Compliance Corner: Winter 2021

In May 2021, the MSRB plans to retire 15 pieces of interpretive guidance that we believe have become outdated over time as market practices and our rules themselves have evolved. This is an initial step in a multi-year review of the historical body of interpretive guidance. The goal is to identify opportunities to clarify, amend or delete interpretive guidance to help ensure it continues to achieve the intended purposes. With the input of regulated entities and others, this initiative will be an impactful way to support compliance and reduce unnecessary costs and burdens for regulated entities, while fulfilling the MSRB’s regulatory obligation to protect investors, municipal entities, obligated persons, and the public interest.

In case you missed it, you can learn more about this initiative in our on-demand webinar available here.

The majority of the more than 200 unique pieces of interpretive guidance in the MSRB Rule Book is more than 20 years old. But what is old can be new again, as we see in this 1993 message from then-MSRB Chair Charles Fish that rings just as true today:

“If the Board is to keep pace with the accelerating rate of change, the increasing demand for liquidity and universally available information, we need your input. If we are to have more relevant rules, not just more rules, we need your input. If we are to maintain professional qualifications at levels consistent with the standards necessary to protect the investor, we need your input. If we are to effectively deny participation in the municipal securities industry to those that have shown disregard for its rules and have diminished the contributions of those who have toiled relentlessly for the highest standards of ethics, we need your input!”

Charles W. Fish
MSRB Chair 1992-1993. 
Read Chair Fish’s full letter.

To echo Former Chair Fish, we need your input to inform the retrospective review of interpretive guidance. We will be seeking your comments, questions and concerns throughout this comprehensive effort. Please reach out to me directly at gmarshall@msrb.org or 202-838-1361.

On December 22, 2020, First Midstate, Inc. and Paul D. Brown, its sole owner and president, agreed to a settlement with the Securities and Exchange Commission (SEC) for violations of MSRB Rule G-17 on Conduct of Municipal Securities and Municipal Advisory Activities and Rule G-21 on Advertising by Brokers, Dealers or Municipal Securities Dealers, as well as Section 15B(c)(1) of the Exchange Act of 1934, by effecting transactions in municipal securities in contravention of MSRB rules.

First Midstate, an Illinois broker-dealer, served as the sole underwriter on a number of bond offerings for municipal issuers, primarily school districts in Illinois during the relevant period, June 1, 2014 to October 1, 2018. The firm stated on its website that it had a large customer list which would allow it to locate suitable investors for the bonds at competitive interest rates. On some occasions, the firm made similar representations when soliciting issuers through responses to requests for proposals. In fact, the firm had an extremely limited client base and its practice was to sell the bonds it underwrote to other broker-dealers, not investors. Indeed, in 101 offerings where the firm was the sole underwriter, the firm sold the entire offering to a single broker-dealer. For those 101 offerings, the purchasing broker-dealer then marked up the bonds and resold them to investors at higher prices (and corresponding lower yields).

These practices were unfair to issuers and in violation of MSRB Rule G-17. Issuers may have received more competitive pricing for their bonds and, as a result, may have paid a lower yield, if the firm had sold the bonds to investors. In addition, the firm’s website violated MSRB Rule G-21 in that it included misleading content. The firm’s website noted that it had an extensive list of municipal bond purchasers and the ability to place each issue with investors but failed to disclose the firm’s practice of selling entire offerings to other broker-dealers who then resold those bonds to investors at higher prices.

As a result of this conduct, First Midstate and Brown agreed to pay civil penalties totaling $200,000 and to cease and desist from committing or causing any violations and any future violations of Section 15(B)(c)(1) of the Exchange Act and MSRB Rules G-17 and G-21. First Midstate also agreed to retain an independent compliance consultant to conduct a review of the firm’s policies and procedures as they relate to the firm’s disclosures to issuers regarding its municipal securities underwriting practices and its professional advertisements.