Notice2023-10468
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Consisting of Amendments to MSRB Rule G-40, on Advertising by Municipal Advisors, and MSRB Rule G-8, on Books and Records
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 17, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 95 (Wednesday, May 17, 2023)</title>
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[Federal Register Volume 88, Number 95 (Wednesday, May 17, 2023)]
[Notices]
[Pages 31562-31571]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-10468]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97483; File No. SR-MSRB-2023-01]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change, as Modified
by Amendment No. 1, Consisting of Amendments to MSRB Rule G-40, on
Advertising by Municipal Advisors, and MSRB Rule G-8, on Books and
Records
May 11, 2023.
I. Introduction
On January 31, 2023, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change (``original proposed rule
change'') to amend MSRB Rule G-40 (``Rule G-40''), on advertising by
municipal advisors, and MSRB Rule G-8 (``Rule G-8''), on books and
records.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The original proposed rule change was published for comment in the
Federal Register on February 14, 2023.\3\ The Commission received two
comment letters on the original proposed rule change.\4\ On March 21,
2023, the MSRB granted an extension of time for the Commission to act
on the filing until May 15, 2023.\5\
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\3\ Securities Exchange Act Release No. 96840 (Feb. 8, 2023), 88
FR 9580 (Feb. 14, 2023) (``Notice'').
\4\ See Letter to Secretary, Commission, from Leslie M. Norwood,
Managing Director and Associate General Counsel, Securities Industry
and Financial Markets Association (``SIFMA''), dated March 7, 2023
(``SIFMA Letter''); Letter to Secretary, Commission, from Susan
Gaffney, Executive Director, National Association of Municipal
Advisors (``NAMA''), dated March 7, 2023 (``NAMA Letter I'').
\5\ See ``Extension of Time on File No. SR-MSRB-2023-01 to May
15, 2023,'' available at <a href="https://msrb.org/sites/default/files/2023-03/MSRB-2023-01%20eot.pdf">https://msrb.org/sites/default/files/2023-03/MSRB-2023-01%20eot.pdf</a>.
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On April 4, 2023, the MSRB responded to the comment letters \6\ and
filed Amendment No. 1 to the original proposed rule change (``Amendment
No. 1'').\7\ On April 11, 2023, the Commission published notice of
Amendment No. 1 in the Federal Register.\8\ In response to Amendment
No. 1, the Commission received one comment letter.\9\ On April 28,
2023, the MSRB submitted a response to the comment received on
Amendment No. 1.\10\ This order approves the original proposed rule
change, as modified by Amendment No. 1 (as so modified, the ``proposed
rule change'').
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\6\ See Letter to Secretary, Commission, from Saliha Olgun,
Interim Chief Regulatory Officer, MSRB, dated April 4, 2023 (the
``MSRB Letter I'').
\7\ Amendment No. 1 is available at <a href="https://msrb.org/sites/default/files/2023-04/MSRB-2023-01%20A-1.pdf">https://msrb.org/sites/default/files/2023-04/MSRB-2023-01%20A-1.pdf</a>.
\8\ Securities Exchange Act Release No. 97255 (Apr. 5, 2023), 88
FR 21729 (Apr. 11, 2023) (``Notice of Amendment No. 1'').
\9\ See Letter to Secretary, Commission, from Susan Gaffney,
Executive Director, National Association of Municipal Advisors,
dated April 26, 2023 (``NAMA Letter II'').
\10\ See Letter to Secretary, Commission, from Saliha Olgun,
Interim Chief Regulatory Officer, MSRB, dated April 28, 2023 (``MSRB
Letter II'').
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II. Description of Original Proposed Rule Change
The MSRB stated that, consistent with its strategic goal to
modernize its rulebook, the original proposed rule change would amend
Rule G-40 to allow municipal advisors to use testimonials in certain
circumstances.\11\ The MSRB stated that this change would better align
Rule G-40 with, to the extent appropriate, the principles of MSRB Rule
G-21 (``Rule G-21''), on advertising by brokers, dealers or municipal
securities, as well as Rule 206(4)-1 \12\ under the Investment Advisers
Act of 1940 (``Advisers Act'') \13\ adopted in 2020 \14\ by the
Commission.\15\
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\11\ Notice, 88 FR at 9580.
\12\ 17 CFR 275.206(4)-1.
\13\ 15 U.S.C. 80b-1 et seq.
\14\ See Investment Advisers Act Release No. 5653 (Dec. 22,
2020), the adopting release for Investment Adviser Marketing (the
``SEC 2020 Adopting Release''), 86 FR 13024 (Mar. 5 2021).
\15\ Notice, 88 FR at 9580-81.
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Specifically, the MSRB indicated the original proposed rule change
would consist of amendments to Rule G-40 to: (i) permit municipal
advisors to use testimonials in advertisements, subject to certain
conditions; (ii) specify additional supervisory obligations with
[[Page 31563]]
respect to the use of testimonials; (iii) modify the definition of
municipal advisory client to better align with MSRB Rule G-38, on
solicitation of municipal securities business; (iv) specify the
obligation to keep a record of any payment for a testimonial; and (v)
create a conforming obligation under Rule G-8, on books and records to
be made by brokers, dealers, municipal securities dealers and municipal
advisors, to include records to correspond with the current obligation
under Rule G-40 to maintain records relating to the supervision of
advertisements as well as the proposed obligation to maintain records
of any payments for a testimonial.\16\
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\16\ Notice, 88 FR at 9580.
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A. Background
1. Advertisements Under Rule G-40
According to the MSRB, in recognition of the fact that municipal
advisors bear similarities with both brokers, dealers and municipal
securities dealers (collectively and individually, ``dealers'') and
investment advisers, and to promote regulatory consistency for
regulated entities dually registered as a dealer and as a municipal
advisor, or as an investment adviser registered with the SEC, the MSRB
established advertising standards for municipal advisors in 2018.\17\
The MSRB noted that those advertising standards were developed by
aligning with, to the extent practicable, the then existing standards
for investment advisers under Rule 206(4)-1 and the then existing
standards for dealers under Rule G-21.\18\
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\17\ See Securities Exchange Act Release No. 83177 (May 7,
2018), 83 FR 21794 (May 10, 2018) (approving MSRB-2018-01,
implementing new Rule G-40). The effective date for municipal
advisors to comply with Rule G-40 was August 23, 2019. Notice, 88 FR
at 9581 n. 6.
\18\ Notice, 88 FR at 9581.
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The MSRB stated that Rule G-40 is designed to protect municipal
entities, obligated persons and the general public by requiring a
municipal advisor's advertisement to adhere to specific content
standards based on the principles of fair dealing and good faith.\19\
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\19\ Id.
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According to the MSRB, in establishing Rule G-40, it determined to
prohibit municipal advisors, directly or indirectly, from publishing,
circulating or distributing any advertisement which refers, directly or
indirectly, to any testimonial of any kind concerning the municipal
advisor or concerning the advice, analysis, report or other service
rendered by the municipal advisor.\20\ The MSRB stated that at that
time, it expressed the view that a testimonial in a municipal advisor's
advertisement would present significant issues, including the
possibility of being misleading.\21\ As a basis for this view, the MSRB
noted that the Commission had taken a similar position in adopting
Advisers Act Rule 206(4)-1 in 1961 (``Initial IA Advertising Rule'' or
``Initial Rule 206(4)-1''), determining that the use of a testimonial
by an investment adviser would constitute a fraudulent, deceptive, or
manipulative act, practice, or course of action.\22\ The MSRB expressed
that it believed that doing so would help ensure consistent regulation
between regulated entities subject to a fiduciary standard, and that
the MSRB determined to act consistently with the language of Initial
Rule 206(4).\23\
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\20\ Id.; see also Rule G-40(a)(iv)(G).
