Financial Services Alert - March 4, 2014 March 04, 2014
In This Issue

OCC and Boston University Center for Finance, Law & Policy to Host Symposium Commemorating 150th Anniversary of OCC

On March 31, 2014 the OCC and Boston University’s Center for Finance, Law & Policy (the “Center”) will host a symposium (the “Symposium”) commemorating the 150th anniversary of the founding of the OCC and the national banking system.  The Symposium will be held at Boston’s Hynes Convention Center.

Comptroller Thomas J. Curry will deliver the keynote address at the Symposium and other featured speakers will be:

  • Sheila Bair, former Chairman of the Federal Deposit Insurance Corporation (FDIC);
  • Sharon Bowles, Chair of the Economic and Monetary Affairs Committee of the European Parliament;
  • Christopher Dodd, former U.S. Senator and Chairman of the Senate Committee on Banking, Housing and Urban Affairs;
  • Camden Fine, President of the Independent Community Bankers of America;
  • Barney Frank, former U.S. Congressman and Chairman of the House Financial Services Committee;
  • Thomas Hoenig, Vice Chairman of the FDIC;
  • Professor Cornelius Hurley, Director of the Boston University Center for Finance, Law & Policy;
  • Raymond Natter, Partner in Washington Law Firm Barnett, Sivon & Natter, P.C. and former Deputy Chief Counsel, Office of the Comptroller of the Currency;
  • Timothy Pawlenty, former Minnesota Governor and President of The Financial Services Roundtable;
  • Karen Shaw Petrou, Managing Partner, Federal Financial Analytics, Inc.;
  • John Reed, former Chairman of Citicorp; and
  • Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System

Among the topics to be discussed at the Symposium are:  the state of the dual banking system; preemption in the wake of the Dodd-Frank Act; banking from the perspective of Europe; the Volcker Rule; U.S. banking reform; the future of universal banking; Too Big to Fail; the future of banking in light of globalization; and emerging alternatives to traditional banks.

Goodwin Procter Financial Institutions Group partners Bill Mayer and Eric Fischer are members of the Board of the Center.  Should you wish to register for the Symposium, please click here.

FRB Issues Supervisory Letter Concerning its Application Process and the Most Frequently Cited Reasons for Application and Notification Denials

The FRB released a supervisory letter (the “Letter”) regarding the FRB’s applications process intended to provide financial institutions and the general public with a better understanding of the FRB’s approach to processing applications and notices and why certain filings may not satisfy statutory requirements for approval or otherwise raise supervisory or regulatory concerns.  The Letter states that the FRB will start publishing a semi-annual report that provides pertinent information on applications and notices filed with the FRB including statistics on the length of time taken to process various applications and notices and the overall volume of approvals, denials, and withdrawals.  The report will also provide the primary reasons for withdrawals, will first be released in the second half of 2014, and will include filings acted on from January through June 2014.

The Letter notes that significant issues that have led FRB staff to recommend denial to the FRB have most often related to the safety and soundness of the financial institution or consolidated organization, or to a failure to meet another statutory requirement for approval. Specifically, the Letter calls out: applications from organizations with issues that have resulted or will result in a less-than-satisfactory rating for safety and soundness, Community Reinvestment Act or consumer compliance, and/or the issuance of a formal enforcement action; applications and notices for proposals that raise concerns with respect to asset quality, liquidity, or capital, or that otherwise would significantly weaken the financial condition of a financial institution; applications of financial institutions in which the backgrounds of the institution’s principals, particularly directors and managers, raise questions regarding their integrity, financial responsibility, or competence, or otherwise raise doubt about their ability to fulfill the responsibilities of their respective roles within the organization; and applications raising concerns about the organization’s compliance with the Bank Secrecy Act, the appropriateness of the organization’s business plan, and the need for an exemption from Section 23A of the Federal Reserve Act and Regulation W.

