Securities Litigation

The MSRB proposed a Revised Draft of Rule G-42 ("Duties of Non-Solicitor Municipal Advisors") by Reg. Not. 2014-12 issued July 23, 2014. We addressed the original proposal in our January 23 blog post, here. The Revised Draft Rule G-42 contains the same basic structure and objectives as originally proposed. It establishes (a) DUTIES owed by Municipal Advisors ("MA's") to Municipal Entity ("ME") clients and to Obligated Person ("OP's"); (b) An engagement-letter-type disclosure regime with certain required DISCLOSURES; (c) A suitability requirement MA's must follow (DO'S); and, (d) Various prohibitions (DON'TS) The Draft Rule's high-points and notable revisions, include: DUTIES: Section (a) of the Draft Rule imposes a fiduciary duty to ME clients (duties of care and loyalty), but a regular duty of care to OP's. The Supplementary Material removes the prior requirements of thorough OS review (-.01) and of investigating alternatives (-.02), instead allowing parties to determine and define the scope of each engagement. DISCLOSURES: Sections (b-c) implement an "engagement letter" disclosure regime. Among the key revisions to this Draft: - Compensation disclosures are narrowed, by requiring compensation-related conflict disclosures only when they arise from compensation contingent on the size or closing of a transactions [(b)(i)(F)] and deleting the requirement to disclose the amount of expected compensation [(c)(ii)]. - Conflicts disclosures have been narrowed, limiting disclosure of other engagements or relationships to the MA (and deleting affiliates, who must disclose their relationship conflicts themselves, e.g. in OS)[(b)(i)(G)] and limiting the no-conflict certification only to "known" conflicts. - The Revised Draft no longer requires disclosure of professional liability insurance [(b)(i)]. - Disciplinary disclosures now mimic Form MA information, with instruction on accessing the Form and the date of last change or revision [(b)(ii-iii), (c)(iii-iv)]. - The Revised Draft no longer requires recitation of specific undertakings requested by client [(c)(v)]. - Engagement letters must address provisions for termination or withdrawal, and require updating with any material changes during relationship [(c)(vii) ]. DO'S: The Revised Draft merges the suitability obligation for principal MA-client recommendations and third-party review engagements (previously articulated separately) and restates the Rule positively ("if, then must"). The Revised Draft adds a new safe-harbor provision governing inadvertently-provided municipal advice. An actor not otherwise an MA under the Rule may avoid MA status for inadvertent advice if it: (a) Promptly documents by dated disclaimer and cessation of the inadvertent advice; (b) Notice to the recipient of non-disclosures that were required under the Rule; (c) Good-faith efforts to identify the unintended advice; (d) Request for client acknowledgement; and (e) A self-review of compliance/supervisory procedures to prevent recurrence. See Supplementary Material .06. DON'TS: The Revised Draft clarifies or limits some prohibitions. Key among them: - The fee-splitting prohibition between MA's and underwriters now is limited to the same transaction on which the MA advised [(e)(i)(D)]. - The "Principal Transaction" prohibition is limited in two ways: First, it defines "Principal Transactions" on those involving the "purchase or sale of a security, derivative, GIC or financial product" for its own account to/from the counterparty ME by MA or affiliate [(e)(ii)]; and Second, it limits it to those directly related to the transaction or product on which the MA is advising [(f)(i)]. Finally, the Principal Transaction ban does not apply to the acquisition of entire offering as permitted by Rule G-23 [Supplementary Material -.07]. The comment period expires August 25, 2014.

MSRB SUBMITS MA SUPERVISION RULES TO SEC

The next day, July 24, the MSRB submitted the final Rule G-44 MA Supervision for SEC approval. File SR-2014-06, here. Proposed earlier this year in Reg. Not. 2014-04 (addressed in our March 11 blog post, here), Rule G-44 mimics the familiar supervision and compliance rules otherwise applicable to broker-dealers under FINRA Rule 3130. Key provisions include: - A supervisory system reasonably designed to achieve compliance with applicable securities laws; - Written supervisory procedures; - Designation of MA principals responsible for supervision; - Compliance processes reasonably designed to achieve compliance with them; - Annual review and certification; under a - Designated Chief Compliance Officer to administer them; and - Accompanying books and records requirements. Thomas K. Potter, III (tpotter@burr.com). Tom is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Resident in the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters.