Rule 206(4)-3 of the Adviser's Act (the ``IA Solicitation Rule'') 
\19\ into one marketing rule for investment advisers, under the 
Advisers Act (the ``Modernized IA Marketing Rule'' or ``SEC Rule 
206(4)-1'').\20\ When adopting the Modernized IA Marketing Rule, the 
SEC noted that, among other things, it replaces the previous rule's 
``broadly drawn limitations with principles-based provisions designed 
to accommodate the continual evolution and interplay of technology and 
advice

[[Page 9582]]

and includes tailored requirements for certain types of 
advertisements.'' \21\ Significantly, the Modernized IA Marketing Rule 
replaced the prior ban on testimonials under the Initial IA Advertising 
Rule with a permissive use of testimonials and endorsements in 
advertisements,\22\ which includes traditional referral and 
solicitation activity, subject to certain conditions.\23\
---------------------------------------------------------------------------

    \18\ Notice of Proposed MSRB Rule G-40, 83 FR 5474, 5487.
    \19\ 17 CFR 275.206(4)-3. The IA Solicitation Rule was adopted 
in 1979 ``to help ensure that clients are aware that paid solicitors 
who refer them to advisers have a conflict of interest.'' See SEC 
2020 Adopting Release, 86 FR 13025.
    \20\ SEC 2020 Adopting Release. The Modernized IA Marketing Rule 
applies to any investment adviser registered or required to be 
registered with the Commission under Sec.  203 of the Advisers Act 
that directly or indirectly disseminates an advertisement.
    \21\ SEC Press Release, SEC Adopts Modernized Marketing Rule for 
Investment Advisers, dated December 22, 2020.
    \22\ A ``testimonial'' is a statement made by a current client 
or investor in a private fund advised by the investment adviser, 
whereas an ``endorsement'' is a statement made by a person other 
than a current client or investor in a private fund advised by the 
investment adviser. See 17 CFR 275.206(4)-1(e)(17) and 17 CFR 
275.206(4)-1(e)(5).
    \23\ 17 CFR 275.206(4)-1(b) (relating to compensated 
testimonials and endorsements); see also 17 CFR 206(4)-1(e)(1)(ii) 
(defining the term ``advertisement'' to include compensated 
testimonials and endorsements). These conditions differ depending on 
whether the testimonial or endorsement is compensated or 
uncompensated. 17 CFR 275.206(4)-1(b)(4)(i) (exempting a testimonial 
or endorsement disseminated for no compensation or de minimis 
compensation from paragraphs 206(4)-1(b)(2)(ii) and (3).
---------------------------------------------------------------------------

    The Modernized IA Marketing Rule requires advertisements that 
include testimonials or endorsements to provide disclosures of certain 
information.\24\ Specifically, the Modernized IA Marketing Rule 
requires that an investment adviser clearly and prominently disclose 
the following at the time the testimonial or endorsement is 
disseminated: (i) that the testimonial was given by a current client or 
investor or, if an endorsement, that the endorsement was given by a 
person other than a current client or investor; (ii) that cash or non-
cash compensation was provided for the testimonial, if applicable; and 
(iii) a brief statement of any material conflicts of interest on the 
part of the person giving the testimonial or endorsement resulting from 
the adviser's relationship with such person.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 275.206(4)-1(b)(1).
    \25\ 17 CFR 275.206(4)-1(b). See 17 CFR 275.206(4)-1(b)(4) 
discussing exemptions from the disclosure requirements.
---------------------------------------------------------------------------

    In addition, disclosure of the material terms of any compensation 
arrangement and a description of any material conflicts of interest on 
the part of the person giving the testimonial or endorsement resulting 
from the advisers' relationship with such person and/or any 
compensation arrangement must be provided to the recipient(s) of the 
testimonial.\26\ All testimonials, including those that are compensated 
and uncompensated are subject to oversight and compliance. 
Specifically, the investment adviser must have (i) a reasonable basis 
for believing that any testimonial or endorsement complies with the 
requirements of the rule, and (ii) a written agreement with any person 
giving a compensated testimonial or endorsement that describes the 
scope of the agreed upon activities. The requirement to have a written 
agreement only applies when the adviser is providing compensation for 
testimonials and endorsements is above the de minimis threshold (i.e., 
$1,000 or less, or the equivalent value in non-cash compensation during 
the preceding twelve months).\27\
---------------------------------------------------------------------------

    \26\ This includes a description of the compensation provided or 
to be provided, directly or indirectly, to the person for the 
testimonial or endorsement. 17 CFR 275.206(4)-1(b)(1).
    \27\ 17 CFR 275.206(4)-1(b)(2).
---------------------------------------------------------------------------

    In light of the Commission's adoption of the Modernized IA 
Marketing Rule, the MSRB has conducted a review of MSRB Rule G-40 and 
is filing the proposed rule change to promote regulatory consistency 
among regulated entities subject to a fiduciary standard. The proposed 
rule change would permit municipal advisors to use testimonials in 
advertisements, subject to certain conditions, as discussed below.\28\
---------------------------------------------------------------------------

    \28\ The term ``testimonial'' is not specifically defined in 
MSRB Rule G-21 or MSRB Rule G-40; based on the application of each 
rule, the term has been understood to include a statement given by a 
current client or person other than a current client and does not 
distinguish between a testimonial and an endorsement.
---------------------------------------------------------------------------

Summary of Proposed Amendments
    To promote regulatory consistency, where practicable, among MSRB 
Rule G-40, MSRB Rule G-21, and the SEC's Modernized IA Marketing Rule, 
proposed amended MSRB Rule G-40 would permit the use of testimonials 
subject to disclosures and other tailored conditions. The proposed rule 
change would not only align MSRB Rule G-40 with the analogous 
requirements for dealers under MSRB Rule G-21, but, because municipal 
advisors have a fiduciary duty to their clients, the proposed rule 
change would also include certain provisions, tailored to apply to 
municipal advisors, which align with the SEC's Modernized IA Marketing 
Rule. Specifically, the proposed rule change would amend the content 
standards under MSRB Rule G-40(a)(iv) to permit municipal advisors to 
use testimonials in advertisements subject to certain conditions; amend 
the supervisory obligations under MSRB Rule G-40(c) to specify 
additional supervisory obligations with respect to the use of 
testimonials; modify the definition of municipal advisory client; and 
amend MSRB Rule G-8 to include records to correspond with the current 
obligation under MSRB Rule G-40 to maintain records relating to the 
supervision of advertisements.
MSRB Rule G-40 Content Standards
    MSRB Rule G-40 currently prohibits the use of testimonials in 
advertisements by municipal advisors.\29\ The MSRB is not proposing to 
alter the fundamental content standards of MSRB Rule G-40 that require 
advertisements to be based on the principles of fair dealing and good 
faith, be fair and balanced, and provide a sound basis for evaluating 
the facts and that the advertisements not make any false, exaggerated, 
unwarranted, promissory, or misleading statement or claim.\30\ 
Consistent with those standards, and recognizing the fiduciary duty 
owed by municipal advisors to their municipal entity clients, the MSRB 
is proposing to permit the use of testimonials in advertisements by 
municipal advisors subject to certain conditions that the MSRB believes 
would diminish the concern, expressed in establishing MSRB Rule G-40, 
that testimonials could cause a municipal advisor's advertisement to be 
misleading.\31\ Specifically, as proposed, MSRB Rule G-40(a)(iv)(G) 
would be amended to provide that municipal advisor advertisements that 
contain testimonials would be subject to additional content standards.
---------------------------------------------------------------------------

    \29\ MSRB Rule G-40(a)(iv)(G).
    \30\ MSRB Rule G-40(a)(iv)(A)-(F), G-40(a)(v) and G-40(b)(ii).
    \31\ See Notice of Proposed MSRB Rule G-40, 83 FR 5474, 5487.
---------------------------------------------------------------------------

    If a municipal advisor's advertisement contains a testimonial of 
any kind concerning the municipal advisor or concerning the advice, 
analysis, report, or other service rendered by the municipal advisor, 
the person making the testimonial would be required to have the 
knowledge and experience to form a valid opinion.\32\ This obligation 
would standardize the content standard with that applicable to dealers' 
use of testimonials under MSRB Rule G-21.\33\ The MSRB believes 
applying this standard to municipal advisors is consistent with the 
existing content standards of MSRB Rule G-40 established to prevent 
false or misleading advertisements and would promote regulatory 
consistency.
---------------------------------------------------------------------------

    \32\ Proposed MSRB Rule G-40(a)(iv)(G)(1).
    \33\ This content standard in MSRB Rule G-21 currently aligns 
with the standard established in Rule 2210, Communications with the 
Public, of the Financial Industry Regulatory Authority (``FINRA''). 
Specifically, FINRA Rule 2210(d)(6)(A) provides that ``if any 
testimonial in a communication concerns a technical aspect of 
investing, the person making the testimonial must have the knowledge 
and experience to form a valid opinion.''

---------------------------------------------------------------------------

[[Page 9583]]

    If an advertisement contains a testimonial concerning the municipal 
advisor or concerning the advice, analysis, report, or other service 
rendered by the municipal advisor, that advertisement must include, 
clearly and prominently, disclosures designed to reduce the risk that 
the use of a testimonial in an advertisement could be misleading. 
First, the testimonial must include a clear and prominent disclosure 
that the person providing the testimonial is a current municipal 
advisory client or, if not currently a municipal advisory client, the 
timeframe, denoted by calendar year(s), during which the person was a 
municipal advisory client.\34\ The MSRB believes that allowing the use 
of a testimonial only when the testimonial is from a current or former 
client reinforces the proposed requirement that the person providing 
the testimonial have the knowledge and experience to form a valid 
opinion and helps ensure that the municipal advisor's advertisement is 
fair and balanced. In addition, disclosing the time frame when a person 
providing a testimonial was a municipal advisory client would provide 
important context to help reduce the risk that the use of a testimonial 
could be misleading, which would benefit the likely recipients of the 
advertisement (i.e., municipal entities and obligated persons). The 
clear and prominent disclosure standard requires that the disclosures 
be included within the advertisement that includes the testimonial such 
that the testimonial and disclosures are read at the same time and 
improve the salience and impact of the disclosures.
---------------------------------------------------------------------------

    \34\ Proposed MSRB Rule G-40(a)(iv)(G)(2)(a).
---------------------------------------------------------------------------

    The testimonial would also be required to include clear and 
prominent disclosures that the testimonial may not be representative of 
the experience of other clients,\35\ that the testimonial is no 
guarantee of future performance or success,\36\ and, if more than $100 
in total value in cash or non-cash compensation is paid for the 
testimonial, the fact that it is a paid testimonial.\37\ Requiring 
municipal advisors that use testimonials to adhere to these disclosure 
requirements would harmonize the content standards with those 
applicable to dealers' use of testimonials under MSRB Rule G-21.\38\ 
The MSRB believes requiring such disclosures is consistent with the 
existing content standards of MSRB Rule G-40 and would promote 
regulatory consistency.
---------------------------------------------------------------------------

    \35\ Proposed MSRB Rule G-40(a)(iv)(G)(2)(b).
    \36\ Proposed MSRB Rule G-40(a)(iv)(G)(2)(c).
    \37\ Proposed Rule MSRB G-40(a)(iv)(G)(2)(d).
    \38\ These disclosure requirements in MSRB Rule G-21 currently 
align with the disclosure requirements in FINRA Rule 
2210(d)(6)(B)(1)-(3).
---------------------------------------------------------------------------

