[Federal Register Volume 80, Number 250 (Wednesday, December 30, 2015)]
[Notices]
[Pages 81614-81637]
[FR Doc No: 2015-32812]

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SECURITIES AND EXCHANGE COMMISSION

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

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

December 23, 2015.

I. Introduction

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

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

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

Proposed Rule G-42

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Definitions

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

Proposed Amendments to Rule G-8

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

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

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

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

A. Standards of Conduct--Scope of Duties

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

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

B. Duty of Care--Reasonable Investigation of Facts

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

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

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

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

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

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

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

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

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

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

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

C. Duty of Care--Preparing Official Statements

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

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

D. Disclosure of Conflicts of Interest

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E. Documentation of Municipal Advisory Relationship

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

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

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

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

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

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

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

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

F. Documentation Related to Recommendations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

G. Suitability Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

H. Sophisticated Municipal Issuers

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

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

I. Inadvertent Advice

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

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

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

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

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

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

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

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

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

J. Prohibition on Delivering Inaccurate Invoices

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

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

K. Prohibited Principal Transactions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    In response to Amendment No. 1 or the OIP, SIFMA commented that the
MSRB failed to consider a suggestion to amend the ban to limit its
scope to principal transactions that are directly related to the advice
provided by the municipal advisor.\130\
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    \130\ See SIFMA letter dated September 11, 2015.
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    In response to the comments, the MSRB determined not to narrow,
broaden or otherwise modify the standard in this regard.\131\ The MSRB
stated its belief that the alternative rule text suggested by SIFMA
would not be a more effective or efficient means for achieving the
stated objective of the proposed ban, which is to eliminate a category
of particularly acute conflicts of interest that would arise in a

