Date of Event: October 23, 2014 Duration of Recording: 5 hrs. 2 min.

Transcript: Compliance Outreach Program for Municipal Advisors

Speakers: Drew Bowden, Director, OCIE; Ed Wegener, Midwest 

Regional Director, FINRA; Lawrence Sandor, Deputy General 

Counsel, Regulatory Support, MSRB; Michael Post, Deputy General 

Counsel, MSRB; John Cross, Director, Office of Municipal Securities; 

Jessica Cain, Deputy Director, Office of Municipal Securities;

Benjamin Tecmire, Counsel, MSRB

This transcript has not been edited for content.

Drew Bowden: Everybody's so attentive. Ma'am? Okay. I'm getting the high sign to start 

up here for those of you tucked behind the podium. And welcome, everybody, the first 

Municipal Advisor Compliance Outreach Program. This is a collaborative event that's 

sponsored by the Municipal Securities Rulemaking Board, FINRA, and the SEC. Joining me 

up here today are Larry Sandor from the MSRB and Ed Wegener from FINRA, and I'm Drew 

Bowden. I'm the Director of the Office of Compliance, Inspections, and Examinations at the 

SEC.

For starters, I'd like to thank our hosts at the Federal Reserve Bank of Chicago for allowing 

us to use this fantastic space, as well as, I think, on behalf of Larry and Ed and myself, 

thanking our teams who have gone to such great lengths and effort to put this event 

together today.

I'm going to take a couple minutes just to maybe introduce O.C. and the SEC to you, and 

give a high-level overview of the ground that will be covered today, and then I'm going to 

turn it over to Ed to sort of give you the FINRA perspective. Before I do that, as, if you are 

familiar with the SEC, you'll know, and if you're not, you'll become accustomed to the fact 

that one of the first things we always have to do is give our standard SEC disclaimer, which 

I'm doing today on behalf of myself and all of my other colleagues who you'll hear from. 

And that is that the SEC disclaims responsibility for any statement or private publication 

made by any of its employees, including me, and so the views expressed here today are 

those of each speaker, and do not necessarily reflect the views of the commission, the 

commissioners, or any other member of the staff.

With that said, as I said, I'm pleased to be able to be here with you to introduce the 

Securities and Exchange Commission, and I had mentioned there's really two offices within 

the Securities and Exchange Division that you're going to hear from today. One are our 

colleagues in the Office of Municipal Securities, and the other are individuals from OCIE, or 

the Office of Compliance, Inspections, and Examinations. As I mentioned, I'm the Director 

of OCIE, and our mission is really fourfold. We exist to do exams to promote compliance, 

prevent fraud, identify risk, and inform policy. Our OCIE staff consists of about 900 

examiners who conduct exams from 12 offices around the country. Our home office is in 

Washington, D.C., and we have offices in pretty much every major city in the U.S. I won't 

go through them all, but obviously, including Chicago. Our office here is right across the 

street.

We conduct examinations of many different types of financial firms. Investment advisors, 

broker-dealers, mutual funds, stock exchanges, SROs, clearing agencies, transfer agents,
and of course, now pursuant to new rule making under Dodd-Frank, municipal advisors. In 

our exams in OCIE, we really go out into the field as the eyes and ears of the commission to 

conduct exams to see whether or not firms are operating in a manner consistent with the 

federal securities laws. I know many people who are registered as admissible advisors are 

also registered as broker-dealers, and may have been examined or I aced [spelled 

phonetically] and they may have some familiarity. I think there's some percentage of the 

people in the room who probably have not yet been examined, whether it's by FINRA, or by 

the SEC. For us at the SEC, when we do an examination, in most instances, about 85 

percent of the time, we issue what we call a deficiency letter to the firm, and we ask them

to respond in writing and let us know what they're going to do to address the deficiencies 

that we've identified. In a smaller percentage of instances, usually a little over 10 percent

of the time, we will also make a referral to our colleagues at the SEC in the Division of

Enforcement.

But in addition to doing exams and working directly with registrants, I mentioned that the 

first pillar of our mission is to promote compliance. We like to say in OCIE that we 

recognize and understand as we go out into the world that most of the people we deal with 

are good people trying to do the right thing. They're trying to help their clients, they're 

trying to grow their business, they're trying to provide for their employees. But they're 

doing it in an environment that's competitive, complicated, and rapidly changing. So we 

don't play a game of gotcha on exams. We try to be as transparent as we can be about 

what we're doing, and in furtherance of our efforts to promote compliance, we do a whole

bunch of stuff. So we publish risk alerts, we publish letters like I hope most of you, if not all 

of you, in this room received a letter we sent out sort of introducing ourselves to the newly

registered municipal securities advisors, and letting you know what to expect in exams.

And we also do outreach events around the country, like this one. Our staff will appear at 

events like this to talk about our program, share the podium with other regulators, and 

make sure that really, there should be no surprises when our exam team shows up. Our 

team has put a lot of effort into today's outreach event, as I mentioned, because many of 

you may not have been examined, and we wanted to make sure you know what to expect. 

Our program is designed to reach as many of you as we possibly can, either here in person, 

or we're also being webcast today, so there are people tuned in from all around the country.

Some of the things we're going to cover today. First, we'll be discussing what new rules and 

regulations from the MSRB are in effect and require compliance, as well as new rule 

proposals by the MSRB that may -- or will require your compliance if and when they become 

effective. That panel's going to discuss new obligations specifically related to registration, 

fiduciary duty, standard of conduct, supervisory responsibilities, and books and records 

obligations. Another panel is going to talk specifically about what it means with the

fiduciary standard of care, another standard of conduct mean, and how they're relevant to 

your practices, and third, we'll cover what to expect during both an SEC and a FINRA exam.

I think on behalf of all of us up here, we would encourage everybody throughout the day to 

ask questions. This is intended to be an engagement with the industry. I know our team, I 

think, has pads, so if people have a question, they can raise their hand, and we'll collect 

those from you. As I said, on behalf of all of our colleagues at the commission, we really 

appreciate you talking the time to be here today. We hope it's a beneficial use of your time.

