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Compliance Corner is a quarterly electronic newsletter published by
the MSRB to support the compliance obligations of brokers, dealers and
municipal securities dealers (collectively "dealers") and municipal
advisors. Compliance Corner provides regulatory updates and
resources to facilitate understanding of MSRB rules. Items below labeled “MA” are for municipal advisors; “BD” for dealers;
“MA/BD” for all.
Compliance in Focus
By Lynnette Kelly, MSRB
President and CEO
Nearly a
year ago, the MSRB announced a strategic shift to provide additional compliance
resources as a way of supporting industry adoption of substantive rules established
in recent years. To inform these efforts, we sought public
comment on our approach and formed the MSRB’s first-ever Compliance
Advisory Group—nine compliance-oriented senior executives representing the
diversity of MSRB-regulated firms. These professionals are well positioned to
advise the MSRB on helping regulated firms better understand MSRB rules of
professional conduct and to develop effective compliance systems
Public feedback
and the advisory group’s insight have shaped our approach to increasing
compliance support, including providing more clarity about the scope of compliance
resources, making them as useful as possible and clearly stating their intent for
regulated entities and enforcement authorities. But we know that challenges
remain. Stakeholders continue to express concern about the intent and purpose
of MSRB compliance resources, as well as about market advisories addressing
topics they believe are beyond the scope of the MSRB’s regulatory jurisdiction.
We are
committed to continuing our dialogue with stakeholders about how we can
continue to improve our efforts. One of our next steps will be to revise our policy
on providing interpretive guidance to ensure it facilitates our efforts to
serve as a resource to regulated entities. The MSRB welcomes feedback from
stakeholders about how the organization can continuously improve our approach
to providing compliance support and ensure the resources available to regulated
entities are clear, helpful and relevant. Please contact the MSRB at
compliance@msrb.org.
On behalf
of the Board of Directors, I would like to express our thanks to the individuals
who graciously lent their time, perspectives and insights to advance the MSRB's
long-term strategic goal to facilitate compliance. Guidance from the Compliance
Advisory Group and other stakeholder input allowed the MSRB to provide the
following compliance assistance for regulated entities in fiscal year 2018:
Read more about the MSRB's FY 2018 compliance initiatives.
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Compliance FAQs
Get answers to commonly asked questions about compliance with MSRB rules.
Q: If I am a
municipal advisor firm, does everyone at my firm need to be Series-50
qualified?
A: Anyone
engaging in municipal advisory activities must pass the MSRB’s Municipal
Advisor Representative Qualification Examination (Series 50
exam). Remember, if a municipal advisor firm currently has an SEC Form
MA-I on file for a person that has not passed the Series 50 exam, that Form
MA-I should be amended to indicate that the person is not engaging in municipal
advisory activities on behalf of the firm. See SEC’s
Registration of Municipal Advisors FAQs Section 16: Professional Qualifications
and Municipal Advisor Firms
Compliance Tip
Stay
vigilant! Cybercriminals aren’t interested in municipal bonds for the public
interest, they want to steal the closing funds. To that end, a cybercriminal
will cast a wide net by sending phishing emails to multiple contacts at
organizations involved in the deal, including issuers, municipal advisors,
underwriters and bond counsel, hoping for just one person to take the bait and
unknowingly give the cybercriminal access to an organization’s systems. Once
in, the cybercriminal can view internal calendars and contact information for
upcoming deal closings. As a closing nears, the cybercriminal can send a sophisticated
and well-timed email from a fake account with new wiring information that will,
unless detected, allow the cybercriminal to steal the funds.
Read
more about avoiding closing scams from the Consumer Financial Protection Bureau.
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Compliance Calendar
Dealers and municipal advisors should note the following key compliance dates and deadlines relevant through the third quarter of calendar year 2018.
 October 1, 2018 – December 31, 2018: Temporary
Fee Reduction on Underwriting, Transaction and Technology Fees Assessed on
Dealers
Effective
October 1, 2018, the rates of assessment for the MSRB’s underwriting,
transaction and technology fees under MSRB Rule A-13 will be reduced
temporarily by approximately one-third to provide short-term limited relief to
dealers. The lower assessment rate will apply only for activity that occurs
during the period October 1, 2018 – December 31, 2018. Read
MSRB Notice 2018-16.
October 1, 2018: Implementation Date for MSRB’s
Modified Professional Qualifications Program
Amendments
to Rule
G-3, which reflect the MSRB’s intended plan to revise the
Municipal Securities Representative Qualification Examination (Series 52) into
a specialized knowledge examination and recognize the SIE Examination as a
prerequisite for the Series 52 examination, have an implementation date of
October 1, 2018. Read
MSRB Notice 2018-11 for more details.
October 31, 2018: Payment Due for Annual MSRB
Registration Fee
All
dealers and municipal advisors must submit disclosures to the MSRB, on a
quarterly basis, regarding political contributions under MSRB Rule G-37. The
quarterly disclosures must be submitted through Form G-37 by January 31, April
30, July 31 and October 31 of each year. See
MSRB Rule G-37.