    Finally, the testimonial also would be required to include, clearly 
and prominently, a brief statement of any material conflicts of 
interest on the part of the person providing the testimonial resulting 
from the municipal advisor's relationship with such person. Recognizing 
the fiduciary duty owed by municipal advisors to their municipal entity 
clients, the MSRB considered the obligations of registered investment 
advisers, who, like municipal advisors, are subject to a fiduciary 
standard in determining the disclosures that would be appropriate for 
municipal advisors when using testimonials in advertisements. This 
disclosure obligation parallels a disclosure obligation required of 
registered investment advisers under SEC Rule 206(4)-1(b)(1)(iii). The 
MSRB believes that a brief statement of any material conflicts of 
interest on the part of the person providing the testimonial resulting 
from the municipal advisor's relationship with such person would result 
in information that informs the likely recipients of the advertisement 
(i.e., municipal entities and obligated persons) which serves to ensure 
that the advertisement is fair and balanced and reduces the risk that 
the use of a testimonial could be misleading. Furthermore, the MSRB 
believes establishing the same disclosure obligation for municipal 
advisors under MSRB Rule G-40 promotes regulatory consistency, 
particularly among regulated entities subject to a fiduciary standard. 
To that end, the MSRB expects this disclosure to be succinct.\39\
---------------------------------------------------------------------------

    \39\ In adopting Rule 206(4)-1(b)(1)(iii), the SEC noted that 
``[s]imilar to the other disclosures subject to the clear and 
prominent standard, we expect this disclosure to be succinct. For 
example, it would be sufficient for an adviser to simply state that 
the testimonial or endorsement was provided by an affiliate of the 
adviser, or that the promoter is related to the adviser, if this 
relationship is the source of the conflict.'' SEC 2020 Adopting 
Release, 86 FR 13025.
---------------------------------------------------------------------------

    There are two broad categories of municipal advisors \40\ -- those 
that provide certain advice to or on behalf of a municipal entity or 
obligated person and those that undertake certain solicitations of a 
municipal entity or obligated person on behalf of certain third-party 
financial professionals, often referred to as solicitors.\41\ The MSRB 
understands that municipal entity clients generally do not accept 
compensation for testimonials and believes that the payment of more 
than a de minimis amount (more than $1000 in total value in cash or 
non-cash compensation during the preceding 12 months) to a municipal 
entity client could present a potential conflict of interest. 
Therefore, proposed MSRB Rule G-40(a)(iv)(G)(3) would prohibit a non-
solicitor municipal advisor from paying more than a de minimis amount 
of compensation for a testimonial.
---------------------------------------------------------------------------

    \40\ Section 15B(e)(4) of the Exchange Act (15 U.S.C. 78o-
4(e)(4)) generally defines ``municipal advisor'' to mean a person 
(who is not a municipal entity or an employee of a municipal entity) 
that (i) provides advice to or on behalf of a municipal entity or 
obligated person with respect to municipal financial products or the 
issuance of municipal securities, including advice with respect to 
the structure, timing, terms, and other similar matters concerning 
such financial products or issues; or (ii) undertakes a solicitation 
of a municipal entity. Notwithstanding the omission of the term, 
``obligated person'' in connection with the undertaking of a 
solicitation under Section 15B(e)(4)(A)(ii) of the Exchange Act (15 
U.S.C. 78o-4(e)(4)(A)(ii)), the SEC has interpreted the definition 
of ``municipal advisor'' to include a person who engages in the 
solicitation of an obligated person acting in the capacity of an 
obligated person. See Exchange Act Release No. 70462 (September 20, 
2013), 78 FR 67467, at notes 138 and 408 (November 12, 2013) (File 
No. S7-45-10) (``Order Adopting SEC Final MA Rule''). See also 
Exchange Act Rule 15Ba1-1(d)(1)(i) (17 CFR 240.15Ba1-1(d)(1)(i)).
    \41\ Section 15B(e)(9) of the Exchange Act (15 U.S.C. 78o-
4(e)(9)) generally defines ``solicitation of a municipal entity or 
obligated person'' to mean a direct or indirect communication with a 
municipal entity or obligated person made by a person, for direct or 
indirect compensation, on behalf of a broker, dealer, municipal 
securities dealer, municipal advisor, or investment adviser . . . 
that does not control, is not controlled by, or is not under common 
control with the person undertaking such solicitation for the 
purpose of obtaining or retaining an engagement by a municipal 
entity or obligated person of a broker, dealer, municipal securities 
dealer, or municipal advisor for or in connection with municipal 
financial products, the issuance of municipal securities, or of an 
investment adviser to provide investment advisory services to or on 
behalf of a municipal entity. The SEC has interpreted this phrase 
generally in a manner similar to the statutory definition. However, 
it has also added two exceptions to the statutory definition for (i) 
advertising by a dealer, municipal advisor or investment adviser and 
(ii) solicitations of an obligated person where such obligated 
person is not acting in the capacity of an obligated person or the 
solicitation is not in connection with the issuance of municipal 
securities or with respect to municipal financial products. See 
Exchange Act Rule 15Ba1-1(n) (17 CFR 240.15Ba1-1(n)). Additionally, 
the SEC has exempted from the municipal advisor definition a person 
that undertakes a solicitation of a municipal entity or obligated 
person for the purpose of obtaining or retaining an engagement by a 
municipal entity or by an obligated person of a dealer or a 
municipal advisor for or in connection with municipal financial 
products that are investment strategies, to the extent such 
investment strategies are not plans or programs for the investment 
of the proceeds of municipal securities or the recommendation of and 
brokerage of municipal escrow investments. See Exchange Act Rule 
15Ba1-1(d)(1) (17 CFR 240.15Ba1-1(d)(1)) and 15Ba1-1(d)(3)(viii) (17 
CFR 240.15Ba1-1(d)(3)(viii)).
---------------------------------------------------------------------------

    To avoid this concern and to avoid creating complexity in MSRB Rule 
G-40 by establishing different standards for

[[Page 9584]]

obligated person clients of non-solicitor municipal advisors, the MSRB 
determined to prohibit non-solicitor municipal advisors from paying any 
compensation for a testimonial to a person, directly or indirectly, of 
more than $1000 in total value in cash or non-cash compensation during 
the preceding 12 months. However, the proposed rule change would permit 
solicitor municipal advisors to pay such compensation to a municipal 
advisor, or an investment adviser (as defined under section 202 of the 
Investment Advisers Act of 1940) on behalf of whom the municipal 
advisor undertakes, or has undertaken, a solicitation of a municipal 
entity or obligated person, as defined in Rule 15Ba1-1(n) \42\ subject 
to certain conditions.
---------------------------------------------------------------------------