\21\ Notice, 88 FR at 9581; see also Securities Exchange Act
Release No. 82616 (Feb. 1, 2018), 83 FR 5474 (Feb. 7, 2018), notice
of proposed rule change (``Notice of Proposed Rule G-40'').
\22\ Notice, 88 FR at 9581; see also Investment Advisers Act
Release No. 121 (Nov. 1, 1961) (the ``1961 Advertising Rule Adopting
Release''), 26 FR 10548 (Nov. 9, 1961). The Commission adopted the
1961 Advertising Rule to target advertising practices that the
Commission believed were likely to be misleading. Notice, 88 FR at
9581 n.13.
\23\ Notice, 88 FR at 9581; see also Notice of Proposed Rule G-
40, 83 FR at 5478 n. 26.
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2. Testimonials Under Rule G-21
The MSRB stated that in establishing Rule G-40, it also sought, to
the extent practicable, to harmonize with its existing rule governing
the advertisements of dealers, Rule G-21.\24\ The MSRB also wrote that,
while not identical, the two MSRB rules are both are based on
principles of fair dealing and maintain rigorous content standards.\25\
However, the MSRB noted that Rule G-40 currently prohibits a municipal
advisor from using a testimonial in an advertisement.\26\ The MSRB
described that this prohibition is based in part on the fiduciary duty
that a non-solicitor municipal advisor (as opposed to a dealer) owes
its municipal entity clients.\27\
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\24\ Notice, 88 FR at 9581.
\25\ Id.
\26\ Id.
\27\ Id.; see generally Notice of Proposed MSRB Rule G-40.
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The MSRB explained that Rule G-21 permits a dealer to use a
testimonial in an advertisement if certain conditions are met.\28\
Specifically, the MSRB noted that, if a dealer's advertisement contains
a testimonial, then the person providing the testimonial concerning a
technical aspect of investing must have the knowledge and experience to
form a valid opinion.\29\ Additionally, the MSRB stated that, if an
advertisement contains a testimonial about the investment advice or
investment performance of the dealer, the advertisement must
prominently disclose: (i) the fact that the testimonial may not be
representative of the experience of other customers; (ii) the fact that
the testimonial is no guarantee of future performance or success; and
(iii) if more than $100 in value is paid for the testimonial, the fact
that it is a paid testimonial.\30\
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\28\ Notice, 88 FR at 9581; see generally Rule G-21.
\29\ Notice, 88 FR at 9581; see also Rule G-21(a)(iii)(G)(1).
\30\ Notice, 88 FR at 9581; see also Rule G-21(a)(iii)(G)(2).
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3. Testimonials Under Advisers Act Rule 206(4)-1
The MSRB stated that in establishing Rule G-40 in 2018, it
recognized that the Commission was considering modernizing the Initial
IA Advertising Rule and noted that it would monitor developments
related to the testimonial ban.\31\ The MSRB recounted that, on
December 22, 2020, the Commission adopted amendments to modernize and
consolidate the Initial IA Advertising Rule and Rule 206(4)-3 of the
Advisers Act (the ``IA Solicitation Rule'') \32\ into one marketing
rule for investment advisers, under the Advisers Act (the ``Modernized
IA Marketing Rule'' or ``IA Rule 206(4)-1'').\33\
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\31\ Notice, 88 FR at 9581; see also Notice of Proposed MSRB
Rule G-40, 83 FR at 5487.
\32\ Notice, 88 FR at 9581; see also 17 CFR 275.206(4)-3. The IA
Solicitation Rule was adopted in 1979 ``to help ensure clients are
aware that paid solicitors who refer them to advisers have a
conflict of interest.'' See SEC 2020 Adopting Release, 86 FR at
13025.
\33\ Notice, 88 FR at 9581; see generally SEC 2020 Adopting
Release. The Modernized IA Marketing Rule applies to any investment
adviser registered or required to be registered with the Commission
under section 203 of the Advisers Act that directly or indirectly
disseminates an advertisement.
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The MSRB indicated that when the Commission adopted the Modernized
IA Marketing Rule, the Commission stated that this rule replaced the
previous rule's ``broadly drawn limitations with principles-based
provisions designed to accommodate the continual evolution and
interplay of technology and advice and includes tailored requirements
for certain types of advertisements.'' \34\ The MSRB noted that the
Modernized IA Marketing Rule replaced the prior ban on testimonials
under the Initial IA Advertising Rule with a permissive use of
testimonials and endorsements in
[[Page 31564]]
advertisements,\35\ which includes traditional referral and
solicitation activity, subject to certain conditions.\36\
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\34\ Notice, 88 FR at 9581-82; see also ``SEC Adopts Modernized
Marketing Rule for Investment Advisers,'' (Dec. 22, 2020), available
at <a href="https://www.sec.gov/news/press-release/2020-334">https://www.sec.gov/news/press-release/2020-334</a>.
\35\ A ``testimonial'' is a statement made by a current client
or investor in a private fund advised by the investment adviser,
whereas an ``endorsement'' is a statement made by a person other
than a current client or investor in a private fund advised by the
investment adviser. See 17 CFR 275.206(4)-1(e)(17); 1(e)(5).
\36\ Notice, 88 FR at 9582. See also 17 CFR 275.206(4)-1(b)
(relating to compensated testimonials and endorsements); 17 CFR
206(4)-1(e)(1)(ii) (defining the term ``advertisement'' to include
compensated testimonials and endorsements). These conditions differ
depending on whether the testimonial or endorsement is compensated
or uncompensated. 17 CFR 275.206(4)-1(b)(4)(i) (exempting a
testimonial or endorsement disseminated for no compensation or de
minimis compensation from paragraphs 206(4)-1(b)(2)(ii) and (3)).
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The MSRB stated that the Modernized IA Marketing Rule requires
advertisements that include testimonials or endorsements to provide
disclosures of certain information.\37\ The MSRB noted that all
testimonials, including those that are compensated and uncompensated,
are subject to oversight and compliance.\38\
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\37\ Notice, 88 FR at 9582. See also 17 CFR 275.206(4)-1(b)(1).
\38\ Notice, 88 FR at 9582.
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In light of the Commission's adoption of the Modernized IA
Marketing Rule, the MSRB stated that it conducted a review of Rule G-40
and filed the original proposed rule change to promote regulatory
consistency among regulated entities subject to a fiduciary
standard.\39\ The MSRB indicated that the original proposed rule change
would permit municipal advisors to use testimonials in advertisements,
subject to certain conditions, as discussed below.\40\
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\39\ Id.
\40\ Id. The term ``testimonial'' is not specifically defined in
Rule G-21 or Rule G-40; based on the application of each rule, the
term has been understood to include a statement given by a current
client or person other than a current client and does not
distinguish between a testimonial and an endorsement. See Notice, 88
FR at 9582 n. 28; see also Rules G-21 and G-40.
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B. Summary of the Original Proposed Rule Change
The MSRB stated that to promote regulatory consistency, where
practicable, among Rule G-40, Rule G-21, and the SEC's Modernized IA
Marketing Rule, proposed amended Rule G-40 would permit the use of
testimonials subject to disclosures and other tailored conditions.\41\
The MSRB further described that the original proposed rule change would
not only align Rule G-40 with the analogous requirements for dealers
under Rule G-21, but, because municipal advisors have a fiduciary duty
to their clients, the original proposed rule change would also include
certain provisions, tailored to apply to municipal advisors, which
align with the SEC's Modernized IA Marketing Rule.\42\ Specifically,
according to the MSRB, the original proposed rule change would amend
the content standards under Rule G-40(a)(iv) to permit municipal
advisors to use testimonials in advertisements subject to certain
conditions; amend the supervisory obligations under Rule G-40(c) to
specify additional supervisory obligations with respect to the use of
testimonials; modify the definition of municipal advisory client; and
amend Rule G-8 to include records to correspond with the current
obligation under Rule G-40 to maintain records relating to the
supervision of advertisements.\43\
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\41\ Notice, 88 FR at 9582.
