Securities Litigation

The SEC instituted proceedings August 6 to allow additional time - and analysis - of the MSRB's proposed Rule G-42 establishing broad conduct standards for municipal advisors. The Order essentially buys more time for the SEC to consider, and the MSRB to respond to, industry comments on the proposed Rule. Release No. 34-75628; File No. SR-MSRB-2015-03 (Aug. 6, 2015) The MSRB itself took two runs at the Rule proposal during 2014 before submitting the Rule for SEC consideration last April. The usual approval process ran on August 6 thus requiring the "proceedings" to extend the time to act. Under the Exchange Act, the Commission usually accepts and considers comments, makes changes and then issues the final rule. The "proceedings" route may signal potential Commission rejection of a proposal. It requires "notice of grounds for disapproval under consideration" to the proposing SRO, so it can respond. But in this Order, the SEC merely parroted the broad language stating the MSRB's purpose, without citing any particular grounds -- effecting, a mere extension of time. As proposed for adoption by the SEC, the Rule broadly imposes:

• A fiduciary duty to Municipal Entities, but only of care to Obligated Persons;
• An "engagement letter" disclosure regime requiring conflicts and disciplinary disclosures, fee-basis, scope and termination of engagement provisions;
• Suitability and Know-Your-Customer requirements; and
• Prohibitions on certain conduct, including excessive compensation, misrepresentations or false claims, certain and undisclosed fee-splitting, most paid solicitation, and principal transactions with Municipal Entity clients.

Notable changes from the Revised Draft include:

• Revision of Rule G-42(e)(i)(E) for more specific description of allowable solicitor payments to affiliates, other MA's or otherwise permissible under Rule G-20;
• Revision of Supplementary Material .06 to clarify that the Inadvertent Advice safe-harbor relieves compliance only with required engagement letter and conflicts disclosures;
• Deletion of former Supplementary Material .08 requiring direct disclosures to municipal-securities investors; and
• Addition of Supplementary Material .11 including bank loans within prohibited principal transactions if they are $1 million or more and economically equivalent to a municipal-securities purchase.

The Rule filing, SR-MSRB-2014-03, is here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).