[Federal Register Volume 80, Number 89 (Friday, May 8, 2015)]
[Notices]
[Pages 26751-26785]
[FR Doc No: 2015-11054]

Vol. 80

Friday,

No. 89

May 8, 2015

Part III

Securities and Exchange Commission

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Self-Regulatory Organizations; Municipal Securities Rulemaking Board;
Notice of Filing of 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 Municipal Advisors; Notice

Federal Register / Vol. 80 , No. 89 / Friday, May 8, 2015 / Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74860; File No. SR-MSRB-2015-03]

Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of 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 Municipal Advisors

May 4, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 24, 2015, the Municipal Securities Rulemaking Board (the
``MSRB'' or ``Board'') filed with the Securities and Exchange
Commission (the ``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the MSRB. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The MSRB filed with the Commission 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 municipal advisors (the ``proposed rule change''). The MSRB
requests that the proposed rule change be approved with an
implementation date six months after the Commission approval date for
all changes.
    The text of the proposed rule change is available on the MSRB's Web
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2015-Filings.aspx, at the MSRB's principal office, and at the Commission's
Public Reference Room.

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

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

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

1. Purpose
    Following the financial crisis of 2008, Congress enacted the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank
Act'').\3\ The Dodd-Frank Act establishes a new federal regulatory
regime requiring municipal advisors to register with the SEC, deeming
them to owe a fiduciary duty to their municipal entity clients and
granting the MSRB rulemaking authority over them. The MSRB, in the
exercise of that authority, is currently developing a comprehensive
regulatory framework for municipal advisors. A significant element of
that regulatory framework is Proposed Rule G-42, which would establish
core standards of conduct for municipal advisors that engage in
municipal advisory activities, other than municipal advisory
solicitation activities (hereinafter, ``municipal advisors'').\4\
Proposed Rule G-42 is accompanied by associated proposed amendments to
Rule G-8.
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    \3\ Public Law No. 111-203, 124 Stat. 1376 (2010).
    \4\ See Registration of Municipal Advisors, Rel. No. 34-70462
(Sept. 20, 2013), 78 FR 67467, at 67519, note 679 (Nov. 12, 2013)
(``SEC Final Rule'') (recognizing that the regulation of municipal
advisors includes the ``application of standards of conduct . . .
that may be required by the Commission or the MSRB, and other
requirements unique to municipal advisors that may be imposed by the
MSRB''). The proposed rule change would not apply to municipal
advisors when engaging in the solicitation of a municipal entity or
obligated person within the meaning of Exchange Act Section
15B(e)(9) (15 U.S.C. 78o-4(e)(9)).
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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. The proposed rule draws on aspects of existing law and
regulation under other relevant regulatory regimes, including those
applicable to brokers, dealers and municipal securities dealers under
MSRB rules and the Exchange Act, investment advisers under the
Investment Advisers Act of 1940 \5\ (``Investment Advisers Act'') and
commodity trading advisors under the Commodity Exchange Act
(``CEA'').\6\
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    \5\ 15 U.S.C. 80b-1 et seq.
    \6\ 7 U.S.C. 1 et seq.
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    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, without limitation, 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 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.
    In addition, the proposed rule change would define key terms used
in 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, 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 impact of client action that is independent of or contrary to
the advice of a municipal advisor, 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 ``engage in a
principal transaction;'' the continued applicability of state and other
laws regarding fiduciary and other duties owed by municipal advisors;
and, finally, 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.
Standards of Conduct
    Section (a) of Proposed Rule G-42 would establish the core
standards of conduct and duties applicable to municipal advisors. The
approach toward the core standards and duties in Proposed Rule G-42
flows from the distinctions drawn in the Dodd-Frank Act between a
municipal advisor's duties owed to clients that are municipal entities
and those duties owed to clients that are obligated persons. The Dodd-
Frank Act specifically deems a municipal advisor to owe a fiduciary
duty to its municipal entity clients.\7\ In contrast, the Dodd-Frank
Act does not impose a fiduciary duty with respect to a municipal
advisor's obligated person clients.\8\
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    \7\ See Section 15B(c)(1) of the Exchange Act, 15 U.S.C. 78o-
4(c)(1) which provides:
    A municipal advisor and any person associated with such
municipal advisor shall be deemed to have a fiduciary duty to any
municipal entity for whom such municipal advisor acts as a municipal
advisor, and no municipal advisor may engage in any act, practice,
or course of business which is not consistent with a municipal
advisor's fiduciary duty or that is in contravention of any rule of
the Board.
    \8\ See SEC Final Rule, 78 FR at 67475, note 100.
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    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, without limitation, a duty of
loyalty and a duty of care. The standards contained in these
subsections would not supersede any more restrictive provisions of
state or other laws applicable to the activities of municipal advisors.
    Proposed supplementary material would provide guidance on the duty
of care and the duty of loyalty. Generally, in lieu of providing
detailed requirements, the duties would be described in terms that
would empower the client to, in large part, determine the scope of
services and control the engagement with the municipal advisor (with
the municipal advisor's agreement).
    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; \9\ 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.
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    \9\ The duty of care, which is applicable to all municipal
advisory activities, would apply to the provision of comments
following the review of any document and the provision of language
for use in any document--including an official statement--to the
extent that conduct constituted municipal advisory activity.
Furthermore, such conduct would be required to comport with the
fiduciary duty owed in the case of a municipal entity client.
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    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 .07 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.
    Paragraph (b)(i)(A) would require a municipal advisor to disclose
any actual or potential conflicts of interest of which the municipal
advisor becomes aware after reasonable inquiry that could reasonably be
anticipated to impair the municipal advisor's ability to provide advice
to or on behalf of the client in accordance with the applicable
standards of conduct (i.e., a duty of care or a fiduciary duty).
Paragraphs (b)(i)(B) through (F) would provide more 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. Paragraph (b)(i)(G) would require municipal advisors
to disclose any other engagements or relationships of the municipal
advisor 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 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. To facilitate the use of existing records, 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 \10\ filed with the Commission, if the municipal
advisor provides detailed information specifying where the client could
access such forms electronically. The requirement to specifically refer
to the relevant portions of the forms would not be satisfied by a broad
reference to the section of the forms containing such disclosures.
Similarly, the specific-information requirement for access to the forms
would not be satisfied by a general reference to the SEC's Electronic
Data Gathering, Analysis, and Retrieval system (``EDGAR''). A municipal
advisor could alternatively meet this latter requirement, for example,
by publishing its most recent forms on its own Web site and then
providing the client with the direct web link or internet address.
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    \10\ 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.\11\ Coupled with its duty to disclose material conflicts of
interest, a municipal advisor's obligation to explain how it addresses
or intends to manage or mitigate its material conflicts of interest was
included in the proposed rule to reflect the Board's intent to
eliminate, or at least to expose and reduce the occurrence of, material
conflicts of interest that might incline a municipal adviser to provide
advice or a recommendation which was not disinterested.\12\ If not
properly managed or mitigated, material conflicts of interest could
lead to a failure to protect a municipal advisor's client's interest,
thereby causing a breach of the duty of care and/or loyalty that would
be established by proposed section (a).
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    \11\ This requirement is analogous to the requirement of Form
ADV (17 CFR 279.1) under the Investment Advisers Act (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.
    \12\ See, e.g., SEC v. Capital Gains Research Bureau, Inc., 375
U.S. 180, 191-92 (1963).
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    Paragraph .06 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 \13\ 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 .06 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 .06 of the
Supplementary Material would also clarify that the satisfaction of the
requirements of paragraph .06 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. Such other legal requirements, would include, but would not
be limited to, other MSRB rules (including Rule G-23), Financial
Industry Regulatory Authority (``FINRA'') rules or federal or state
laws that apply to municipal advisory activities.\14\
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    \13\ Under subsection (f)(vi) of Proposed Rule G-42, 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.
    \14\ Rule G-23, on activities of financial advisors, generally
provides that a dealer that has a financial advisory relationship
(as defined by Rule G-23(b)) with respect to the issuance of
municipal securities is precluded from acquiring all or any portion
of such issue, directly or indirectly, from the issuer as principal,
either alone or as a participant in a syndicate or other similar
account formed for that purpose. A dealer is also, under Rule G-23,
precluded from arranging the placement of an issue with respect to
which it has a financial 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: \15\
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    \15\ While no acknowledgement from the client of its receipt of
the documentation would be required, 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; \16\
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    \16\ 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). However, the description of the events contained
in Forms MA or MA-I must be sufficiently specific to allow a
municipal entity or obligated person client to understand the nature
of any disclosed legal or disciplinary event. In addition, the
municipal advisor must provide detailed information specifying where
the client could access such forms electronically. See supra note 10
and accompanying text.
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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, 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).
    Proposed Rule G-42(c) also would require municipal advisors to
promptly amend or supplement the writing(s) during the term of the
municipal advisory relationship as necessary to reflect any material
changes or additions in the required information. For example, if the
basis of compensation or scope of services materially changed during
the term of the relationship, the municipal advisor would be required
to amend or supplement the writing(s) and promptly deliver the amended
writing(s) or supplement to the client. The same would be true in the
case of material conflicts of interest discovered after the
relationship documentation was last provided to the client. The
amendment and supplementation requirement in proposed section (c) would
apply to any material changes and additions that are discovered, or
should have been discovered, based on the exercise of reasonable
diligence by the municipal advisor. Any amendments or supplementation
also would be subject to the requirements of the proposed rule change
that would apply as if it were the first relationship documentation
provided to the client.
    Proposed Rule G-42(c) is modeled in part on Rule G-23, which
requires a broker, dealer or municipal securities dealer (``dealer'')
that enters into a financial advisory relationship with an issuer to
evidence that relationship in writing prior to, upon or promptly after
the inception of that relationship. Like Rule G-23, proposed section
(c) would not require that the writing(s) evidencing the relationship
be a bilateral agreement or contract. For example, if state law
provided for the procurement of municipal advisory services in a manner
that did not require a writing sufficient to establish a bilateral
agreement, a municipal advisor could send its client a writing, such as
a letter that references the procurement document and contains the
terms and disclosures required by proposed Rule G-42(b) and (c) to
evidence its municipal advisory relationship with its municipal entity
or obligated person client.
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 determined, based on the information obtained
through the reasonable diligence of the municipal advisor, whether the
transaction or product is suitable for the client.\17\ 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.
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    \17\ Some securities market participants are required to make
only recommendations that are ``consistent with'' their customer's
best interests. (See FINRA Notice 12-25, Suitability (May 2012)). As
provided in proposed section (a) and paragraph .02 of the
Supplementary Material to Proposed Rule G-42, a municipal advisor to
a municipal entity client owes the client a fiduciary duty that
includes a duty of loyalty in addition to the duty of care, which
requires the municipal advisor to deal honestly and with the utmost
good faith with the municipal entity client and act in the client's
best interests without regard to the financial or other interests of
the municipal advisor. A municipal advisor's recommendations of
municipal securities transactions and municipal financial products
to a municipal entity client, as is the case with all municipal
advisory activities performed for a municipal entity client, must
comport with the municipal advisor's fiduciary duty and particularly
its duty of loyalty. The MSRB considers the duty of loyalty
described in Proposed Rule G-42 to be even more rigorous than a
standard requiring consistency with a client's best interests.
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    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 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. The proposed rule does
not include requirements regarding how such information must be
communicated by the municipal advisor to the client, and a municipal
advisor would be permitted to choose the appropriate method by which to
communicate the information