fiduciary relationship between a municipal advisor and its municipal
entity client. In this context, the MSRB noted that the suggested
change could leave transactions that have a high risk of self-dealing
insufficiently addressed.
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    \131\ See MSRB Response Letters.
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    The MSRB modified the proposed ban to incorporate the Exception,
discussed below under ``Exception to Prohibited Principal
Transactions.'' In light of the MSRB's incorporation of the Exception,
the MSRB stated its belief that it is not appropriate to further modify
the ban at this time.\132\
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    \132\ See December Response Letter.
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5. Affiliates or ``Remote Businesses''
    In response to the Proposing Release, SIFMA and Wells Fargo
addressed concerns regarding the impact of the principal transaction
prohibition on affiliates of municipal advisors.\133\ Wells Fargo
stated that the MSRB should exempt municipal advisor affiliates
operating with information barriers, and stated that if an affiliate
has no actual knowledge of the municipal advisory relationship between
the municipal entity client and the municipal advisor due to
information barriers and governance structures, the risk of a conflict
of interest is significantly diminished.\134\ SIFMA proposed the
addition of a knowledge standard (i.e., to prohibit a municipal advisor
and any affiliate from knowingly engaging in a prohibited principal
transaction), arguing that such a knowledge standard is consistent with
Section 206(3) of the Advisers Act.\135\ SIFMA suggested that an
investment vehicle such as a mutual fund that is advised by a municipal
advisor or its affiliate should not itself be an ``affiliate'' of the
municipal advisor solely on the basis of the advisory relationship.
Otherwise, SIFMA argued the investment fund may be unable to invest in
a municipal security if an affiliate of the fund's advisor acted as a
municipal advisor on the transaction. SIFMA stated that the ban in this
type of situation is unnecessary because mutual funds and similar
vehicles have independent boards and their affiliates do not have
significant equity stakes in the funds they advise.
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    \133\ See letters of SIFMA dated May 28, 2015 and Wells Fargo
dated May 29, 2015.
    \134\ See Wells Fargo letter dated May 29, 2015.
    \135\ See SIFMA letter dated May 28, 2015.
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    In response to Amendment No. 1 or the OIP, SIFMA commented that the
MSRB failed to consider limiting the application of the ban to
affiliates of a municipal advisor that have no knowledge of the
municipal advisory engagement, or more broadly to affiliates and
business units of the municipal advisor that have no such
knowledge.\136\ SIFMA commented that the proposed rule would
``significantly harm competition'' because it would lead to municipal
advisor firms exiting the municipal advisory marketplace. SIFMA
commented that a decrease in municipal advisors may result in the
remaining firms increasing their fees and a deterioration in the
quality of the services provided by municipal advisory firms.
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    \136\ The MSRB responded to a prior comment by SIFMA regarding
this matter, stating that SIFMA's suggestion to add a knowledge
qualifier would be overly stringent, which could hinder regulatory
examinations and enforcement. See August Response Letter.
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    In response to the comments, the MSRB stated its belief that the
proposed ban, as to affiliates, is appropriately targeted given the
acute nature of the conflicts of interest presented and the risk of
self-dealing by affiliates in transactions that are ``directly
related'' to the municipal securities transaction or municipal
financial product as to which the affiliated municipal advisor has
provided advice.\137\ The MSRB believes that the concerns expressed by
various commenters, including the concerns regarding the potential
impact on competition in the municipal advisory marketplace, will be
substantially mitigated, if they at all manifest, by the MSRB's
inclusion of the Exception to the principal transaction ban.
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    \137\ See December Response Letter.
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6. Bank Loans
    Several commenters expressed concerns with proposed paragraph .11
of the Supplementary Material under which a bank loan would be subject
to the prohibition on principal transactions if the loan was ``in an
aggregate principal amount of $1,000,000 or more and economically
equivalent to the purchase of one or more municipal securities.'' \138\
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    \138\ See letters from ABA dated May 29, 2015; Millar Jiles
dated May 29, 2015; BDA dated May 29, 2015; and Zions dated May 29,
2015.
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    ABA expressed a general concern that banking organizations that are
required to operate through a variety of affiliates and subsidiaries
would fall within the scope of the ``common control'' definition in the
statute and the prohibition would prevent a banking organization from
providing ordinary bank services to a municipal entity.\139\ ABA also
requested the prohibition be amended to exclude bank loans made by an
affiliate from the definition of ``other similar financial products''
if the bank enters into the loan after the municipal entity solicits
bidders for such loan using a request for proposal and the bank intends
to hold the loan on its books until maturity. ABA believed that there
should be few concerns regarding conflicts if a loan is entered into by
an affiliate of a municipal advisor and a municipal entity would be
free to choose its lender based on factors most appropriate for the
municipality and its taxpayers. In addition, ABA stated that the
potential conflicts of interest should be substantially mitigated if a
bank holds a loan on its books to maturity because in such cases, the
commenter believes the interest of the municipal entity and the bank
are aligned in that each party wants funding that serves the particular
needs of the municipal entity and both parties must be satisfied that
the loan can be repaid and desire that it be repaid.\140\
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    \139\ See ABA letter dated May 29, 2015.
    \140\ Id.; see also Zions letter dated May 29, 2015.
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    Similarly, Millar Jiles suggested that a municipal advisor should
be able to satisfy its fiduciary obligation to a municipal entity by
procuring bids for the proposed financing (and thus make a principal
bank loan through an affiliated entity permissible), stating that if
the affiliate of the municipal advisor were the lowest bidder, the
municipality would be penalized by being forced to borrow at a higher
rate under the proposed rule change.\141\
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    \141\ See Millar Jiles letter dated May 29, 2015.
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    The MSRB responded that even if both elements (i.e., the use of an
RFP and intent to hold a loan to maturity) were incorporated as
conditions to exclude certain principal transactions from the
prohibition in Proposed Rule G-42(e)(ii), the conflicts of interest are
not sufficiently mitigated to eliminate the concerns of overreaching
and self-dealing and other actions inconsistent with the fiduciary duty
between a municipal and its client.\142\ The MSRB reasoned that the
bank and borrower are counterparties with conflicting interests, and a
lender's intent at one point in time to hold a loan on its books until
maturity would provide insufficient controls or checks over conflicts
of interest inherent in the transaction. The MSRB explained that at any
time after making the loan, a bank would be free to change its intent
and sell the loan if doing so was in the bank's best interest. The MSRB
also stated its belief that an RFP process does not protect a municipal
entity sufficiently from conflicts of interest because, for example, a
municipal advisor may be able to inappropriately influence the
municipal entity client to obtain a loan instead of issuing a municipal
security,