    \42\ 17 CFR 240.15Ba1-1(n).
---------------------------------------------------------------------------

    The first condition would require a solicitor municipal advisor to 
conclude, based on the exercise of reasonable diligence, that the 
municipal advisor or investment adviser who will provide the 
testimonial is currently registered with the Commission. The MSRB 
believes requiring a solicitor municipal advisor to determine that the 
municipal advisor or investment adviser providing the testimonial is 
registered with the Commission would establish a reasonable basis to 
believe that the entity providing the testimonial would not be the 
subject of a ``disqualifying Commission action'' or ``disqualifying 
event'' as those terms are defined in SEC Rule 206(4)-1(e)(3) and 
(4).\43\ While this proposed requirement under MSRB Rule G-40 is 
similar to a requirement imposed on investment advisers under the 
Modernized IA Marketing Rule, the requirement under MSRB Rule G-40 is 
tailored to solicitor municipal advisors with the recognition that the 
intended recipients of municipal advisors' advertisements are municipal 
entities and obligated persons.
---------------------------------------------------------------------------

    \43\ SEC Rule 206(4)-1(e)(3) defines a ``disqualifying 
Commission action'' to mean a Commission opinion or order barring, 
suspending, or prohibiting the person from acting in any capacity 
under the Federal securities laws. SEC Rule 206(4)-1(e)(4) defines a 
``disqualifying event'' as any of the following events that occurred 
within ten years prior to the person disseminating an endorsement or 
testimonial: (i) a conviction by a court of competent jurisdiction 
within the United States of any felony or misdemeanor involving 
conduct described in paragraph (2)(A) through (D) of section 203(e) 
of the Act; (ii) a conviction by a court of competent jurisdiction 
within the United States of engaging in any of the conduct specified 
in paragraphs (1), (5), or (6) of section 203(e) of the Act; (iii) 
the entry of any final order by any entity described in paragraph 
(9) of section 203(e) of the Act, or by the U.S. Commodity Futures 
Trading Commission or a self-regulatory organization (as defined in 
the Form ADV Glossary of Terms), of the type described in paragraph 
(9) of section 203(e) of the Act; (iv) the entry of an order, 
judgment or decree described in paragraph (4) of section 203(e) of 
the Act, and still in effect, by any court of competent jurisdiction 
within the United States; and (v) a Commission order that a person 
cease and desist from committing or causing a violation or future 
violation of (A) any scienter-based anti-fraud provision of the 
Federal securities laws, including without limitation section 
17(a)(1) of the Securities Act of 1933 (15 U.S.C. 77q(a)(1)), 
section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 
78j(b)) and Sec.  240.10b-5 of this chapter, section 15(c)(1) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o(c)(1)), and section 
206(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(1)), 
or any other rule or regulation thereunder; or (B) section 5 of the 
Securities Act of 1933 (15 U.S.C. 77e). 17 CFR 275.206(4)-1.
---------------------------------------------------------------------------

    The second condition would require a solicitor municipal advisor 
that compensates a municipal advisor or investment adviser, directly or 
indirectly, more than $1000 in total value in cash or non-cash 
compensation during the preceding 12 months, to have a written 
agreement with the municipal advisor or investment adviser.\44\ The 
written agreement would be required to describe the scope of the 
agreed-upon activities with respect to the testimonial and the terms of 
the compensation for those activities. The proposed obligation for a 
solicitor municipal advisor to have a written agreement with the 
municipal advisor or investment adviser that describes the scope of the 
agreed-upon activities with respect to the testimonial is akin to an 
obligation under the Modernized IA Marketing Rule.\45\ The MSRB 
believes the proposed additional conditions that would permit solicitor 
municipal advisors to pay more than a de minimis amount of compensation 
to a municipal advisory client providing a testimonial would reduce the 
potential concerns raised by permitting a non-solicitor municipal 
advisor to pay more than a de minimis amount of compensation to 
municipal advisory clients.
---------------------------------------------------------------------------

    \44\ As discussed below, MSRB Rule G-38 prohibits dealers from 
paying persons who are not affiliated with the dealers for a 
solicitation of municipal securities business on their behalf. As a 
result, the proposed rule change assumes that solicitor municipal 
advisors would not obtain testimonials from dealers since dealers 
are prohibited from paying solicitor municipal advisors for their 
solicitations.
    \45\ See SEC Rule 206(4)-1(b)(2)(ii), 17 CFR 275.206(4)-
1(b)(2)(ii).
---------------------------------------------------------------------------

MSRB Rule G-40 Supervisory Obligations
    MSRB Rule G-40 currently requires that each advertisement subject 
to the requirements of the rule be approved in writing by a municipal 
advisor principal, as defined in MSRB Rule G-3(e)(i), prior to first 
use. The proposed rule change would broaden these supervisory 
obligations to require, with respect to an advertisement that includes 
a testimonial, that such approval be based on a reasonable belief that 
the testimonial complies with the requirements of proposed MSRB Rule G-
40(a)(iv)(G). The MSRB believes this additional supervisory obligation 
is appropriate in allowing municipal advisors the use of testimonials 
in advertisements. This obligation would be consistent with the 
oversight obligation under the Modernized IA Marketing Rule that 
requires an investment adviser to have a reasonable basis for believing 
that a testimonial complies with the requirements of SEC Rule 206(4)-
1.\46\ The MSRB believes establishing the same obligation for municipal 
advisors under MSRB Rule G-40 would promote regulatory consistency, 
particularly among regulated entities subject to a fiduciary standard.
---------------------------------------------------------------------------

    \46\ See SEC Rule 206(4)-1(b)(2)(i), 17 CFR 275.206(4)-
1(b)(2)(i).
---------------------------------------------------------------------------

