A self-regulatory organization (SRO) created under the Securities Acts Amendments of 1975 (commonly referred to as the “Tower Amendment”) to adopt rules for brokers, dealers and municipal Securities dealers effecting transactions in municipal Securities. The MSRB rules are approved by the SEC and enforced by the SEC, FINRA, and the federal banking regulators depending on the regulated entity.
Prior to the establishment of the MSRB, the municipal market and its key participants (including banks, securities firms and other financial institutions) operated with high standards of conduct aimed at protecting investors. However, the market rapidly expanded in the 1970s and required a more in-depth and formal regulation system. Under the oversight of the SEC, the MSRB developed formal regulations and standards as it actively created and wrote rules for the industry. In fact, once approved by the SEC, “MSRB rules have the force and effect of federal law.” The MSRB’s rulemaking authority extends to municipal brokers and dealers, but not to municipal Securities Issuers. The MSRB’s rules are enforced by several agencies and other regulatory organizations including the SEC, FINRA, the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve System (“FRS”) and the Office of the Comptroller of the Currency (“OCC”).
The MSRB Board of Directors is composed of 15 members including representatives of investors and municipal entities, as well as representatives of the organizations regulated by the MSRB including bank dealers, broker-dealers and Municipal Advisors. In addition to the creation of regulations for the industry, the MSRB’s leadership concentrates on general industry outreach, education and leadership and the collection and public distribution of relevant industry information to attain a more transparent market.
Select MSRB Rules
Of particular interest to Bond Counsel and Underwriter’s Counsel are rules governing advertising (G-21), primary offering practices (G-11), disclosures to Issuers by Underwriters (G-17) and disclosures in connection with New Issues (G-32).
Disclosures in New Issues
MSRB Rule G-32 requires Underwriters to submit the Official Statement, together with related details of the New Issue, electronically to the MSRB’s EMMA portal within one business day after receipt from the Issuer but by no later than the Closing for the New Issue. If the Official Statement for a primary Issue is not posted by the Closing, the Underwriter must post a notice on EMMA indicating the date of delivery and must post the Official Statement within one day of receipt from the Issuer. If an offering includes an Advance Refunding, MSRB Rule G-32 also requires the Underwriter to submit the Escrow Deposit Agreement or its equivalent by, or on behalf of, the Issuer within five days of the Closing. MSRB Rule G-34(c) requires the Underwriter or the remarketing agent for variable rate demand Securities to use its best efforts to obtain and submit to the MSRB within five business days of receipt any Standby Bond Purchase Agreement, Letter of Credit or other document that establishes an obligation to provide liquidity for the purchase of the Securities or any amendment thereof.
Primary Offering Practices
MSRB Rule G-11 provides the rules relating to Underwriting Syndicate practices in connection with New Issue offerings. MSRB Rule G-11, subsections (b)-(e) provide specific procedures that Underwriting Syndicate members must follow regarding priority provisions that govern the allocation of Securities to different categories of orders as well as requiring disclosure of the allocation of Securities, Syndicate expenses and other relevant information and sales to related parties. Rule G-11 also requires any dealer that submits orders during any “retail order period” to make certain representations and disclosures regarding eligibility requirements, customer commitment, orders received from a retail customer for a Security for which the same CUSIP Number has been assigned, identifying information for the customer (but not including customer names or social security numbers) and the Par amount of the order. Rule G-11 also requires that the senior Syndicate Manager communicate to all Syndicate members and selling group members, at the same time, when the Issue is free to trade in the secondary market at prices that vary from the initial offering prices. Rule G-11 places significant restrictions on the ability of Underwriters and remarketing agents to provide bondholder consent to amendments to Trust Indentures or Bond Resolutions unless they can meet one of several limited exceptions.
Duties of Municipal Advisors
MSRB Rule G-42 establishes the standards of conduct and duties of Municipal Advisors when they engage in municipal advisory activities. Specifically, Rule G-42 prohibits a Municipal Advisor from engaging in certain enumerated activities. In the Regulatory Notice adopting MSRB Rule G-42, the MSRB stressed that Rule G-42 is designed to “set forth the core elements of the fiduciary duty” owed by Municipal Advisors to the municipalities that they advise, which is set out in Section 15B(c)(1) of the 1934 Act but that Rule G-42 “was not intended to comprehensively set forth every aspect of that duty.” In addition, Rule G-42 also provides that the Municipal Advisor must have a reasonable basis to believe a transaction or product is suitable for a client and must disclose the structure, benefits and risks related to its recommendation. The MSRB subsequently released “FAQ’s Regarding MSRB Rule G-42 and Making Recommendations,” the stated purpose of which was to provide “answers to frequently asked questions and related scenarios.” MSRB Rule G-42 requires that a Municipal Advisor’s engagement be in writing and must be preceded by certain disclosures, including any conflicts of interest. Municipal Advisors are also required to follow specific procedures when a Municipal Advisor gives advice inadvertently that would otherwise create a fiduciary relationship but does not intend to continue the relationship.
The Dodd-Frank Wall Street Reform and Consumer Protection Act enacted sweeping changes in the regulation of financial institutions, municipal advisors, and the financial markets.
Dealers Acting as Financial Advisors to Municipal Issuers
MSRB Rule G-23 provides that, with limited exceptions, a dealer that has a financial advisory relationship with an Issuer with respect to an Issue of municipal Securities may not act as a principal in the purchase, directly or indirectly, of the Issue or act as the Issuer’s agent in arranging a placement of the Securities. This rule also applies to affiliates of the dealer. Additionally, Rule G-23 prohibits a dealer that has a financial advisory relationship with an Issuer with respect to an Issue of municipal Securities of that Issuer from acting as the remarketing agent for the same Issue until one year after the relationship has terminated. Rule G-23 (specifically, subsection (d) of Rule G-23) does not prohibit: (i) a dealer Financial Advisor from placing an Issuer’s entire Issue with another governmental entity, such as a bond bank, as part of a plan of financing by such purchasing governmental entity for or on behalf of the Issuer, so long as the dealer Financial Advisor receives no compensation for underwriting any related contemporaneous transaction or (ii) a dealer Financial Advisor from purchasing Securities from an Underwriter if not done to contravene the purpose of the rule.
MSRB Rule G-15(f) prohibits a dealer from buying or selling municipal Securities in a transaction with a customer in an amount lower than the Minimum Denominations set forth in the Bond documents governing the Securities, unless the customer is selling its entire position or purchasing another customer’s entire position in the Securities.
Because retail investors tend to purchase Securities in smaller amounts, setting the Minimum Denominations at a higher amount helps ensure that dealers sell higher Yield Securities only to investors who can make sizeable investments and, therefore, likely are more prepared to bear the higher risk. Note that to benefit from the exemptions to Rule 15c2-12(d)(1), Private Placements or limited offerings of municipal Securities must be sold in an authorized Denomination of $100,000 or more.
CUSIP Number Assignment
Rule G-34(a)(i)(A)(1) requires the Underwriter to apply for CUSIP Numbers by no later than the completion of the Pricing and with sufficient time to ensure CUSIP Number assignment prior to formal award of any Bonds in a Negotiated Sale. Rule G-34(a)(i)(A)(3) requires that if a dealer acts as Financial Advisor in a Competitive Sale, it must apply for CUSIP Numbers by no later than one business day after dissemination of the Notice of Sale and with sufficient time to ensure CUSIP Number assignment prior to formal award of the Bonds. If no such CUSIP assignment has occurred by the award of sale, the Underwriter must apply for CUSIP Numbers immediately upon receiving notification of the award. Under Rule G-34(a)(i)(D), in the case of certain Advance Refundings that partially refund outstanding Maturities of a Bond Issue, the Underwriter also may be responsible to apply for new CUSIP Numbers for the partially refunded maturities of the Bond Issue.
G. Section 15B(c)(1) of the 1934 Act
Section 15B(c)(1) of the 1934 Act prohibits dealers and Municipal Advisors from violating any rule promulgated by the MSRB while selling a municipal Security or providing advice with respect to municipal financing products or the issuance of municipal Securities. The SEC can institute administrative proceedings against dealers and Municipal Advisors in the event of a violation of an MSRB Rule.
A website, operated by the MSRB, designated by the SEC as the official source for municipal securities data (including disclosures made pursuant to a continuing disclosure undertaking) and offering documents.
Federal agency that oversees and regulates the securities industry and aims “to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”
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Law designed to ensure that investors are provided with material information about new issues of securities offered for sale to the public.