to its client so long as it comports with the duty of care owed.
    Section (d), like other provisions of Proposed Rule G-42, would
reflect the basic principle that the client controls the scope of the
engagement with its municipal advisor (with the agreement of the
municipal advisor). For example, a municipal advisor's engagement may
be limited in scope because the municipal advisor's client already
reached a decision regarding a particular municipal securities
transaction or municipal financial product, or engaged another
professional to undertake certain duties in connection with a municipal
securities transaction or municipal financial product. Paragraph .04 of
the Supplementary Material would provide that a municipal advisor and
its client could limit the scope of the municipal advisory relationship
to certain specified activities or services. A municipal advisor,
however, would not be permitted to alter the standards of conduct or
duties imposed by the proposed rule with respect to that limited scope.
    The proposed rule change 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.\18\ Consistent with the approach in the case of dealers, 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 obligate the municipal advisor to
conduct a suitability analysis of its recommendation. Depending on all
of the facts and circumstances, communications by a municipal advisor
to a client that concern minor or ancillary matters 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) but would not
trigger the suitability obligation set forth in proposed section (d).
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    \18\ See MSRB Rule G-19. See also MSRB Notice 2002-30 (Sept. 25,
2002) Notice Regarding Application of Rule G-19, on Suitability of
Recommendations and Transactions, to Online Communications.
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    Paragraph .08 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 .09 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.\19\ 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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    \19\ 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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    As a practical matter, it is understood that a client could at
times elect a course of action either independent of or contrary to the
advice of its municipal advisor. Paragraph .03 of the Supplementary
Material would provide that the municipal advisor would not be required
to disengage from the municipal advisory relationship on that basis.
Specified Prohibitions
    Subsection (e)(i) of Proposed Rule G-42 would prohibit discrete
conduct or activities that would conflict, or would be highly likely to
conflict, with the core standards of conduct--the duty of loyalty and
the duty of care--applicable to municipal advisors under Proposed Rule
G-42 and the Exchange Act.
    Paragraph (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 .10 of the Supplementary Material would provide additional
guidance on how compensation would be determined to be excessive.
Included in paragraph .10 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.
    Paragraph (e)(i)(B) would prohibit municipal advisors from
delivering an invoice for fees or expenses for municipal advisory
activities that does not accurately reflect the activities actually
performed or the personnel that actually performed those activities.
This provision would not prohibit a municipal advisor from including a
discount for the services it actually performed, if accurately
disclosed.
    Paragraph (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. Note that,
additionally, the MSRB's existing fundamental fair practice rule, Rule
G-17, precludes municipal advisors, in the conduct of their municipal
advisory activities, from engaging in any deceptive, dishonest or
unfair practice with any person.
    Paragraph (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.
    Paragraph (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 paid to another
municipal advisor registered as such with the Commission and MSRB for
making such a communication as described in subparagraph (e)(i)(E)(1);
and (3) payments that are permissible ``normal business dealings'' as
described in MSRB Rule G-20. The proposed rule change, however, would
not prescribe parameters that would effectively limit a client's
ability to decide the source of funds for the payment of fees for
services rendered by the municipal advisor.
Principal Transactions
    Subsection (e)(ii) of Proposed Rule G-42 would prohibit a municipal
advisor to a municipal entity, and any affiliate of such municipal
advisor, from engaging in a principal transaction directly related to
the same municipal securities transaction or municipal financial
product as to which the municipal advisor is providing or has provided
advice. 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,
importantly, 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 .07 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. The purpose of this
provision would be to avoid a potential conflict in MSRB rules and
provide, until such time as the MSRB may further review and potentially
amend Rule G-23, that the specific prohibition against principal
transactions contained in subsection (e)(ii) would not prohibit such
underwriting transactions, as they are already addressed and prohibited
in certain circumstances by Rule G-23.
    For purposes of the prohibition in proposed subsection (e)(ii),
subsection (f)(i) would define the term ``engaging in a principal
transaction'' to mean ``when acting as a principal for one's own
account, selling to or purchasing from the municipal entity client any
security or entering into any derivative, guaranteed investment
contract, or other similar financial product with the municipal entity
client.'' This definition draws on the statutory language regarding
principal transactions in the Investment Advisers Act.\20\ Among other
things, the definition was designed to exclude transactions thought to
be potentially covered by some commenters, such as the taking of a cash
deposit or the payment by a client solely for professional services.
Further, paragraph .11 of the Supplementary Material would clarify that
the term ``other similar financial products,'' as used in subsection
(f)(i), 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. Bank loans would
be included under the specified circumstances because, as a matter of
market practice, they 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.
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    \20\ See 15 U.S.C. 80b-6(3).
---------------------------------------------------------------------------

Definitions
    Section (f) of Proposed Rule G-42 would provide definitions of the
terms ``engaging in a principal transaction,'' ``affiliate of the
municipal advisor,'' \21\ ``municipal advisory relationship,'' \22\ and
``official statement.'' \23\ 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;'' \24\
``municipal advisor;'' \25\ ``municipal advisory activities;'' \26\

``municipal entity;'' \27\ and ``obligated person.'' \28\
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    \21\ ``Affiliate of the municipal advisor'' would mean ``any
person directly or indirectly controlling, controlled by, or under
common control with such municipal advisor.'' See Proposed Rule G-
42(f)(iii).
    \22\ Proposed Rule G-42(f)(vi) provides 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. The municipal
advisory relationship shall be deemed to have ended on the date
which is 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 this rule or (ii) the date on which the municipal
advisor withdraws from the municipal advisory relationship.
    \23\ ``Official statement'' would have the same meaning as in
MSRB Rule G-32(d)(vii). See Proposed Rule G-42(f)(ix).
    \24\ ``Advice'' would have the same meaning as in Section
15B(e)(4)(A)(i) of the Exchange Act (15 U.S.C. 78o-4(e)(4)(A)(i));
SEC Rule 15Ba1-1(d)(1)(ii) (17 CFR 240.15Ba1-1(d)(1)(ii)); and other
rules and regulations thereunder. See Proposed Rule G-42(f)(ii).
    \25\ ``Municipal advisor'' would have the same meaning as in
Section 15B(e)(4) of the Act, 17 CFR 240.15Ba1-1(d)(1)-(4) and other
rules and regulations thereunder; provided that it shall exclude a
person that is otherwise a municipal advisor solely based on
activities within the meaning of Section 15B(e)(4)(A)(ii) of the Act
and rules and regulations thereunder or any solicitation of a
municipal entity or obligated person within the meaning of Section
15B(e)(9) of the Act and rules and regulations thereunder.
    See Proposed Rule G-42(f)(iv).
    \26\ ``Municipal advisory activities'' would mean those
activities that would cause a person to be a municipal advisor as
defined in subsection (f)(iv) (definition of ``municipal advisor'')
of Proposed Rule G-42. See Proposed Rule G-42(f)(v).
    \27\ ``Municipal entity'' would ``have the same meaning as in
Section 15B(e)(8) of the Act, 17 CFR 240.15Ba1-1(g) and other rules
and regulations thereunder.'' See Proposed Rule G-42(f)(vii).
    \28\ ``Obligated person'' would ``have the same meaning as in
Section 15B(e)(10) of the Act, 17 CFR 240.15Ba1-1(k) and other rules
and regulations thereunder.'' See Proposed Rule G-42(f)(viii).
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Applicability of Proposed Rule G-42 to 529 College Savings Plans and
Other Municipal Fund Securities
    The regulation of municipal advisors, as the SEC has
recognized,\29\ is relevant to municipal fund securities.\30\ 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.
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    \29\ See SEC Final Rule, 78 FR at 67472-3.
    \30\ ``Municipal fund security'' is defined in MSRB Rule D-12 to
mean ``a municipal security issued by an issuer that, but for the
application of Section 2(b) of the Investment Company Act of 1940,
would constitute an investment company within the meaning of Section
3 of the Investment Company Act of 1940.'' The term refers to, among
other things, interests in governmentally sponsored 529 college
savings plans and local government investment pools.
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Proposed Amendments to Rule G-8
    The proposed amendments to Rule G-8 would require each municipal
advisor to make and keep any document created by the municipal advisor
that was material to its review of a recommendation by another party or
that memorialize its basis for any conclusions as to suitability.
2. Statutory Basis
    Section 15B(b)(2) of the Exchange Act \31\ provides that:
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78o-4(b)(2).

