Fixed Income Conference March 11, 2014 2014 by FINRA. All Rights Reserved. The FINRA Fixed Income Conference Video is reproduced by permission of the Financial Industry Regulatory Authority, Inc. (FINRA) under a non-exclusive license and may not be rebroadcasted, reproduced, or repurposed without the express written consent of FINRA. FINRA is not responsible for any errors in or omissions from the information contained in the FINRA Fixed Income Conference Video. All such information is provided "as is" without warranty of any kind and FINRA makes no representations and disclaims all express, implied and statutory warranties of any kind to the user and/or any third party, including any warranties of accuracy, timeliness, completeness, merchantability and fitness for any particular purpose. FINRA reserves the right to amend the Fixed Income Conference Video at its discretion.
Conference resumes at 11:45 a.m. Report Center Secure access to data and reports designed to support firms compliance activities MSRB G-32 Report Card Municipal Continuing Disclosure Report Municipal Primary Offering Disclosure Report TRACE Quality of Markets Report Cards www.finra.org/reportcenter 2014 FINRA Fixed Income Conference 2014 FINRA. All rights reserved.
Municipal Securities FINRA Fixed Income Conference March 11, 2014 New York, NY
MSRB Regulatory Update Michael L. Post, Deputy General Counsel Municipal Securities Rulemaking Board FINRA Fixed Income Conference Crowne Plaza Times Square Manhattan Hotel March 11, 2014
Presentation Outline MSRB Municipal Advisor Regulation MSRB Municipal Advisor Regulatory Framework Draft Rule G-42 on the Duties of Non-Solicitor Municipal Advisors Draft Rule G-44 Supervisory and Compliance Obligations Municipal Advisor Fees Pricing in the Municipal Market Pre-Trade Transparency Best Execution Primary Offering Practices Under MSRB Rule G-11 Retail Order Periods Bondholder Consents Municipal Securities Rulemaking Board 4
Municipal Advisor Regulation
Advancing Municipal Advisor Regulation Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 charged MSRB with developing regulatory framework for municipal advisors to: Protect state and local governments and other municipal entities that engage the services of a municipal advisor Promote a fair and efficient market Preserve municipal market integrity Municipal Securities Rulemaking Board 6
Regulatory Framework MSRB is developing a comprehensive regulatory framework that includes: Rules governing the professional conduct of municipal advisors A professional qualifications program to ensure municipal advisors are qualified in their duties Extensive education and outreach to municipal advisors on regulatory developments and duties and obligations Municipal Securities Rulemaking Board 7
Registering as a Municipal Advisor SEC released a final registration rule for municipal advisors in September 2013 Defined scope of municipal advisory activities subject to registration requirements and MSRB rules A municipal advisor s registration can be verified on the MSRB s website at msrb.org/msrb1/pqweb/maregistrants.asp Unregistered municipal advisors are in violation of federal law Municipal Securities Rulemaking Board 8
Dealing Fairly MSRB Rule G-17 currently applies to municipal advisors as well as municipal securities dealers Must deal fairly with all persons Must not engage in any deceptive, dishonest or unfair practice Municipal Securities Rulemaking Board 9
Municipal Advisor Rulemaking Board set pace, timing and priority of municipal advisor rulemaking for FY 2014 Core Standards of Conduct Supervision Political Contributions Gifts and Gratuities Duties of Municipal Advisors Acting as Solicitors Also focused on developing professional qualifications Municipal Securities Rulemaking Board 10
Draft Rule G-42: Duties of Non-Solicitor Municipal Advisors First MSRB proposed rule for municipal advisors since the adoption of the SEC final registration rule Focuses on core standards of conduct for municipal advisors Aimed at protecting state and local governments and other municipal entities that engage the services of a municipal advisor Incorporates MSRB s preliminary economic analysis of the benefits, burdens and potential alternatives Comment period closed March 10, 2014 Municipal Securities Rulemaking Board 11
Draft Rule G-42: Duties of Non-Solicitor Municipal Advisors Standards of conduct Duty of care to municipal entity and obligated person clients Duty of loyalty to municipal entity clients Disclosure of conflicts of interest Documentation of the relationship Recommendations Suitability analysis Know-Your-Client obligation Principal transactions Prohibition on principal transactions by municipal advisors and affiliates, with limited exceptions Other matters Municipal Securities Rulemaking Board 12
Duty of Care Principle of duty of care in draft MSRB Rule G- 42 applies to municipal advisors conduct with all clients Would require a municipal advisor to, among other things: Disclose conflicts of interest Document the relationship with the client [in writing] Know your client Make only suitable recommendations Municipal Securities Rulemaking Board 13
Duty of Loyalty Duty of loyalty applies when advising a state or local government client Draft rule requires a municipal advisor to act in the utmost good faith and in the best interests of the client Provides guidance on the application of the municipal advisor s fiduciary duty to municipal entity clients Request for comment asks if the fiduciary duty should be extended to municipal advisors working with obligated persons Municipal Securities Rulemaking Board 14