or to influence the RFP process or requirements to favor the selection
of the municipal advisor's bank affiliate as lender.
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    \142\ See August Response Letter.
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    Zions argued that bank loans ``should be excluded in their
entirety'' from Proposed Rule G-42.\143\ Zions believed that it would
be paradoxical to allow individuals and private businesses to borrow
money from banks that are fiduciaries, but to prevent municipal
entities from doing the same. Alternatively, Zions requested that MSRB
increase the threshold loan amount in paragraph .11 of the
Supplementary Material to align with the bank qualified exemption
amount in the Internal Revenue Code, which it states is currently $10
million.
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    \143\ See Zions letter dated May 29, 2015.
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    In response to Zions's comments, the MSRB noted that proposed
paragraph .12, on principal transactions--other similar financial
products, is limited substantially and would target only those loans
that would be the same as, or directly related to, the municipal
securities transaction or municipal financial product as to which the
municipal advisor is providing or has provided advice and which would
be considered ``economically equivalent to the purchase of one or more
municipal securities.'' \144\ The MSRB also responded to the comments
regarding increasing the threshold from $1 million to $10 million by
stating the same threshold is used in other aspects of the regulation
of municipal securities such as SEC Rule 15c2-12,\145\ and that after
the MSRB has experience with the rule as in effect, the MSRB may
solicit information regarding whether the threshold should be modified.
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    \144\ See August Response Letter.
    \145\ 17 CFR 240.15c2-12(a).
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    In response to Amendment No. 1 or the OIP, Zions commented that the
principal transaction ban is overly broad and inconsistent with federal
banking laws, and, as an alternative to generally permitting principal
transactions (subject to disclosure and consent requirements), bank
loans should be excluded in their entirety from the ban.\146\ Zions
commented that banks, as highly regulated entities, should be allowed
to continue offering traditional banking services to municipal
entities, including as principal. Zions further commented that
determining on a case-by-case basis whether a particular transaction is
economically equivalent to the purchase of one or more municipal
securities is unnecessarily complex and costly for products that are
already thoroughly regulated. As an example of the complexity of
applying the standard, Zions stated that the written evidence of
indebtedness from municipal entities must have virtually the same
structure and provisions that would be in place for a municipal
security. Zions stated that the only clear way to distinguish between
direct bank loans and municipal securities is to look at the intent of
the acquirer at the time of acquisition. In Zions's view, if the
indebtedness is acquired with an intent to distribute, the instrument
should be deemed a security, but if a bank acquires the indebtedness
directly for its own portfolio with no intent to distribute, the
instrument is, and should be treated as, a bank loan. If bank loans are
potentially subject to the ban, Zions suggested, as an alternative,
that the threshold bank loan amount be higher than $1 million. Zions
believed that the threshold amount should be consistent with, and
pegged to, the $10 million threshold for bank-qualified obligations
under Section 265 of the Internal Revenue Code.\147\ In addition, Zions
commented that, for the Proposed Rule to be consistent with the
Exchange Act, the proposed threshold should be raised to $10 million.
Zions also commented that unless the threshold amount was increased,
the proposed ban would be inconsistent with the goals of the Community
Reinvestment Act (``CRA'').\148\ Zions believed that the ban may
prevent municipal advisors, such as Zions, from issuing direct loans to
smaller and more remote municipal entities and/or cause banks to
provide services to underserviced municipalities in less than all three
of the required categories of the CRA (i.e., lending, investments and
financial services).
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    \146\ See Zions letter dated September 10, 2015.
    \147\ 26 U.S.C. 265 et seq.
    \148\ 12 U.S.C. 2901 et seq.
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    In response to Zions's comments, the MSRB stated that the concerns
are addressed to some extent by the bank exemption from the definition
of ``municipal advisor.'' \149\ In addition, the MSRB stated that even
in situations where a bank's provision of advice were not exempt and
Proposed Rule G-42 and the ban applied, Zions's concerns referenced
above and its concern regarding the impact to smaller communities or
projects in such communities as a result of the proposed ban, should be
substantially ameliorated because the MSRB has added the Exception. The
MSRB explained that bank loans were included in the ban and should
remain as a ``similar financial product'' because, as a matter of
market practice, bank loans serve as a financing alternative to the
issuance of municipal securities and pose a comparable, acute potential
for self-dealing and other breaches of the fiduciary duty owed by a
municipal advisor to a municipal entity client. The MSRB also stated
that it does not find support in the comments for importing into the
proposed term ``Other Similar Financial Products'' an unrelated dollar
threshold (i.e., $10 million) from a statutory provision regarding the
bank qualification of municipal securities, in lieu of the proposed $1
million threshold.
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    \149\ See December Response Letter (citing 17 CFR 240.15Ba1-
1(d)(e)(iii)).
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    In response to Zions's comments that the principal transaction ban
should be eliminated because of its possible impact on the CRA, the
MSRB noted that the proposed prohibition on principal transactions is
narrowly targeted and would have a limited impact on a municipal
advisor or its affiliate providing loans and financial services,
generally. The MSRB also stated that Zions's comments do not
demonstrate--and the MSRB is not aware of any indication--that Congress
intended the requirements of the CRA to take precedence over other
statutory and regulatory requirements.
    BDA commented on the language of paragraph .11 of the Supplementary
Material, arguing that the phrase ``economically equivalent'' is ``too
ambiguous and does not provide clarity.'' \150\ BDA acknowledged this
phrase appeared intended to develop a standard that does not require
the determination of when a bank loan constitutes a security, and
acknowledged difficulties applying the Reves \151\ test to make such a