And with that, I'm going to turn the podium over to Ed Wegener. Ed is the vice president 

and Midwest Regional Director of FINRA. He's responsible for the regulatory programs in 

FINRA's Chicago and Kansas City district offices. Ed's been with FINRA since 1998, and 

before that, Ed was out in the industry. So Ed, turning to you.
Ed Wegener: Well, thanks, Drew, and I really appreciate it. I thought what I would do 

today is to talk about FINRA, its role generally, its role specific to what it is we do in the 

municipal security space, and also now, with the municipal advisors, and then let you know 

what you can expect from -- for those who are FINRA members, what you can expect from

a FINRA examination. But before I do, I really just want to say that we really do appreciate 

the opportunity to be here today, to engage in this dialogue with, you know, our coregulators in this space, and also to echo Drew's thanks to both our staff, and to the Fed for

allowing us to be here, and the work that they put into making today's event a success.

FINRA's role is a unique one. As a self-regulatory organization, we're responsible for 

regulating the securities activity of registered broker-dealer firms, and there are just over

4,000 registered FINRA members for whom we're responsible regulating, writing rules,

conducting examinations, enforcing those rules for our members. But this includes, also, 

specifically examining and enforcing the rules of the SEC and the MSRB when it comes to 

municipal securities activity of our member firms. And for those FINRA member firms that 

are also registered as municipal advisors, we have been designated with the responsibility 

to examine for, and to enforce the municipal advisor rules that we're going to be talking 

about today.

But importantly, one of the things that we're also going to be doing as we conduct 

examinations of our member firms, especially those member firms that aren't registered as 

municipal advisors, taking a look at the activity that they are conducting, and ensuring that, 

if they're conducting, the types of activities that would require them to be registered as 

municipal advisors, to make sure that they do so. So both of those things are going to be 

important factor things that we'll be conducting in our examination program as we go 

forward.

We have a risk-based examination program, and those of you who are FINRA members have 

probably heard quite a bit about our evolution from very rules-based examination program

to a much more risk-based program. And for those of you who aren't FINRA members,

what that really means is that the driver of what we do in our examination program is to 

understand and really get to identify and assess the risk at specific member firms, and then 

to use that risk assessment to drive not only the frequency of the examinations that we 

conduct, but also the scope of the things that we're going to review. So because our 

examination program is risk based, and we do this assessment on a firm by firm basis, the 

frequency with which we go out and conduct an exam may vary, as well as when we do go 

out and conduct an exam, the areas that we focus on will vary. But one of the key drivers 

for assessing what areas we review are new rules and important rules that have come out

to make sure that firms are ready to comply with those rules, and to make sure that, you 

know, going forward, firms are complying with those rules. So you can anticipate that as 

we conduct our examination program in 2015 and going forward that we will be focusing on

municipal advisory rules, and the activities of municipal advisors.

One of the things that we've been doing over the summer is to train our examination staff 

on the activities of municipal advisors so that they really understand from an industry 

perspective what role municipal advisors play, so that when they go out and conduct the 

exam, they can put the rules and the things that they're reviewing into context. And we've 

also been training them on the specific rules, the things that you're going to hear about 

today, so that when they come out and conduct examinations at your firm, they really have 

a good understanding of your firm, the activity that you're engaged in, as well as the rules 

that you're required to comply with.
In addition to that, we've spent a tremendous amount of time developing examination 

guidance and procedures that they'll use to help drive their examinations. We work really 

closely with both the SEC and with the MSRB, at really understanding the issues that we --

that drive our examination program, and as we develop our examination priorities for any 

given year. So it's a great effort that we have to work together to really make sure that 

we're being consistent in how we apply the rules, and how we examine for the rules. So I 

think that today's event is a great start to that. The opportunity that we have to come to 

talk to you together not only drives consistency, but it also gives us the opportunity to talk 

to you about what our expectations are of you as we regulate this space, and then for you 

to understand what you can expect when we come out and conduct an examination.

But I think that what's as important, if not more important, is for us to hear from you. So I 

was great to hear that this is going to be a dialogue, because it's important for us not only 

to hear your questions, to hear where your challenges are, but to get your feedback. And 

hopefully, this is just the beginning of a regular and ongoing dialogue that we can be part

of. But we really appreciate the opportunity to be here today to participate on the different 

panels that will be going on today, and also to be part of that ongoing dialogue. So, with

that, I'll turn it over to Larry.

Larry Sandor: Thank you, Ed. Good morning, and welcome on behalf of the MSRB. I 

would like to also extend our thanks to the Federal Reserve for this beautiful space, and our 

thanks to the SEC and to FINRA. I think this is an example of the very good coordination 

between the MSRB, FINRA, and the SEC. We have continued discussions about the 

regulation of municipal advisors, but this is a prime example of how we coordinate our

efforts.

I see a lot of familiar faces out there, and I did want to acknowledge Steve Apfelbacher, who 

I see is here today. He is a board member of the MSRB, and he's also a former member of 

our Professional Qualifications Advisory Committee. So welcome, Steve. Also, Bob Lamb, 

who is a former board member, is here today, and I'd like to acknowledge his service on the 

MSRB Board. My name is Larry Sandor. I'm the deputy general counsel of the MSRB. I'm

joined here today by two of my colleagues that you're going to hear in a moment, Mike Post

and Ben Tecmire, and I want to thank you for participating in this event and also encourage, 

as Ed did, to be active and ask questions.

As the regulatory environment continues to evolve, the MSRB recognizes the need to engage

the municipal advisor community in ongoing dialogue, and we're committed to providing 

education about each phase of the regulatory process, from the rule proposal to compliance

with final rules. Clarity in our rule making, and your understanding of the rules, is essential.

Those of you who are joining us in person should have received flash drives which are 

preloaded with some useful educational resources. We want to highlight there's a 

publication on participating in the rule making process, which provides information on the 

many ways in which municipal advisors can share their input on developing rules. You're 

also getting an advance preview of the MSRB's first podcast for municipal advisors. This 10 

minute audio recording provides a general overview of what it means to be regulated.

Those watching the live webcast can access these resources on the MSRB's website at

MSRB.org, in the “Resources for Municipal Advisors” area. The podcast, by the way, will be 

available online tomorrow.

We have a great program today, but before we begin, I want to address a topic that I know 

is of interest to all of you, which is the development of the professional qualifications exam.
First, let me thank you for your participation in our municipal advisor survey over the 

summer. We received more than 500 responses to our questions about municipal advisor 

business activities, and the survey has proven helpful in helping us refine the draft content 

outline for the municipal advisor representative qualification exam. Given the significant 

changes that accompany any new regulatory regime, the MSRB believes it important for all 

municipal advisor representatives, regardless of their years of experience or other 

certifications, to take the examination. In the near future, we will be filing amendments to 

our rule G3 with the SEC, which will establish two professional qualification classifications.