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

    Section 15B(b)(2)(C) of the Exchange Act \32\ provides that the
MSRB's rules shall:

    \32\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

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

    Section 15B(b)(2)(L)(i) of the Exchange Act \33\ requires, with
respect to municipal advisors, the Board to adopt rules 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.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78o-4(b)(2)(L)(i).
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    The MSRB believes that, the proposed rule change is consistent with
Sections 15B(b)(2),\34\ 15B(b)(2)(C) \35\ and 15B(b)(2)(L)(i) \36\ of
the Exchange Act because it will enhance the protections afforded to
municipal bond issuers and investors by providing guidance to municipal
advisors that is designed to promote compliance with the standards of
conduct, requirements and intent of the Dodd-Frank Act.
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    \34\ 15 U.S.C. 78o-4(b)(2).
    \35\ 15 U.S.C. 78o-4(b)(2)(C).
    \36\ 15 U.S.C. 78o-4(b)(2)(L)(i).
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    In this regard, neither the Dodd-Frank Act nor the recently-adopted
SEC Final Rule prescribe the duties and obligations of municipal
advisors beyond a general statement that municipal advisors shall be
deemed to have a fiduciary duty to any municipal entity for whom the
municipal advisor acts as a municipal advisor. Adoption of Proposed
Rule G-42 will fulfill the need for regulatory guidance with respect to
the standards of conduct and duties of municipal advisors and the
prevention of breaches of a municipal advisor's fiduciary duty to its
municipal entity clients. Proposed Rule G-42 also will establish
standards of conduct and duties for municipal advisors when engaging in
municipal advisory activities for obligated persons and provide
guidance to these municipal advisors as to what conduct would satisfy
these duties and obligations.
    The MSRB believes that by articulating specific standards of
conduct and duties for municipal advisors, Proposed Rule G-42 will
assist municipal advisors in complying with the statutorily-imposed
requirements of the Dodd-Frank Act, and help prevent failures to meet
those requirements. The proposed rule change will aid municipal
entities and obligated persons that choose to engage municipal advisors
in connection with their issuances of municipal securities as well as
transactions in municipal financial products by promoting higher
ethical and professional standards of such municipal advisors. The MSRB
also believes that articulating standards of conduct and duties of
municipal advisors will enhance the ability of the MSRB and other
regulators to oversee the conduct of municipal advisors, as
contemplated by the Dodd-Frank Act.
    The MSRB believes the proposed rule change will enhance municipal
entity and obligated person protections by ensuring that these entities
have access to sufficient information to make meaningful choices, based
on the merits of the municipal advisor, when considering engaging a
municipal advisor 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. As a result, municipal advisor clients will be
able to evaluate municipal advisors on this objective set of
information. These protections will also be enhanced as a result of the
proposed rule change's guidance for municipal advisors that could
assist advisors in complying with, or help prevent breaches of, their
fiduciary duty and duty of care, as well as other applicable
obligations such as the duty of fair dealing (which is owed under MSRB
Rule G-17 by all municipal advisors to all persons). To the extent that
this guidance, provided in the supplementary material in the proposed
rule change, would increase the likelihood of compliance by municipal
advisors, municipal entities and obligated persons will benefit.
Investors in municipal bond offerings will also benefit from the
proposed rule change to the extent that a municipal entity or obligated
person issuing bonds that uses a municipal advisor is more likely to
receive services that reflect a higher ethical and professional
standard than otherwise would be the case.
    The proposed rule change would also, to some extent, prescribe
means for municipal advisors to help prevent breaches of these duties,
which would include, among others: Requirements for the information
that must be included in the documentation of the municipal advisory
relationship; specified activities (such as certain principal
transactions) 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.
    Section 15B(b)(2)(L)(iv) of the Exchange Act \37\ requires that
rules adopted by the Board:
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78o-4(b)(2)(L)(iv).

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

    not impose a regulatory burden on small municipal advisors that
is not necessary or appropriate in the public interest and for the
protection of investors, municipal entities, and obligated persons,
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 \38\ because the proposed
rule change would impose on all municipal advisors, including small
municipal advisors, only the necessary and appropriate regulatory
burdens needed to promote compliance with the proposed rule change. To
accomplish this, Proposed Rule G-42 would use both a principles and
prescriptive-based approach to establish the core standards of conduct
in order to, among other things, accommodate the diversity of the
municipal advisor population, including small municipal advisors and
sole proprietorships, and to provide uniform protections to its
clients, investors and the public.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78o-4(b)(2)(L)(iv).
---------------------------------------------------------------------------

    The MSRB recognizes that municipal advisors would incur costs to
meet the standards of conduct and duties contained in the proposed rule
changes. These costs also could include additional compliance and
recordkeeping costs. To ensure compliance with the disclosure
obligations of the proposed rule change, municipal advisors could incur
costs by seeking advice from legal and compliance professionals when
preparing disclosures to clients. However, the MSRB believes that some
of these costs are accounted for in the SEC Final Rule which requires
disclosure of at least some similar information, such as the disclosure
of disciplinary events. Proposed Rule G-42 could also impose additional
costs on municipal advisors by requiring the disclosure of additional
information directly to clients, some of which must already be
submitted to the SEC on SEC Forms MA \39\ and MA-I.\40\ The MSRB has
considered these costs and that there could be some instances of
duplicative disclosure, but believes that the overlap in disclosure
requirements between the SEC and MSRB will be minimal and that the
disclosure requirements of the proposed rule are important elements of
Proposed Rule G-42 that protect municipal advisor clients and foster
transparency in the municipal advisory marketplace.
---------------------------------------------------------------------------

    \39\ 17 CFR 249.1300.
    \40\ 17 CFR 249.1310.
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    As to the potential costs associated with additional recordkeeping
requirements, the SEC recognized in its economic analysis \41\ of its
recordkeeping requirements that municipal advisors should already be
maintaining books and records as part of their day-to-day operations.
In addition, municipal advisors who are also registered as broker-
dealers or investment advisers are currently subject to the
recordkeeping requirements of those regulatory frameworks. Against this
back-drop, the MSRB believes that the costs associated with the few
additional recordkeeping requirements associated with Proposed Rule G-
42 will not be significant.
---------------------------------------------------------------------------

    \41\ See SEC Final Rule, 78 FR at 67619.
---------------------------------------------------------------------------

    The MSRB believes that any increase in municipal advisory fees
attributable to the additional costs of the proposed rule change will
be minimal and that at least the element of fixed costs per municipal
advisory firm will be spread across the number of advisory engagements
for each firm. The MSRB recognizes, however, that for smaller municipal
advisors with fewer clients, the cost of compliance with the proposed
rule change's standards of conduct and duties could represent a greater
percentage of annual revenues, and, thus, such advisors could be more
likely to pass those costs along to their advisory clients.
    The MSRB also recognizes that, as a result of these costs, some
municipal advisors could decide to exit the market, curtail their
activities, consolidate with other firms, or pass the costs on to
municipal entities and obligated persons in the form of higher fees.
The MSRB believes, however, that by articulating the core standard of
conduct and duties and obligations of municipal advisors and by
prescribing means that would prevent breaches of these duties, the
proposed rule change will reduce possible confusion and uncertainty
about what is required in order to comply with relevant provisions of
the Dodd-Frank Act. Therefore, the proposed rule change likely will
reduce certain costs of compliance that might have otherwise been
incurred by allowing municipal advisors to more quickly and accurately
determine compliance requirements.
    The MSRB also believes that the proposed rule change is consistent
with Section 15B(b)(2)(G) of the Exchange Act,\42\ which provides that
the MSRB's rules shall:
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78o-4(b)(2)(G).

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

    The proposed rule change would require, under the proposed
amendments to Rule G-8, 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 conclusions as to suitability. The MSRB believes that
the proposed amendments to Rule G-8 related to recordkeeping (with the
ensuing application of existing Rule G-9 on records preservation) would
promote compliance and facilitate enforcement of Proposed Rule G-42,
other MSRB rules, and other applicable securities laws and regulations.

