MSRB NOTICE 2012-28 (MAY 31, 2012)
REQUEST FOR COMMENT ON CONCEPT PROPOSAL TO PROVIDE FOR PUBLIC DISCLOSURE OF FINANCIAL
INCENTIVES PAID OR RECEIVED BY DEALERS AND MUNICIPAL ADVISORS REPRESENTING POTENTIAL CONFLICTS
The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on a concept proposal relating to the potential public disclosure on the MSRB’ s Electronic Municipal
Market Access (“EMMA”®) system of certain payments and receipts by brokers, dealers, and municipal securities dealers (“dealers”) and municipal advisors in connection with
their respective municipal securities activities and municipal advisory activities that could potentially represent conflicts of interest. This concept proposal is intended to elicit input
from all interested parties on the potential benefits and burdens of establishing such a public conflicts disclosure regime, as well as on potential alternatives to achieving the
purposes enunciated below, to assist the MSRB in determining whether to consider undertaking a rulemaking process to propose requirements for public disclosures as
Comments should be submitted no later than July 31, 2012, and may be submitted in electronic or paper form. Comments may be submitted electronically by clicking here.
Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria,
VA 22314. All comments will be available for public inspection on the MSRB’s website.
Questions about this notice should be directed to Ernesto A. Lanza, Deputy Executive Director and Chief Legal Officer, at 703-797-6600.
The MSRB has long been charged by Congress with the duty of protecting investors and the public interest, with its mandate recently expanded to include the protection of
municipal entities and obligated persons as well. The MSRB’s rulemaking authority with respect to dealers was recently expanded to include rulemaking with respect to
In addition to its comprehensive body of dealer rules establishing general standards of professionalism and its rules creating fair practice, disclosure, suitability, fair pricing and
other duties applicable in connection with specific transaction-based activities, the MSRB also has adopted rules designed to preserve the integrity of the municipal market by
addressing potential conflicts of interest that can impair the ability of municipal market professionals to act fairly and objectively. For example, MSRB Rule G-37 was adopted in
1994 to prohibit dealers from engaging in municipal securities business with issuers of municipal securities if certain political contributions have been made to officials of such
issuers and to require dealers to publicly disclose political contributions and related information. Such disclosure allows public scrutiny of the political contributions and municipal
securities business of dealers. In addition, under former Rule G-38, the MSRB required public disclosures regarding arrangements with, payments to and certain political
contributions by third-party consultants hired by dealers to solicit issuers to obtain municipal securities business, before Rule G-38 was revised to ban the use of such consultants
in 2005. These rules were designed to address practices that could distort the process by which state and local government business is awarded and therefore could
undermine a free and open market in municipal securities and the integrity of and public confidence in this market.
The MSRB believes that municipal securities offerings borne from self-interested advice or in the context of conflicting interests or undisclosed payments to third-parties are much
more likely to be the issues that later experience financial or legal stress or otherwise perform poorly as investments, resulting in significant harm to investors and issuers,
including increased costs to taxpayers. In particular, in adopting its Rule G-37 and former Rule G-38, the MSRB established disclosure obligations based on its belief that such
disclosures would help to limit undisclosed relationships that could pose potential conflicts of interest or result in potentially improper conduct by dealers or consultants attempting
to obtain municipal securities business. Further, with its recent adoption of interpretive guidance relating to the fair practice duties of underwriters to issuers of municipal
securities, the MSRB has established a requirement for underwriters to make conflict-related disclosures to such issuers. Similarly, in proposing a series of rule changes
relating to the fiduciary obligations and fair practice duties of municipal advisors, the MSRB would require such municipal advisors to make conflict-related disclosures to
municipal entities and obligated persons.
In recent years, a series of state and federal proceedings involving, among other things, undisclosed third-party payments in connection with new issues of municipal securities or
closely-related transactions have been instituted, with the practices described in these proceedings presenting significant challenges to the integrity of the municipal market. In at
least one case, such undisclosed third-party payments allegedly occurred in connection with activities that may have contributed to the largest municipal bankruptcy in United
States history in Jefferson County, Alabama. In addition, the United States Department of Justice, the Securities and Exchange Commission (the “SEC”), and the attorneys
general of several states have pursued a number of criminal and civil cases involving, among other things, alleged fraudulent activities relating to municipal securities offerings
and closely-related transactions in which undisclosed third-party payments have played an important role in carrying out the allegedly fraudulent activities.