A municipal advisor representative classification, and a municipal advisor principal 

classification. Individuals at each of those classifications will be required to take it and pass

the

municipal advisor representative qualification examination under the proposal.

The MSRB's PQAC committee, or Professional Qualifications Advisory Committee, is in its last 

stages of developing their content outline for the examination. Once approved by our board

of directors, it will be filed with the SEC, and shortly thereafter in 2015, next year, the MSRB 

will release a pilot examination, which will help us establish the passing grade for the test. If

you're interested in volunteering to take the pilot exam, please email us at 

Pqmailbox@msrb.org. Again, that's Pqmailbox@msrb.org if you're interested in

volunteering to take the test.

Let me also, as Ed did, stress that we really do want your engagement, and I'm going to 

give you my direct email. Feel free to email me if you have any questions. It's Lsandor, LS-A-N-D-O-R, at MRSB.org. I look forward to your questions and comments throughout the 

day. Thank you.

[applause]

Michael Post: Good morning. I'm Michael Post, Deputy General Counsel at the MSRB, and 

while Larry primarily focuses on many things that are relevant to today, coordinating with 

FINRA and the SEC, supporting those organizations in their examination function and 

enforcement function, I primarily focus on the rule making at the MSRB.

I will be moderating this session, which is focusing on registration of municipal advisors with 

the SEC and MSRB, and I'm joined by John Cross, the Director of the Office of Municipal 

Securities at the SEC, and Jessica Kane, the Deputy Director of that office, and these two 

have -- who've been the leaders of the office during the period when the SEC was

developing its adopting release of its final definition of municipal advisor, and its final 

registration rules. They've been the leaders of the office during the development of FAQs

following the adoption of that final definition, and have overseen the implementation of the 

registration process at the SEC through the phased-in compliance period from July through, I 

guess, October 31st. So I'm not sure there's any more phasing in going on. But we will 

learn this morning.

By, a show of hands- - I'm interested--how many of you are with firms that are already 

registered with the SEC permanently? And the MSRB? And is anyone as of yet considering

whether they are a municipal advisor and will register with the SEC and MSRB? Because 

this is very helpful to kind of guide the discussion this morning, in addition to what we have 

prepared. We encourage your questions. Really, your questions will be the best means to 

guide what you hear today to ensure that it's relevant to you.

The SEC's municipal advisor definition is important not just for determining whether you 

register in the first instance, but it's critical to determining, even if you are a registered 

municipal advisor, to whom you are a municipal advisor, and whether the sort of follow on
obligations of a municipal advisor are triggered in your dealings with a particular recipient of 

potential advice, and the triggering of the MSRB rules that are in development -- that some 

have been approved by the SEC and will be in effect soon, and others that are in other 

stages of the rule making process, but in broad measure, you can anticipate going into

effect in the coming months and years.

So what I will do is largely turn over the floor to John and Jessica to give some background 

on the final registration rules. I expect that they'll go into some detail about some of the 

more prominent exemptions from the registration requirement, like the underwriter 

exemption, and the independent registered municipal advisor exemption, often known as, to 

John's chagrin, the IRMA exemption. And we'll take your questions, and at the end,

because of the kind of composition of the audience, I'll spend a little time mainly talking 

about the ongoing obligations under the MSRB's rules for municipal advisors in terms of

updating registration information, annually affirming it, and staying current with the 

required fees to support your self-regulatory organization, which has municipal advisor 

representatives on the board. So with that, I'll turn it over to you, John and Jessica. Give 

your remarks.

John Cross: Okay. Thank you very much, Mike. Let me just take a second to comment on 

my two colleagues, here. Mike Post is a superb lawyer at the MSRB. With him, we've been 

working very closely on the municipal advisory implementation rules, as well as other MSRB 

initiatives, and we really value the relationship with the MSRB, and their whole team, and 

our Office of Municipal Securities, which is a new office created at the SEC under DoddFrank act, has assumed primary responsibility for overseeing the MSRB rules, and for 

working on Municipal securities issues at the SEC. And to my left is our superb deputy 

director of our office, Jessica Kane, who has been an integral anchor to all the efforts on our 

final municipal advisor rules, and all the efforts on all the initiatives in municipal securities 

that we have ongoing.

I'd like to take a few minutes to just ease you all into, you know, municipal advisor 

compliance rules by giving you a little background on the statute, where it came from, and 

the final municipal advisor rules, and just to put all this in perspective, let me observe. You 

know, there are harder things that people have to do in the world than register as municipal 

advisors, and I was reminded of that last night upon hearing and seeing the guy who wasn't 

content to walk on a tightrope across a river from the top of buildings in Chicago without a 

net. He felt compelled to be blindfolded as well.

[laughter]

And so, you know, keep the challenges in perspective. With that, in 2008, concerns arose in 

the financial crisis about unregulated financial advisors to municipalities. At that time, the 

MSRB, in April, 2009, did a study on unregulated advisors. Issues included advisors who

are -- questions about qualifications, concerns about conflicts of interest, pay to play, and 

one particular item was issues on complex municipal derivatives in which municipalities 

often suffered significant losses on derivatives, where there were questions about the 

suitability, or whether or not they fully understood those derivatives. Example one,

Jefferson County, Alabama's bankruptcy. In response to this in the Dodd-Frank act, 

Congress added a very broad new requirement that municipal advisors register with the 

SEC, effective October 1, 2010. So temporary registration rules went into effect at that

time. The -- this provision aims fundamentally to enhance protections to municipal entities, 

and imposes a new fiduciary duty on municipal advisors to act in the best interests of their 

municipal entity clients. This provision also aims to enhance qualification, supervision, and 

oversight of these municipal advisors, and gives the MSRB a big role in those efforts.
In our humble little Office of Municipal Securities, we spent our first year of operations. 

We're working on the slim and trim 777 page final municipal advisor registration rules, 

which the commission adopted unanimously. On September 20, 2013, these final rules 

went into effect on July 1 of this year. A transition period for the registration process under 

the final rules began on July 1 of this year, and generally ended on October 31st, although 

we're still in the throes of getting people registered under the final rules. We also issued 

two big batches of interpretive guidance on municipal advisor registration rules in the form 

of FAQs, frequently asked questions, in January and in May of this year, and I commend 

those to your reading pleasure for lots of helpful interpretive gloss on various issues that 

market participants raised in this area.