December 31, 2018: Deadline for Continuing Education Needs Analysis
Under
MSRB
Rule G-3, municipal advisor firms are required to complete a needs
analysis, develop a continuing education program for their covered persons and
deliver training to all covered persons by December 31, 2018. See
MSRB Notice 2017-10.
December
31, 2018: Investor and Municipal Advisory Client Education Notifications
All
dealers and municipal advisors must provide a written notification to customers
and municipal advisory clients with a statement that they are registered with
the MSRB and the Securities and Exchange Commission (SEC); the MSRB’s website
address; and a statement as to the availability of the Information for Municipal
Securities Investors and/or Information for Municipal
Advisory Clients brochures. This notification
must be provided once each year. See MSRB Rule G-10.
December
31, 2018: SEC Form MA Verification
Within
90 calendar days after a municipal advisor firm’s fiscal year end (calendar
year end for sole proprietors), the municipal advisor firm must file an “annual
update,” which is an amendment to the municipal advisor firm’s SEC Form MA,
that either confirms the information is accurate or updates responses to any
item for which the information is no longer accurate. See
SEC Rule § 240.15Ba1-5.
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 Virtual Workshops
To submit questions in advance of any workshop or to suggest
topics for future workshops, email MSRBEvents@msrb.org.
MSRB Rule G-37: Completing Form G-37 (MA/BD)
September 14, 2018, 12:30 – 1:30 p.m. ET
Register
to attend this
free, virtual compliance workshop. MSRB staff discuss key provisions of MSRB
Rule G-37 on Political Contributions and Prohibitions on
Municipal Securities Business and Municipal Advisory Business related
to Form G-37. The workshop will follow a question-and-answer format based on questions and suggestions from regulated entities and other stakeholders.
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EMMA® for Municipal Advisors (MA)
October 11, 2018, 3:00 – 4:00 p.m. ET
Register
to attend this
free, virtual compliance workshop to learn how municipal advisors can leverage
the MSRB’s Electronic Municipal Market Access (EMMA®) website to find
information about the municipal securities market and specific state and local
government issuers. Explore EMMA’s intuitive navigation, quick links to
interactive tools and improved display of information about individual bonds,
including trade data and disclosure documents.
MSRB Rules G-21 and G-40:
Advertising by Dealers and Municipal Advisors (MA/BD)
November 8, 2018, 3:00 – 4:00 p.m. ET
Register
to attend this
free, virtual compliance workshop. MSRB staff will conduct an in-depth
discussion about key provisions of MSRB Rule
G-21, on advertising by dealers, and MSRB Rule
G-40, on advertising by municipal advisors. This workshop will
follow a question-and-answer format based on questions and suggestions from
regulated entities and other stakeholders.
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Enforcement Insight
This periodic feature summarizes a recent enforcement
matter brought by an examining authority, which includes the Securities and
Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) or
applicable bank regulator, relevant to the municipal securities market.
Enforcement matters can, when applicable, inform firms and help identify
potential compliance risks. Read
about the MSRB’s regulatory coordination and enforcement support.
Municipal Bond “Flipping”: On August 14,
2018, the Securities and Exchange Commission (SEC) charged two firms and 18
individuals (collectively, “defendants”) in federal court for engaging in
conduct which the SEC characterized as “flipping,” where the defendants posed
as retail investors to purchase new issue municipal bonds based on a
prearranged understanding that the bonds would be sold immediately to
broker-dealers for a fee. Effectively, the defendants were acting as
unregistered broker-dealers and obtaining the securities from underwriters in
contravention of priority order and allocation provisions established for the
offerings. Read more.
On August 22-24
2018 and September 4, 2018, the SEC settled with fifteen of the defendants, including Core Performance
Management, LLC (“CPM”), James P. Scherr, who was the majority owner and managing director of
CPM, RMR Asset Management Company (RMR),
which like CPM, engaged in unregistered broker-dealer activity, buying and
selling new issue municipal bonds, Ralph M. Riccardi, RMR’s owner, as well as
employees of CPM and independent contractors associated with RMR.
Fifteen defendants
consented to be permanently enjoined from future violations of Sections 10(b)
and 15(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule
10b-5 thereunder, and MSRB Rule G-17, with CPM and Scherr also consenting to be
permanently enjoined from future violations of Section 17(a) of the Securities
Act of 1933. Each of these defendants were barred from association with any
broker, dealer, investment adviser, municipal securities dealer, municipal
advisor, transfer agent, or nationally recognized statistical rating agency,
with a right to reapply after two years, subject to multiple conditions,
including satisfaction of any disgorgement orders, restitution orders and
arbitration awards. In addition, the consent judgments require these defendants
to pay more than $3 million in disgorgement and prejudgment interest and $890,000
in civil penalties.
Two defendants
consented to be permanently enjoined from future violations of Sections
15(a)(1) of the Exchange Act of 1934. Each of these defendants were suspended for twelve
months from association with any broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or nationally recognized
statistical rating agency.