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

    Section 15B(b)(2)(C) \43\ of the Exchange Act requires that MSRB
rules not be designed to impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act. In addition,
Section 15B(b)(2)(L)(iv) \44\ of the Exchange Act provides that MSRB
rules may not impose a regulatory burden on small municipal advisors
that is not necessary or appropriate in the public interest and for the
protection of investors, municipal entities, and obligated persons,
provided that there is robust protection of investors against fraud.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78o-4(b)(2)(C).
    \44\ 15 U.S.C. 78o-4(b)(2)(L)(iv).
---------------------------------------------------------------------------

    In determining whether these standards have been met, the MSRB was
guided by the Board's Policy on the Use of Economic Analysis in MSRB
Rulemaking.\45\ In accordance with this policy, the Board evaluated the
potential impacts of the proposed rule, including in comparison to
reasonable alternative regulatory approaches, relative to the baseline
that, inter alia, deemed municipal advisors to owe a fiduciary duty to
their municipal entity clients and established a registration
requirement. Based on this evaluation, the MSRB does not believe that
the proposed rule change would impose any additional burdens on
competition that are not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
---------------------------------------------------------------------------

    \45\ Policy on the Use of Economic Analysis in MSRB Rulemaking,
available at http://www.msrb.org/About-MSRB/Financial-and-Other-Information/Financial-Policies/Economic-Analysis-Policy.aspx.
---------------------------------------------------------------------------

    The proposed rule may also provide a range of benefits to municipal
entities, investors and municipal advisors. Municipal entities and
obligated persons will have access to more information about municipal
advisors

and can 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
market. Moreover, the MSRB believes that the proposed rule change will
provide a benefit to municipal advisors who could otherwise face
greater uncertainty about the standards of conduct and duties required
to meet certain of the requirements of the Dodd-Frank Act.
    The MSRB considered whether costs associated with the proposed rule
change, relative to the baseline, could affect the competitive
landscape by leading some municipal advisors to exit the market,
curtail their activities, consolidate with other firms, or pass costs
on to municipal entity and obligated person clients in the form of
higher fees. In addition, the MSRB considered whether the costs
associated with the proposed rule, relative to the baseline, could
create barriers to entry for firms wishing to offer to engage in
municipal advisory activities.
    The MSRB recognizes that some municipal advisors may exit the
market as a result of the costs associated with the proposed rule
relative to the baseline. However, the MSRB believes municipal advisors
may exit the market for a number of reasons other than costs associated
with the proposed rule. The MSRB also recognizes that some municipal
advisors may consolidate with other municipal advisors in order to
benefit from economies of scale (e.g., by leveraging existing
compliance resources of a larger firm) rather than to incur separately
the costs associated with the proposed rule. Finally, the MSRB
acknowledges that some potential market entrants may be discouraged
from entering the market because of costs or because the requirement to
disclose information such as disciplinary events might make attracting
business more difficult.
    It is also possible that competition for municipal advisory
activities may be affected by whether incremental costs associated with
requirements of the proposed rule are passed on to advisory clients.
The amount of costs passed on may be influenced by the size of the
municipal advisory firm. For smaller municipal advisors with fewer
clients, the incremental costs associated with the requirements of the
proposed rule may represent a greater percentage of annual revenues,
and, thus, such advisors may be more likely to pass those costs along
to their advisory clients. As a result, the competitive landscape may
be altered by the potentially impaired ability of smaller firms to
compete for advisory clients.
    In addition to the factors noted above that may affect smaller
advisory firms, the MSRB understands that some small municipal advisors
and sole proprietors may not employ full-time compliance staff and that
the cost of ensuring compliance with the requirements of the proposed
rule may be proportionally higher for these smaller firms.
    The MSRB believes these costs represent only those necessary to
achieve the purposes of the Exchange Act. Relative to draft Rule G-42
as initially published for comment,\46\ the MSRB has made efforts to
minimize costs that could affect the competitive landscape including,
narrowing the scope of the conflicts that must be disclosed, specifying
a less burdensome method for disclosing conflicts and disciplinary
actions and documenting the municipal advisory relationship, clarifying
the obligations owed by municipal advisors to obligated persons, and
removing a number of other previously considered requirements.
---------------------------------------------------------------------------

    \46\ The MSRB sought comment on the initial draft Rule G-42
(``Initial Draft Rule'') and draft amendments to Rules G-8 and G-9
in MSRB Notice 2014-01 (Jan. 9, 2014) (``First Request for
Comment'').
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    Further, while exit, consolidation, or a reduced number of new
market entrants may lead to a reduced pool of municipal advisors, the
SEC concluded in the SEC Final Rule (on the permanent registration of
municipal advisors) that the market would be likely to remain
competitive despite the potential exit of some municipal advisors
(including small entity municipal advisors), consolidation of municipal
advisors, or lack of new entrants into the market.\47\
---------------------------------------------------------------------------

    \47\ See SEC Final Rule, 78 FR at 67608.
---------------------------------------------------------------------------

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

    The MSRB solicited comment on the proposed rule change in the First
Request for Comment, requesting comment on a draft of Rule G-42 and
draft amendments to Rules G-8 and G-9, and a second notice requesting
comment on a revised draft of Rule G-42 and draft amendments to Rules
G-8 and G-9.\48\
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    \48\ See MSRB Notice 2014-12 (Jul. 23, 2014) (``Second Request
for Comment''). The draft rule text published in the Second Request
for Comment is hereinafter the ``Revised Draft Rule.''
---------------------------------------------------------------------------

    The MSRB received forty-six comment letters in response to the
First Request for Comment,\49\ and nineteen

comment letters in response to the Second Request for Comment.\50\ The
comments are summarized below by topic and MSRB responses are
provided.\51\
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    \49\ Comments were received in response to the First Request for
Comment from: Acacia Financial Group, Inc.: Letter from Kim M.
Whelan, Co-President, dated March 10, 2014 (``Acacia''); American
Bankers Association: Letter from Cristeena G. Naser, Vice President
and Senior Counsel, dated March 4, 2014 (``ABA''); American Council
of Engineering Companies: Letter from David A. Raymond, President
and CEO, dated March 7, 2014 (``ACEC''); American Public
Transportation Association: Letter from Michael P. Melaniphy,
President and CEO, dated March 10, 2014 (``APTA''); Bond Dealers of
America: Letter from Michael Nicholas, Chief Executive Officer,
dated March 10, 2014 (``BDA''); Cape Cod Five Cents Savings Bank:
Letter from Dorothy A. Savarese, President and Chief Executive
Officer, dated March 10, 2014 (``Cape Cod Savings''); Chancellor
Financial Associates: Email from William J. Caraway, President,
dated January 14, 2014 (``Chancellor Financial''); Coastal
Securities: Letter from Chris Melton, Executive Vice President,
dated March 10, 2014 (``Coastal''); College Savings Foundation:
Letter from Mary G. Morris, Chair, dated March 10, 2014 (``CSF'');
College Savings Plans Network: Letter from Betty Everitt Lochner,
Director, Guaranteed Education Tuition Program, dated March 10, 2014
(``CSPN''); Cooperman Associates: Letter from Joshua G. Cooperman
dated March 10, 2014 (``Cooperman''); Erika Miller: Email dated
February 4, 2015; FCS Group: Letter from Taree Bollinger, Vice
President, dated March 17, 2014 (``FCS''); First River Advisory
L.L.C.: Letter from Shelley J. Aronson, President, dated January 16,
2014 (``First River Advisory''); First Southwest Company: Letter
from Hill A. Feinberg, Chairman and Chief Executive Officer, and
Michael G. Bartolotta, Vice Chairman, dated March 7, 2014 (``First
Southwest''); Frost Bank: Letter from William H. Sirakos, Senior
Executive Vice President, dated March 10, 2014 (``Frost''); George
K. Baum & Company: Letter from Guy E. Yandel, EVP and Head of Public
Finance, Dana L. Bjornson, EVP, CFO and Chief Compliance Officer,
and Andrew F. Sears, SVP and General Counsel, dated March 10, 2014
(``GKB''); Government Finance Officers Association: Letter from
Dustin McDonald, Director, Federal Liaison Center, dated March 13,
2014 (``GFOA''); Government Investment Officers Association: Letter
from Laura Glenn, President, et al., dated March 7, 2014 (``GIOA'');
Investment Company Institute: Letter from Tamara K. Salmon, Senior
Associate Counsel, dated March 4, 2014 (``ICI''); J.P. Morgan:
Letter from Paul N. Palmeri, Managing Director, dated March 10, 2014
(``JP Morgan''); Kutak Rock LLP: Letter from John J. Wagner dated
March 10, 2014 (``Kutak''); Lamont Financial Services Corporation:
Letter from Robert A. Lamb, President, dated March 10, 2014
(``Lamont''); Lewis Young Robertson & Burningham, Inc.: Letter from
Laura D. Lewis, Principal, dated March 3, 2014 (``Lewis Young'');
MSA Professional Services, Inc.: Letter from Gilbert A. Hantzsch,
CEO, dated March 10, 2014 (``MSA''); National Association of Bond
Lawyers: Letter from Allen K. Robertson, President, dated March 18,
2014 (``NABL''); National Association of Health and Educational
Facilities Finance Authorities: Letter from Pamela Lenane,
President, David J. Kates, Chapman and Cutler LLP, and Charles A.
Samuels, Mintz Levin, dated March 10, 2014 (``NAHEFFA''); National
Association of Independent Public Finance Advisors: Letter from
Jeanine Rodgers Caruso, President, dated March 10, 2014
(``NAIPFA''); National Healthcare Capital LLC: Letter from Richard
Plumstead, dated March 10, 2014; New York State Bar Association:
Letter from Peter W. LaVigne, Chair of the Committee, dated March
12, 2014 (``NY State Bar''); Northland Securities, Inc.: Letter from
John R. Fifield, Jr., Director of Public Finance/Senior Vice
President, dated March 7, 2014 (``Northland''); Oppenheimer & Co.
Inc.: Email from John Rodstrom dated March 10, 2014
(``Oppenheimer''); Parsons Brinckerhoff Advisory Services, Inc.:
Letter from Mark E. Briggs, President, dated March 10, 2014
(``Parsons''); Piper Jaffray: Letter from Frank Fairman, Managing
Director, Head of Public Finance Services, dated March 10, 2014
(``Piper Jaffray''); Public Financial Management, Inc.: Letter from
John H. Bonow, Chief Executive Officer, dated March 10, 2014
(``PFM''); Public Resources Advisory Group: Letter from Thomas
Huestis dated March 10, 2014 (``PRAG''); Raftelis Financial
Consultants, Inc.: Letter from Lex Warmath dated March 10, 2014
(``Raftelis Financial''); Securities Industry and Financial Markets
Association: Letter from Leslie M. Norwood, Managing Director and
Associate General Counsel, dated March 10, 2014 (``SIFMA'');
Sutherland Asbill & Brennan LLP: Letter from Michael B. Koffler
dated March 10, 2014 (``Sutherland''); Wells Fargo Advisors, LLC:
Letter from Robert J. McCarthy, Director of Regulatory Policy, dated
March 10, 2014 (``Wells Fargo''); Winters & Co. Advisors, LLC:
Letter from Christopher J. Winters dated March 10, 2014 (``Winters
LLC''); WM Financial Strategies: Letter from Joy A. Howard,
Principal, dated March 10, 2014 (``WM Financial''); Woodcock &
Associates, Inc.: Email from Christopher Woodcock dated January 14,
2014 (``Woodcock''); Wulff, Hansen & Co.: Letter from Chris Charles,
President, dated March 17, 2014 (``Wulff Hansen''); Yuba Group:
Letter from Linda Fan, Managing Partner, dated March 7, 2014
(``Yuba''); Zion's First National Bank: Letter from W. David
Hemingway, Executive Vice President, dated March 10, 2014
(``Zion'').
    \50\ Comments were received in response to the Second Request
for Comment from: ABA: Letter from Cristeena Naser, Vice President,
Center for Securities, Trust & Investments, dated August 25, 2014;
ACEC: Letter from David A. Raymond, President and CEO, dated August
25, 2014; BDA: Letter from Michael Nicholas, Chief Executive
Officer, dated August 25, 2014; Columbia Capital Management, LLC:
Letter from Jeff White, Principal, dated August 25, 2014 (``Columbia
Capital''); Dave A. Sanchez: Letter dated August 25, 2014
(``Sanchez''); Financial Services Roundtable: Letter from Richard
Foster, Vice President and Senior Counsel for Regulatory and Legal
Affairs, dated August 25, 2014 (``FSR''); Florida Division of Bond
Finance: Letter from J. Ben Watkins III, Director, dated August 22,
2014 (``FLA DBF''); GFOA: Letter from Dustin McDonald, Director,
Federal Liaison Center, dated September 2, 2014; ICI: Letter from
Tamara K. Salmon, Senior Associate Counsel, dated August 19, 2014;
Mr. Bart Leary: Email dated July 23, 2014 (``Leary''); Lewis Young:
Letter from Laura D. Lewis, Principal, dated August 25, 2014;
NAIPFA: Letter from Jeanine Rodgers Caruso, President, dated August
25, 2014; New York State Bar: Letter from Peter W. LaVigne, Chair of
the Committee, dated August 27, 2014; Piper Jaffray: Letter from
Frank Fairman, Managing Director, Head of Public Finance Services,
dated August 25, 2014; SIFMA: Letter from Leslie M. Norwood,
Managing Director and Associate General Counsel, dated August 25,
2014; Southern Municipal Advisors, Inc.: Letter from Michael C.
Cawley, Senior Consultant, dated August 25, 2014 (``SMA''); Wells
Fargo: Letter from Robert J. McCarthy, Director of Regulatory
Policy, dated August 25, 2014; WM Financial: Letter from Joy A.
Howard, Principal, dated August 25, 2014; and Zion: Letter from W.
David Hemingway, Executive Vice President, dated August 25, 2014.
    \51\ The draft rule text included in the First Request for
Comment is referred to herein as the ``Initial Draft Rule;'' the
draft rule text included in the Second Request for Comment is
referred to herein as the ``Revised Draft Rule.''
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Standards of Conduct
    Under Proposed Rule G-42(a), a municipal advisor would be subject
to a duty of care as to its obligated person clients under subsection
(a)(i) and a fiduciary duty as to its municipal entity clients under
subsection (a)(ii) when engaging in municipal advisory activities for
such clients. Several commenters raised concerns relating to the
proposed standards of conduct that would apply to municipal advisors.
Scope of the Fiduciary Relationship
    In the First Request for Comment, the MSRB proposed that a
municipal advisor be subject to a fiduciary duty when engaging in
municipal advisory activities for municipal entity clients.
Subsequently, in the Second Request for Comment, the MSRB asked whether
the Revised Draft Rule should uniformly apply the proposed fiduciary
standard to a municipal advisor in its relationships with all of its
clients, including obligated persons. A number of commenters opposed
extending the application of the fiduciary standard to municipal
advisors in connection with their obligated person clients.\52\
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    \52\ See, e.g., comment letters from: ABA, BDA, Cape Cod
Savings, Cooperman, GKB, Kutak, Lewis Young, NABL, NAHEFFA, Parsons,
Piper Jaffray and SIFMA. A few commenters, including First River
Advisory, NAIPFA and Yuba, supported the application of a fiduciary
duty to a municipal advisor when engaging in municipal advisory
activities on behalf of an obligated person client.
---------------------------------------------------------------------------