POTENTIAL PUBLIC DISCLOSURES REGARDING THIRD-PARTY PAYMENTS
The MSRB is considering whether to require dealers and municipal advisors to submit to the MSRB, for public display through the EMMA website, disclosures regarding certain
payments and receipts by dealers and municipal advisors in connection with their respective municipal securities activities and municipal advisory activities that could potentially
represent conflicts of interest. As described below, disclosures would be required with respect to payments, credits (such as inter-company credits or values between affiliated
parties), quid-pro-quo arrangements or other valuable consideration (collectively, “financial incentives”), either provided to any other party, including municipal entities and their
personnel (a “third-party recipient”), or received from any party other than the municipal entity (a “third-party payor”). Such public disclosures could alert investors and other
market participants to any possible conflicts of interest of transaction participants, in a manner similar to the public disclosure of certain political contributions already required by
Rule G-37. In addition, such disclosures would provide municipal entities and the general public with critical information relevant to the selection of competent and non-conflicted
underwriters and municipal advisors for their public sector financial undertakings and would assist in restoring taxpayer confidence in the services provided by financial
professionals to their state and local jurisdictions.
Potential Disclosures by Underwriters. Dealers serving as underwriters to municipal entities in connection with their new issues of municipal securities act in a critical role in
providing such municipal entities with access to the capital markets. This access entails municipal entities taking on substantial financial commitments and long-term legal
obligations involving institutional and individual investors who purchase their municipal securities as well as a range of financial markets professionals who assist in the issuance
and servicing of the municipal securities. Disclosures of payments and receipts by underwriters would be designed to make transparent any potential financial incentives that
may have an impact on the substantial and long-term commitments undertaken by municipal entities.
Disclosures that could be required to be made by underwriters include the following:
• any financial incentives received by the underwriter from any third-party payor for recommending a municipal securities financing or any closely-related transaction (together,
a “new issue transaction”) to the municipal entity or an obligated person, or for recommending the participation of any third-party to undertake a role in connection with such
new issue transaction
• any other financial incentives received by the underwriter from any third-party payor in connection with a new issue transaction
• any financial incentives paid by the underwriter to any third-party recipient in connection with a new issue transaction, including, but not limited to, financial incentives paid for
the purpose of obtaining or retaining any such new issue transaction
Potential Disclosures by Municipal Advisors. Municipal advisors may consist of a wide variety of professionals that provide advice to or on behalf of municipal entities and
obligated persons with respect to municipal financial products or the issuance of municipal securities, or that undertake a solicitation of a municipal entity or obligated person
on behalf of an unaffiliated dealer, municipal advisor or investment adviser to obtain or retain an engagement in connection with certain activities relating to municipal financial
products, the issuance of municipal securities or the provision of investment advisory services. As with the services provided to municipal entities by underwriters, the advice
provided by municipal advisors involves municipal entities or obligated persons taking on substantial financial commitments and long-term legal obligations involving institutional
and individual investors as well as a range of financial markets professionals. Disclosures of payments and receipts by municipal advisors would be designed to make
transparent any potential financial incentives that may have an impact on the advice provided by municipal advisors to municipal entities or obligated persons in connection with
their undertaking of such substantial and long-term commitments.
