On October 24, the Municipal Securities Rulemaking Board ("MSRB") received approval from the U.S. Securities and Exchange Commission ("SEC") to implement Rule G-44. This rule establishes baseline supervisory and compliance obligations for municipal advisors. It is the first new rule for these advisors since the SEC released its final municipal advisor registration rule in September 2013.
Once effective, Rule G-44 will require municipal advisors to have in place a system to supervise their municipal advisory activities, and those of their associated persons, in a manner reasonably designed to achieve compliance with applicable securities laws and regulations, including applicable MSRB rules. To comply with Rule G-44, municipal advisors will need to adopt written supervisory procedures tailored to their size, business model, and structure. (The rule offers some flexibility for small municipal advisory firms, including those with only one associated person.)
The rule also will require municipal advisors to promptly amend their supervisory procedures on an ongoing basis as changes in applicable rules and the advisor’s supervisory system occur, and to promptly communicate such modifications to their relevant associated persons. In addition, municipal advisors will be required to assign one or more principals to be responsible for the supervision mandated by the rule. (Rule G-44 describes the authority and specific qualifications required for these principals.)
Along with supervisory obligations, the rule also will require municipal advisors to implement certain compliance processes, including creating processes to establish, maintain, review, test, and modify written compliance policies and supervisory procedures. The rule will require municipal advisors to conduct compliance policy and supervisory procedure reviews at least annually. The MSRB has stressed, however, that municipal advisors should consider whether more frequent reviews are needed to comply with all requirements under Rule G-44. The rule identifies the minimum elements firms should consider during such reviews, including compliance matters that may have arisen since the prior review, changes in the firm's municipal advisory activities, and changes in applicable laws.
Rule G-44 also will require municipal advisors to designate a chief compliance officer ("CCO"). As defined, the CCO will serve as the primary adviser to the municipal advisor on its overall compliance program and the policies and procedures it adopts to comply with applicable laws. The rule will permit a CCO to hold other positions within the municipal advisor, including senior management positions, provided the person designated can perform their CCO duties simultaneously with their other responsibilities. The rule will permit advisors to designate a person external to the firm as CCO. The MSRB has emphasized, though, that such persons must have the appropriate competence to perform the specified functions and that the municipal advisor will retain ultimate responsibility for the firm’s compliance obligations.
Finally, Rule G-44 will require a municipal advisory firm's chief executive officer (or the firm’s equivalent officer) to certify in writing annually that their firm has in place processes to establish, maintain, review, test, and modify written compliance policies and supervisory procedures that are reasonably designed to achieve compliance with applicable rules.
The Financial Industry Regulatory Authority ("FINRA") has a similar annual certification requirement under FINRA Rule 3130. Municipal advisors that are also FINRA members will be exempted from this requirement under Rule G-44. The MSRB also will provide an exemption from Rule G-44 for federally regulated banks engaging in municipal advisory activities in the exercise of bank fiduciary powers. To use this exemption, the municipal advisor will need to certify in writing annually that it is, with respect to its municipal advisory activities, subject to federal supervisory and compliance obligations and books and record retention requirements that are substantially equivalent to the requirements under Rule G-44 and Rule G-8 (as described below).
In connection with the approval of Rule G-44, the SEC also approved accompanying amendments to MSRB Rule G-8 and G-9, which will require municipal advisors to make and keep certain records relating to its supervisory and compliance obligations for a period of not less than five years. Records of the designations of persons responsible for supervision and as CCO will need to be preserved for the period of designation and for at least six years following any change in such designation.
Rule G-44 will become effective on April 23, 2015, although the annual certification requirement will not become effective until a year later. The delayed effective date provides municipal advisors time to adopt and implement written supervisory and compliance policies and procedures, designate at least one supervisory principal and a CCO, and prepare the records required under the amendments to Rules G-8 and G-9.
To view or download the MSRB notice announcing the Rule G-44 approval, please click here.
ACA Compliance Group is one of the largest employers of former SEC, FINRA, NFA, FSA, and state inspectors in the world. We assist municipal advisors in meeting their ongoing SEC, MSRB, and FINRA compliance obligations and specialize in preparing firms for regulatory inspections.
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