    The MSRB believes that the application of the fiduciary standard is
appropriately limited to municipal advisors when engaging in municipal
advisory activities for or on behalf of municipal entity clients and
strikes the appropriate balance. Proposed Rule G-42 establishes a
minimum standard, which, as noted by NABL, does not limit an obligated
person client and its municipal advisor from agreeing to a higher
standard of conduct, or incorporating other requirements or protections
in the municipal advisory relationship.
Scope of the Duty/529 Plans
    Proposed paragraph .01 of the Supplementary Material provides that
a municipal advisor acting in accordance with the duty of care must
undertake reasonable investigation to determine that it is not basing
any recommendation made to a client on materially inaccurate or
incomplete information. In response to the First and Second Request for
Comment, ICI stated that municipal advisors to 529 college savings
plans (``529 plans'') should not be required to verify the veracity or
completeness of the information provided to the municipal advisor by
authorized state employees or officials who are authorized to act on
behalf of the 529 plan. ICI requested that paragraph .01 of the
Supplementary Material be revised not to require municipal advisors to
investigate whether information is materially inaccurate or incomplete
when it is provided to the municipal advisor by persons who are
authorized by the client to act on behalf of a state's 529 plan.
    Neither the First Request for Comment nor the Second Request for
Comment contemplated that municipal advisors in municipal advisory
relationships with 529 plans would be exempted or excluded, in whole or
in part, from the proposed core standards of conduct, including aspects
of the duty of care that a municipal advisor owes to a client. The MSRB
believes that exempting municipal advisors from the proposed core
standards of conduct would reduce the protections that Congress through
the Dodd-Frank Act intended to provide to municipal entity clients and
investors in 529 plan securities.
Fiduciary Duty--Authority
    In response to the Second Request for Comment, Sanchez commented
that the MSRB lacks the statutory authority to define ``fiduciary
duty'' or to prescribe means designed to effectuate the performance of
that duty.
    As discussed above, the Exchange Act grants the MSRB statutory
authority to adopt rules with respect to municipal advisors engaging in
municipal advisory activities that are designed to, among other things,
prevent fraudulent and manipulative acts and practices, and acts,
practices or courses of business that are not consistent with a
municipal advisor's fiduciary duty to its clients.\53\ Accordingly, the
MSRB has concluded that it is properly exercising the authority granted
to it by statute.
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    \53\ See, e.g., 15 U.S.C. 78o-4(b)(2)(C); and 15 U.S.C. 78o-
4(b)(2)(L)(i).
---------------------------------------------------------------------------

Fiduciary Duty--Standards
    In response to the First Request for Comment, NABL stated that the
Initial Draft Rule should draw on established common law and similar
standards that NABL believes are intended to provide substantive
guidance regarding fiduciary duties (e.g., the standards applicable to
attorneys), rather than the standards applicable to broker-dealers or
registered investment advisers. NABL argued that the attorney-client
relationship is more comparable to the municipal advisor-client
relationship

because both can have a wide spectrum of scopes of responsibilities,
similar contexts in which there are interactions with the client, and a
longer duration over which the representation occurs. BDA similarly
believed that the fiduciary standards set forth in the Initial Draft
Rule would not operate like other well-established standards, such as
those for attorneys, and that the MSRB did not justify why the
standards for municipal advisors would deviate from those standards as
outlined in the Model Rules of Professional Conduct for attorneys
(``Model Rules''). Accordingly, BDA suggested that Proposed Rule G-42
should adopt or parallel the same fiduciary duty standards used by
other similarly situated professionals.
    In developing Proposed Rule G-42, the MSRB consulted various codes
of conduct and sources of federal and state law regarding the duties
and obligations of a fiduciary that apply to professionals who are, or,
in certain relationships, may be, fiduciaries. Some provisions of the
proposed rule reflect principles incorporated from MSRB Rule G-17,
including the duties of dealers to issuers, while other provisions were
based on principles and requirements in the Investment Advisers Act.
The MSRB believes the Investment Advisers Act is particularly relevant
in developing a rule regarding fiduciary duties and obligations, and
notes that the SEC also considered the Investment Advisers Act
informative as it developed the SEC Final Rule.\54\ Moreover, the MSRB
believes it is important to establish rules and standards that address
the practices of various types of municipal advisors and their clients,
and that the provisions addressing the duties and obligations of a
fiduciary are tailored to address the unique characteristics of the
municipal securities market and the variety of responsibilities
undertaken by municipal advisors in their relationships with municipal
entity and obligated person clients. The MSRB notes that, to the extent
that Proposed Rule G-42 does not specifically prescribe or prohibit
certain conduct, or address certain activity, common law regarding
fiduciary obligations and duties may be referenced by a judicial or
adjudicatory decision-maker.
---------------------------------------------------------------------------

    \54\ See generally, SEC Final Rule, 78 FR 67467.
---------------------------------------------------------------------------

Fiduciary Duty--Obligated Persons
    A number of commenters raised concerns that Proposed Rule G-42
implicitly and inappropriately imposes fiduciary duty obligations on
municipal advisors whose clients are obligated persons without a
demonstrated need for a more robust regulatory framework than that
adopted by Congress or the SEC.\55\ Those commenters believed that the
treatment accorded to obligated persons should be distinguished from
that accorded to municipal entities because, as they stated, obligated
person clients do not handle public funds, are private, domestic and
international for-profit companies or not-for-profit businesses, and,
therefore, operate with a different level of public accountability.
Overall, these commenters believed that fiduciary duties should not be
mandatorily extended to benefit obligated persons.
---------------------------------------------------------------------------