Let's step back to the fundamental framework. A statutory municipal advisor definition is --

a municipal advisor is defined broadly to mean a person who provides advice to or on behalf 

of a municipal entity, or an obligated person. That's a fancy word for, basically, conduit 

borrowers and municipal financings with respect to several things. Municipal financial 

products, including municipal derivatives, guaranteed investment contracts, and investment 

strategies, or, most fundamentally, the issuance of municipal securities, including advice

with respect to the structure, timing, terms, and other similar matters concerning such 

financial products or issues, and also, a separate prong of the whole thing involves certain

solicitations of municipal entities. We're going to focus mainly on the core municipal advice 

aspects, however, here.

Absent an available statutory or regulatory exemption, a municipal advisor must register 

with the SEC in the subject of training, qualifications, and record keeping requirements. 

They also must register with the MSRB. So, let's take a minute just to lay the groundwork 

on, you know, what are we regulating, here? What is advice? What is the advice standard? 

The advice standard under the final rules, first, is the facts and circumstances standard. 

Most importantly, on the positive end of what is advice, advice includes certain 

recommendations that are particular to the specific needs, objectives, or circumstances of a 

municipality. Conversely, advice does not include general information that does not involve 

recommendations. Examples -- in other words, all communications are not advice that put 

you into this regime. Examples of general information include information that's factual

without subjective assumptions, opinions, or views, information that's not particularized to a 

specific municipal entity or type of municipal entity, information in the nature of educational

materials, or information that's widely disseminated widely for use by the public. Our FAQs 

flesh out the general information standard and the advice standard a great deal, and 

basically, the first FAQ we did.

This regime covers advice, not on everything, but on three topics. First, the issuance of 

municipal securities, including structure, time and terms, and other similar matters. We 

interpreted this broadly time-wise to include advice from the early planning stages of a 

municipal bond issue, to bond redemption. Second, advice covers advice on investments. 

Not investments of everything, but investments of bond proceeds, proceeds of municipal 

securities, and the recommendation and brokerage of municipal escrow investment. 

Basically, bond proceeds in refundings. This is under the investment strategies definition. 

And finally, advice includes advice on municipal derivatives. Two types. Basic swaps, which 

are largely regulated by the CFTC, and security base swaps, which are regulated by the

SEC.

Let me now take a minute to turn to the exemptions. The structure of this statute is such 

that it has a really broad general coverage, and then everyone in sight who didn't want to

be under the statute saw an exemption, so there's a whole list of exemptions. And we tried
very carefully in both statutory exemptions, and in regulatory exemptions, to focus 

thematically on identified activities on market participants that warranted exceptions or 

exemptions as opposed to the status of market participants. In other words, you don't get 

out of this regime just because you're a broker-dealer. We also sought to take carefully into 

account avoidance of duplication of regulations, so that, for example, several of the 

exemptions are just tied directly to other regulatory regimes. Let me just take a minute to 

go down the list of exemptions, and then after that, I will turn it over to Jessica Cain to go 

into some more juicy detail on a couple of those exemptions.

There's -- two thirds of the comment letters in the public comment process for these rules 

involved whether or not individuals who are basically employees or board members of 

municipal entities, if they gave advice to their municipal entity, would that be covered under 

these rules, whether they're elected board members, or appointed board members, or 

members of committees. I think we've got 600 and, you know, 75 letters on that topic 

alone. We addressed that topic. We have a broad exemption that covers public officials, 

both elected and appointed, and public employees, that provide advice basically under a 

standard of acting within the scope of their official capacities.

Next exemption, the underwriting exemption. A statutory exemption covers registered 

broker-dealers and municipal securities dealers serving as underwriters within the meaning 

of the Securities Act of 1933, and we interpreted that carefully to cover an underwriter's 

advice regarding a particular transaction. It is transaction oriented, and this -- and once 

you're in the capacity of an underwriter, though, it broadly covers advice under structured 

timing turns, and other matters, with respect to these transactions. Importantly, the 

underwriting exemption does not cover advice on investments. That is not -- essentially, 

that's not an activity that's within the scope of that function, and it also does not cover 

advice on municipal derivatives, which is really an area in which the waterfront has been 

covered by other regulatory sectors.

Jessica's going to discuss the parameters in the underwriting exemption further. You know, 

we thought it was important that it be very clear when you get -- when that exemption 

starts, and when it ends, and how you get into it, because particularly with small issuers in 

the financial crisis, a real issue was ambiguity on the roles of broker-dealers with less 

sophisticated issuers.

Another exemption that's very relevant is -- and I'll concede the acronym, the IRMA 

exemption. Independent Registered Municipal Advisors. This important exemption permits 

the free flow of information between market participants and municipalities in the case 

where the municipality is represented by an independent registered municipal advisor. This

exemption has certain procedural conditions which will be -- we will discuss further. The key 

idea, though, is that if you've got an independent advisor standing at your side, it should be 

okay to get advice from other folks in a transaction.

Next, let me just rattle off a whole bunch of other exemptions real quick. There's an 

exception for SEC-registered investment advisors that provide investment advice, as 

contrasted with advice on structuring bond issues, or advice on structuring municipal 

derivatives that are used in bond issues. We clarified in an FAQ that certain municipal 

derivatives that are part of advice on investment portfolio registered investment advisors 

historically have done are covered within that exemption. Another exemption is for 

registered commodity trading advisors. This is basically swap advisors with the CFTC. A 

tailored -- another exemption is a tailored exemption for banks, cover certain identified 

traditional banking activities, deposits, extensions of credit, loans, direct purchases of 

municipal securities for a bank's own account, but not other things. There's an exemption
for attorneys that covers legal advice and traditional legal services, but not attorneys that 

hold themselves out as financial advisors, or financial experts.

There's an exemption for accountants that covers accountant supervised audit or test 

services, prepared financial statements, or issue letters for underwriters. One of my 

personal favorites is the next one, the exemption for engineers that covers engineering 

advice. We had way too many meetings with engineers expressing angst about these rules. 

We're not really looking for engineers, here. Finally, there's an exemption for requests for 

proposals, or requests for qualifications. Basically, circumstances in which an issuer has 

within its control, you know, sat down, sort of defined parameters of seeking advice from 

certain market participants on certain activities or things they need, with the issuer's control 

being important. We felt that's a way that you could -- there could be an exemption from 

this regime. In our FAQs, we try to flesh that out a lot about how that works, and how it's 

not necessarily the full-blown formal statutory process at various state levels, but could be 

more formal -- more informal in the way it operates as long as it's sort of under the

direction of the municipal issuer.