\42\ Id.
\43\ Id.
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1. Rule G-40 Content Standards
The MSRB stated that Rule G-40 currently prohibits the use of
testimonials in advertisements by municipal advisors.\44\ The MSRB
explained that it is not proposing to alter the fundamental content
standards of Rule G-40 that require advertisements to be based on the
principles of fair dealing and good faith, be fair and balanced, and
provide a sound basis for evaluating the facts and that the
advertisements not make any false, exaggerated, unwarranted,
promissory, or misleading statement or claim.\45\ The MSRB explained
that, consistent with those standards, and recognizing the fiduciary
duty owed by municipal advisors to their municipal entity clients, the
MSRB proposed to permit the use of testimonials in advertisements by
municipal advisors subject to certain conditions that the MSRB believes
would diminish the concern, expressed in establishing Rule G-40, that
testimonials could cause a municipal advisor's advertisement to be
misleading.\46\ The MSRB stated that, as proposed, Rule G-40(a)(iv)(G)
would be amended to provide that municipal advisor advertisements that
contain testimonials would be subject to additional content
standards.\47\
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\44\ Id.; Rule G-40(a)(iv)(G).
\45\ Notice, 88 FR at 9582; Rule G-40(a)(iv)(A)-(F); G-40(a)(v);
G-40(b)(ii).
\46\ Notice, 88 FR at 9582.
\47\ Id. Amendment No. 1 specifically defines the term
``testimonial'' for purposes of Rule G-40 as a ``statement of a
person's or entity's experience concerning the municipal advisor or
concerning the municipal advisory services rendered by the municipal
advisor.'' Furthermore, if a municipal advisor's advertisement meets
certain conditions, then a municipal advisor may, directly or
indirectly, publish, circulate or distribute an advertisement which
refers directly or indirectly, to a testimonial. See Amendment No.
1; Notice of Amendment No. 1, 88 FR at 21729.
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The MSRB explained that if a municipal advisor's advertisement
contains a testimonial of any kind concerning the municipal advisor or
concerning the advice, analysis, report, or other service rendered by
the municipal advisor, the person making the testimonial would be
required to have the knowledge and experience to form a valid
opinion.\48\ The MSRB stated that this obligation would standardize the
content standard with that applicable to dealers' use of testimonials
under Rule G-21.\49\ The MSRB argued that applying this standard to
municipal advisors is consistent with the existing content standards of
Rule G-40 established to prevent false or misleading advertisements and
would promote regulatory consistency.\50\
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\48\ Notice, 88 FR at 9582. In Amendment No. 1, the MSRB also
removed language from the original proposed rule change that
referred to the ``advice, analysis or report or other services,
rendered by the municipal advisor'' and instead, uses ``municipal
advisory services'' in the proposed definition of ``testimonial''
and elsewhere in the rule text. See Amendment No. 1; Notice of
Amendment No. 1, 88 FR at 21729. The MSRB also clarified that a
municipal advisor may only use a testimonial if the person or entity
providing the testimonial has the knowledge and experience to make a
statement concerning their experience with the municipal advisor or
with the municipal advisory services rendered by the municipal
advisor. See Amendment No. 1; Notice of Amendment No. 1, 88 FR at
21730.
\49\ Notice, 88 FR at 9582. This content standard in Rule G-21
currently aligns with the standard established in Rule 2210,
Communications with the Public, of the Financial Industry Regulatory
Authority (``FINRA''). Specifically, FINRA Rule 2210(d)(6)(A)
provides that ``if any testimonial in a communication concerns a
technical aspect of investing, the person making the testimonial
must have the knowledge and experience to form a valid opinion.''
Notice, 88 FR at 9582 n. 33.
\50\ Notice, 88 FR at 9582.
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The MSRB stated that if an advertisement contains a testimonial
concerning the municipal advisor or concerning the advice, analysis,
report, or other service rendered by the municipal advisor, that
advertisement must include, clearly and prominently, disclosures
designed to reduce the risk that the use of a testimonial in an
advertisement could be misleading.\51\
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First, the MSRB explained that the testimonial must include a clear and
prominent disclosure that the person providing the testimonial is a
current municipal advisory client or, if not currently a municipal
advisory client, the timeframe, denoted by calendar year(s), during
which the person was a municipal advisory client.\52\ The MSRB
concluded that the clear and prominent disclosure standard requires
that the disclosures be included within the advertisement that includes
the testimonial such that the testimonial and disclosures are read at
the same time and improve the salience and impact of the
disclosures.\53\
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\51\ Notice, 88 FR at 9583. The MSRB added a Supplementary
Material .03 to Rule G-40 to clarify that in order for a requisite
disclosure in an advertisement to be clear and prominent (including
that a testimonial is a paid testimonial), the disclosure must be at
least as prominent in the advertisement as the testimonial.
According to the MSRB, this revision indicates that disclosures
should appear close to the associated testimonial statement with the
same prominence so that the statement and disclosures are read at
the same time, rather than referring the reader to somewhere else in
the advertisement. See Amendment No. 1; Notice of Amendment No. 1,
88 FR at 21730.
\52\ Notice, 88 FR at 9583. The MSRB stated that it would amend
the original proposed rule change to permit municipal advisors to
use testimonials from a third party, whether a person or entity,
subject to the conditions set forth in Amendment No. 1. Notice of
Amendment No. 1, 88 FR at 21729.
\53\ Notice, 88 FR at 9583.
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The MSRB also wrote that the testimonial would also be required to
include clear and prominent disclosures that the testimonial may not be
representative of the experience of other clients, that the testimonial
is no guarantee of future performance or success, and, if more than
$100 in total value in cash or non-cash compensation is paid for the
testimonial, the fact that it is a paid testimonial.\54\ The MSRB
explained that requiring municipal advisors that use testimonials to
adhere to these disclosure requirements would harmonize the content
standards with those applicable to dealers' use of testimonials under
Rule G-21.\55\ The MSRB argued that requiring such disclosures is
consistent with the existing content standards of Rule G-40 and would
promote regulatory consistency.\56\
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\54\ Id.
\55\ Id. These disclosure requirements in Rule G-21 currently
align with the disclosure requirements in FINRA Rule
2210(d)(6)(B)(1)-(3). Notice, 88 FR at 9583 n. 38.
\56\ Notice, 88 FR at 9583.
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Finally, the MSRB noted that the testimonial also would be required
to include, clearly and prominently, a brief statement of any material
conflicts of interest on the part of the person providing the
testimonial resulting from the municipal advisor's relationship with
such person.\57\ The MSRB wrote that, recognizing the fiduciary duty
owed by municipal advisors to their municipal entity clients, the MSRB
considered the obligations of registered investment advisers, who, like
municipal advisors, are subject to a fiduciary standard in determining
the disclosures that would be appropriate for municipal advisors when
using testimonials in advertisements.\58\ The MSRB stated that this
disclosure obligation parallels a disclosure obligation required of
registered investment advisers under IA Rule 206(4)-1(b)(1)(iii).\59\
The MSRB explained that a brief statement of any material conflicts of
interest on the part of the person providing the testimonial resulting
from the municipal advisor's relationship with such person would result
in information that informs the likely recipients of the advertisement
(i.e., municipal entities and obligated persons) which serves to ensure
that the advertisement is fair and balanced and reduces the risk that
the use of a testimonial could be misleading.\60\ Furthermore, the MSRB
discussed that establishing the same disclosure obligation for
municipal advisors under Rule G-40 promotes regulatory consistency,
particularly among regulated entities subject to a fiduciary
standard.\61\ The MSRB wrote that it expects this disclosure to be
succinct.\62\
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\57\ Id.
