Municipal Securities Rulemaking Board Rules Apply to Build America Bonds: Broker-Dealers Should Review Compliance Procedures

28 April 2009 Publication
Authors: Reed Groethe Heidi H. Jeffery

Legal News Alert: Financial Crisis Response Team

On April 24, 2009, the Municipal Securities Rulemaking Board (MSRB) published its Notice 2009-15 (Notice) clarifying for broker-dealers (dealers) that all MSRB rules apply to transactions handled by dealers in Build America Bonds (BABs).

The Notice should prompt each dealer to re-examine its practices and procedures to determine whether those practices and procedures are accurate and appropriate in light of participation in BABs transactions. In particular, a dealer should consider carefully its practices and procedures regarding professional qualifications of registered representatives and principals, supervision of municipal securities activities, political contributions, gifts, delivery responsibilities, uniform and fair practice, automated clearance and settlement, and the payment of MSRB underwriting and transaction assessment fees.

Professional qualifications. The MSRB understands that many BABs may be sold by dealers’ taxable desks and reminds dealers of the professional qualification requirements of registered representatives and principals.

Supervision. The MSRB further reminds dealers that Rule G-27 requires that a municipal securities principal must supervise all municipal securities activities, including sales made by a dealer’s taxable desk.

Political contributions. Rule G-37 prohibits a dealer from engaging in municipal securities business with an issuer within two years after any contribution to an elected official of such issuer (and including any candidate for elective office of the issuer) made by the dealer, any dealer-controlled political action committee (PAC), or any municipal finance professional (MFP) associated with the dealer. In light of participation by personnel on its taxable desk, a dealer should review written supervisory procedures to make sure that such procedures are broad enough to ensure that neither the dealer nor any of its MFPs (again, taking into consideration the activities of personnel on a taxable desk) is using a payment to a political party (and including a nondealer-controlled PAC) to contribute indirectly to an issuer official. A dealer also should review the political contributions made by these “new” MFPs, to the extent the dealer does not already restrict the political contributions made by those individuals now participating or expected to participate in BABs transactions.

Gifts. A dealer should consider carefully expenses that may benefit issuer personnel and that exceed the limits set forth in MSRB Rule G-20 (generally $100), especially those payments that cover expenses incurred by family or other guests of issuer personnel.

Delivery responsibilities. A dealer also has official statement delivery responsibilities to customers under Rule G-32. Once final, recently proposed revisions to Rule G-32 will require an underwriter to satisfy its official statement submission obligations electronically through use of the MSRB’s Electronic Municipal Market Access (EMMA) system and will allow a dealer to satisfy its official statement delivery obligation by means of appropriate notice to customers.

The Notice further clarifies that the following additional types of tax-credit bonds are municipal securities subject to MSRB rules: Recovery Zone Economic Development Bonds, Qualified School Construction Bonds, Clean Renewable Energy Bonds, New Clean Renewable Energy Bonds, Midwestern Tax Credit Bonds, Energy Conservation Bonds, and Qualified Zone Academy Bonds.

The Notice does not address the securities law characterization of the tax credit component of BABs or other tax credit bonds, whether the tax credits are used by investors in the bonds or stripped and sold to other investors.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Heidi H. Jeffery
Chicago, Illinois

Reed Groethe
Milwaukee, Wisconsin

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