The Letter further notes that applicants and notificants are generally expected to resolve any outstanding substantive supervisory issues prior to filing an application or notice with the FRB and that applicants and notificants with proposals that present unique or novel issues are encouraged to use the FRB’s pre-filing process (described in SR letter 12-12/ CA letter 12-11, “Implementation of a New Process for Requesting Guidance from the Federal Reserve Regarding Bank and Nonbank Acquisitions and Other Proposals”) to receive feedback on potential issues on a filing prior to submitting a formal filing.

Goodwin Procter Alert: FCA Issues Final Remuneration Guidance for AIF Managers

Glynn Barwick in the firm’s London Office has prepared a client alert that analyzes the implications for EU and non-EU managers of the UK Financial Conduct Authority’s new guidance on AIFMD remuneration requirements.

FINRA Fines Firm and Former Chief Compliance and AML Officer For Failing to Register Foreign Finders and Failure to Comply with Anti-Money Laundering Obligations

On January 28, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) accepted a Letter of Acceptance, Waiver and Consent (the “AWC”) from a member firm, Banorte-Ixe Securities International, Ltd. (the “Firm”), and Brian Anthony Simmons, the Firm’s former chief compliance officer and anti-money laundering (“AML”) officer (the “CCO”), regarding alleged failures to (i) register approximately 200 to 400 foreign finders who interacted with the Firm’s Mexican clients, and (ii) comply with FINRA’s AML rule, during the period between January 1, 2008 and May 9, 2013 (the “Relevant Period”).  This article summarizes FINRA’s findings, which the Firm and the CCO neither admitted nor denied in connection with executing the AWC.


The Firm’s primary business is providing services to Mexican nationals seeking to invest in U.S. and global securities.  The Firm is part of an affiliated group of companies that includes a Mexican broker-dealer and a large Mexican bank.  The Firm has been a member of FINRA since 1996.  The CCO has been involved in the securities industry since 2000, and served as the chief compliance officer and AML officer of the Firm between April 10, 2006 and August 20, 2010.

During the Relevant Period, the foreign finders employed by its Mexican affiliates (the “Finders”) acted as the Firm’s primary point of contact with customers, discussing investments, placing orders,  responding to inquiries and, in some instances, obtaining limited trading authority over customer accounts. Among other things, the Finders entered mutual fund orders directly into the Firm’s trading platform and, for other securities, entered orders into a system subject to the approval of the Firm’s trading desk.  At all times during the Relevant Period, the Firm maintained ultimate control over the Finders’ activities with respect to accounts held by the Firm.  Prior to July 2006, the Firm had registered the Finders as “foreign associates”; however, the Firm did not maintain those registrations after that date.

NASD Rule 1031 requires that all persons engaged in the investment banking or securities business of a member who function as representatives register with the member. Moreover, NASD Rule 1031 defines a representative of a member as any person associated with the member engaged in the investment banking or securities business, including functions of supervision, solicitation or conduct of business in securities or who are engaged in the training of persons associated with a member for any of these functions.  However, under NASD Rule 1060(b), foreign finders are not required to be registered if they limit their activities to the initial referral of non-U.S. customers to the firm and adhere to certain other conditions.  Foreign finders who do not limit their activities to the initial referral of non-U.S. customers to the firm and, by virtue of their activities, are considered “associated persons” of the firm, are required to register as foreign associates pursuant to NASD Rule 1100, or in another appropriate registration category.

FINRA Rule 3310 requires member firms to develop and implement a written AML program reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act (the “BSA”) and the regulations thereunder.  This Rule also requires that AML programs include, at a minimum, (i) policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under the BSA, (ii) policies, procedures and internal controls reasonably designed to achieve compliance with the BSA and the regulations thereunder, (iii) annual testing for compliance, (iv) designation of an individual or individuals responsible for overseeing the AML program and (v) ongoing training for appropriate personnel.  In addition, the BSA obligates financial institutions, such as the Firm, to conduct a risk-based investigation of customer activity.