    \55\ See letters from: ABA, BDA, Cape Cod Savings, GKB, Kutak,
Lewis Young, NABL, NAHEFFA, Parsons, Piper Jaffray, Sanchez and
SIFMA. On the other hand, NAIPFA, First River Advisory and Yuba
supported imposing fiduciary duties upon municipal advisors with
respect to the advice they provide to obligated persons.
---------------------------------------------------------------------------

    NAHEFFA suggested that the duty of care and the requirements of the
Initial Draft Rule G-42(b)-(f) be revised to state that municipal
advisors owe a fiduciary duty only to their municipal entity clients.
In the alternative, NAHEFFA requested that the MSRB provide
clarification on the legal and practical distinctions among the
standards and duties and obligations of municipal advisors vis-
[agrave]-vis both types of clients, including a clarification that an
alleged violation of the duty of care would be subject to review under
a negligence standard and an alleged violation of the duty of loyalty
would require evidence of intent. Generally, NAHEFFA supported either a
revised Rule G-42, or a separate rule that would simplify and reflect
the duties and obligations of a municipal advisor with respect to its
obligated person clients. NAHEFFA suggested that, as to obligated
person clients, the duty should be to exercise professional judgment
and expertise in providing services and to deal fairly with its
clients. Similarly to NAHEFFA, BDA requested that the MSRB revise
Proposed Rule G-42 to more clearly state and distinguish between the
duties and obligations that municipal advisors would owe to each of the
two types of clients.
    ABA commented that the MSRB lacked the requisite authority to
impose a fiduciary duty on municipal advisors with respect to their
obligated person clients, and that even if it had the authority, such a
standard would be unworkable since banks would have difficulty
identifying which of their many customers were obligated persons. ABA
stated that the extension of a fiduciary duty to municipal advisors in
their relationship with their obligated person clients would result in
a significant risk that banks would inadvertently violate regulatory
requirements by becoming an unwitting municipal advisor with respect to
a client they did not know was an obligated person. Moreover, the banks
would run the corresponding risk of violating the attendant fiduciary
duty applicable to such municipal advisor.
    More specifically, Sanchez commented that the language in Revised
Draft Rule G-42(b)(i)(A) and (b)(i)(G) appeared to import the duty of
loyalty and duty of care into representations of obligated persons by
using the phrase ``unbiased and competent advice'' with respect to
advice provided to or on behalf of obligated persons. He suggested that
these provisions be revised to say ``impair its ability to render
advice to or on behalf of the obligated person in accordance with the
standards of conduct required in clause (a)'' in lieu of the phrase
referencing ``unbiased and competent advice.''
    Neither the Initial Draft Rule nor the Revised Draft Rule would
deem municipal advisors to owe a fiduciary duty to obligated person
clients, and the MSRB disagrees with the view that either the Initial
or Revised Draft Rule implicitly and inappropriately imposed fiduciary
duty obligations to such clients. After carefully considering the
comments, the MSRB has not modified Proposed Rule G-42(a), on standards
of conduct. Further, Proposed Rule G-42 follows the approach taken in
the Dodd-Frank Act, deeming a municipal advisor to owe a fiduciary duty
only to its municipal entity clients. However, although the Exchange
Act fiduciary duty standard would not apply to a municipal advisor
advising an obligated person client, all municipal advisors are subject
to fair-dealing obligations under MSRB Rule G-17, which already
requires a municipal advisor to deal fairly with all persons and
prohibits engaging in any deceptive, dishonest or unfair practice.
Moreover, the provisions in Proposed Rule G-42(b)-(f) appropriately
establish the duties and obligations of municipal advisors. The MSRB
notes that these duties are, in part, based on similar existing duties
for other regulated entities (e.g., underwriters' duties to issuers),
which are separate and apart from a fiduciary duty. Therefore, the MSRB
does not believe Proposed Rule G-42 creates an implicit fiduciary duty
for municipal advisors with respect to the advice they provide to
obligated person clients.
    The MSRB agrees with Sanchez's specific comments regarding
paragraphs (b)(i)(A) and (b)(i)(G) of the Revised Draft Rule and has
revised the proposed rule change to clearly differentiate between the
handling of conflicts of

interest under the duty of loyalty, as discussed in paragraph .02 of
the Supplementary Material, and conflicts under the disclosure
requirements that are applicable to all municipal advisory clients as
part of a municipal advisor's duty of care, as discussed in paragraph
.01 of the Supplementary Material. Specifically, under proposed
subsection (a)(ii), the duty of loyalty in the proposed rule change, a
municipal advisor must not engage 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. Conversely, under proposed section (c) of
Proposed Rule G-42 and as discussed further with respect to proposed
paragraph .05 of the Supplementary Material, a municipal advisor can
continue to serve as a municipal advisor to its municipal entity or
obligated person client when an actual or potential conflict of
interest that could be reasonably anticipated to impair its ability to
provide that advice exists, so long as such conflict of interest is
disclosed and addressed in accordance with the relevant provisions of
Proposed Rule G-42 \56\ and the municipal advisor can satisfy the
applicable standards of conduct described in section (a).
---------------------------------------------------------------------------

    \56\ Municipal advisors would be required to disclose and
document such a material conflict of interest under Proposed Rule G-
42(b) and (c) and paragraph .05 of the Supplementary Material. With
respect to municipal entity clients, municipal advisors also would
need to provide an explanation to the client of how the municipal
advisor intends to manage or mitigate its conflict in a manner that
will permit it to act in the municipal entity's best interests.
---------------------------------------------------------------------------

    NAHEFFA requested that the MSRB clarify the legal distinctions
between the duty of care and duty of loyalty, and suggested that the
state of mind standard to determine a violation of the duty of care
should be negligence, and the state of mind standard regarding a
violation of the duty of loyalty should be intent. In response to
NAHEFFA's request for clarification regarding such standards, the MSRB
believes it would be appropriate for the courts and other adjudicatory
authorities to determine the ``state-of-mind'' elements when applying
the standards of conduct of Proposed Rule G-42 to specific sets of
facts and circumstances presented, drawing on existing jurisprudence
regarding analogous duties of care and fiduciary obligations.
    In response to ABA's comment, the MSRB again notes that determining
which activities constitute municipal advisory activities requires a
legal interpretation of the SEC Final Rule. Such authority is vested
with the SEC rather than the MSRB.
    Finally, the MSRB notes again that the standards of conduct in
Proposed Rule G-42 would be minimum requirements, which the MSRB has
developed to empower the client to a large extent to determine the
scope of services and control the engagement with the municipal
advisor, and as suggested by NABL, any municipal advisor and its client
may agree to more stringent standards of conduct for their specific
engagement.
Duty of Care--Supplementary Material .01
    In response to the Second Request for Comment, WM Financial
challenged the requirement that a municipal advisor ``undertake a
reasonable investigation to determine that it is not basing any
recommendation on materially inaccurate or incomplete information.''
While WM Financial agreed that a municipal advisor should make a
reasonable investigation in order to determine whether a recommendation
is in a client's best interest, WM Financial believed that a municipal
advisor should be able to rely on publicly-available documents as being
true and accurate, and should be able to assume that any additional
information provided to it by the municipal entity is also true and
accurate. WM Financial believed that requiring the municipal advisor to
verify the accuracy of the information it receives from a client
imposes an inappropriate burden. As noted above, ICI similarly opposed
the requirement in the context of 529 plans, for which the municipal
advisor that is also acting as a plan sponsor would typically work with
and rely upon state employees who are authorized to represent a state's
plan and requested revisions to paragraph .01 of the Supplementary
Material.
    Proposed paragraph .01 of the Supplementary Material would provide,
as a core general standard, that a municipal advisor must undertake a
reasonable investigation to determine that it is not basing any
recommendation on materially inaccurate or incomplete information.
There is no exception for information that is provided to the advisor
by the client. The MSRB believes that the provisions of proposed
paragraph .01 of the Supplementary Material remain appropriate and, as
discussed above, does not believe that advisors to 529 plans should be
relieved from an obligation to inquire as to the accuracy of material
that is relevant to a municipal advisor's recommendation provided by
its client or other parties. The MSRB further believes this provision
of proposed paragraph .01 of the Supplementary Material would provide
an objective standard for when it is appropriate for a municipal
advisor to rely on information provided by a client when making a
recommendation to such client, including representatives of a 529 plan
authorized to act on behalf of the plan. Finally, because proposed
paragraph .01 would require municipal advisors to undertake only a
``reasonable investigation'' of the veracity of the information on
which it is basing a recommendation, municipal advisors would not be
required to go to the impractical lengths suggested by commenters. The
MSRB believes this standard would be sufficient to allow municipal
advisors to assess their risk exposure to any reliance on that
information and determine what potential mitigating actions need to be
taken.
    Sanchez also commented that the MSRB should ``consider whether the
information for which `a municipal advisor must have a reasonable basis
for' incorporated in [subparagraphs] (a) through (c) [of paragraph .01
of the Supplementary Material] is not already addressed in the
standards of conduct required of municipal advisors by MSRB Rule G-17
and general antifraud rules related to municipal securities
disclosure.'' As such, he suggested deleting those provisions of
paragraph .01 of the Supplementary Material to avoid unnecessarily
duplicative regulatory requirements. The MSRB has decided to retain
those provisions because it believes they would provide additional
guidance regarding the proposed duty of care and would assist municipal
advisors in satisfying that duty without unnecessarily duplicating the
principles of MSRB Rule G-17 or other federal securities anti-fraud
statutes.
    Finally, SIFMA noted that, while the requirement for a municipal
advisor to make a reasonable inquiry--regarding the facts that are
relevant to a client's determination to pursue a particular course of
action or that form the basis of any advice to the client--could be
appropriate in the context of arranging a municipal securities
issuance, it could be cost prohibitive in the case of ordinary
brokerage and related advice, given the number of trades potentially
involved, timing considerations and the general context of broker-
related advice. Therefore, SIFMA did not believe that such a standard
should be applied in addition to otherwise applicable suitability
requirements that would attach to recommendations made in the context
of brokerage/securities

execution services. The MSRB believes that the duties and standards in
the proposed rule are appropriately applied to municipal advisory
activities (other than the undertaking of a solicitation), and notes
that a municipal advisor to a municipal entity client will owe a
statutory fiduciary duty to the client. If the conduct SIFMA describes
constitutes the giving of advice under the SEC rules providing for the
registration of municipal advisors as discussed in the SEC Final
Rule,\57\ then Proposed Rule G-42 would apply in its entirety.
Likewise, if such conduct did not constitute the giving of advice under
those rules, then Proposed Rule G-42 would not apply.
---------------------------------------------------------------------------