MSRB Rule G-40 Definitions
    MSRB Rule G-40(a)(iii) currently defines ``municipal advisory 
client,'' for purposes of MSRB Rule G-40, to include either: a 
municipal entity or obligated person for whom the municipal advisor 
engages in municipal advisory activities, as defined in MSRB Rule G-
42(f)(iv); or a broker, dealer, municipal securities dealer, municipal 
advisor, or investment adviser (as defined under section 202 of the 
Investment Advisers Act of 1940) on behalf of whom the municipal 
advisor undertakes a solicitation of a municipal entity or obligated 
person, as defined in Rule 15Ba1-1(n), 17 CFR 240.15Ba1-1(n), under the 
Act.\47\ However, MSRB Rule G-38 prohibits dealers from paying persons 
who are not affiliated with the dealers for a solicitation of municipal 
securities business on their behalf. Accordingly, to avoid confusion 
and promote standardization across MSRB rules, the proposed rule change 
would modify the definition of municipal advisory client. Specifically, 
as proposed, the amended definition would exclude a broker, dealer, and 
municipal securities dealer from the list of entities on behalf of whom 
the municipal advisor undertakes a solicitation of a municipal entity 
or obligated person.
---------------------------------------------------------------------------

    \47\ MSRB Rule G-40(a)(iii).
---------------------------------------------------------------------------

Recordkeeping Requirements Under Rule G-40 and G-8
    MSRB Rule G-40 currently requires that each municipal advisor make 
and keep current in a separate file, records of all advertisements.\48\ 
The proposed rule change would extend that

[[Page 9585]]

obligation to include records of any payment made to a municipal 
advisory client for a testimonial. The proposed rule change also would 
make a conforming amendment to the recordkeeping obligations under MSRB 
Rule G-8(h) to add subparagraph (viii) to include records concerning 
compliance with MSRB Rule G-40.\49\ Specifically, the proposed rule 
change would amend MSRB Rule G-8(h) to specify that every municipal 
advisor that is registered or required to be registered under Section 
15B of the Act and the rules and regulations thereunder would be 
required to make and keep current the records specified under MSRB Rule 
G-40. This would, therefore, include not only a record of all 
advertisements, which is currently required under MSRB Rule G-40(e), 
but also, to align with the proposed amendments to MSRB Rule G-40(e), a 
record of any cash or non-cash compensation provided to a municipal 
advisory client, as that term is defined in MSRB Rule G-40(a)(iii) and 
a record of any written agreement with a municipal advisor or 
investment adviser required under proposed MSRB Rule G-
40(a)(iv)(G)(3)(b), which is required to describe the scope of the 
agreed-upon activities with respect to the testimonial and the terms of 
the compensation for such.
---------------------------------------------------------------------------

    \48\ MSRB Rule G-40(e).
    \49\ Today the MSRB also filed a proposed rule change to adopt 
new MSRB Rule G-46, on duties of solicitor municipal advisors, and 
amend MSRB Rule G-8 by adding subparagraph (h)(ix) to include 
records concerning compliance with MSRB Rule G-46.
---------------------------------------------------------------------------

    The MSRB believes that specifying these recordkeeping requirements 
would provide more certainty for municipal advisors with respect to 
their recordkeeping obligations. In addition, with the application of 
existing MSRB Rule G-9, which requires that municipal advisors 
generally preserve the books and records described in Rule G-8(h) for a 
period of not less than five years, the proposed amendments to MSRB 
Rule G-8(h) would provide examining authorities beneficial information 
to assist in evaluating a municipal advisor's compliance with MSRB Rule 
G-40.\50\ In addition, the proposed amendment to MSRB Rule G-8 would 
align with SEC recordkeeping requirements, which require a municipal 
advisor to make and keep true, accurate, and current certain books and 
records relating to its municipal advisory activities, including 
originals or copies of all written communications sent, by such 
municipal advisor (including inter-office memoranda and communications) 
relating to municipal advisory activities, regardless of the format of 
such communications.\51\
---------------------------------------------------------------------------

    \50\ Municipal advisors are also subject to the recordkeeping 
requirements described in SEC Rule 15Ba1-8(a)(1)-(8) under the Act.
    \51\ See Rule 15Ba1-8(a)(1)-(8), 240.15Ba1-8. MSRB Rule G-8 
requires that municipal advisors make and keep current all books and 
records described in Rule 15Ba-18(a)(1)-(8) under the Act.
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2) of the Exchange Act,\52\ which provides that the 
Board shall propose and adopt rules to effect the purposes of this 
title with respect to transactions in municipal securities effected by 
brokers, dealers, and municipal securities dealers and advice provided 
to or on behalf of municipal entities or obligated persons by brokers, 
dealers, municipal securities dealers, and municipal advisors with 
respect to municipal financial products, the issuance of municipal 
securities, and solicitations of municipal entities or obligated 
persons undertaken by brokers, dealers, municipal securities dealers, 
and municipal advisors.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78o-4(b)(2).
---------------------------------------------------------------------------

    Section 15B(b)(2)(C) of the Exchange Act \53\ provides that the 
MSRB's rules shall be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in municipal securities and municipal 
financial products, to remove impediments to and perfect the mechanism 
of a free and open market in municipal securities and municipal 
financial products, and, in general, to protect investors, municipal 
entities, obligated persons, and the public interest.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The MSRB believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act \54\ because proposed MSRB Rule G-40, 
while permitting the use of testimonials, would continue to: prevent 
fraudulent and manipulative acts and practices; protect municipal 
entities, obligated persons and the public interest; promote just and 
equitable principles of trade; remove impediments to and perfect the 
mechanism of a free and open market in municipal securities; and foster 
cooperation and coordination with regulators.
---------------------------------------------------------------------------

    \54\ Id.
---------------------------------------------------------------------------