\58\ Id.
\59\ Id.
\60\ Id.
\61\ Id.
\62\ Id.
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Next, the MSRB explained that there are two broad categories of
municipal advisors: \63\ (i) those that provide certain advice to or on
behalf of a municipal entity or obligated person; and (ii) those that
undertake certain solicitations of a municipal entity or obligated
person on behalf of certain third-party financial professionals, often
referred to as solicitors.\64\ The MSRB stated that it understands that
municipal entity clients generally do not accept compensation for
testimonials and believes that the payment of more than a de minimis
amount (more than $1000 in total value in cash or non-cash compensation
during the preceding 12 months) to a municipal entity client could
present a potential conflict of interest.\65\ Therefore, according to
the MSRB, proposed Rule G-40(a)(iv)(G)(3) would prohibit a non-
solicitor municipal advisor from paying more than a de minimis amount
of compensation for a testimonial.\66\
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\63\ Notice, 88 FR at 9583. See also 15 U.S.C. 78o-4(e)(4); 17
CFR 240.15Ba1-1(d)(1)(i); Securities Exchange Act Release No. 70462
(Sept. 20, 2013), 78 FR 67467, n. 138 and 408 (Nov. 12, 2013).
\64\ Notice, 88 FR at 9583. See also 15 U.S.C. 78o-4(e)(9); 17
CFR 240.15Ba1-1(n), 17 CFR 240.15Ba1-1(d)(1); (d)(3)(viii).
\65\ Notice, 88 FR at 9583.
\66\ Id.
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The MSRB stated that, to avoid this concern and to avoid creating
complexity in Rule G-40 by establishing different standards for
obligated person clients of non-solicitor municipal advisors, it
determined to prohibit non-solicitor municipal advisors from paying any
compensation for a testimonial to a person, directly or indirectly, of
more than $1000 in total value in cash or non-cash compensation during
the preceding 12 months.\67\ However, the MSRB noted that this change
would, permit solicitor municipal advisors to pay such compensation to
a municipal advisor, or an investment adviser (as defined under section
202 of the Advisers Act) on behalf of whom the municipal advisor
undertakes, or has undertaken, a solicitation of a municipal entity or
obligated person, as defined in Exchange Act Rule 15Ba1-1(n) \68\
subject to certain conditions.\69\
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\67\ Notice, 88 FR at 9583-84.
\68\ 17 CFR 240.15Ba1-1(n).
\69\ Notice, 88 FR at 9584. In response to comments that the
proposal to establish a different standard for the use of
testimonials by solicitor municipal advisors was confusing, the MSRB
proposed in Amendment No. 1 to remove proposed language that would
have permitted, subject to certain conditions, a solicitor municipal
advisor to pay more than $1000 in total value in cash or non-cash
compensation during the preceding 12 months for a testimonial.
Further, the MSRB eliminated the language in the original proposed
rule change in Rules G-40 and G-8 concerning additional records to
be maintained by a solicitor municipal advisor related to such
payments. Notice of Amendment No. 1, 88 FR at 21730.
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2. Rule G-40 Supervisory Obligations
The MSRB identified that Rule G-40 currently requires that each
advertisement subject to the requirements of the rule be approved in
writing by a municipal advisor principal, as defined in MSRB Rule G-
3(e)(i), prior to first use.\70\ The MSRB noted that the original
proposed rule change would broaden these supervisory obligations to
require, with respect to an advertisement that includes a testimonial,
that such approval be based on a reasonable belief that the testimonial
complies with the requirements of proposed Rule G-40(a)(iv)(G).\71\ The
MSRB wrote that this additional supervisory obligation is appropriate
in allowing municipal advisors the use of testimonials in
advertisements.\72\ The MSRB stated that this obligation would be
consistent with the oversight obligation under the Modernized IA
Marketing Rule that requires an investment adviser to have a reasonable
basis for believing that a testimonial complies with the requirements
of IA Rule 206(4)-1.\73\ The MSRB argued that establishing the same
obligation for municipal advisors under
[[Page 31566]]
Rule G-40 would promote regulatory consistency, particularly among
regulated entities subject to a fiduciary standard.\74\
---------------------------------------------------------------------------
\70\ Notice, 88 FR at 9584; see also Rule G-40.
\71\ Notice, 88 FR at 9584.
\72\ Id.
\73\ Id.; see also 17 CFR 275.206(4)-1(b)(2)(i).
\74\ Notice, 88 FR at 9584.
---------------------------------------------------------------------------
3. Rule G-40 Definitions
The MSRB stated that Rule G-40(a)(iii) currently defines
``municipal advisory client,'' for purposes of Rule G-40, to include
either: a municipal entity or obligated person for whom the municipal
advisor engages in municipal advisory activities, as defined in MSRB
Rule G-42(f)(iv); or a broker, dealer, municipal securities dealer,
municipal advisor, or investment adviser (as defined under section 202
of the Advisers Act) on behalf of whom the municipal advisor undertakes
a solicitation of a municipal entity or obligated person, as defined in
Rule 15Ba1-1(n) under the Act.\75\ However, the MSRB explained that
MSRB Rule G-38 prohibits dealers from paying persons who are not
affiliated with the dealers for a solicitation of municipal securities
business on their behalf.\76\ The MSRB stated that, to avoid confusion
and promote standardization across MSRB rules, the proposal would
modify the definition of municipal advisory client.\77\ Specifically,
the MSRB wrote that the amended definition would exclude a broker,
dealer, and municipal securities dealer from the list of entities on
behalf of whom the municipal advisor undertakes a solicitation of a
municipal entity or obligated person.\78\
---------------------------------------------------------------------------
\75\ Notice, 88 FR at 9584; see also Rule G-40(a)(iii).
\76\ Notice, 88 FR at 9584.
\77\ Id.
\78\ Id.
---------------------------------------------------------------------------
4. Recordkeeping Requirements Under Rules G-40 and G-8
The MSRB explained that Rule G-40 currently requires that each
municipal advisor make and keep current in a separate file, records of
all advertisements.\79\ The MSRB stated that the original proposed rule
change would extend that obligation to include records of any payment
made to a municipal advisory client for a testimonial.\80\ The MSRB
noted that original proposed rule change also would make a conforming
amendment to the recordkeeping obligations under Rule G-8(h) to add
subparagraph (viii) to include records concerning compliance with Rule
G-40.\81\ Specifically, the MSRB articulated that the original proposed
rule change would amend Rule G-8(h) to specify that every municipal
advisor that is registered or required to be registered under section
15B of the Act (and the rules and regulations thereunder) would be
required to make and keep current the records specified under Rule G-
40.\82\ The MSRB concluded that this proposal would include not only a
record of all advertisements, which is currently required under Rule G-
40(e), but also, to align with the proposed amendments to Rule G-40(e),
a record of any cash or non-cash compensation provided to a municipal
advisory client, as that term is defined in Rule G-40(a)(iii) and a
record of any written agreement with a municipal advisor or investment
adviser required under proposed Rule G-40(a)(iv)(G)(3)(b), which is
required to describe the scope of the agreed-upon activities with
respect to the testimonial and the terms of the compensation for
such.\83\
---------------------------------------------------------------------------
\79\ Id.; see also Rule G-40(e).
\80\ Notice, 88 FR at 9584-85.
\81\ Notice, 88 FR at 9585.
\82\ Id.
\83\ Id.