The Violations

Failure to Register Foreign Finders

FINRA found that, during the Relevant Period, the Firm and the CCO violated NASD Rules 1031 and 2110 and FINRA Rule 2010 by failing to register the Finders.  Specifically, FINRA found that the Finders did not limit their activities to the initial referral of non-U.S. customers to the Firm and, by virtue of their activities, were associated persons of the Firm, required to be registered as foreign associates pursuant to NASD Rule 1100, or in another appropriate registration category.  FINRA found that instead of limiting their activities to the referral of customers, the Finders maintained the primary relationship with the Firm’s customers.  Among other things, the Finders: (i) had access to the automated order platform operated by the Firm’s clearing firm; (ii) took orders to buy or sell securities and processed requests for wire transfers by sending such requests to the CCO for review and approval; (iii) prepared letters of authorization for customer signature, subject to review and signature verification by the CCO; (iv) gathered and transmitted new account information and documents identifying customers, as well as requests to change customer information, to the Firm; and (v) in some cases, entered into limited trading authority agreements with customers that allowed the Finders, with the approval of the customers, to place orders with the Firm to buy and sell various instruments, including stocks, mutual funds, fixed income products, options, and foreign currency.

Additionally, FINRA found that the Firm controlled the Finders during the Relevant Period by, among other things: (a) providing access to the automated order entry platform; (b) issuing them representative identification numbers which became associated with customer transactions; and (c) taking parting in directing the activities of the Finders through (1) information disseminated on an intranet system shared by the Firm and its foreign affiliates, (2) twice-monthly mandatory conference calls attended by a principal of the Firm and (3) frequent meetings between the top-producing Finders and a senior Firm manager. 

FINRA noted that the revenue generated by the Finders accounted for more than 90 percent of the Firm’s gross revenues during the Relevant Period, and that a substantial portion of the Firm’s revenues was returned to a foreign affiliate. 

FINRA also noted that before July of 2006, the Firm had registered its foreign finders as foreign associates, but beginning in July 2006 the Firm failed to maintain such registrations, and starting in February 2009, the Firm intentionally began terminating the registrations of those Finders who had been previously registered.  FINRA noted these changes in registration practices were not precipitated by any related modification or reduction in the responsibilities of the Finders.

Inadequacies in AML Policies and Procedures

FINRA found that, during the Relevant Period, the Firm and the CCO violated NASD Rules 3011(a) and (b) and 2110, and FINRA Rules 3310(a) and (b) and 2010 for failing to tailor the Firm’s AML program to its business model and failing to enforce its AML program as written, and violated NASD Rules 3011(a) and 2110, and FINRA Rules 3310(a) and 2010 for failing to monitor for, detect, and investigate certain suspicious activity.

  • Failure to Tailor Its AML Program to its Business Model.  Noting that that NASD Rule 3011 and FINRA Rule 3310 require each broker-dealer to tailor its AML program to its business, considering such factors as its size, location, business activities, types of accounts it maintains, the types of transactions it effects, and its technological environment, FINRA found that the Firm’s business model required it to have a robust AML program.  FINRA stated that approximately 95 % of the Firm’s business involved servicing high net worth Mexican nationals who had banking and brokerage relationships with the Firm’s foreign affiliates, noting that Mexico has been identified as a high-risk environment for money laundering.  FINRA stated that, in designing its AML program, the Firm was obliged to consider the high-risk nature of its business, as well as its reliance on the Finders as the primary point of contact with customers.  FINRA found that, notwithstanding the high-risk and complex nature of its business, the Firm purchased from a third party vendor generic off-the-shelf Written Supervisory Procedures (the “WSPs”), which included an AML program, and issued them without modification.  As a result, the AML program did not address the compliance challenges the Firm faced in its business.  Additionally, FINRA noted that certain sections in the AML program requiring input from the Firm remained blank or had not been modified to address specific factors related to the Firm. For example, the section identifying “red flags” for suspicious activity was generic and included no red flags related to the unique risks of the Firm’s business.