    The MSRB believes that the proposed rule change would help prevent 
fraudulent and manipulative acts and practices. The proposed rule 
change does not alter the standards that advertisements be based on the 
principles of fair dealing and good faith, be fair and balanced, and 
provide a sound basis for evaluating the facts and that the 
advertisements do not include any false, exaggerated, unwarranted, 
promissory or misleading statement or claim. As a result, the MSRB 
believes that permitting municipal advisors to use only testimonials 
that are consistent with these standards would help ensure that MSRB 
Rule G-40 continues to prevent fraudulent and manipulatives acts and 
practices.
    Proposed MSRB Rule G-40 also would protect municipal entities, 
obligated persons and the public interest. It would do so by ensuring 
that recipients of any advertisement containing a testimonial have the 
necessary context to evaluate the testimonial because the proposed rule 
change would only permit the use of testimonials if certain conditions 
are met, including that specified disclosures are made. Since municipal 
entities and obligated persons are the likely recipients of municipal 
advisor's testimonials, the MSRB believes that the requisite 
disclosures would help ensure that the proposed rule change would not 
result in an erosion of protection for municipal entities, obligated 
persons and the public interest.
    The MSRB also believes that the proposed rule change would promote 
just and equitable principles of trade by aligning the advertising rule 
for municipal advisors, to the extent practicable, with the advertising 
rules for dealers and for investment advisers. This serves to provide 
regulatory consistency for entities that may be dually registered, for 
example as a municipal advisor and an investment adviser, and therefore 
promotes compliance with the advertising rules, which in turn serves to 
help prevent fraudulent and manipulative practices and protect 
municipal entities, obligated persons, and the public interest. 
Additionally, the MSRB believes that the proposed rule change may 
remove impediments to a free and open municipal securities market by 
permitting municipal advisors to also use testimonials in 
advertisements, which could improve competition among municipal 
advisors by allowing another method for advertising.
    In addition, the proposed rule change would foster coordination 
with persons engaged in regulating transactions in municipal 
securities. The amendments to MSRB Rule G-40 would more tightly align 
the content standards for MSRB Rule G-40 with the content standards of 
the SEC's Modernized IA Marketing

[[Page 9586]]

Rule. Providing a more uniform standard for regulated entities subject 
to a fiduciary standard serves to foster greater cooperation and 
coordination among the examining authorities responsible for ensuring 
compliance with MSRB rules. The MSRB further believes that the proposed 
amendment to MSRB Rule G-8 (with the related application of existing 
MSRB Rule G-9 on records preservation) would help municipal advisors 
create an audit trail for compliance and, in turn, would assist 
examination and enforcement authorities in their examination for 
compliance with MSRB Rule G-40, which would further help prevent 
fraudulent and manipulative acts and practices.
    Section 15B(b)(2)(L)(iv) of the Exchange Act \55\ requires that 
rules adopted by the Board not impose a regulatory burden on small 
municipal advisors that is not necessary or appropriate in the public 
interest and for the protection of investors, municipal entities, and 
obligated persons, provided that there is robust protection of 
investors against fraud. The MSRB believes that the proposed rule 
change is consistent with Section 15B(b)(2)(L)(iv) of the Exchange Act 
\56\ because the proposed rule change would allow the use of 
testimonials by all municipal advisors, including small municipal 
advisors. The use of testimonials in advertising would be subject to 
tailored obligations designed to impose only the necessary and 
appropriate regulatory burdens needed to promote compliance with the 
proposed rule change. The proposed rule change represents a balanced 
approach to prescriptive standards for those municipal advisors that 
choose to have the potential benefit of using testimonials in 
advertisements.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78o-4(b)(2)(L)(iv).
    \56\ Id.
---------------------------------------------------------------------------

    Additionally, the MSRB sought to harmonize standards, where 
applicable, between those applicable to solicitor municipal advisors, 
non-solicitor municipal advisors, dealers, and registered investment 
advisers such that those regulated entities that engage in conduct that 
would make them two or more of the above could leverage some of their 
existing processes to comply with relevant obligations under a 
comparable regulatory framework. Moreover, the MSRB believes that 
permitting municipal advisors to use a testimonial in an advertisement 
would be particularly helpful for small municipal advisors to highlight 
the services provided to other municipal advisory clients.
    The MSRB also believes that the proposed rule change is consistent 
with Section 15B(b)(2)(G) of the Exchange Act,\57\ which provides that 
the MSRB's rules shall prescribe records to be made and kept by 
municipal securities brokers, municipal securities dealers, and 
municipal advisors and the periods for which such records shall be 
preserved. The proposed rule change would require municipal advisors, 
consistent with current MSRB Rule G-40(e), to make and keep current a 
record of all advertisements and, consistent with proposed MSRB Rule G-
40(e), a record of any payment made to a municipal advisory client, as 
that term is defined in MSRB Rule G-40(a)(iii) for a testimonial and a 
record of any written agreements required under proposed MSRB Rule G-
40(a)(iv)(G)(3)(b). The MSRB believes that the proposed amendments to 
MSRB Rule G-8 related to recordkeeping (with the ensuing application of 
existing MSRB Rule G-9 on records preservation) would promote 
regulatory consistency and compliance as well as facilitate the 
examination for compliance with MSRB Rule G-40, other MSRB rules, and 
other applicable securities laws and regulations.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78o-4(b)(2)(G).
---------------------------------------------------------------------------

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

    Section 15B(b)(2)(C) of the Exchange Act \58\ requires that MSRB 
rules not be designed to impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Exchange Act. The 
MSRB believes the proposed rule change to amend MSRB Rule G-40 and MSRB 
Rule G-8 would not impose any burden on competition and would not have 
an impact on competition, as the proposed rule change would apply a 
similar regulatory regime to all municipal advisors.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    In accordance with the Board's policy on the use of economic 
analysis in rulemaking, the Board has reviewed proposed amended MSRB 
Rule G-40 and proposed amended MRB Rule G-8.\59\ The MSRB believes that 
the proposed changes to MSRB Rule G-40 and MSRB Rule G-8 would promote 
regulatory consistency and would benefit municipal advisors by removing 
the prohibition that an advertisement does not refer, directly or 
indirectly, to any testimonial of any kind concerning the municipal 
advisors. The proposed amendments to MSRB Rule G-40 and MSRB Rule G-8, 
by design, would continue to prevent any fraudulent or manipulative 
practices, and therefore would protect issuers and investors, as 
municipal advisors could only include the usage of a testimonial as 
part of an advertisement if certain conditions are met, and if abiding 
by the standards of the advertising rule in general. In addition, by 
aligning MSRB rules with the SEC's Modernized IA Marketing Rule, as 
well as MSRB Rule G-21, the proposed amendments to MSRB Rule G-40 and 
MSRB Rule G-8 would also improve efficiency by providing regulatory 
consistency for regulated entities dually registered as a dealer and as 
a municipal advisor, or as an investment adviser registered with the 
SEC and as a municipal advisor. The MSRB therefore believes the 
proposed amendments to MSRB Rule G-40 and MSRB Rule G-8 would promote 
competition and would not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
---------------------------------------------------------------------------

