SIFMA sent comments to the Municipal Securities Rulemaking Board’s (“MSRB”) regarding proposed amendments to MSRB Rule A-3 governing membership on…
Request for Comment on MSRB Rule G-23 on Activities of Dealers Acting as Financial Advisors
Ronald W. Smith
Municipal Securities Rulemaking Board
1300 I Street NW
Washington, DC 20005
Re: MSRB Notice 2019-13: Request for Comment on MSRB Rule G-23 on Activities of Dealers Acting as Financial Advisors
Dear Mr. Smith,
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates this opportunity to provide input on the Municipal Securities Rulemaking Board’s (“MSRB”) Request for Comment (the “Request”) on MSRB Rule G-23 on Activities of Dealers Acting as Financial Advisors.2 In connection with the ongoing retrospective review of its rules and guidance, the MSRB is seeking comment on Rule G-23, revisited last in 2011, and its interaction with the more recent municipal advisor regulatory framework and other rules and guidance adopted or updated since then. As always, we welcome a retrospective review of rules to ensure that they reflect current market practices, do not create unwarranted burdens on market participants, and are appropriately harmonized with other rules. We applaud the MSRB’s choice to review Rule G-23 with a goal to appropriately update the rule in light of the adoption of the SEC’s municipal advisory regulatory framework and eliminate any inconsistencies between the two. We share common ground with the MSRB in this goal, and hope our comments are helpful to update the rule to reflect Congress’ intent of municipal advisor regulation and issuer protection. Below are our responses to select questions posed in the Request.
Responses to Select Questions Posed in the Request
- What has been the experience of issuers, dealers, municipal advisors, and other market participants with respect to Rule G-23’s prohibition on role switching since the 2011 amendment? Has the rule been effective in achieving its primary purpose of addressing the conflict of interest that exists when a dealer acts as both a financial advisor and an underwriter with respect to the same issue?
SIFMA’s members implemented the role-switching prohibition and currently utilize the exceptions, which should be preserved and expanded in a revised rule as described in our responses to other questions posed by the MSRB. With respect to placement agent activity in relation to the role-switching prohibition, please see our responses to Questions 3 and 7 below.
- Considering the implementation of the MSRB’s and SEC’s municipal advisor rules, are there ways the MSRB could achieve Rule G-23’s purpose without retaining it as a standalone rule? For example, should the MSRB eliminate Rule G-23 and address any need for regulatory requirements and exceptions through enhancements to other MSRB rules, such as Rule G-42?
SIFMA’s members do not have a strong opinion whether Rule G-23 remains as a standalone rule or is eliminated and incorporated into other rules, primarily G-42, though they recognize that principles of regulatory construction may favor that G-23 be eliminated to streamline similar or related requirements. More importantly, our members are more concerned about G-23’s substance as opposed to the form it takes, including preserving and expanding the exceptions to the role-switch prohibition for them to serve the market effectively; ensuring that it is consistent with other rules; and that it is uniformly applicable to all parties operating in the same or similar roles.
The current construct – a newer municipal advisory framework for dealer and non-dealer municipal advisors existing with an older Rule G-23 applicable to dealer municipal advisors only – has resulted in confusion over role clarity, i.e., what is and is not permitted when acting in a certain role. For example, as we have seen recently with the interpretive request made to the SEC by PFM, non-dealer municipal advisors believe that, because they are subject to a fiduciary standard, they can act as a placement agent for the same issue on which they are serving in the capacity of an municipal advisor, even though dealer municipal advisors are prohibited from this role-switching under G-23. SIFMA submitted a response to the PFM letter objecting to the request, pointing out, in part, that the same principles that compel the role-switching prohibition for dealer municipal advisors apply equally to non-dealer municipal advisors acting in the same role.
In addition, SIFMA’s members strongly believe that the current role-switching exceptions should carry over. This includes the bond bank exception; the remarketing exception; and the exception specifically allowing a dealer municipal advisor to buy the bonds from the issuance from another syndicate member for its own account or for the account of customers so long as it is not an effort to become an indirect underwriter contrary to the role-switching prohibition. The reasons for these exceptions remain valid; they have served the market well, offering municipal issuers choice, flexibility, and as a result, lower cost financing. As discussed in our response to Question 6.d., additional exceptions should be added as well.