---------------------------------------------------------------------------
The MSRB argued that specifying these recordkeeping requirements
would provide more certainty for municipal advisors with respect to
their recordkeeping obligations.\84\ In addition, the MSRB stated that
with the application of existing MSRB Rule G-9, which requires that
municipal advisors generally preserve the books and records described
in G-8(h) for a period of not less than five years, the proposed
amendments to Rule G-8(h) would provide examining authorities
beneficial information to assist in evaluating a municipal advisor's
compliance with Rule G-40.\85\ In addition, the MSRB wrote that the
proposed amendment to Rule G-8 would align with SEC recordkeeping
requirements, which require a municipal advisor to make and keep true,
accurate, and current certain books and records relating to its
municipal advisory activities, including originals or copies of all
written communications sent, by such municipal advisor (including
inter-office memoranda and communications) relating to municipal
advisory activities, regardless of the format of such
communications.\86\
---------------------------------------------------------------------------
\84\ Id.
\85\ Id. Municipal advisors are also subject to the
recordkeeping requirements described in Exchange Act Rule 15Ba1-
8(a)(1)-(8).
\86\ Notice, 88 FR at 9585; see also 17 CFR 240.15Ba1-8. Rule G-
8 requires that municipal advisors make and keep current all books
and records described in Exchange Act Rule 15Ba-18(a)(1)-(8).
---------------------------------------------------------------------------
III. Description of Amendment No. 1
As described further below, the MSRB filed Amendment No. 1 to
respond to comments on the original proposed rule change, relating to:
(1) the definition of ``testimonial;'' (2) non-client testimonials; (3)
solicitor municipal advisors; (4) social media guidance; and (5) other
clarifications to rule text and design.\87\
---------------------------------------------------------------------------
\87\ Notice of Amendment No. 1, 88 FR at 21729. The MSRB stated
that Amendment No. 1 does not alter or impact the analysis in the
original proposed rule change's burden on competition or the
statutory basis sections. Id.
---------------------------------------------------------------------------
A. Definition of Testimonial
The MSRB noted that a commenter suggested that the term
``testimonial'' be defined within the rule language itself.\88\ The
MSRB responded, stating it would provide a definition of a
``testimonial'' in Rule G-40 to avoid confusion with the term
``testimonial'' as used in Rule 206-4(1) \89\ under the Advisers
Act.\90\ Specifically, the MSRB defined ``testimonial'' in the amended
Rule G-40(a)(iv)(G)(1) as ``a statement of a person's or entity's
experience concerning the municipal advisor or concerning the municipal
advisory services rendered by the municipal advisor.'' \91\
Furthermore, the MSRB also removed language from the original proposed
rule change referring to the ``advice, analysis, report, or other
services rendered by the municipal advisor.'' \92\ The MSRB concluded
that replacing this language with ``municipal advisory services'' in
the definition of ``testimonial'' (and elsewhere in the original
proposed rule change's rule text) provided greater clarity.\93\ The
MSRB also made conforming numbering changes to the original proposed
rule change's Rule G-40 revisions to accommodate the addition of the
definition of ``testimonial'' to amended Rule G-40(a)(iv)(G)(1).\94\
---------------------------------------------------------------------------
\88\ Id.
\89\ 17 CFR 275.206(4)-1(b)(1).
\90\ Notice of Amendment No. 1, 88 FR at 21729.
\91\ Id.
\92\ Id.
\93\ Id.
\94\ Id. The MSRB also added a cross-reference to the new
definition of ``testimonial'' in the original proposed rule change's
Rule G-8. Notice of Amendment No. 1, 88 FR at 21729 n.16.
---------------------------------------------------------------------------
The MSRB stated that the revised rule text in amended Rule G-
40(a)(iv)(G)(2) provides that, if a municipal advisor's advertisement
meets certain conditions, then a municipal advisor may, directly or
indirectly, publish, circulate or distribute an advertisement which
refers, directly or indirectly, to a testimonial.\95\ The MSRB wrote
that this definition addresses a comment requesting that Rule G-40
include a definition of the term ``testimonial,'' but also a comment's
suggestion that the rule ``include affirmative language that
[[Page 31567]]
testimonials may be used if certain requirements are met.'' \96\ The
MSRB also deleted a redundant phrase later in this subsection;
specifically, amended Rule G-40(a)(iv)(G)(2)(b)(iv)(``the paid
testimonial must include'').\97\
---------------------------------------------------------------------------
\95\ Notice of Amendment No. 1, 88 FR at 21729.
\96\ Id.
\97\ Id.
---------------------------------------------------------------------------
B. Non-Client Testimonials
The MSRB noted that both commenters suggested that it would promote
further harmonization with Rule G-21, on advertising by brokers,
dealers, and municipal securities dealers, if municipal advisors were
able to use testimonials by third parties.\98\ The MSRB stated that it
would amend the original proposed rule change to permit municipal
advisors to use testimonials from a third party, whether a person or
entity, subject to the conditions set forth in proposed Amendment No.
1.\99\ The MSRB reasoned that, for example, analogous to Rule 206-4(1)
\100\ under the Advisers Act,\101\ an advertisement of a municipal
advisor that includes a testimonial would need to include a disclosure
indicating whether the testimonial is from a current client or from
someone who is not a current client.\102\ The MSRB wrote that it agreed
with the Commission's belief that this type of disclosure would provide
important context for weighing the relevance of the testimonial.\103\
---------------------------------------------------------------------------
\98\ Id.; see also NAMA Letter I and SIFMA Letter.
\99\ Notice of Amendment No. 1, 88 FR at 21729.
\100\ 17 CFR 275.206(4)-1(b)(1).
\101\ 15 U.S.C. 80b-1-80b-2.
\102\ Notice of Amendment No. 1, 88 FR at 21729.
\103\ Notice of Amendment No. 1, 88 FR at 21729; see also SEC
2020 Adopting Release, 86 FR at 13048.
---------------------------------------------------------------------------
C. Solicitor Municipal Advisors
The MSRB stated that both commenters found the proposal to
establish a different standard for the use of testimonials by solicitor
municipal advisors confusing.\104\ In response, the MSRB revised the
original proposed rule change to create uniformity in the criteria for
the use of testimonials by all municipal advisors.\105\ Specifically,
the MSRB removed proposed language that would have permitted, subject
to certain conditions, a solicitor municipal advisor to pay more than
$1000 in total value in cash or non-cash compensation during the
preceding 12 months for a testimonial.\106\ Additionally, the MSRB
eliminated the proposed language in the original proposed rule change
in Rules G-40 and G-8 concerning additional records to be maintained by
a solicitor municipal advisor related to such payments.\107\ The MSRB
concluded that these revisions in Amendment No. 1 would prohibit any
municipal advisor from providing any compensation to a person or
entity, directly or indirectly, of more than $1000 in total value in
cash or non-cash compensation during the preceding 12 months.\108\
---------------------------------------------------------------------------
\104\ Notice of Amendment No. 1, 88 FR at 21729-30; see also
NAMA Letter I and SIFMA Letter.
\105\ Notice of Amendment No. 1, 88 FR at 21730.
\106\ Id.
\107\ Id.
\108\ Id. Correspondingly, the MSRB added the phrase ``directly
or indirectly'' to the original proposed rule change's Rule G-8.
Notice of Amendment No. 1, 88 FR at 27130 n.30.
---------------------------------------------------------------------------
D. Social Media Guidance
The MSRB wrote that both commenters suggested that the MSRB's
``FAQs regarding the Use of Social Media under Rule G-21, on
Advertising by Brokers, Dealers or Municipal Securities Dealers, and
Rule G-40, on Advertising by Municipal Advisors'' (``social media
guidance'') \109\ be updated to reflect the proposed amendments to Rule
G-40.\110\
---------------------------------------------------------------------------
\109\ These frequently asked questions (``FAQs'') were filed
with the Commission for immediate effectiveness. See Securities
Exchange Act Release No. 85222 (Feb. 28, 2019), 84 FR 8132 (Mar. 6,
2019). These FAQs can be found on the MSRB's website at <a href="https://www.msrb.org/FAQs-regarding-Use-Social-Media-under-MSRB-Rule-G-21-Advertising-Brokers-Dealers-or-Municipal-0">https://www.msrb.org/FAQs-regarding-Use-Social-Media-under-MSRB-Rule-G-21-Advertising-Brokers-Dealers-or-Municipal-0</a> (Aug. 23, 2019).