And with that, I will stop and turn it over to Jessica Cain to talk about a couple of these 

exemptions in further detail, and then to give you some insight into her heroic efforts on 

trying to get the registration process for the final rules implemented.

Jessica Kane: Thank you, John. As John mentioned, the underwriter exemption covers 

registered broker-dealers and registered municipal securities dealers serving as 

underwriters, with respect to an underwriter's advice regarding a particular transaction for 

the issuance of municipal securities, including advice on the structure, timing, terms, and 

other similar matters. The underwriter exemption does not cover advice on the investment 

of bond proceeds, or advice on municipal derivatives. As John mentioned, the FAQs flesh 

out some important details relating to advice, including interpretive guidance on the extent 

to which broker-dealers can provide business promotional materials under the general 

information exception to advice. The time period for application of the underwriter 

exemption begins at the time of engagement of an underwriter on a particular transaction, 

and extends until the end of the underwriting period.

FAQ 5.1 clarifies that an issuer's engagement of an underwriter may be on a preliminary 

basis subject to certain conditions, such as approval by the issuer's governing body. FAQ

5.1 emphasizes that an important basic component of the underwriter exemption involves 

the affirmative decision by the municipal entity, or the obligated person, to select the 

broker-dealer to serve as underwriter on a particular issuance of municipal securities, and

that affirmative decision is fully informed by the disclosure of the role of underwriter as 

required by MSRB rule G17. FAQ 5.1 also notes that a broker-dealer's unilateral action to 

identify itself in writing as an underwriter, and not as a financial advisor under MSRB rule 

G23 is insufficient to establish that the broker-dealer meets the underwriter exemption.

Moving on to the IRMA exemption, this is an important new exemption that covers advice 

given when a municipal entity or obligated person is represented by an independent, SEC 

registered municipal advisor. When the conditions of this exemption are met, the exemption 

should foster the free flow of information between market participants and municipal

entities because the IRMA is positioned to help its municipal entity or obligated person client 

evaluate the advice received from other market participants, and identify any conflicts of

interest. To qualify for this exemption, first, the market participant must receive a written 

representation from the municipality that the municipality is represented by and will rely on 

the advice of its IRMA. The FAQs clarify that this “rely on” language means that the 

municipality must seek and consider the advice, analysis, and perspective of its IRMA, but
not that the municipality is required to follow such advice. A municipality may post this 

type of representation on its official website, and the market participant must have a 

reasonable basis for relying on the representation.

Second, the municipality must receive a written disclosure from the market participant that 

the market participant relying on the exemption is not a municipal advisor, and is not 

subject to any fiduciary duty. Slightly different representation in the case of an obligated 

person, which omits the fiduciary duty reference. And third, the IRMA must be engaged to 

provide advice with respect to the same aspects of the municipal financial product or 

issuance of municipal securities as the market participant relying on the exemption.

The independence test looks at certain entity level and individual level associations between 

the registered municipal advisor and the market participants for a two year period. The 

individual level analysis focuses in part on participation of certain individuals in municipal 

entity activities. The IRMA exemption only covers advice within the scope of the 

engagement of the IRMA. For example, an advisor advising on structuring an issuance of 

municipal securities, or an advisor on investments of municipal bond proceeds, or municipal 

derivatives.

One cautionary point. The IRMA exemption requires a meaningful engagement of the IRMA 

in a way that the advisor is advising the municipal entity or obligated person in a 

substantive way to give effect to the policy underlying this exemption. That the freer flow

of advice from unregistered municipal market participants is justified when protected by the 

safeguard of an IRMA clearly standing on the side of the municipal entity to look out for the

municipal entity's best interest, and vet potential conflicts.

The final municipal advisor rules, however, do not mandate the use of the IRMA exemption. 

Thus, for example, if a municipal entity seeks to rely on advice from its underwriter about 

structuring a transaction for the issuance of municipal securities, the municipal entity may 

engage an underwriter for that purpose subject to the parameters of the underwriter 

exemption.

Moving on the registration. The SEC's final registration process is now in effect. The SEC's 

final municipal advisor rules went into effect on July 1, 2014. Municipal advisors were 

required to register with the SEC through the SEC's EDGAR system using the final 

registration form on a staggered basis over a phase in compliance period, which began on 

July 1, 2014, and ended on Friday, October 31st. Therefore, all municipal advisors that 

previously registered with the SEC on form MA-T, and expect to continue to be a municipal 

advisor, should have already submitted a form MA and all required form MA-Is to the SEC 

through EDGAR during this phase in compliance period. Furthermore, in general, any 

municipal advisor that now seeks to register with the SEC as a municipal advisor must use 

the final registration process. The temporary process on form MA-T is no longer in effect. All 

existing temporary registrations on form MA-T either have already expired, or will expire by 

December 31st, 2014.

So who is required to register as a municipal advisor with the SEC? Municipal advisory firms 

are required to register with the SEC through EDGAR on form MA. While individuals are not 

required to register with the SEC, municipal advisory firms are required to submit a form

MA-I for each individual associated with the firm who engages in municipal advisory 

activities on the firm's behalf. Unfortunately, putting these requirements together, that

means sole proprietors have to submit both a form MA, and a form MA-I.

So what are you required to do to register with the SEC? First, I'll just briefly list out the
MA form. Form MA, this is the initial application for registration for the municipal advisor 

firm, and also any amendments. Form MA-I is for the individuals. Form MAW, this is the 

form used to provide notice of withdrawal from registration as a municipal advisor. This can 

only be used after the SEC has granted your municipal advisor registration on form MA.

This cannot be used to withdraw a temporary registration on form MA-T. And finally, form

MANR. This is the form used by municipal advisors that are not U.S. residents to designate 

a U.S. agent for service of process. The general instructions glossary and adopting release

also provide additional guidance with respect to the form, so I encourage you to take a look

at the general instructions glossary and adopting release for further information.

So, to register with the SEC as a municipal advisor, first, you must obtain access to the 

EDGAR system. Second, you must submit a complete form MA for the municipal advisory 

firm, and a complete form MA-I for each individual engaged in municipal advisory activities. 

A few tips on this process: you must submit both MA and MA-I through the EDGAR system.

I encourage you to submit these forms as close in time as possible. While the commission 

has 45 days to review a municipal advisor's registration, that 45-day review period does not 

begin until the commission receives a complete form MA, and all other required documents,

including all required form MA-Is.