Relatedly, on
August 14, 2018, the SEC instituted settled administrative
proceedings against a
registered broker-dealer/MSRB registrant (“dealer”), its former head of
municipal trading and its chief compliance officer (“CCO”), who was also
responsible for supervising the former head of municipal trading. The SEC
alleged that the dealer and its former head of municipal trading: (1) engaged
in a practice, characterized as “parking,” in which the dealer sold municipal
bonds that it was underwriting to unaffiliated and unregistered persons (i.e.,
including to CPM and Scherr), subject to an agreement that the dealer would
repurchase those bonds for its own inventory at a higher price following the
completion of the offering; and also (2) placed “orders” with CPM and Scherr to
obtain new issue municipal bonds that had been obtained from other underwriters
under the guise that the purchases were for investors. As a result, the dealer
and its former head of municipal trading were found to have violated, among
other things, MSRB Rule G-17 and the CCO, who had failed to implement the
dealer’s procedures for the quarterly review of the transactions conducted by
the head of municipal trading, was found to have violated MSRB Rule G-27.
The Division of
Enforcement’s Public Finance Abuse Unit is continuing to investigate conduct
related to the defendants’ flipping scheme.
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Compliance Resource: Supervisory
Responsibilities of Qualified Principals (BD)
This resource is designed to assist dealers in understanding the scope of
municipal securities activities that designated principals are permitted to
supervise, pursuant to MSRB Rule G-27, on supervision, consistent with MSRB
Rule G-3, on professional qualification requirements.
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Compliance Resource: Compliance
Advisory for Municipal Advisors (MA)
This Compliance Advisory highlights certain MSRB rules and provides
considerations a municipal advisor could use in assessing its own policies and
procedures for compliance with the applicable rules.
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Compliance Resource: Organizational
Change Checklist (BD/MA)
This resource provides a checklist of questions regulated entities may wish
to consider when contacting MSRB Support in advance of an upcoming
organizational change, such as a reorganization or a merger or acquisition,
that may result in a change to their registration status with the MSRB.
Coming Soon
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Municipal Advisor Principal Qualification Examination (Series
54): Development is underway for the Series 54 exam—a
principal-level examination for municipal advisor professionals defined under
MSRB Rule G-3 as municipal advisor principals. The rule defines a municipal
advisor principal as a person associated with a municipal advisor who is
qualified as a municipal advisor representative and is directly engaged in the
management, direction or supervision of the municipal advisory activities of
the municipal advisor and its associated persons.
Once the MSRB launches a pilot Series 54 exam and later, the
permanent Series 54 exam in 2019, municipal advisor principals will be required
to pass the permanent exam within 12 months. The MSRB will provide regular
communications regarding the formalization of professional qualification
requirements for municipal advisor principals, including a corresponding
amendment to Rule G-3, as well as information on the Series 54 pilot and
permanent exam.
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Regulatory Roundup
Keep up with current requests for comment,
updated regulatory requirements and upcoming rule filings, and learn about opportunities to provide input
at various stages
of the MSRB’s rulemaking process.
September 14, 2018:
Submit Comments on Draft FAQs on Use of Social Media in Advertising
Share feedback on
draft answers to FAQs addressing the use of social media in advertising by
municipal advisors and municipal securities dealers and their associated
persons. New
MSRB Rule G-40, on advertising by municipal advisors – together with amendments
to MSRB Rule G-21, on advertising by municipal securities dealers – becomes
effective on February 7, 2019. The MSRB has committed to providing
guidance in advance of the effective date to assist regulated entities as they
develop their compliance policies and procedures. In addition to today’s draft
guidance on social media, the MSRB has sought
feedback on draft FAQs on the use of municipal advisory client lists and case
studies under Rule G-40. Next month, the MSRB plans to seek input on
draft guidance related to Rule G-40’s content standards.
September
17, 2018: Submit Comments on Draft Amendments to MSRB Rules on Primary Offering
Practices
Share your input regarding the MSRB’s draft
amendments on MSRB rules on syndicate practices and disclosure of information
related to primary offerings. The request for comment includes several
potential amendments to MSRB
Rule G-11, including requiring senior syndicate managers to provide
specified information to issuers and standardizing the process for issuing a
“free-to-trade wire” to communicate to all syndicate members at the same time
that the new issue is free to trade. The potential changes also include
amendments to MSRB
Rule G-32 to, among other things, collect additional
information on Form G-32 to support municipal market transparency efforts. Read
the request for comment and submit your response by Monday, September 17, 2018
November 6, 2018: Submit Comments on Draft Interpretive Guidance on Pennying and Other
Trading Practices
Provide comments on draft interpretive guidance
related to the practice of “pennying” and draft amendments to existing guidance
on best execution relating to the posting of bid-wanteds on multiple trading
platforms. In addition, as part of its ongoing review of its rules, the MSRB
also seeks comment as to whether there are other secondary market trading
practices that could benefit from additional regulatory guidance or clarity, or
whether there are any MSRB requirements related to secondary market trading
practices that commenters may feel are no longer necessary and could be removed
from and/or amended in MSRB rules.
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