Disclosures that could be required to be made by municipal advisors include the following:
• any financial incentives received by the municipal advisor from any third-party payor for recommending any municipal financial product or the issuance of municipal securities
or any closely-related transaction (collectively, an “advised transaction”) to the municipal entity or an obligated person, or for recommending the participation of any third-
party to undertake a role in connection with such advised transaction
• any other financial incentives received by the municipal advisor from any third-party payor in connection with an advised transaction
• any financial incentives received by the municipal advisor from any party for a solicitation of a municipal entity or obligated person on behalf of an unaffiliated dealer,
municipal advisor or investment adviser to obtain or retain an engagement in connection with municipal financial products, the issuance of municipal securities or the
provision of investment advisory services, or for any closely-related transaction (together, a “solicitation”), including any payment made by the party on behalf of which such
municipal advisor undertakes the solicitation
• any financial incentives paid by the municipal advisor to any third-party recipient in connection with an advised transaction or any other engagement to provide advice as a
municipal advisor, including, but not limited to, financial incentives paid for the purpose of obtaining or retaining any such advised transaction or engagement
REQUEST FOR COMMENT
The MSRB seeks comment on the following questions, as well as any other comments on the concept proposal, to assist it in determining whether to consider proposing
requirements for public disclosures as described herein. If the MSRB determines to proceed with rulemaking in this area after reviewing the comments received on this concept
proposal, it would publish one or more requests for comment seeking further industry input on specific requirements intended to achieve the goals enunciated herein before
making a final decision whether to file such a proposal with the SEC for its approval.
• Would the implementation of this concept proposal help to protect municipal entities, obligated persons, investors and the public interest (including taxpayers)?
• Would the disclosure of any of the items of information described in this notice have any negative effects on the protection of municipal entities, obligated persons, investors
and the public interest, or on the fair and efficient operation of the municipal market? If so, please describe in detail.
• Should transactions with, advice provided to, or payments made to obligated persons be treated differently under this concept proposal than with respect to municipal
• The disclosures that would be required under this concept proposal are limited to payments made to, and received from, third parties. Would it be beneficial for other
disclosures (such as underwriter’s or municipal advisor’s fees and scope of work) to be made public on EMMA?
• Should disclosures of payments be limited solely to the identity of the payor or payee and the purpose of such payment, or should the amount of such payment or other
additional information be required in all cases? If the amount is required, should any in-kind or quid-pro-quo payment be required to be disclosed based on its value or would
a descriptive disclosure of such payment be acceptable?
• This concept proposal includes disclosure of payments relating to closely-related transactions, which is not defined in the proposal but would include, among other things,
transactions such as a swap transaction or bond proceeds investment occurring contemporaneously with a new issue. Are there other examples of transactions that should
or should not be considered closely-related transactions, and are there any potential objective standards that could be used in creating a more precise definition of this term?
• This concept proposal would treat all payments made by underwriters and municipal advisors to third-party recipients the same. Should there be exceptions for commercially
reasonable payments to third parties providing standard services to an underwriter or municipal advisor in the normal course of doing business? For example, should
disclosures include payments to entities such as third-party service providers (e.g., copy, analytic, design, printing, electronic publishing, or other services), suppliers (e.g.,
office supplies, equipment, or other goods) and other enterprises performing bona fide standard functions at commercially reasonable rates? If certain such payments
should be exempted from the disclosure requirement, are there any potential objective standards that could be used in more precisely defining such an exemption?
• Not all disclosures contemplated by this concept proposal would relate to new issue underwritings for which a reporting regime exists through EMMA. For example, some
disclosures would relate to transactions involving municipal financial products, and others may relate to non-transaction based on-going municipal advisory business. Should
all such disclosures be made through a unified periodic submission by dealers and municipal advisors (similar to quarterly Form G-37 submissions under Rule G-37), or
should disclosures in connection with new issues be made as such issues go to market through the existing EMMA submission process and the remaining disclosures be
• The MSRB notes that a number of states (e.g., California, Florida, New Jersey, and Texas) already require the submission of detailed information by issuers about the fees
and other costs associated with in-state securities offerings. Should the MSRB consider permitting issuers to submit to EMMA, on a voluntary basis, copies of such state
filings for public dissemination? In the alternative, should the MSRB consider developing, as a complement to or a substitute for this concept proposal, a standardized form
that would permit issuers throughout the country to provide, on a voluntary basis, full disclosure of amounts paid to all transaction participants and service providers,
including bond counsel and trustees, as well as other transaction expenses?
• To what extent, if any, would the information that would be disclosable under the concept proposal consist of information that is not already available to dealers and
municipal advisors? Would dealers and municipal advisors already be retaining such records for their other regulatory, risk mitigation or financial recordkeeping purposes?
Under what circumstances might a dealer or municipal advisor not have access to such information?