    \59\ Policy on the Use of Economic Analysis in MSRB Rulemaking 
is available at http://msrb.org/Rules-and-Interpretations/Economic-Analysis-Policy.aspx. In evaluating whether there was a burden on 
competition, the Board was guided by its principles that required 
the Board to consider costs and benefits of a rule change, its 
impact on capital formation and the main reasonable alternative 
regulatory approaches.
---------------------------------------------------------------------------

Necessity of the Amendments to MSRB Rule G-40 and MSRB Rule G-8
    As part of the MSRB's strategic goal to modernize the MSRB 
Rulebook, the MSRB proposes to amend MSRB Rule G-40 on advertising by 
municipal advisors to permit municipal advisors to use testimonials in 
advertisements. As MSRB Rule G-40 is currently written, municipal 
advisors are prohibited from using testimonials. This was due to the 
MSRB modeling MSRB Rule G-40 on the original 1961 Initial IA 
Advertising Rule specifying that using a testimonial by an investment 
adviser would constitute a fraudulent, deceptive, or manipulative act, 
practice, or course of action. In December 2020, the SEC amended Rule 
206(4)-1, establishing the Modernized IA Marketing Rule and reversed 
the prior ban on the use of testimonials for traditional referral and 
solicitation activity, subject to certain conditions.\60\ At the time 
of the 1961 Initial IA Advertising Rule, the SEC explained that 
investment advisers had stricter standards of conduct than those for 
other commercial enterprises and that clients and prospective clients 
of investment advisers are frequently unsophisticated in investment 
matters.\61\ The advent of the internet and the growth of technological 
advances, in general, have made social

[[Page 9587]]

media and websites key parts of commerce, including investment advisory 
services.\62\ To provide investment advisers with more flexibility, and 
to increase investors' awareness of service providers' offerings and 
potentially reduce investors' search costs for an adviser, the SEC 
amended the Initial IA Advertising Rule to reflect the common use of 
testimonials and to provide a principles-based regulatory approach.\63\
---------------------------------------------------------------------------

    \60\ See SEC 2020 Adopting Release.
    \61\ See 1961 Advertising Rule Adopting Release.
    \62\ See 84 FR 67518. ``People continue to seek out and consider 
the views of others when making a multitude of transactions or 
decisions--from purchasing a coffee maker to finding the right 
medical expert to consult.''
    \63\ See SEC 2020 Adopting Release.
---------------------------------------------------------------------------

    For the reasons discussed above, the proposed amendments to MSRB 
Rule G-40 are intended to align MSRB Rule G-40's provision governing 
the use of testimonials by municipal advisors to the analogous 
requirements under the SEC's Modernized IA Marketing Rule, by 
prohibiting the use of testimonials in an advertisement unless a 
municipal advisor complies with disclosure and oversight provisions. 
The proposed amendments to MSRB Rule G-40 are intended to promote 
regulatory consistency for regulated entities dually registered as a 
dealer and as a municipal advisor, or as an investment adviser with the 
SEC and as a municipal advisor. Because municipal advisors have a 
fiduciary duty to their clients, the MSRB believes the associated 
requirements for using testimonials as part of the advertising, which 
are meant to protect potential issuer clients from misleading 
advertisements of municipal advisors, would ensure the proposed 
amendments to MSRB Rule G-40 would not result in an erosion of 
protections for issuers, obligated persons and other market 
participants.
Baseline for Evaluation and Reasonable Alternative Approaches
    To evaluate the potential impact of amending MSRB Rule G-40 and 
MSRB Rule G-8, a baseline or baselines must be established as a point 
of reference to compare the expected future state with the proposed 
change to MSRB Rule G-40 and MSRB Rule G-8. The economic impact of the 
proposed change is generally viewed as the difference between the 
baseline state and the expected state. The baseline is the current 
iteration of MSRB Rule G-40 and MSRB Rule G-8.
    The MSRB has considered reasonable alternatives where applicable 
when considering the costs, benefits, and impact of a proposed 
amendment. One alternative would be to merge MSRB Rule G-40 with MSRB 
Rule G-21 on advertising for dealers. Consolidating advertising 
requirements for dealers and municipal advisors would provide the 
benefit of holding both groups to the same standards, including the 
usage of testimonials in advertisements. However, dealers and municipal 
advisors provide vastly different services because, unlike dealers, 
most municipal advisors have a fiduciary duty to their clients. As a 
result, the MSRB believes that there is a need for a separate municipal 
advisor advertising rule.\64\ In addition, prioritizing harmonization 
solely within MSRB rules, as opposed to harmonization of MSRB rules 
with Commission rules, as appropriate, would still result in 
inconsistency in rule requirements as related to advertisements between 
municipal advisors and investment advisers, both of which are subject 
to a fiduciary standard.
---------------------------------------------------------------------------

    \64\ See Response to Comments on File No. SR-MSRB-2014-08, 
February 5, 2015. ``. . . market for municipal advisory services is 
separate and distinct from the market for services of municipal 
securities brokers and dealers.''
---------------------------------------------------------------------------

