SEC Approves MSRB Conduct Rules for Municipal Advisors
The SEC approved an MSRB rulemaking to adopt standards of professional conduct for municipal advisors. New Rule G-42 sets forth the standards for the fiduciary duty of municipal advisors to municipal entity clients. In addition, adopted amendments to MSRB Rule G-8 ("Books and Records to Be Made by Brokers, Dealers and Municipal Securities Dealers") require a municipal advisor to keep documentation that was material to its review of recommendations, or that memorialized its basis for any suitability determination.
Rule G-42 sets forth broadly the requirements that will apply to the relationship between a municipal advisor and its clients. The rule establishes, among other things,(i) the fiduciary duty of care and loyalty, (ii) the standard of care owed to "obligated person" clients, (iii) standards for the documentation of the municipal advisory relationship, and (iv) a suitability standard for recommendations. The rule also (i) requires the disclosure of conflicts of interest and legal or disciplinary events, and (ii) prohibits certain activities, including the receipt of "excessive" compensation, particular kinds of fee-splitting arrangements with underwriters, making payments in order to obtain or retain an engagement to perform municipal advisory activities, and entering into certain principal transactions with municipal advisors' municipal entity clients.
The MSRB announced that the new rules will become effective on June 23, 2016.
Commentary
With the finalization of these rules and other rules in the works, 2016 is shaping up to be a challenging year for firms that act as advisors to municipal entities. The new conduct rules will require firms to establish substantial policies and procedures, and to reassess documentation that remains in place with all municipal clients.