    The CCO was responsible for tailoring the WSPs, including the AML program, to the Firm’s business and failed to do so.  Additionally, FINRA found that between January 1, 2008 and March 2, 2011, the CCO (and other members of senior management) did not conduct a review of all areas of the Firm’s business to identity potential money laundering risks as required by the WSPs.  Moreover, FINRA stated that the reviews conducted in 2011 and 2012 were inadequate because they did not sufficiently address risks inherent in operating in Mexico or relying on the Finders. 
  • Failure to Enforce Its AML Program.  FINRA found that the Firm did not take certain actions required either by law or the WSPs with respect to the Firm’s suspicious activity detection program and Customer Identification Program (“CIP”).

    FINRA found that the Firm did not comply with elements of its AML program that (i) required the CCO to work with the Firm’s clearing firm to ensure that all appropriate exception reports were made available to the Firm in order to monitor for suspicious activity, and to request additional reports as necessary, (ii) required the Firm to maintain documentation concerning the use of exception reports, including dates, initials of the individuals involved in the review and any findings or follow-up matters.  FINRA faulted the Firm for failing to use the exception reports generated by the clearing firm to detect suspicious activity and failing to work with the clearing firm to modify or customize existing reports, create additional reports or otherwise monitor activity in a manner reasonably designed to detect suspicious activity.  In this regard, FINRA noted that the Firm did not use any of the exception reports provided by the clearing firm to detect suspicious activity despite the fact that the clearing firm’s AML rules engine identified thousands of possible AML exceptions between January 2009 and December 2011.

    FINRA noted that BSA implementing regulations require member firms to establish risk-based CIP programs, tailored to the firm’s business and customer base and require the firm to collect customer information and establish a process for verifying customers’ identities.  FINRA found that, notwithstanding requirements in the CIP contained in the WSPs that registered persons should obtain more than one type of documentary verification of a customer’s identification, the Firm relied on the Finders to collect and submit customer’s documentary verification and as a result (i) were unable to independently verify the identity of customers, and (ii) in many cases received only one type of documentary verification.
  • Failure to Detect and Investigate Suspicious Activity.  NASD Rule 3011 (a) and FINRA Rule 3310 require members to establish and implement policies and procedures reasonably designed to detect and cause the reporting of suspicious activity and transactions under the BSA, which must include provisions for monitoring for, detecting, and responding to “red flags.”  BSA implementing regulations require brokers to file with the Financial Crimes Enforcement Network reports of certain suspicious activity.  FINRA found that, during the Relevant Period, the Firm lacked an adequate system to identify and investigate suspicious activity, and that the Firm and the CCO failed to adequately investigate and, as necessary, report suspicious activity in three customer accounts, as detailed in the AWC.


The Firm consented to a censure and a fine in the amount of $451 million.  The CCO consented to a 30 calendar day suspension from association with any FINRA member in any principal capacity.

Corrective Actions

The Firm also undertook to establish, within 90 days of acceptance of the AWC, systems and procedures reasonably designed to achieve compliance with its AML and registration obligations, including but not limited to remediating the deficiencies identified in the AWC. 

Banorte-Ixe Securities International, Ltd., Letter of Acceptance, Waiver and Consent No. 2010025241301 (Jan. 28, 2014).

ISDA Publishes 2014 Credit Derivatives Definitions

The International Swaps and Derivatives Association (“ISDA”) announced the publication of the 2014 Credit Derivatives Definitions (the “2014 Definitions”), which pertain to credit default swaps (“CDS”).  The 2014 Definitions are intended ultimately to supersede the 2003 ISDA Credit Derivatives Definitions.  Although ISDA has stated that it expects market participants to begin confirming transactions using the 2014 Definitions on the September 2014 CDS roll date, use of the 2014 Definitions is not automatic.  The 2014 Definitions only apply if parties to a swap elect to use them either when documenting a new swap or when amending a pre-existing swap.