    \57\ See generally, SEC Final Rule, 78 FR 67467.
---------------------------------------------------------------------------

Duty of Loyalty--Supplementary Material .02
    In response to the First Request for Comment, ACEC and APTA
indicated that they believed there are circumstances when the duty of
loyalty could directly conflict with an engineer's professional and
ethical responsibilities, and expressed concerns as to how such
conflicts could affect engineering firms' business. Both ACEC and APTA
specifically stated that, in the course of providing professional
engineering services to a client, circumstances could arise in which
the engineer would find himself or herself facing a conflict between
breaching its fiduciary duty in its role as municipal advisor and
violating the ethical obligations to which the engineer is subject
under applicable state law and regulation, or one or more professional
associations. According to ACEC, in such circumstances, it would be
detrimental to the health, safety and welfare of the public to
prioritize the fiduciary duty the engineer municipal advisor owed to
its client. ACEC argued that paragraph .02 of the Supplementary
Material, therefore, would not serve the public interest and requested
that the MSRB address how this type of conflict could be managed.
    The MSRB notes that SEC Rule 15Ba1-1(d)(2)(v) excludes engineers
providing engineering advice from the definition of municipal
advisor.\58\ The MSRB further notes that the same and similar issues
raised by the commenters in response to the First Request for comment
also were raised with the SEC during its rulemaking to establish the
registration regime for municipal advisors. In the SEC Final Rule, the
SEC provided greater clarity to engineers concerning the definition of
``municipal advisor'' and the scope of the exclusion for engineers.\59\
If, given that guidance, an engineer were in fact to engage in
municipal advisory activities, it would be subject to the statutory
fiduciary duty to a municipal entity client, and, in the MSRB's view,
appropriately subject to the duty of loyalty provisions in Proposed
Rule G-42. Under certain circumstances, if a material conflict of
interest would prevent the municipal advisor from being able to act in
accordance with the standards of conduct of section (a) of Proposed
Rule G-42, which the MSRB believes would be rare, the firm might need
to determine not to provide municipal advice if it preferred to provide
engineering services.
---------------------------------------------------------------------------

    \58\ See 17 CFR 240.15Ba1-1(d)(2)(v). See also 15 U.S.C. 78o-
4(e)(4)(C).
    \59\ See SEC Final Rule, 78 FR at 67529-32.
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Disclosure of Conflicts of Interest
    The MSRB received a number of comments regarding section (b) of
Proposed Rule G-42 on required disclosures of material conflicts of
interest by municipal advisors to their clients. Generally, commenters
were supportive of, or did not express an objection to, requiring
municipal advisors to provide written disclosure of material conflicts
of interest. However, some commenters did express concerns about some
of the facets of the disclosure requirements; those concerns are
described below and followed by the MSRB's response.
Compensation Arrangements
    Several commenters expressed concern regarding paragraph (b)(i)(F)
of Proposed Rule G-42, which requires municipal advisors to disclose
conflicts of interest arising from compensation arrangements that are
contingent on the size or closing of any transaction as to which the
municipal advisor is providing advice.
    Commenting on the Initial Draft Rule, Lewis Young stated that
contingent fee arrangements benefit clients, particularly smaller
municipal entities, because they allow municipal entity clients to
finance the costs of the municipal advisor with the proceeds of the
issuance. In their view, characterizing a contingent fee arrangement as
a conflict of interest requiring disclosure to the client amounted to
advising a client that the municipal advisor may not be acting in the
client's best interest. They added that they believe the disclosure
requirement would serve no useful purpose and could confuse clients.
Sutherland stated that the Initial Draft Rule's required disclosure of
contingent fee arrangements was duplicative of SEC Form MA \60\ and,
therefore, unnecessarily burdensome, and should be deleted.
---------------------------------------------------------------------------

    \60\ See SEC Form MA, Items 4.H.-4.J.
---------------------------------------------------------------------------

    Commenting on the Revised Draft Rule, Columbia Capital stated that
the provision ``creates the appearance that the MSRB takes the position
that one fee modality is less preferable to all others.'' Columbia
Capital, Cooperman and Piper Jaffray commented that the proposed rule
change should not single out one fee arrangement as being preferable to
others. Columbia Capital, Cooperman and Piper Jaffray also contended
that fee arrangements of any sort (hourly, fixed or non-contingent)
create an adversarial relationship between the municipal advisor and
its client. In Piper Jaffray's view, the potential conflicts of
interest that are inherent in all fee arrangements are also ``generally
knowable'' to both sides of a transaction and, therefore, the Revised
Draft Rule's disclosure requirement would not be beneficial. Columbia
Capital suggested deleting the provision.
    WM Financial also expressed concerns regarding paragraph (b)(i)(F)
of the Revised Draft Rule, but differed in its reasoning from Columbia
Capital and Piper Jaffray. WM Financial disagreed with the premise that
all fee structures create some conflict of interest. Rather, WM
Financial stated that, because municipal advisors would be required to
``act in the best interest of their clients . . . good advice will
prevent a fee arrangement from creating a `conflict'.'' In their view,
a ``conflict of interest does not exist when payment of fees is based
on the success of services to be provided . . . .'' Like Lewis Young,
WM Financial stated that contingent fees serve a valuable function
because they allow small municipal entity clients to finance the cost
of the municipal advisor with the proceeds from the issuance and ensure
that the cost of the municipal advisor is only incurred after the
successful completion of the issuance. WM Financial also requested that
paragraph (b)(i)(F) be deleted.
    The MSRB has considered the arguments and alternatives advanced by
commenters and determined that requiring the disclosure of conflicts of
interest arising from fee arrangements contingent on the size or
closing of the transaction as to which the municipal advisor is
providing advice is an appropriate and necessary measure to alert
municipal entity and obligated person clients to the potential conflict
of interest inherent in such fee arrangements. While the MSRB
recognizes, as some commenters