    As another alternative, the MSRB considered harmonizing MSRB Rule 
G-40 with FINRA Rule 2210(2)(6) on communications with the public, 
including the usage of testimonials. Harmonizing with FINRA rules would 
provide a benefit to dually registered entities with FINRA and the 
MSRB. This position has previously been proposed by SIFMA in response 
to MSRB's SEC filing on creating MSRB Rule G-40.\65\ However, FINRA 
Rule 2210 governs a broker-dealer's communications, as opposed to a 
municipal advisor's communications. This alternative may still cause 
inconsistency and confusion for advisory entities that provide both 
investment advisory and municipal advisory services because they would 
need to follow two separate testimonial rules (the SEC's Modernized IA 
Marketing Rule and a FINRA-aligned MSRB Rule G-40), which may also 
result in more costs associated with compliance. For the reasons stated 
above, the current proposed amendments to MSRB Rule G-40, which are 
designed, to the extent practicable, to align with MSRB Rule G-21 and 
the SEC's Modernized IA Market Rule are deemed to be superior to the 
alternative of aligning with FINRA's rule requirements related to the 
use of testimonials by broker-dealers.
---------------------------------------------------------------------------

    \65\ Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated February 28, 2018 (``SIFMA'').
---------------------------------------------------------------------------

Benefits and Costs
    The MSRB believes that the proposed amendments to MSRB Rule G-40 
and MSRB Rule G-8, in aggregate, would benefit municipal advisors by 
allowing testimonials in their advertisements subject to certain 
requirements, which would provide municipal advisors another marketing 
method to solicit potential clients, subject to certain conditions. In 
addition, the proposed amendments to MSRB Rule G-40 and MSRB Rule G-8 
would potentially reduce the compliance burden for regulated entities 
dually registered as a dealer and as a municipal advisor, or as an 
investment adviser with the SEC and as a municipal advisor by aligning 
MSRB Rule G-40 with the SEC's Modernized IA Marketing Rule, as well as 
with MSRB Rule G-21 as related to the usage of testimonials in 
advertisements.
    The ability to provide testimonials in advertisements may benefit 
municipal advisors by allowing municipal advisors to show satisfied 
clients or other individuals willing to endorse their business 
practices. In addition, the MSRB believes the associated requirements 
for using testimonials as part of an advertisement, which are meant to 
protect potential issuer clients and obligated persons of municipal 
advisors, would help ensure the proposed amendments to MSRB Rule G-40 
and MSRB Rule G-8 would not result in an erosion of protection for 
issuers, obligated persons and other market participants.
    The MSRB believes that the proposed amendments to MSRB Rule G-40 
and MSRB Rule G-8 would impose minor costs on municipal advisors. 
Municipal advisors would incur the upfront costs related to updating 
policies and procedures on using testimonials in advertising, which 
would be a one-time effort only. In addition, on an ongoing basis, 
there would be minor compliance costs to assure municipal advisors' 
adherence to the disclosure requirements and supervisory obligations 
when using testimonials in advertisements, which would likely be 
greater than the current ongoing compliance costs of ensuring no 
testimonial is included in an advertisement. If a municipal advisor 
opts to use testimonials in advertisements, there would also be a cost 
from the resultant recordkeeping obligations, recognizing that absent 
proposed amendments to MSRB Rule G-8, municipal advisors are subject to 
SEC recordkeeping requirements to make and keep records of all written 
communications received, and originals

[[Page 9588]]

or copies of all written communications sent, by such municipal advisor 
relating to municipal advisory activities.\66\
---------------------------------------------------------------------------

    \66\ See Rule 15Ba1-8(a)(1)-(8) and MSRB Rule G-8(h)(i).
---------------------------------------------------------------------------

    The MSRB estimates that the annual costs for fulfilling the 
requirements associated with the use of testimonials in advertisements 
would be no more than $400 per municipal advisor per year, assuming 
each municipal advisor would use approximately five testimonials per 
year, based on the SEC's 2019 estimated ongoing costs for investment 
advisers using testimonials and endorsements.\67\ The MSRB does not 
expect any of the cost components to be a major burden for municipal 
advisors. Furthermore, individual municipal advisory firms may decide 
whether it is cost-effective to use testimonials in advertising when 
weighing against the associated requirements and the compliance costs, 
as the usage of testimonials is optional. It is expected that municipal 
advisors would only choose to include testimonials in their 
advertisements if the expected benefits exceed the expected costs of 
doing so.
---------------------------------------------------------------------------

    \67\ See SEC 2020 Adopting Release. In 2019, the Commission 
estimated that the aggregate internal cost of providing the 
disclosures associated with testimonials and endorsements would be 
$337 per investment adviser per year, assuming each investment 
adviser would use approximately five testimonials or endorsements 
per year.
---------------------------------------------------------------------------

Effect on Competition, Efficiency and Capital Formation
    The proposed amendments to MSRB Rule G-40 and MSRB Rule G-8 would 
be applicable to all municipal advisors and would help ensure that all 
regulated entities dually registered as a dealer and as a municipal 
advisor, or as an investment adviser with the SEC and as a municipal 
advisor, are subject to consistent standards on the use of testimonials 
in advertisements. The proposed amendments to MSRB Rule G-40 and MSRB 
Rule G-8 would therefore promote efficiency in the marketplace.
    The MSRB believes that proposed amended MSRB Rule G-40 and MSRB 
Rule G-8 would not impose an unnecessary or inappropriate regulatory 
burden on small municipal advisory firms, as the potential benefits 
from using testimonials in advertising would be applicable to all 
municipal advisors and should be proportionate to each municipal 
advisory firm's business activities. The proposed amendments to MSRB 
Rule G-40 and MSRB Rule G-8 therefore should not negatively affect 
competition and capital formation; it may improve competition among 
municipal advisors by allowing another method for advertising. The MSRB 
believes that permitting municipal advisors to use a testimonial in an 
advertisement would be particularly helpful for small municipal 
advisors to highlight the services provided to other municipal advisory 
clients.

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

    Written comments were neither solicited nor received on the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period of up to 90 days (i) as 
the Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please 
include File Number SR-MSRB-2023-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MSRB-2023-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the MSRB. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2023-01 and should be submitted on 
or before March 7, 2023.

    For the Commission, pursuant to delegated authority.\68\
---------------------------------------------------------------------------

    \68\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03059 Filed 2-13-23; 8:45 am]
BILLING CODE 8011-01-P