The 2014 Definitions reflect recent events.  For example, they add a new credit event triggered by a government-initiated bail-in, as well as related provisions such as those governing the delivery of the proceeds of bailed-in debt.  The 2014 Definitions also add additional provisions pertaining to CDS contracts on sovereign reference entities.

SEC Re-Opens Comment Periods for Asset-Backed Securities Rule Proposals

The SEC re-opened the comment periods on its rule proposals regarding asset-backed securities described in the releases entitled “Asset-Backed Securities” (the “2010 Release”) and “Re-Proposal of Shelf Eligibility Conditions for Asset-Backed Securities” (the “2011 Release” and, collectively with the 2010 Release, the “Releases”).  The 2010 Release, which was discussed in the April 13, 2010 Financial Services Alert, proposed significant revisions to Regulation AB including increased disclosure and reporting requirements.  The comment period on the 2010 Release initially closed on August 2, 2010.  The 2011 Release, which was discussed in the August 2, 2011 Financial Services Alert, re-proposed portions of the 2010 Release in light of the mandates of the Dodd-Frank Act.  The comment period on the 2011 Release initially closed on October 4, 2011.

Certain comments in response to the Releases expressed concern that the disclosures proposed in the Releases would include potentially sensitive data.  Noting that data submitted through the SEC’s EDGAR system would publicly available, the comments requested alternative means of providing sensitive information.  Some comments suggested that sensitive data could be provided through a limited-access website or otherwise available on a restricted basis.  In response to these comments, the SEC’s Division of Corporation Finance has prepared a memorandum describing an alternative approach for disclosing potentially sensitive asset-level information to investors and potential investors through an issuer’s website where it could be subject to appropriate safeguards on access.  To permit public comment on this alternative, the SEC has reopened the comment period for both Releases through March 28, 2014.

MSRB Proposes New Conduct Rule for Non-Solicitor Municipal Advisors and Amendments to Books and Records Rules for Municipal Advisors

On January 9, 2014, the Municipal Securities Rulemaking Board (“MSRB”) published a request for comments on a proposed new conduct rule for non-solicitor municipal advisors and amendments to existing books and records rules to include municipal advisors in Regulatory Notice 2014-01 (the “Rule Notice”).

The Dodd-Frank Act required persons engaged in the business of being municipal advisors, as defined in the Act, to register with the SEC as municipal advisors and to become members of the MSRB. In 2010 the SEC created a temporary registration program for municipal advisors which is still in effect. On September 13, 2013, the SEC adopted final rules for municipal advisors, including permanent registration forms and requirements. The final rules will become effective on July 1, 2014, and persons currently registered as municipal advisors under the temporary registration program will be required to apply for permanent registration on a rolling basis from July to October 2014.  For additional detail on municipal advisor registration, see the Municipal Advisor topic on the firm’s Dodd-Frank Site.

All registered municipal advisors are required to become members of the MSRB. Municipal advisor members are subject only to those MSRB rules specifically designated as applicable to municipal advisors. In the Rule Notice, the MSRB proposes to (1) adopt a new conduct rule, Rule G-42, applicable to non-solicitor municipal advisors, (2) amend Rule G-8, requiring the making of books and records, to apply to municipal advisors and (3) amend Rule G-9, requiring the preservation of records, to apply to municipal advisors.

Municipal Advisors Subject to Proposed Rule G-42

Under the MSRB proposal, Rule G-42 would apply to all municipal advisors, as defined in Section 15B(e)(4) of the Securities Exchange Act of 1934 (the “Exchange Act”), except any person that is a municipal advisor solely because it “undertakes a solicitation of a municipal entity” pursuant to Section 15B(e)(4)(A)(ii).