\110\ Notice of Amendment No. 1, 88 FR at 21730; see also NAMA
Letter I and SIFMA Letter.
---------------------------------------------------------------------------
The MSRB responded by proposing to amend its social media guidance
to reflect the proposed amendments to Rule G-40 (inter alia, allowing
the use of testimonials in municipal advisor advertisements, subject to
certain conditions).\111\ The MSRB explained that the current social
media guidance notes that, by paying for or soliciting positive
comments from a third party: (i) a municipal advisor would be deemed to
be entangled with those comments, and (ii) the posting of those third-
party comments on the municipal advisor's social media page would be
deemed to be an advertisement by the municipal advisor that contains a
testimonial.\112\ The MSRB stated that such revisions to the social
media guidance would make clear that the advertisement containing a
testimonial would be permissible so long as the advertisement meets the
requirements of Rule G-40 (including having the requisite
disclosures).\113\
---------------------------------------------------------------------------
\111\ Notice of Amendment No. 1, 88 FR at 21730.
\112\ Id.
\113\ Id.
---------------------------------------------------------------------------
In addition, the MSRB noted that the revised social media guidance
would make clear that if a municipal advisor did not pay, directly or
indirectly, for a testimonial, but liked, shared, or commented on a
post from a third-party, the municipal advisor would be deemed to have
adopted those comments and the posting of those third party comments on
the municipal advisor's social media page would be deemed an
advertisement that contains a testimonial.\114\ The MSRB concluded that
the advertisement containing a testimonial would be permissible so long
as the advertisement meets the requirements of Rule G-40 (including
having the requisite disclosures).\115\ The MSRB also revised the
social media guidance's footnotes with updated citations and conforming
numbering changes.\116\
---------------------------------------------------------------------------
\114\ Id.
\115\ Id.
\116\ Id.
---------------------------------------------------------------------------
E. Other Modifications to Rule Text
As discussed further below, the MSRB also proposed other textual
changes in Amendment No. 1 to provide additional clarity and facilitate
compliance.\117\
---------------------------------------------------------------------------
\117\ Id.
---------------------------------------------------------------------------
1. Language in Rule G-40 Regarding Use of a Testimonial
The MSRB stated that it revised the original proposed rule change
to clarify that a municipal advisor may only use a testimonial if the
person or entity providing the testimonial has the knowledge and
experience to make a statement concerning their experience with the
municipal advisor or with the municipal advisory services rendered by
the municipal advisor.\118\
---------------------------------------------------------------------------
\118\ Id.
---------------------------------------------------------------------------
2. Supplementary Material .03 to Rule G-40
The MSRB added Supplementary Material .03 to Rule G-40 to the
original proposed rule change, stating that this revision would clarify
that, in order for a requisite disclosure in an advertisement to be
clear and prominent (including that a testimonial is a paid
testimonial), the disclosure must be at least as prominent in the
advertisement as the testimonial.\119\ The MSRB also explained that
this revision indicates that disclosures should appear close to the
associated testimonial statement with the same prominence so that the
statement and disclosures are read at the same time, rather than
referring the reader to somewhere else in the advertisement to view the
disclosures.\120\
---------------------------------------------------------------------------
\119\ Id.
\120\ Id.
---------------------------------------------------------------------------
[[Page 31568]]
IV. Summary of Comments Received to the Original Proposed Change and
Amendment No. 1 and MSRB's Responses
A. Comments Received in Response to the Original Proposed Rule Change
The Commission received two comment letters \121\ on the original
proposed rule change, as well as response from the MSRB to the comment
letters.\122\
---------------------------------------------------------------------------
\121\ See NAMA Letter I and SIFMA Letter.
\122\ See MSRB Letter I.
---------------------------------------------------------------------------
1. Definition of Testimonial
One commenter suggested that the term ``testimonial'' be defined
within the rule language itself. The commenter wrote that, ``While
within a footnote in the Filing, endorsements are noted as being within
the meaning of testimonial,'' the MSRB does not fully explain what it
``means by an endorsement in this context, which under the Investment
Adviser Rule would consist of statements from persons other than a
current client (but are not limited to past clients), or if/how it
applies to municipal advisors.'' \123\ In response, the MSRB stated
that it proposed, in Amendment No. 1, to specifically define the term
``testimonial'' for purposes of Rule G-40 to mean a statement of a
person's or entity's experience concerning the municipal advisor or
concerning the municipal advisory services rendered by the municipal
advisor.\124\ In addition, the MSRB noted that the proposed rule text
would specifically provide that if a municipal advisor's advertisement
meets certain conditions, then a municipal advisor may, directly or
indirectly, publish, circulate or distribute an advertisement which
refers, directly or indirectly, to a testimonial.\125\
---------------------------------------------------------------------------
\123\ NAMA Letter I at 1.
\124\ MSRB Letter I at 2.
\125\ Id.
---------------------------------------------------------------------------
The MSRB responded that this not only addresses the comment
requesting that Rule G-40 include a definition of the term
``testimonial,'' but also the commenter's suggestion that the rule
``include affirmative language that testimonials may be used if certain
requirements are met.'' \126\
---------------------------------------------------------------------------
\126\ NAMA Letter I at 4; see also MSRB Letter I at 2.
---------------------------------------------------------------------------
2. Non-Client Testimonials
Both commenters suggested that the proposal would promote further
harmonization with Rule G-21, on advertising by brokers, dealers or
municipal securities dealers, if municipal advisors were able to use
testimonials by third parties. Specifically, one commenter stated that
non-client testimonials/endorsements should be specifically allowed and
the rule should also discuss the requirements and parameters for
testimonials/endorsements from other parties \127\ and another
discussed that municipal advisor testimonials by third parties should
be permitted, in order to harmonize Rule G-40 with the Advisers Act as
well as Rule G-21 covering brokers, dealers, and municipal securities
dealers.\128\
---------------------------------------------------------------------------
\127\ NAMA Letter I at 2.
\128\ SIFMA Letter at 1.
---------------------------------------------------------------------------
The MSRB responded that it was amending the original proposed rule
change to permit municipal advisors to use testimonials from any third
party, whether a person or entity, subject to the conditions set forth
in Amendment No. 1.\129\ The MSRB explained, for example, that similar
to IA Rule 206-4(1)9, an advertisement of a municipal advisor that
includes a testimonial would need to include a disclosure indicating
whether the testimonial is from a current client or from someone that
is not a current client.\130\ The MSRB added that it agreed with the
Commission's belief that this type of disclosure (in the context of
testimonials pertaining to investment advisers) would provide important
context for weighing the relevance of the testimonial.\131\
---------------------------------------------------------------------------
\129\ MSRB Letter I at 3.
\130\ Id.
\131\ Id.
---------------------------------------------------------------------------
3. Solicitor Municipal Advisors
Both commenters found the original proposed change to establish a
different standard for the use of testimonials by solicitor municipal
advisors to be confusing. Specifically, one commenter noted ``[i]t is
important for the Rule to be very clear on the requirements of
municipal advisors (the vast majority of MAs) and solicitor municipal
advisors, and separate the requirements for each'' \132\ and another
noted ``MSRB Rule G-40 will be unnecessarily complicated by including
solicitor municipal advisors.'' \133\
---------------------------------------------------------------------------
\132\ NAMA Letter I at 3.
\133\ SIFMA Letter at 1.