• Beginning on August 2, 2012, many of the proposed disclosures that would be made by underwriters under this concept release will become required disclosures by
underwriters to municipal entities. What would be the incremental additional burden to dealers to report such disclosures to the public through EMMA in addition to making
such disclosures to the municipal entities themselves?
• Similarly, assuming that many of the proposed disclosures under this concept proposal may also become required disclosures by municipal advisors to municipal entities
under other MSRB proposals, what would be the incremental additional burden to municipal advisors to report such disclosures to the public through EMMA in addition to
making such disclosures to the municipal entities themselves?
• Are there alternative methods the MSRB should consider to providing the protections sought under this concept proposal that would be more effective and/or less
May 31, 2012
 Comments are posted on the MSRB website without change. Personal identifying information such as name, address, telephone number or email address will not be edited
from submissions. Therefore, commenters should submit only information that they wish to make available publicly.
 The terms “municipal entity” and “obligated person” are defined in Section 15B(e)(8) and (10) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The
MSRB’s regulatory mandate was expanded in 2010 pursuant to Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended Section 15B of
the Exchange Act.
 The term “municipal advisor” is defined in Section 15B(e)(4) of the Exchange Act.
 See MSRB Notice 2005-44 (August 18, 2005); MSRB Notice 2005-41 (August 9, 2005); MSRB Notice 2005-16 (March 15, 2005).
 See MSRB Notice 2012-25 (May 7, 2012). The interpretive guidance becomes effective August 2, 2012.
 See MSRB Notice 2011-48 (August 23, 2011); MSRB Notice 2011-49 (August 24, 2011). These proposals were withdrawn by the MSRB pending final rulemaking by the
Securities and Exchange Commission (the “SEC”) regarding the definition and registration of municipal advisors. See MSRB Notice 2011-51 (September 12, 2011).
 See In re J.P. Morgan Securities, Inc., Securities Act Release No. 9078, Exchange Act Release No. 60928 (Nov. 4, 2009); see also Congressman Spencer T. Bachus,
“Federal Policy Responses to the Predicament of Municipal Finance,” Cumberland Law Review, Vol. 40, No. 3, 2009-2010.
 See, e.g., United States Department of Justice, Press Release: Three Former Financial Services Executives Convicted for Roles in Conspiracies Involving Investment
Contracts for the Proceeds of Municipal Bonds available at http://www.justice.gov/opa/pr/2012/May/12-at-620.html; United States Department of Justice, Press Release: CDR
Financial Products and Its Owner Plead Guilty to Bid-Rigging and Fraud Conspiracies Related to Municipal Bond Investments (December 30, 2011), available at
 Effective August 2, 2012, the MSRB requires that certain of these disclosures be made by underwriters directly to municipal entities. See MSRB Notice 2012-25 (May 7,
2012); Exchange Act Release No. 66927 (May 4, 2012), 77 FR 27509 (May 10, 2012).
 While Rule G-38 currently bans any such payments by dealers to unaffiliated third-parties to obtain or retain municipal securities business, this disclosure would include
permitted payments made to affiliates for such purposes in addition to any third-party payments made in violation of Rule G-38.
 The term “municipal financial product” is defined in Section 15B(e)(5) of the Exchange Act and generally includes municipal derivatives, guaranteed investment contracts and
investment strategies (as defined in Section 15B(e)(3) of the Exchange Act).
 The MSRB has proposed requiring that certain of these disclosures be made by municipal advisors directly to issuers in a proposal previously filed with the SEC but later
withdrawn pending final SEC rulemaking in connection with municipal advisor registration. See MSRB Notice 2011-48 (August 23, 2011); MSRB Notice 2011-51 (September 12,
 Any request for comment regarding specific requirements applicable to municipal advisors would not be published until after the SEC has completed its pending rulemaking
on the definition and registration of municipal advisors in order to afford the full range of entities and persons who would be subjected to such a proposal as municipal advisors
the opportunity to provide meaningful input.
 Rule G-32 already requires disclosure through EMMA of the underwriting spread and any fee received by the underwriter as agent for the issuer for negotiated offerings.
 See MSRB Notice 2011-48 (August 23, 2011) and MSRB Notice 2011-49 (August 24, 2011).