Rule G-42 would, however, apply to managers of or advisers to collective pools that (i) are required to register as municipal advisors because the collective pool includes “proceeds of municipal securities” invested by municipal entities or “municipal escrow investments” invested by municipal entities or obligated persons and (ii) are not able to use the exemption available for federally registered investment advisers. Managers and advisers that fall into the non-exempt category include exempt reporting advisers, state registered investment advisers, banks (which are exempt from registration as investment advisers), and real estate advisers.

Elements of Rule G-42

Standards of Conduct. Section (a) would provide that a municipal advisor is subject to a duty of care to obligated person clients and a fiduciary duty to municipal entity clients that includes both a duty of loyalty and a duty of care.

“Obligated person” as used in proposed Rule G-42 would have the same meaning as in Section 15B(e)(10) of the Exchange Act, where it is defined generally to mean a person that is committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.

“Duty of care” is defined in supplementary material .01 and includes possessing the degree of knowledge and expertise needed to provide the municipal entity or obligated person client with informed advice, making a reasonable inquiry as to the relevant facts and having a reasonable basis for advice provided to the client and representations made in a certificate that the municipal advisor signs that will reasonably foreseeably be relied upon by the client.

“Duty of loyalty” is defined in supplementary material .02 and provides that the municipal advisor must:

  • deal honestly and with the utmost good faith with a municipal entity client and act in the client’s best interests without regard to the financial or other interests of the municipal advisor;
  • either eliminate or provide full and fair disclosure to the client about each of its material conflicts of interest; and
  • investigate or consider other reasonably feasible alternatives to any recommended municipal securities transaction or municipal financial product that might also or alternatively serve the municipal entity client’s objectives.

Disclosure of Conflicts of Interest and Other Information. The proposed rule would require the municipal advisor, at or prior to the inception of a municipal advisory relationship, to provide the client with a document making full and fair disclosure of all material conflicts of interest, including disclosure of:

  1. any actual or potential conflicts of interest of which it is aware after reasonable inquiry that might impair its ability either to render unbiased and competent advice to or on behalf of the client or to fulfill its fiduciary duty to the client, as applicable;
  2. any affiliate of the municipal advisor that provides any advice, service, or product to or on behalf of the client that is directly or indirectly related to the municipal advisory activities to be performed by the disclosing municipal advisor;
  3. any payments made by the municipal advisor directly or indirectly to obtain or retain the client’s municipal advisory business;
  4. any payments received by the municipal advisor from third parties to enlist the municipal advisor’s recommendation to the client of its services, any municipal securities transaction or any municipal financial product;
  5. any fee-splitting arrangements involving the municipal advisor and any provider of investments or services to the client;
  6. any conflicts of interest that may arise from the use of the form of compensation under consideration or selected by the client for the municipal advisory activities to be performed;
  7. any other engagements or relationships of the municipal advisor or any affiliate of the municipal advisor that might impair the advisor’s ability either to render unbiased and competent advice to or on behalf of the client or to fulfill its fiduciary duty to the client, as applicable;
  8. the amount and scope of coverage of professional liability insurance that the municipal advisor carries (e.g., coverage for errors and omissions, improper judgments, or negligence), deductible amounts, and any material limitations on such coverage, or a statement that the advisor does not carry any such coverage; and
  9. any legal or disciplinary event that is (a) material to the client’s evaluation of the municipal advisor or the integrity of its management or advisory personnel; (b) disclosed by the municipal advisor on the most recent Form MA filed with the Commission; or (c) disclosed by the municipal advisor on the most recent Form MA-I filed with the Commission regarding any individual actually engaging in or reasonably expected to engage in municipal advisory activities in the course of the engagement.

A municipal advisor that concluded that it had no material conflicts of interest would have to provide written documentation to the client to that effect.