Review your form MA and MA-Is for completeness, and save these files before submitting 

them to the SEC through EDGAR. An incomplete form MA generally will be suspended 

during the SEC's review process. If your form MA is suspended by the SEC, you will be 

required to add the missing information to the form MA, and resubmit the form through 

EDGAR. If you've saved your files, this process can be a lot easier. You should be able to 

upload the previously saved file and change the missing information. Also, if your form MA 

is suspended, it was not considered complete, and the 45 day review period will start when 

you resubmit your form MA, assuming it is complete.

A brief word on attachments and exhibits. There is no process in place for the commission 

to remove personally identifiable information if they are submitted in these attachments or 

exhibits. While the EDGAR system will block social security numbers, birth dates, and other 

personally identifiable information from being included in the publicly available forms of

form MA and form MA-I, it will do so only in those sections where the SEC has specifically 

required this information, and provides guidance that such information will not be included 

in the publicly available forms. I would encourage you to take a look at any attachments or

exhibits to your form MA, or for MA-I, and think about whether they contain PII. If you 

have any questions, you should feel free to call the Office of Municipal Securities. We're 

happy to discuss this process and this issue.

With respect to amendments, you can only amend a form MA or MA-I after the commission 

grants your initial application for municipal advisor registration. You may not amend a form 

MA or MA-I while that form is under review by the SEC. A municipal advisor is required to 

file an annual update of its form MA within 90 -- 90 years.

[laughter]

That'd be quite an update.

Drew Bowden: On the fast track. 

[laughter]

Jessica Kane: Within 90 days after the end of its fiscal year, and for full proprietors, it's the
calendar year. In addition to the annual update, a municipal advisor must promptly file an 

amendment to its form MA whenever a material event has occurred that changes the 

information provided in the form. The instructions for the form MA series provide further 

guidance on when a material event will be deemed to have occurred. A form MA-I must be 

amended whenever the information previously included becomes inaccurate. And finally, a 

little good news. The SEC does not charge any fees in connection with municipal advisor 

registration. So there's no fee to submit the form, and there's no fee to become an SEC 

registered municipal advisor.

When are you required to register with the SEC? As I previously mentioned, the phased in 

compliance period for SEC municipal advisor registration ended on October 30th -- 31st,

2014. Therefore, all municipal advisors that previously registered with the SEC, and that 

expect to continue to be a municipal advisor, should have already submitted a form MA, and

all required form MA-Is. All new entrants to the municipal advisory business must first 

register with the SEC as a municipal advisor under the final municipal advisor rules.

How does the registration process work at the SEC? Assuming you have successfully 

transmitted your form MA and form MA-I, there will be a popup window that indicates your 

submission was transmitted successfully, and it will provide you an accession number for the 

filing. You may use this accession number to track the status of your application in the 

EDGAR system. As I mentioned, the 45 day review period does not begin until the

municipal advisor has submitted a complete form MA, and all required form MA-Is.

An easy way to check to see whether you've submitted all of your form MA-Is is to compare 

the number of MA-Is you submitted to item 4B of form MA, which is the number of 

employees engaged in municipal advisory activities. After the commission receives a 

complete form MA, and all the required form MA-Is, the commission has 45 days to grant 

municipal advisor registration, or institute proceedings to determine whether to deny. If the 

commission determines to grant your municipal advisor registration, you'll receive an

EDGAR-generated email notifying you that your submission has been accepted. This means 

the SEC has granted your registration. This email will include the filing date and the filing

number. It's an 867 number for your form MA, and an 868 number for MA-I, and this 

number will be important in MSRB registration, which, I think, Mike will talk about later.

After the commission grants your registration, it will be published on the SEC.gov EDGAR 

website. This is a public website, and you may direct clients or others to this website to 

review your form MA and MA-Is, and as evidence of your registration status with the SEC. 

You will also receive a paper order via US. Mail. If the commission does not grant your 

municipal registration, the commission will institute proceedings to determine whether to 

deny your municipal advisor registration. Under the Exchange Act, the commission is 

required to deny a firm's registration if it finds that if the firm were so registered, its 

registration would be subject to suspension or revocation under the Exchange Act. This is a 

formal process. The commission would institute proceedings which would provide a notice 

for the grounds of denial under consideration, and an opportunity for a hearing, and this 

must be concluded within 120 days of the filing of the municipal advisor application. At the 

conclusion of such proceedings, the commission is required to either grant or deny such 

registration by order.

Michael Post: Thank you, John and Jessica. We have some questions, and I have a couple 

of questions of -- I'll focus on the audience questions first, of course. So, one was asking --

well, pointing out that some major, or at least very frequent issuers are finding the 

representation and documenting process for the IRMA exemption to be burdensome, and

the question is whether the SEC's going to consider any sort of sophisticated issuer 
modification to that process to establish the IRMA exemption.

John Cross: I'll kick off that question. I think, you know, initially, we want to give this 

regime some time to see how it works in practice. It's just barely gone into effect, and, you 

know, at some level, the most sophisticated issuers are also the issuers best equipped to 

work within this regime as it currently exists. That is, they're most frequently the ones that 

have municipal advisors, and most frequently the ones that are able to use the IRMA 

exemption. You know, we've tried to make that user friendly by allowing people to post 

representations about it on their websites.

The premise of that exemption is that issuers, you know, sort of control the process. You 

know, of course, more generally, you know, in other areas, there are various exemptions 

that sort of tailor for sophisticated investors, for sophisticated frequent well-seasoned 

issuers, and the corporate contacts that sort of tailor the rules to the more sophisticated

end of the spectrum of issuers. And so, you know, we certainly could consider some kind of 

sophisticated issuer exemption. You know, I think the regime needs to have some time to 

operate to see how it's working in practice.

I -- you know, there's an -- the -- this is not something -- people have asked in the past. 

This is not something we can just go do interpretively. This would require, you know, a new 

commission action to make a policy call in an order other amendment to a rule to address 

that, and it, of course, would have, you know, some tricky issues about who you define as 

sophisticated. Is it, you know, how much debt you have outstanding, how frequently you 

issue, how currently you do your financial statements, or other kinds of considerations. You 

certainly could address parameters on that. But, you know, everyone who wants an 

exemption thinks they're sophisticated, and so, you know, it's not always, you know, it's

kind of the eye of the beholder. Jessie may want to add to that.

