WASHINGTON — The Municipal Securities Rulemaking Board plans to seek public comment on a series of new rules and interpretive guidance in the next four to six weeks, most of which stem from its new oversight of muni advisers.
MSRB officials outlined the plan in a Monday morning conference call following the board’s three-day meeting in San Diego.
The MSRB plans to propose a new fiduciary duty rule for advisers, Rule G-36, that details how they would have to disclose conflicts of interest to clients. The rule also will include interpretive guidance explaining what it means to have a duty of care to clients.
The rule elaborates on a federal fiduciary duty imposed on all muni advisers by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July. It gave the MSRB oversight of muni advisers beginning Oct. 1.
The board plans to propose two separate pieces of interpretive guidance related to its Rule G-17 on fair dealing. The first would detail the rule’s implications for muni advisers after the Securities and Exchange Commission agreed in December that the rule would apply to them.
The second piece of guidance will apply to dealers and require them to disclose to clients “all material terms and risks of proposed transactions as well as any incentives and conflicts of interest” of transaction, according to MSRB chair Michael Bartolotta, who is vice chairman of First Southwest Co. in Houston.
Separately, the MSRB plans to issue draft interpretive guidance on its Rule G-23 explaining when a dealer-financial adviser is serving as an underwriter and not an adviser. The guidance must be finalized before it and related changes to the rule can be submitted to the SEC for final approval.
The G-23 changes and guidance, which the SEC asked for last spring, would prohibit dealers from initially serving as financial advisers and then later becoming underwriters in the same transaction. However, dealers would be able to advise on the timing and structure of a transaction without becoming an adviser, Bartolotta said.
Bartolotta said the guidance revolves around “how you hold yourself out.” A dealer-FA acting as a fiduciary who then changes into an arms-length role as an underwriter, would be engaging in a banned conflict. But dealers who hold themselves out as an underwriter throughout a transaction, “should be ok,” he said.
G-23 currently allows dealer-FAs to become underwriters in negotiated transactions if they disclose possible conflicts of interest stemming from their role switch to an issuer, disclose their expected compensation, and obtain the issuer consent. In competitive deals, dealer-FAs must obtain the issuer’s written consent before bidding on the bonds.
SEC chairman Mary Schapiro described role-switching as a “classic conflict of interest” in May and essentially ordered the rule overhauled.
In other action, the board voted to draft a new rule, G-34, on the role of brokers’ brokers, in lieu of interpretive guidance it issued in the fall. The board voted to extend its Rule G-20 on gifts and gratuities to muni advisers and to seek SEC permission to establish an historical subscription service for the market data and disclosures it collects.
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