pointed out, that other fee arrangements (such as hourly, fixed or
otherwise non-contingent) might also give rise to conflicts, the MSRB
believes that the potential harm to a client may be particularly acute
if a client is not informed of a conflict of interest arising from a
contingent fee arrangement. Furthermore, the MSRB does not agree with
commenters that have argued that requiring a conflict of interest
disclosure would suggest that the municipal advisor is not acting in
the best interest of its client. The purpose of the disclosure
requirement in proposed paragraph (b)(i)(F) simply would be to allow a
municipal advisor's client to make an informed decision based on
relevant facts and circumstances. Also, under the proposed rule change,
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 serves its needs.
Disclosure of Conflicts of Interest to Investors
    The MSRB received comments that called for the deletion of a
provision set forth previously in the Revised Draft Rule as paragraph
.08 of the Supplementary Material. Under the provision, if all or a
portion of a document prepared by a municipal advisor or any of its
affiliates were included in an official statement for an issue of
municipal securities by or on behalf of a client of the municipal
advisor, the municipal advisor would have been required to provide
written disclosure to investors of any affiliation that would be a
material conflict of interest under paragraph (b)(i)(B) of the Revised
Draft Rule. The disclosure requirement also could have been satisfied
if the relevant affiliate provided the written disclosure to
investors.\61\
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    \61\ Paragraph (b)(i)(B) of the Revised Draft Rule required
written disclosure of ``any affiliate of the municipal advisor that
provides any advice, service, or product to or on behalf of the
client that is directly or indirectly related to the municipal
advisory activities to be performed by the disclosing municipal
advisor.''
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    SIFMA supported deleting the disclosure requirement, noting that
``[m]unicipal advisors and their affiliates may have no contractual or
other relationships (and in many cases have no form of privity) with
investors, nor do they control the content of the Official Statement.''
SIFMA stated that it is the obligation of the issuer ``to make sure
that its disclosure is materially accurate and complete'' and the
responsibility of broker-dealers to comply with their obligations under
applicable law. SIFMA observed that the municipal advisor is already
required to provide the issuer with the same conflict disclosure under
paragraph (b)(i)(B), arguing that the MSRB should leave the decision of
whether to include such information in material distributed to
investors to the issuer.
    ICI and NABL also commented in favor of deleting the requirement.
ICI provided comments similar to SIFMA's comments in response to both
the Initial and Revised Draft Rules, but focused on how the required
disclosure to investors would impact municipal advisors advising 529
plans. ICI supported requiring municipal advisors to disclose conflicts
of interest to the municipal advisor's client but questioned why such
information would be relevant to a person investing in 529 plan
securities. ICI stated that if ``all material terms and conditions of
the 529 plan offering already are disclosed in the offering document
that is provided to investors and potential investors, this
supplemental disclosure would not provide any additional protection to
investors.'' In response to the First Request for Comment, NABL
contended that requiring these disclosures would run contrary to the
intent of the Dodd-Frank Act, which is to protect issuers. NABL
suggested, as an alternative, that issuers be allowed to choose whether
to disclose the conflicts of interest to investors.
    The MSRB agrees with the commenters and notes that the provision
could put municipal advisors in the impractical position of being
required to make conflict of interest disclosures directly to investors
or include the content of such disclosures in an issuer's official
statement, although the municipal advisor may not have the authority or
the means to do so. Moreover, because the proposed rule change would
already require the municipal advisor to disclose all material
conflicts of interest to the issuer, the MSRB believes the issuer will
be well positioned to make the determination of whether to include such
information in the official statement or other investor disclosure
documents, consistent with the issuer's duties under all applicable
law. In light of the comments and after a re-evaluation of the purpose
and feasibility of the disclosure provision in the supplementary
material as described above, the MSRB has deleted the provision.
Acknowledgment or Consent to Conflicts of Interest Disclosure
    In response to the First Request for Comment, several commenters
suggested differing approaches to the question of whether municipal
advisors should be required to obtain some form of acknowledgment from
their client of the conflicts of interest disclosures that municipal
advisors are required to make under the proposed rule change.
    In response to the First Request for Comment, NABL commented that
the MSRB should follow the approach taken in the Model Rules of Conduct
of the American Bar Association regarding the disclosure of conflicts
of interest as stated in the Initial Draft Rule. NABL argued that
municipal advisors should be required to obtain ``informed consent,
confirmed in writing'' to each potentially waivable material conflict
of interest. NABL stated that this standard is as appropriate for
municipal advisors as it is for common law fiduciaries or attorneys.
NABL suggested that the ``informed consent'' it advocated could be
accomplished in several ways, including ``a writing evidencing an
engagement, including a letter of intent, after disclosure to the
client sufficient to establish informed consent.'' NABL contended that
informed written consent from a municipal advisor's client is ``a
necessary corollary to the requirement that an advisor disclose and
provide sufficient detail about the nature of all material conflicts of
interest.'' NABL also noted that informed consent confirmed in writing
would be consistent with the requirements of the CFTC for commodity
trading advisors. NAIPFA stated that it believed municipal advisors
should be required to obtain an acknowledgment from their clients of
the conflicts of interest that it has disclosed, saying that this would
conform to the obligations of underwriters and other ``professionals
possessing fiduciary duties.'' GFOA provided similar support for
requiring an acknowledgment of the conflicts of interest disclosures
from the municipal advisor's client but stated that, if such a
requirement was added to the proposed rule change it would expect an
explanation within the proposed rule change detailing how the
acknowledgements of such conflicts relate to a municipal advisor's
fiduciary duty.
    In contrast to NABL, NAIPFA and GFOA, commenters including
Cooperman, Lewis Young and Acacia commented that municipal advisors
should not be required to obtain a written acknowledgment of
disclosures

before proceeding with the engagement. Cooperman stated that
acknowledgement of conflicts of interest disclosures from municipal
entity clients is an unnecessary and unjustified requirement that
should be removed. Lewis Young stated that such written disclosure
should not be required ``so long as the disclosures provided are not
objected to by the client.'' Proposing a somewhat different approach,
Acacia stated that municipal advisors should not be required to obtain
a written acknowledgement of the conflicts disclosed but should be
required to (i) provide such information (and record such provision),
(ii) request receipt and consent but (iii) be permitted to proceed with
a municipal advisory engagement in the absence of such receipt and
consent if the municipal advisor has a reasonable belief that such
information has been received. Acacia reasoned that its approach would
be analogous to existing MSRB guidance for underwriters under MSRB Rule
G-17.
    The proposed rule change would not require a municipal advisor to
obtain written acknowledgement from its client of the disclosure of
conflicts of interest. While the MSRB understands the concerns
expressed by commenters, the MSRB believes that the proposed rule
change sufficiently obligates municipal advisors to ensure that their
clients receive proper notice of material conflicts of interest.
Proposed paragraph .05 of the Supplementary Material, for instance,
would require municipal advisors to provide information sufficiently
detailed to inform a client of the nature, implications and potential
consequences of each conflict, and include an explanation of how the
municipal advisor addresses or intends to manage or mitigate each
conflict. Such disclosure would allow a municipal advisor's client to
make an informed decision as to whether such conflicts can be
adequately managed or mitigated. Furthermore, a municipal advisor's
duty of care would require an advisor to have a reasonable basis for
believing that its client received the disclosure and understood the
nature, implications and potential consequences of the conflicts of
interest that the municipal advisor disclosed. Further, the MSRB
believes that obtaining some form of written acknowledgement from
municipal entities and obligated persons would prove to be a
significant procedural burden to both municipal advisors and their
clients that would likely not result in a substantiated benefit.
Explanation of Mitigating Conflicts of Interest
    As discussed above, proposed paragraph .05 of the Supplementary
Material to Proposed Rule G-42, on conflicts of interest, would require
a municipal advisor to include an explanation of how the municipal
advisor would address, or manage or mitigate, the material conflicts of
interest that it has disclosed to its client. In response to the Second
Request for Comment, Sanchez challenged the value and purpose of this
requirement by opining that municipal securities brokers and dealers
are not subjected to the burden of making such disclosures. Sanchez
requested that the MSRB revise the proposed rule change to require such
disclosures only if requested by the client.
    The MSRB has considered Sanchez's comments and determined not to
amend proposed paragraph .05 of the Supplementary Material because the
MSRB believes that the provision would serve a beneficial and
protective function for clients. The municipal advisor's explanation
would allow its client to adequately assess the potential effects the
conflicts of interest could have on an engagement with the municipal
advisor and to determine whether the actions the municipal advisor
proposes to take to mitigate the conflicts of interest are sufficient
and will not overly impair the quality and neutrality of the services
to be performed by the municipal advisor.
Services for Conduit Issuers and Obligated Person Clients
    Under subsection (e)(ii) of Proposed Rule G-42, a municipal advisor
would be precluded from serving its municipal entity client as
underwriter for a transaction directly related to the same municipal
securities transaction or municipal financial product as to which the
municipal advisor is providing or has provided advice to the municipal
entity.
    In response to the Second Request for Comment, BDA commented that
the proposed rule should explicitly allow a dealer/municipal advisor to
serve as an underwriter for a conduit issuer and as a municipal advisor
for the conduit borrower, even with respect to directly related
matters.
    Underwriting such a transaction would not be specifically
prohibited by the ban on principal transactions in subsection (e)(ii)
of Proposed Rule G-42, because it applies only in cases of municipal
entity clients. A conduit borrower is typically not a municipal entity.
Thus, depending on the specific facts and circumstances, this scenario
could be permissible with appropriate disclosure and consent. Still, it
is not clear that, even with disclosure and consent, such activity
would be categorically consistent with all of the duties of a municipal
advisor to an obligated person in all circumstances. Therefore, the
MSRB has not amended the proposed rule as suggested by BDA.
Material Conflicts of Interest Required To Be Disclosed
    Section (b) of Proposed Rule G-42 would include a non-exhaustive
list of matters that would always constitute material conflicts of
interest and that would be required to be disclosed by municipal
advisors under the proposed rule change. Matters that must be disclosed
as material conflicts of interest under section (b) include, among
others: Any fee-splitting arrangements involving the municipal advisor
and any provider of investments or services to the client; 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 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; and any legal or disciplinary event that is material
to the client's evaluation of the municipal advisor or the integrity of
its management or advisory personnel.
    In response to the First Request for Comment, Lewis Young stated
that the proposed rule should only require disclosure when an actual
conflict of interest exists because providing tailored explanations of
potential or hypothetical situations would be ``expensive, time
consuming, and not very helpful.'' The MSRB disagrees and believes that
the likely benefits from these disclosures will outweigh the cost
associated with providing them to a municipal advisor's clients because
the proposed rule change limits the required disclosure to only
material conflicts of interest, both actual and potential, of which a
municipal advisor is aware of after a reasonable inquiry. The MSRB also
believes that requiring a municipal advisor to disclose conflicts of
interest, actual and potential, that the municipal advisor becomes
aware of after reasonable inquiry and that could reasonably be
anticipated to impair the municipal advisor's ability to provide advice
in accordance with the standards of conduct in section (a) of the rule,
is necessary to provide clients with the requisite information to make
an

informed decision regarding the selection of their municipal advisor.
    ICI suggested adding prefatory language to section (b) that would
clarify that a municipal advisor would be required to disclose only
conflicts of interest that are applicable to its relationship with the
specific client. ICI stated that adding such language would harmonize
section (b) with the approach taken in the Investment Advisers Act
regarding the delivery of brochures,\62\ which it believed permits an
investment adviser to omit ``inapplicable information'' from a
disclosure it is required to provide to clients. The MSRB believes that
Proposed Rule G-42 makes clear that municipal advisors are required
only to make disclosure of material conflicts of interest and that this
would exclude inapplicable information.
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    \62\ See 17 CFR 275.204-3.
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    First Southwest expressed concern regarding the requirement of
subsection (b)(i) that municipal advisors must provide written notice
when they have no material conflicts of interest to disclose to their
clients. First Southwest stated that the requirement would increase
administrative requirements and provide little, if any, benefit in the
event a conflict of interest were later discovered. The MSRB disagrees
and believes that an affirmative written statement by the municipal
advisor that it has no known material conflicts of interest would
remove potential ambiguities about the completeness of the conflicts
disclosure.
    Sutherland commented that the conflicts of interest required to be
disclosed would be duplicative of information that could be found in
SEC Forms MA and MA-I and, therefore, would be unnecessary. As an
example, Sutherland stated that SEC Form MA requires the disclosure of