The MSRB issued a Compliance Advisory to aid municipal securities dealers, brokers and dealers (collectively, “dealers”) in addressing compliance risks and in supplementing evaluations of existing compliance programs and controls.
In the Advisory, the MSRB highlighted several factors (as summarized below) for dealers to consider when evaluating compliance:
- Standards of Professional Qualification (Rules G-2, G-3, A-12): Firms should consider how they ensure that employees perform functions only as permitted by their qualifications and whether appropriate training procedures have been implemented to train employees on the scope of their qualifications.
- Best Execution and Fair Pricing Standards (Rules G-18, G-30): Firms should evaluate whether they have policies and procedures that take into account the entire “market” when making best execution determinations, and cover how and when retail customer orders are exposed to multiple bids, in addition to considering whether they are periodically evaluating processes for determining whether aggregate prices charged to customers are fair and reasonable.
- Standards of Conduct in the Performance of Financial Advisory Activities (Rule G-23): Firms should assess whether they have procedures to notify issuers of their role in a particular transaction and to consider factors that necessitate classification (and possible registration) as a “municipal advisor.”
- Fair Dealing with All Persons in the Conduct of Municipal Securities Activity (Rule G-17): Firms should consider employee training on standards of fair dealing, procedures for determining the best account structure for particular customers, and processes for evaluating disclosures and representations made by underwriters.
- Pay-to-Play Restrictions (Rule G-37): Firms should evaluate current training available to make employees aware of reporting requirements for certain political contributions, assess processes for monitoring for such contributions for two-year look-back periods, and ensure that firms are meeting all reporting and disclosure requirements.
- Time of Trade Disclosures to Customers (Rule G-47): Firms should examine their procedures to determine whether they have a process for ensuring they are using established industry sources of information relating to municipal securities transactions (particularly as new sources become available and are more generally used by dealers). Firms should also examine whether they have procedures to ensure that all material information about municipal securities transactions is properly disseminated to registered representatives engaged in sales to and purchases from a customer.
- Supervisory Controls (Rule G-27) and Books and Records (Rules G-8, G-9): Firms should assess all of their supervisory controls to ensure that they are properly monitoring regulatory developments, maintaining written procedures and accurately documenting the nature and function of particular securities accounts.
Lofchie Comment: The MSRB’s statement provides a useful outline for firms to undertake a general review of their compliance procedures in this space. There is nothing like a priority risk list from the regulators to focus one’s attention.