Jessica Kane: The only thing I have to add is as John mentioned, this isn't something we 

could do interpretively, but if there are things that you all are seeing in the market, and 

there are things we could do interpretively, if there's something that an additional FAQ, or 

additional interpretive guidance could help, or if we could do something by highlighting an 

issue in an FAQ, you know, we'd be happy to hear about that, and happy to consider it. So 

please feel free to reach out. I know that was mentioned during the welcoming remarks, 

but please feel free to reach out to anyone in our office to the extent you have questions or 

suggestions for interpretive guidance based on what you're seeing in the market.

Michael Post: So, we have another question regarding someone who'd filed an MA-T, and

doesn't intend to permanently register, and asks is there a requirement for a firm to file the

MAW form to withdraw, or is it enough to just let the MAT expire?

Jessica Kane: So the MA-W is a form that is only able to be used once the commission has 

granted your registration on form MA. MA-T is an entirely different system. To withdraw a 

form MA-T, you simply file a new form MA-T, and there's a box that you can check to

withdraw it. It's a very simple process, and we are encouraging folks who have determined

that they're not going to be municipal advisors, and they're not going to register on form

MA-T, or submit any Form MA-Is to withdraw on Form MA-T by checking this box and

submitting a new Form MA-T. We think that will help complete our records, and it will

hopefully help some of our folks in OCIE from making a lot of phone calls, wondering why

you didn't register on Form MA.

John Cross: Let me just -- another quick point of context on that. You know, I didn't ask 

at the beginning of the session. You know. There were the two questions of who's
registered with the SEC under the final rules, and who's registered with the MSRB under 

their rules for municipal advisors. Who -- the follow-up question was who are the rest of 

you all --

[laughter]

-- that didn't raise your hand on either one of those questions? But I want to flag an issue, 

which is -- and it relates to this record keeping issue, which is, you know, around the end of 

the year, the temporary registration regime for municipal advisors turns into a pumpkin, 

goes away completely, expires, on December 31st, and, you know, anecdotally, you know, 

we have some sense that there are a whole lot of people out there who registered under the 

temporary rules who thought that did the trick, and they don't have to do anything else,

and haven't showed up to register under the file rules, or to register on EDGAR. And so

part of Jessica's point of, you know, complete the record by withdrawing on the MAT, relates 

to, I think, an exercise that will occur early next year, which is, you know, in the compliance 

and exam programs, people will begin to look at, okay, you know, where do we stand on

this final registration regime, and has everyone come in who should, and do we need to do

more outreach or exams or what to address that? So that's a coming issue.

Michael Post: So while -- some, I think, that might be quick, and then I can go to some 

that might be more involved, but this one, I suspect, may be something you could quickly 

clarify. The questioner asks: would you characterize the IRMA exemption as possibly 

allowing underwriters to discuss more topics than the underwriter exemption alone would 

allow?

Jessica Cain: Yes. The IRMA --

Michael Post: Elaborate. 

[laughter]

Jessica Kane: Sure. The IRMA exemption is really designed to provide and facilitate the 

free flow of information between market participants and a municipal entity, or an obligated 

person when the independent SEC registered municipal advisor is standing on the side of 

the municipal entity or obligated person, owes them either a fiduciary duty or a duty of fair 

dealing in the case of an obligated person, and is there to help evaluate the advice received 

by these other market participants, and identify any potential conflicts of interest. You 

know, we really designed that with that policy rationale in mind, and, you know, the 

underwriter exemption is very circumscribed and narrowly tailored to underwriting activities 

within the definition of the 33 acts. So it certainly could be that market participants, 

including underwriters, would provide more information in the context of an IRMA

exemption than any of the other exemptions.

John Cross: And just as a matter of topics, the underwriting exemption covers structuring 

the bond issue once you've been engaged as the underwriter. It does not cover advice on 

investments of bond proceeds. IT does not cover advice on municipal derivatives. If you 

had a registered independent municipal advisor, then the underwriter could also give you 

sort of supplemental advice on investments and derivatives where you've got the financial 

advisor also looking at that from the standpoint of having a fiduciary duty to misfiling. 

Yeah. I mean, it was the case that conflicts with underwriters over derivatives was a real 

problem in the financial crisis.

Michael Post: Jessica, this questioner understood you to be referring to a slight difference
in the IRMA exemption when dealing with an obligated person versus when dealing with a 

municipal entity, and they're wondering if you could expound on that.

Jessica Kane: Well, the statute provides that a municipal advisor has the fiduciary duty with 

respect to its municipal entity clients, and that's not the case with respect to obligated 

person clients, so the slight tweak that I mentioned has to do with the exchange of 

representation, and it's the representation that a municipality must receive from -- or an 

obligated person must receive from the market participant that the market participant is 

relying on the IRMA exemption, and is not a municipal advisor, and is not a municipal 

advisor, and is not subject to a fiduciary duty. The fiduciary duty disclosure goes to 

municipal entities, and the disclosure that goes to obligated persons omits that fiduciary

duty reference.

Michael Post: The next question related to the underwriter exemption, and it has to do 

with, I think, an FAQ that addresses the subject where an underwriter could be sort of 

preliminarily engaged, and it could be for consideration of a potential issuance, and the 

engagement could end without ultimately there being any issuance, and I think some of the 

rationale behind that was that at least the issuer would have taken an affirmative step to 

reach out to the underwriter, and perhaps understand the underwriter's role by doing that. 

And the questioner says that they have observed in the market a number of these sort of 

soft engagements and -- that allow on the underwriter exemption, and they wondered if you 

had any comment on kind of the prevalence of this practice, or any more kind of 

expoundment on that FAQ.

Jessica Kane: Well, I think that FAQ talks about, you know, provides the parameters of the 

underwriter exemption. You know, in the staff's view ,and talks about, you know, the 

interplay between some of the MSRB rules, and the SEC's underwriter exemption under the 

final municipal advisor registration rules, but I think that FAQ also talks about, you know,

the issuer reasonably expects to work with this underwriter in engaging this underwriter in a 

preliminary engagement letter. I think any effort to, you know, move around that

reasonable expectation of engagement is potentially troublesome. I'm not aware of these

practices happening, so please call us up and tell us about this when you see this, but to the 

extent that underwriters and issuers are using the, you know, parameters that we talked 

about in our FAQs as a way of moving around the municipal advisor rules, you have to find 

that concerning.

