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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 highlights recent 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: Regulation Best Interest
The MSRB is reviewing its rulebook to determine whether changes to MSRB rules are necessary or appropriate to align with the requirements of the U.S. Securities and Exchange Commission’s (SEC) new Regulation Best Interest (Reg BI), adopted June 5, 2019. Reg BI establishes a best interest standard for broker-dealers and their associated persons when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. As part of the Regulation BI rulemaking package, the SEC also adopted a requirement for broker-dealers and investment advisers to provide a relationship summary (Form CRS) to retail investors and published two interpretations of the Investment Advisers Act of 1940 (Advisers Act). The Advisers Act interpretations were effective on July 12, 2019. Broker-dealers must comply with Regulation BI and Form CRS by June 30, 2020. See the following SEC resources for details:
The MSRB intends to coordinate closely with the SEC and the Financial Industry Regulatory Authority as it considers the impact of Reg BI. Any proposed changes to MSRB rules will be filed with the SEC for public comment.
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Compliance Frequently Asked Questions (FAQs)
Get answers to commonly asked questions about compliance with MSRB rules.
Q: Can a municipal advisor outsource its compliance functions, including the role of the Chief Compliance Officer (CCO)?
A: Yes. MSRB Rule G-44, on supervision, provides municipal advisors with flexibility in establishing a reasonably designed supervisory system by allowing compliance tasks, including the role of the CCO, to be outsourced. While the CCO role may be outsourced, the municipal advisor retains ultimate responsibility for its compliance obligations. Due to the unique and integral role a CCO has in administration of a firm’s compliance processes, a municipal advisor must consider whether an outsourced CCO has the time and skill to understand the specific services and activities that the municipal advisor engages in and, if engaged by multiple firms, whether the outsourced CCO has the capacity to effectively discharge its duty as CCO.
Compliance Tip: Let the Record Show
Under MSRB Rule G-8, a municipal advisor is required to make and maintain General Business Records relating to its municipal advisory activities that are true, accurate and current. General Business Records include check books, bank statements, cancelled checks and cash reconciliations of the municipal advisor, as well as general ledgers that reflect assets, liabilities, reserves, capital and income and expense accounts. Read SEC Rule 15Ba1-8 for additional records that must be made and maintained as General Business Records under MSRB Rule G-8.
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Compliance Calendar
Dealers and municipal advisors should note the following key compliance dates and deadlines relevant through the fourth quarter of calendar year 2019.
October 31, 2019: Political Contributions Quarterly Disclosures (MA/BD)
MSRB-regulated entities must submit information to the MSRB through Form G-37 on their municipal securities and advisory business and related political contributions to municipal entity officials, state and local political parties, and bond ballot campaigns. Read instructions for Form G-37.
October 31, 2019: Payment Due for Annual MSRB Registration Fee (MA/BD)
As part of its initial registration and annually thereafter, based on the fiscal year of the Board, each broker, dealer, municipal securities dealer and municipal advisor shall pay to the Board an annual registration fee of $1,000. The annual registration fee shall be payable in the manner provided by the MSRB Registration Manual. See MSRB Rule A-12.
December 31, 2019: Investor and Municipal Advisory Client Education Notifications (MA/BD)
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, 2019: SEC Form MA Verification (MA)
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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Enforcement Insight
This periodic feature summarizes a recent enforcement matter brought by an examining authority, which includes the SEC, 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.
On April 11, 2019, the U.S. Securities and Exchange Commission (SEC) issued an order, In the Matter of Clear Scope Advisors, Inc. (the”Order”) in a settled administrative proceeding against a registered municipal advisor. Clear Scope Advisors, Inc. (CSA) had registered with the SEC and the Municipal Securities Rulemaking Board (MSRB) in 2010 and had filed a SEC Form MA-I with the SEC for its sole municipal advisor professional "MA Professional".
MSRB Rules G-2 and G-3 provide that no municipal advisor shall engage in municipal advisory activities, unless such municipal advisor and every natural person associated with such municipal advisor are qualified in accordance with the rules of the MSRB. Specifically, Rule G-3 requires individuals that engage in municipal advisory activities on behalf of a municipal advisor firm, as well as those individuals who engage in the management, direction or supervision of the municipal advisory activities of the municipal advisor firm or its associated persons must take and pass the MSRB’s Municipal Advisor Representative Qualification Examination (Series 50). When the MSRB launched the permanent Series 50 exam in 2016, firms were given a one-year grace period, until September 12, 2017, to have their MA professionals take and pass the Series 50 exam. The MSRB conducted outreach to municipal advisors before the grace period ended, including reminding firms that MA professionals would not be able to continue to engage in municipal advisory activities after September 12, 2017 if they had not taken and passed the Series 50 exam.
While CSA received several notifications before the September 12, 2017 deadline, CSA and their MA professional failed to meet the applicable professional qualification standards under Rules G-2 and G-3 until May 16, 2018. During this eight-month period, at which time the MA professional had not taken and passed the Series 50 exam, CSA provided advisory services to two separate schools, including advising on the price of the potential bond offerings, participating in weekly conference calls with the other professionals engaged to work on the bond issuances, participating in investor presentations and participating in a ratings call. In addition, CSA failed to amend its Form MA-I for the MA professional to reflect that, at that time, the MA professional was no longer permitted to engage in municipal advisory services on behalf of CSA because the MA professional had not passed the Series 50 exam.
The Order censured and enjoined the firm from committing or causing any future violation of Section 15B(c)(1) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 15Ba1-5, and MSRB Rules G-2 and G-3. The firm was also ordered to pay disgorgement of $20,000, prejudgment interest of $678.64, and a fine of $5,000, of which $1,250 is related to MSRB rule violations.
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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 24, 2019: SEC Approval Order on Proposed Rule Change to Amend MSRB Rule A-11, on Assessments for Municipal Advisor Professionals, to Increase the Annual Professional Fee Over a Two-Year Phase-In Period
September 11, 2019: Proposed Rule Change to Amend MSRB Rule A-11, on Assessments for Municipal Advisor Professionals, to Increase the Annual Professional Fee Over a Two-Year Phase-In Period
September 10, 2019: SEC Request for Extension of Time on Proposed Rule Change to Amend and Restate the MSRB's August 2, 2012 Interpretive Notice Concerning the Application of Rule G-17 to Underwriters of Municipal Securities
August 9, 2019: Federal Register Notice of Filing on Proposed Rule Change to Amend and Restate the MSRB's August 2, 2012 Interpretive Notice Concerning the Application of Rule G-17 to Underwriters of Municipal Securities
August 1, 2019: Proposed Rule Change to Amend and Restate the MSRB's August 2, 2012 Interpretive Notice Concerning the Application of Rule G-17 to Underwriters of Municipal Securities
July 3, 2019: Federal Register Notice of Approval on Proposed Rule Change to Amend Rules G-11 and G-32 and Form G-32 Regarding a Collection of Data Elements Provided in Electronic Format to the EMMA Dataport System in Connection with Primary Offerings
June 27, 2019: SEC Approval Order on Proposed Rule Change to Amend Rules G-11 and G-32 and Form G-32 Regarding a Collection of Data Elements Provided in Electronic Format to the EMMA Dataport System in Connection with Primary Offerings
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