Documentation of Municipal Advisory Relationship. The proposed rule would require a municipal advisor to evidence each of its municipal advisory relationships by a writing entered into prior to, upon or promptly after the inception of the municipal advisory relationship. The writing must be dated and include, at a minimum:

  1. the form and basis of direct or indirect compensation, if any, for the municipal advisory activities to be performed;
  2. the reasonably expected amount of any such compensation;
  3. the information regarding conflicts of interest and other matters required to be disclosed by section (b) of the rule;
  4. the scope of the municipal advisory activities to be performed and any limitations on the scope of the engagement;
  5. in the case of municipal advisory activities relating to a new issue or reoffering of municipal securities, the specific undertakings, if any, requested by the client to be performed by the municipal advisor with respect to the preparation and finalization of an official statement or similar disclosure document; and
  6. the date, triggering event, or means for the termination of the municipal advisory relationship, or, if none, a statement that there is none.

The rule would also require prompt amendment of the writing as necessary during the term of the municipal advisory relationship.

Recommendations. The proposed rule would provide that a municipal advisor must not recommend that its municipal entity or obligated person client enter into any municipal securities transaction or municipal financial product unless the advisor has a reasonable basis for believing, based on the information obtained through the reasonable diligence of the advisor, that the transaction or product is suitable for the client. In addition, the rule would require the municipal advisor discuss the following with its client:

  • the municipal advisor’s evaluation of the material risks, potential benefits, structure, and other characteristics of the recommended municipal securities transaction or municipal financial product;
  • the basis upon which the municipal advisor reasonably believes that the recommended municipal securities transaction or municipal financial product is suitable for the client; and
  • whether the municipal advisor has investigated or considered other reasonably feasible alternatives to the recommended municipal securities transaction or municipal financial product that might also or alternatively serve the client’s objectives.

With respect to a client that is a municipal entity, a municipal advisor would only be permitted to recommend a municipal securities transaction or municipal financial product that was in the client’s best interest.

Review of Recommendations of Other Parties. The proposed rule would provide requirements for the review of recommendations of other parties, including factors the municipal advisor would be required to discuss with its client.

Principal Transactions. The proposed rule would prohibit a municipal advisor from engaging in any transaction, in a principal capacity, to which a municipal entity or obligated person client of the municipal advisor is a counterparty, other than activities of financial advisors expressly permitted under Rule G-23.

Specified Prohibitions. A municipal advisor would be prohibited from:

  1. receiving compensation that is excessive in relation to the municipal advisory activities actually performed;
  2. delivering an invoice for fees or expenses for municipal advisory activities that do not accurately reflect the activities actually performed or the personnel that actually performed those services;
  3. making any representation or the submission of any information about the capacity, resources or knowledge of the municipal advisor, in response to requests for proposals or qualifications or in oral presentations to a client or prospective client, for the purpose of obtaining or retaining municipal advisory business that the advisor knows or should know is materially false or misleading;
  4. making, or participating in, any fee-splitting arrangements with underwriters, and any undisclosed fee-splitting arrangements with providers of investments or services to a municipal entity or obligated person client of the municipal advisor; and
  5. making payments for the purpose of obtaining or retaining municipal advisory business other than reasonable fees paid to another registered municipal advisor for a solicitation of a municipal entity or obligated person.

Supplementary Material.  In addition to describing the duty of care and duty of loyalty, as discussed above, the proposed supplementary material in the Rule Notice would provide guidance relating to, among other matters, limitations on the scope of engagement, suitability of recommendations and the elements of a reasonable know-your-customer inquiry.

Amendments to Rules G-8 and G-9

The MSRB proposes to amend existing Rule G-8 (Books and Records to Be Made by Brokers, Dealers, and Municipal Securities Dealers) and Rule G-9 (Preservation of Records) to apply to municipal advisors and to include records required to be maintained by municipal advisors pursuant to Section 15B of the Exchange Act and applicable SEC rules (“municipal advisor records”) within the category of records to be maintained and preserved by Rules G-8 and G-9.

Request for Comment

In addition to requesting general comment, the Rule Notice lists a number of specific aspects of the proposals, including the MSRB’s underlying economic analysis, on which public comment is sought.  Comments are due not later than March 10, 2014.