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This is a reminder that the deadline for MSRB Rule G-44, which requires municipal advisors to provide evidence that they have reviewed their supervisory procedures and compliance policies, is April 23, 2016. Municipal advisors must review these policies and procedures at least annually to ensure they are reasonably designed to achieve compliance with applicable rules and to make any changes as a result of the review.
Additionally, beginning on April 23, 2016, a firm's Chief Executive Officer (CEO) or equivalent officer must certify on an annual basis that the municipal advisor has in place processes to establish, maintain, review, test, and modify written compliance policies and supervisory procedures reasonably designed to achieve compliance. The MSRB issued a Municipal Advisor 2016 Compliance Advisory in November 2015 highlighting some issues that municipal advisors should be aware of as they finalize their reviews and related certifications.
With the SEC’s approval of MSRB Rule G-42 and amendments to Rules G-20 and G-37, municipal advisors can use the annual review process to assess what changes are needed to their supervisory procedures and compliance policies in 2016. In addition, municipal advisors should review their client agreements and contracts, and related disclosures of conflicts of interest, as the deadline for compliance with Rule G-42 approaches (June 23, 2016).
Furthermore, during the Compliance Outreach Program for Municipal Advisors (“Compliance Outreach”) in February 2016, the SEC staff stated that they will review advisory contracts with municipalities and obligated persons to make sure that they are not purely boilerplate, but actually describe what the advisor is not doing for their clients.In addition, if the SEC staff finds that any existing, ongoing agreement in effect that does not meet the standards of Rule G-42, the SEC staff expects that municipal advisors will issue an amendment or supplement to the existing contract that contains any required provisions not addressed in the existing documentation, including the relevant conflict of interest disclosures required under Rule G-42.
The SEC staff highlighted during the Compliance Outreach event that Rule G-42’s requirements concerning suitability only apply to recommendations and the review of the recommendations of third parties, not merely advice. Also, while Rule G-8 requires the maintenance of records material to the review of a recommendation by a third party or that memorializes the basis for any determination as to suitability, the MSRB staff is not prescribing the creation of specific documents. The SEC staff did say, however, that they expect that some documentation is being maintained, as part of the ordinary course of business. In other words, the SEC staff will ask firms to articulate how they have met their fiduciary duty to municipal entity clients. The MSRB is hosting a free education webinar on Rule G-42 on April 28, 2016, in advance of the rule's effective date. To register for the webinar, click here.
In regard to the SEC's examination concerns and focus areas highlighted during the Compliance Outreach event, the SEC staff is still following the provisions of the Municipal Adviser Examination Initiative, which set forth the seven focus areas that may be selected by the examination staff (i.e., registration, fiduciary duty, disclosure, fair dealing, supervision, books and records, and training/qualifications). Highlights of deficiencies discovered during SEC exams thus far are:
The SEC staff also highlighted three issues that they expect to be a bigger concern for municipal advisors in the future, which will be incorporated into their examinations, specifically cybersecurity, written agreements/engagement letters, and gifts/entertainment.
The FINRA staff also highlighted a couple of issues that they have found in their examinations of dealer-advisors (approximately 150 municipal advisors are registered as broker-dealers):
The FINRA staff also noted that they are continuing to receive multiple one-off requests concerning municipal advisor registration implications that require input from FINRA’s Fixed Income Unit, and that concerns with regard to the timing of Rule G-17 disclosure statements by underwriters will be a future focus of their examinations.
Both the SEC and FINRA staff at the Compliance Outreach event relayed concerns with outsourcing CCO activities, telling attendees that municipal advisors should perform adequate due diligence to make sure the CCOs they are working with (i) don’t have too many clients or are overextended; (ii) have adequate experience; and (iii) spend adequate time with the municipal advisor to understand its business, risks, and procedures. Finally, the MSRB staff stated that in April 2016, they expect the announcement of the effective dates of the Series 50 final examination, likely to be in the fall of 2016, with a one-year grace period.
For further information regarding what to expect during an examination, or assistance with the requirements of Rule G-44, feel free to get in contact with the ACA personnel listed below.
ACA employs the world’s largest team of former SEC examiners and in-house compliance professionals. We assist firms in meeting their ongoing SEC, MSRB, and FINRA compliance obligations and specialize in preparing firms for regulatory inspections.
ACA Compliance Group