Principal Transactions Draft rule proposes for public comment to prohibit principal transactions by municipal advisors and any affiliates Aims to preserve the highest standards of impartiality and the provision of unbiased advice Addresses inherent conflicts of providing advice while simultaneously acting as counterparty to a transaction Limited exceptions for activity permitted under existing Rule G-23 Request for comment asks if principal transactions should be permitted, and, if so, under what circumstances Municipal Securities Rulemaking Board 15
Other Municipal Advisor Duties in Draft Rule G-42 Duty to undertake a thorough review of the official statement when advising on a new issuance Prohibitions on certain practices, including: Receiving excessive compensation Misrepresenting the extent of the municipal advisor s knowledge or qualifications Municipal Securities Rulemaking Board 16
Draft Rule G-44: Supervisory and Compliance Obligations of Municipal Advisors Sets forth supervisory and compliance obligations of municipal advisors when engaging in municipal advisory activities Takes a primarily principles-based approach to accommodate the diversity of the municipal advisory population Municipal Securities Rulemaking Board 17
Draft Rule G-44: Supervisory and Compliance Obligations of Municipal Advisors Reasonable system of supervision Written supervisory procedures reasonably designed to achieve compliance At least one principal designation Single chief compliance officer requirement Chief compliance officer position allowed to be outsourced Compliance processes to review, test, and modify policies and procedures Responsibility of the chief compliance officer At least annual reviews of procedures Municipal Securities Rulemaking Board 18
Municipal Advisor Fees MSRB proposed Rule A-11 to charge municipal advisors an annual fee of $300 per professional To be implemented during the second half of 2014 in parallel with the SEC s permanent registration process for municipal advisors In addition to the initial fee of $100 upon MSRB registration and the $500 annual registration fee Municipal Securities Rulemaking Board 19
Pricing in the Municipal Market
Increasing Access to Pricing Information Developing a platform to provide comprehensive, interactive and real-time display of pricing-related market data Public access to live information about the current state of the market Improve municipal market price transparency, especially for retail investors View all public comments received on MSRB July 2013 concept proposal on MSRB s website msrb.org/rulesand-interpretations/ Requests-For- Comment Gradual process with extensive market input and feedback Municipal Securities Rulemaking Board 21
Draft Rule G-18: Best Execution Request for Comment (February 19, 2014) Draft Rule G-18 requires dealers to use reasonable diligence in seeking to obtain for their retail customer transactions in municipal securities the most favorable terms available under prevailing market conditions Exception for transactions with sophisticated municipal market professionals Generally harmonized with FINRA Rule 5310 but tailored to the characteristics of the municipal securities market Comment period closes March 21, 2014 Concept Release (August 6, 2013) Municipal Securities Rulemaking Board 22
Primary Offering Practices Under MSRB Rule G-11
Rule G-11: Retail Order Periods Effective March 31, 2014, dealers have increased obligations with respect to priority provisions and retail order periods Underwriters must communicate to syndicate/selling group regarding issuer s terms and conditions, retail order period requirements, priority provisions and pricing information Dealers must submit identifying information about an order to help ascertain whether it constitutes a valid retail order Underwriters must report to EMMA whether a primary offering included a retail order period and applicable dates and times Amended Rule G-11 also adds new definition of retail order period that clarifies that issuers define the eligibility criteria for orders during these periods Municipal Securities Rulemaking Board 24
Rule G-11: Bondholder Consents Effective February 3, 2014, dealers when acting as underwriters or remarketing agents are generally prohibited from consenting to changes to bond authorizing documents except in limited circumstances Amendments help ensure those who consent to amendments have economic interests comparable to bondholders Consents given under the exceptions must be consistent with the Rule G-17 duty of fair dealing Municipal Securities Rulemaking Board 25
MSRB Regulatory Update Michael L. Post, Deputy General Counsel Municipal Securities Rulemaking Board FINRA Fixed Income Conference Crowne Plaza Times Square Manhattan Hotel March 11, 2014
Conference resumes at 2:15 p.m. FINRA Annual Conference May 19 21, 2014 Washington, DC Features over 31 sessions on regulatory and compliance topics and includes Office Hours on both TRACE and Fixed Income. www.finra.org/annualconference 2014 FINRA Fixed Income Conference 2014 FINRA. All rights reserved.
Market Volatility, Liquidity Issues and Customer Bond Positions (Institutional Focus) FINRA Fixed Income Conference March 11, 2014 New York, NY