---------------------------------------------------------------------------
In response to these comments, the MSRB stated that Amendment No. 1
harmonized the criteria for the use of testimonials by all municipal
advisors, no longer making a distinction between the use of
testimonials by solicitor municipal advisors and non-solicitor
municipal advisors.\134\ As part of Amendment No. 1, the MSRB removed
originally proposed language that would have permitted, subject to
certain conditions, a solicitor municipal advisor to pay more than
$1000 in total value in cash or non-cash compensation during the
preceding 12 months for a testimonial. As a result, the MSRB noted that
the proposed rule change would prohibit any municipal advisor from
providing any compensation to a person or entity, directly or
indirectly, of more than $1000 in total value in cash or non-cash
compensation during the preceding 12-months.\135\
---------------------------------------------------------------------------
\134\ MSRB Letter I at 3.
\135\ MSRB Letter I at 3-4.
---------------------------------------------------------------------------
4. Other Clarifications to Rule Text and Design
One commenter also suggested additional clarifications to the
proposed text and design of Rule G-40, suggesting that such changes
would be helpful to facilitate compliance, especially for small
municipal advisor firms.\136\ For example, the commenter stated that
the phrase ``concerning the advice, analysis, report or other service
rendered by the municipal advisor. . .'' is too broad and could be
problematic.\137\ The MSRB responded that, to provide additional
clarity and facilitate compliance, the MSRB had Amendment No. 1 remove
that phrase and replace it with ``concerning the municipal advisor or
concerning the municipal advisory services rendered by the municipal
advisor.'' \138\ Additionally, the commenter wrote that the language
that a person providing a testimonial must have the knowledge and
experience to form a valid opinion is too absolute and does not exist
in the investment adviser rulemaking.\139\ In response, the MSRB
explained that while this standard may not exist in the Investment
Adviser Marketing Rule, it does exist, to some degree, in Rule G-
21.\140\
---------------------------------------------------------------------------
\136\ See NAMA Letter I.
\137\ NAMA Letter I at 2.
\138\ MSRB Letter I at 4.
\139\ NAMA Letter I at 3.
\140\ MSRB Letter I at 4.
---------------------------------------------------------------------------
The MSRB further noted that it could be misleading if a municipal
advisor's advertisement included a testimonial from a person or entity
that has no knowledge or experience to make a statement as to their
experience with the municipal advisor or the municipal advisory
services rendered by the municipal advisor.\141\ To address the concern
that the text of the rule could be interpreted as overly broad, the
MSRB indicated that it proposed Amendment No. 1 to clarify that a
municipal advisor may only use a testimonial if the person or entity
providing the testimonial has the
[[Page 31569]]
knowledge and experience to make a statement concerning their
experience with the municipal advisor or with the municipal advisory
services rendered by the municipal advisor.\142\
---------------------------------------------------------------------------
\141\ Id.
\142\ Id.
---------------------------------------------------------------------------
One commenter also noted that the disclosure required for a paid
testimonial should be in the same size font and location as the
testimonial and not placed in a footnote.\143\ The MSRB responded that,
in Amendment No. 1, Supplementary Material .03 to Rule G-40 would adopt
a standard consistent with the views expressed by the SEC in adopting
the Investment Adviser Marketing Rule.\144\ Specifically, according to
the MSRB, Amendment No. 1 clarified that, for a requisite disclosure in
an advertisement to be clear and prominent (including a disclosure that
a testimonial is a paid testimonial), the disclosure must be at least
as prominent in the advertisement as the testimonial.\145\ The MSRB
added that disclosures should appear close to the associated
testimonial statement with the same prominence so that the statement
and disclosures are read at the same time, rather than referring the
reader to somewhere else in the advertisement to view the
disclosures.\146\
---------------------------------------------------------------------------
\143\ NAMA Letter I at 3.
\144\ MSRB Letter I at 4; see also SEC 2020 Adopting Release, 86
FR at 13048.
\145\ MSRB Letter I at 4-5.
\146\ Id. at 5.
---------------------------------------------------------------------------
5. Social Media Guidance
Both commenters suggested that the MSRB's ``FAQs regarding the Use
of Social Media under MSRB Rule G-21, on Advertising by Brokers,
Dealers or Municipal Securities Dealers, and MSRB Rule G-40, on
Advertising by Municipal Advisors'' (``social media guidance'') be
updated to reflect the proposed amendments to Rule G-40.\147\
---------------------------------------------------------------------------
\147\ See NAMA Letter I and SIFMA Letter.
---------------------------------------------------------------------------
The MSRB wrote that, in response to commenters, it drafted
Amendment No. 1 to revise its social media guidance so that such
guidance, as amended, incorporates the proposed amendments to Rule G-
40, which would allow municipal advisors to use testimonials, subject
to certain conditions, in their advertisements.\148\ The MSRB explained
that its current social media guidance notes that by paying for or
soliciting positive comments from a third party, a municipal advisor
would be deemed to be entangled with those comments, and the posting of
those third-party comments on the municipal advisor's social media page
would be deemed to be an advertisement by the municipal advisor that
contains a testimonial.\149\ The MSRB argued that the updated guidance
would make clear that the advertisement containing a testimonial would
be permissible so long as the advertisement meets the requirements of
Rule G-40, including having the requisite disclosures.\150\ The MSRB
also noted that, in further response to comments, the updated guidance
would make clear that if a municipal advisor did not pay, directly or
indirectly, for a testimonial, but liked, shared, or commented on a
post from a third party, the municipal advisor would be deemed to have
adopted those comments and the posting of those third-party comments on
the municipal advisor's social media page would be deemed an
advertisement that contains a testimonial.\151\ The MSRB explained
that, similarly, the advertisement containing a testimonial would be
permissible so long as the advertisement meets the requirements of Rule
G-40, including having the requisite disclosures.\152\
---------------------------------------------------------------------------
\148\ MSRB Letter I at 5.
\149\ Id.
\150\ Id.
\151\ Id.
\152\ Id.
---------------------------------------------------------------------------
One commenter also requested additional amendments to the social
media guidance, and noted that technology and social media have changed
dramatically over the past few years, and SIFMA members feel it would
be helpful for the MSRB to review the FAQs in light of these changes
and the proposed amendments to MSRB Rule G-40.\153\ The MSRB responded
that in initially developing its social media guidance, the MSRB's goal
was to align the FAQs with the social media guidance published by the
SEC and FINRA, and not to create unnecessary inconsistencies between
its guidance and similar guidance issued by other regulators that may
be applicable to other aspects of the regulated entity's business.\154\
The MSRB also replied that it believes that its social media guidance
remains appropriately aligned with other regulators, and therefore,
other than amendments to reflect proposed amendments to Rule G-40, the
MSRB is not otherwise making substantive changes to its social media
guidance.\155\
---------------------------------------------------------------------------
\153\ SIFMA Letter at 2.
\154\ MSRB Letter I at 6.
\155\ Id.
---------------------------------------------------------------------------
The MSRB also noted that in establishing Rule G-40, it developed
compliance resources to help facilitate compliance \156\ and will
undertake a review of these compliance resources to ensure that they
undergo an update to reflect any amendments to Rule G-40.\157\ In doing
so, the MSRB stated that it expects to engage with stakeholders in some
capacity (e.g., via discussions with the MSRB's Compliance Advisory
Group and/or discussions with key stakeholders) to help ensure that the
resources meet the needs of municipal advisors.\158\
---------------------------------------------------------------------------
\156\ Application of the Content Standards to Advertisements by
Municipal Advisors under MSRB Rule G-40 [effective Aug. 23, 2019],
FAQs on Use of Municipal Advisory Client Lists and Case Studies
[effective Aug. 23, 2019], Assessing Supervision of Municipal
Advisor Advertising Regulations. MSRB Letter I at 6.
\157\ Id.
\158\ Id.
