MSRB: Advisers acting as agents for muni private placements are subject to MSRB rules

By Angela McDaniels

Tacoma, Wash., Aug. 4 - The Municipal Securities Rulemaking Board issued a notice Thursday about financial advisers and private placements in the municipal market.

MSRB said that given the growing use of placements as an alternative to traditional public offerings of municipal securities, it is important that all financial advisers understand the principles for treatment as a "broker."

If a financial adviser's activities would cause it to be viewed as a placement agent for a new issue of municipal securities, its activities in connection with that placement would be subject to all MSRB rules normally applicable in connection with private placements.

MSRB said activities of particular concern are introductions of potential investors to an issuer or negotiation with potential investors, in either case coupled with the receipt of transaction-based compensation.

Financial adviser placement agents would be required to register with the MSRB as broker-dealers if they have not previously done so, even if they were already registered as municipal advisers.

"Importantly, financial advisers that have not traditionally viewed themselves as brokers could unintentionally become subject to MSRB Rule G-23," MSRB said in the notice.

Effective Nov. 27, 2010, Rule G-23 generally precludes financial advisers that are broker-dealers from becoming underwriters or placement agents for municipal issues for which they have been acting as financial advisers.

Among other rules, they would also be subject to Rule G-3, which requires broker-dealers engaged in municipal securities activities to pass qualifying examinations; Rule G-17, which imposes a duty of fair dealing on broker-dealers; and Rule G-32, which requires submissions of official statements and related new issue information.

MSRB said it is also important for financial advisers to be aware that what are referred to as "bank loans" may, depending on the specific terms and conditions, be placements of municipal securities.

If the financial instrument is a loan, the financial adviser's activities in connection with the loan will probably not cause it to have to register as a broker, MSRB.

The board warned that certain financial instruments, although characterized as loans, may in fact be municipal securities. MSRB plans to issue a future notice describing the factors that distinguish a loan to a municipal entity from a municipal security in the context of the activities of financial advisers and broker-dealers.

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