---------------------------------------------------------------------------
B. Comment Received in Response to Amendment No. 1
The Commission received one comment letter on Amendment No. 1,\159\
as well as response from the MSRB to this comment letter.\160\ The
commenter expressed support for Amendment No. 1, noting appreciation
for the MSRB's work in addressing concerns initially raised in response
to the original proposed rule change.\161\ The commenter also requested
that ``the SEC approve the filing at its earliest convenience.'' \162\
Additionally, the commenter encouraged the MSRB to work with market
participants and look for ways to provide streamlined guidance that can
be easily and readily utilized by municipal advisors.\163\ The MSRB
responded to the comment that it appreciated the continued
participation of commenters in the rulemaking process, and reiterated
its commitment in its earlier response letter that the MSRB will
continue to engage with stakeholders to support the implementation of
the amendments to help municipal advisors understand the applicable
obligations and facilitate compliance.\164\
---------------------------------------------------------------------------
\159\ See NAMA Letter II.
\160\ See MSRB Letter II.
\161\ See NAMA Letter II.
\162\ Id. at 2.
\163\ Id.
\164\ MSRB Letter II at 2.
---------------------------------------------------------------------------
V. Discussion of Commission's Findings
The Commission has carefully considered the proposed rule change,
the comment letters received, and the MSRB's responses thereto. The
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the MSRB.
In particular, the Commission believes that the proposed rule
change is consistent with the provisions of section 15B(b)(2)(C), which
provides, in
[[Page 31570]]
part, that the MSRB's rules shall be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in municipal
securities and municipal financial products, to remove impediments to
and perfect the mechanism of a free and open market in municipal
securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the
public interest.\165\ The Commission finds that the proposed rule
change will: (i) prevent fraudulent and manipulative acts and
practices; (ii) protect investors, municipal entities, obligated
persons, and the public interest; (iii) promote just and equitable
principles of trade; and (iv) foster cooperation and coordination with
persons engaged in regulating transactions in municipal securities.
---------------------------------------------------------------------------
\165\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
A. Prevent Fraudulent and Manipulative Acts and Practices
The Commission finds that the proposed rule change would help
prevent fraudulent and manipulative acts and practices. The proposed
rule change does not alter the standards that advertisements be based
on the principles of fair dealing and good faith, be fair and balanced,
and provide a sound basis for evaluating the facts and that the
advertisements do not include any false, exaggerated, unwarranted,
promissory or misleading statement or claim. As a result, permitting
municipal advisors to use only testimonials that are consistent with
these standards would help ensure that Rule G-40 continues to prevent
fraudulent and manipulatives acts and practices. The Commission further
believes that the proposed amendment to Rule G-8 (with the related
application of existing MSRB Rule G-9 on records preservation) would
help municipal advisors create an audit trail for compliance and, in
turn, would assist examination and enforcement authorities in their
examination for compliance with Rule G-40, which would further help
prevent fraudulent and manipulative acts and practices.
B. Protect Investors, Municipal Entities, Obligated Persons, and the
Public Interest
The Commission finds that the proposed Rule G-40 also would protect
municipal entities, obligated persons and the public interest. It would
do so by ensuring that recipients of any advertisement containing a
testimonial have the necessary context to evaluate the testimonial
because the proposed rule change would only permit the use of
testimonials if certain conditions are met, including that specified
disclosures are made. Municipal entities and obligated persons are the
likely audience for municipal advisors' testimonials. As such, the
requisite disclosures would help ensure that the proposed rule change
would further the protection of municipal entities, obligated persons,
and the public interest.
The Commission further notes that the amendments to Rule G-40 are
intended to align Rule G-40's provision governing the use of
testimonials by municipal advisors to the analogous requirements under
the SEC's Modernized IA Marketing Rule, by prohibiting the use of
testimonials in an advertisement unless a municipal advisor complies
with disclosure and oversight provisions. Therefore, the Commission
finds that the proposed rule change's associated requirements for
testimonials (like the Modernized IA Marketing Rule) are meant to
protect potential clients from misleading advertisements. In this way,
the Commission finds that the proposed amendments to Rule G-40 would
enhance protections for potential recipients of municipal advisor
testimonials, including issuers, obligated persons, and other market
participants.
C. Promote Just and Equitable Principles of Trade
The Commission also believes that the proposed rule change would
promote just and equitable principles of trade by aligning the
advertising rule for municipal advisors, to the extent practicable,
with the advertising rules for dealers and for investment advisers.
This alignment serves to provide regulatory consistency for entities
that may be dually registered (e.g., as a municipal advisor and an
investment adviser). By establishing a consistent regulatory standard
for advertising across dealers, investment advisors, and municipal
advisors, the Commission finds that the proposed rule change promotes
more just and equitable principles of trade among these different
market participants.
D. Foster Cooperation and Coordination With Persons Engaged in
Regulating Transactions in Municipal Securities
Furthermore, the Commission believes the proposed rule change would
foster coordination with persons engaged in regulating transactions in
municipal securities. The amendments to Rule G-40 would more tightly
align the content standards for Rule G-40 with the content standards of
the SEC's Modernized IA Marketing Rule.\166\ The proposed change
thereby provides a more uniform standard for regulated entities subject
to a fiduciary standard (i.e., investment advisors and municipal
advisors). This uniformity allows the examining authorities to
coordinate examinations of municipal advisors and municipal advisors
dually registered as investment advisors more effectively. Moreover,
the proposed rule change will allow examiners to compare content
standard practices across all municipal advisors (regardless of dually
register status) more clearly. As such, the Commission finds that the
proposed rule change serves to foster greater cooperation and
coordination among the examining authorities responsible for ensuring
compliance with MSRB rules.
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\166\ Notice, 88 FR at 9585-86.
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Section 15B(b)(2)(C) of the Act \167\ requires that MSRB rules not
be designed to impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. In approving the
proposed rule change, the Commission has considered the proposed rule
change's impact on efficiency, competition, and capital formation.\168\
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\167\ 15 U.S.C. 78o-4(b)(2)(C).
\168\ 15 U.S.C. 78c(f).
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The Commission does not believe the proposed rule change to amend
Rule G-40 and Rule G-8 would impose any new burden on competition or
have an impact on competition, as the proposed rule change would apply
a similar regulatory regime to all municipal advisors. Further, the
Commission believes that the proposed changes to Rules G-40 and G-8
would promote regulatory consistency and would benefit municipal
advisors by removing the prohibition that an advertisement does not
refer, directly or indirectly, to any testimonial of any kind
concerning the municipal advisors. By aligning MSRB rules with the
SEC's Modernized IA Marketing Rule, as well as Rule G-21, the proposed
amendments to Rules G-40 and G-8 would also improve efficiency by
providing regulatory consistency for regulated entities dually
registered as a dealer and as a municipal advisor, or as an investment
adviser registered with the SEC and as a municipal advisor.
The Commission also finds that the proposed rule change will not
hinder capital formation, as the proposed amendments to Rule G-40 and
Rule G-
[[Page 31571]]
8 would be applicable to all municipal advisors. As such, the
Commission finds that the proposed rule change would help ensure that
all regulated entities dually registered (as a dealer and as a
municipal advisor, or as an investment adviser with the SEC and as a
municipal advisor), are subject to consistent standards on the use of
testimonials in advertisements. The Commission finds that the proposed
amendments to Rules G-40 and G-8 would therefore promote efficiency in
the marketplace. Therefore, the Commission concludes that the
amendments to Rule G-40 and Rule G-8 would not negatively affect
competition and capital formation.
VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\169\ that the proposed rule change (SR-MSRB-2023-01) be,
and hereby is, approved.
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\169\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Office of Municipal Securities,
pursuant to delegated authority.\170\
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\170\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-10468 Filed 5-16-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 17, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.