John Cross: Let me just add a point or two about sort of our FAQ that talked about 

preliminary engagements of underwriters. I think two important features of that, mike, you 

alluded to them. One was that we want the issuer doing the deciding. So we want the 

issuer to say to the broker-dealer, “Yes, we want you to be our underwriter.” We want that 

to be an informed, affirmative decision by a municipal issuer. We also want it to be

informed by disclosure by the underwriter of the G17 disclosures about the nature of the

role of the underwriter. By contrast, one of the things that we were sort of guarding against 

is we didn't want it to just be automatic under rule -- MSRB rule G-23 that a broker-dealer 

sends you a letter and says, “I want to be your underwriter. Thus, I'm your underwriter.”

You know. It's not that existential. We want the issuer sort of in control of deciding.

Within that, we did allow for it to be preliminary. In other words, there was a lot of angst 

that in underwriting relationships, you know, the issuer doesn't, you know, officially, totally, 

fully, you know, approve the thing until the pricing, you know, on the day before the closing. 

Well, we were intending to allow at a much earlier stage in the transaction, you to -- an 

issuer to say, “Yes, we want you to be our underwriter and hear advice on that,” so that it 

can have conditions of, you know, working out the final terms. But as Jessica cautioned, it,
you know, also does need to be real, and a reasonable expectation on a particular bond 

issue.

Michael Post: So this next question relates to the independence requirement for the IRMA 

exemption, and the questioner wondered if you could talk in a little more detail about the 

independence test for individuals, and the questioner believes that given the movement that 

frequently occurs in this industry between firms that the two year periods could significantly 

reduce the number of firms that can take advantage of the IRMA exemption.

John Cross: You want to start, or -- let me make a comment or two about that. I think the 

most important thing to appreciate about the -- sort of the independence test with 

individuals was that it is something you can control with participation. That is, if you have 

an individual who is in the municipal finance business, to take an example, at a brokerdealer, and moves over to a municipal financial advisory firm, the core message of how the 

independence test works is you need to screen that individual off from participation in, you 

know, basically client engagements involving that broker-dealer with a particular municipal 

entity for two years. We've heard a lot of angst about how, “Oh, geez, you know, it's such a 

challenge,” but it really is a matter of focusing on the participation of the potential affected 

individuals once they're at the municipal advisory firm, or vice versa. It is not a, you know, 

total bar, but the idea is, you know, there's a potential conflict if, you know, someone was 

working in this business, in the municipal finance business, at a broker-dealer, who's not 

working with an issuer. One of their former employees is now working for the municipal 

advisor. It raises the question of a conflict, there. But with a fix, the fix being don't 

participate for two years, and screen them off.

Jessica Kane: I will just add that FAQ3.6 goes into painstaking detail of the entity level and 

individual level tests. So commend that to your reading pleasure, as well.

Michael Post: The next questioner asks if it's correct that an accession number can only be 

checked, I think, in terms of its status, for a certain number of days, and if so, how can the 

applicant check on the status of a registration form after that number of days?

Jessica Kane: The accession number should be valid during the time that the commission is 

reviewing your Form MA. There might be some technical issues that happen if the Form MA 

is suspended for being incomplete, but the accession number should be available. If you're 

having trouble with accessing the status of your Form MA by entering the accession number, 

please, you know, give our office a call, and we'll do what we can to help figure out that 

situation.

Michael Post: The next question asks whether there are, I guess, any plans or 

consideration given to further potential enhancements to EDGAR to facilitate some of the 

functions that are being performed in the market, including diligence by issuers on current 

or potential MA service providers, and secondly, diligence by market participants in 

association with the checks that they would do to determine whether an individual is a

potential IRMA.

Jessica Kane: So, the commission's EDGAR system is something that is used throughout 

the SEC. WE are not the only form on the EDGAR system. So any enhancements to the 

EDGAR system are vetted by a much larger committee, much bigger outside than just the 

municipal securities office. We certainly could take in any recommendations that folks have 

as to how to enhance the EDGAR system, but I would say as of right now, there are no 

current enhancements actively being considered in this area.
John Cross: Let me just add in an informational matter. I think one of the goals once the 

final registrations are done is that the information about the final registrations get posted on 

the public SEC website, and so we've gotten some suggestions, I think, to, you know,

maybe provide more guidance on how people look out functionally, and search those 

databases to look for particular firms, or particular individuals or activities related to those 

firms. So that we do believe that, you know, the EDGAR database of the municipal advisor

registrations will be a source that people can look for the kinds of issues you're taught 

about, Mike, and I think our office will be, you know, receptive to sort of considering ways 

to guide people on how to do that.

Michael Post: Thank you. We have a few minutes remaining, so I'll try to shift to some of 

the ongoing obligations. Sir?

Male Speaker: Can you describe the origin of differences between this whole entity, the 

obligated person, if they seem to be treated differently [unintelligible] Dodd-Frank --

John Cross: I think it's an unfortunate source of complexity. The obligated person -- but it 

is a source of complexity that's related to the municipal finance business, you know? There, 

essentially, is -- there are direct municipal financings; general obligation bonds; and bonds 

of, you know, sort of general purpose municipal issuers where they issue debt for

themselves and use the proceeds and go on about their business. There's a whole category 

of structured financings where there's a loan, a lease, and a solid sale to a conduit borrower 

who essentially is the beneficiary of the financing, and those conduit borrowers, you know, 

are integral to a whole category of municipal financings. And the term “obligated person,” I 

think, comes, in part, from SEC rule 15C-212, which has a definition of that in that they 

have undertakings for continuing disclosure. But basically, in Dodd-Frank, the decision was 

made that, well, if you have a conduit financing in which a conduit, borrower, or obligated 

person is involved and the advisors are giving all the advice to that ultimate beneficiary, in 

substance, you know, that's relevant to the municipality who's serving as a nominal issuer. 

And so, for that reason, they were included, generally, with a municipal advisor regime.

I acknowledge that -- the fact that they don't have a fiduciary duty and so that there's a bit 

of -- there's enhanced protection to municipalities, but still bringing them the obligated 

persons and the regime, it introduces some tricky issues, and we've gotten a lot of 

questions about that, you know, sort of tried to work through that.

Michael Post: So I tried to raise the questions that seem to be more relevant to a larger 

number of people. I wasn't able to get to some of the questions that asked about very 

specific situations, so I'm sure John and Jessica would be happy to answer questions 

separately or take your calls at their offices, but I just wanted to quickly go through some of 

the ongoing obligations, administratively, with the MSRB, just so you're aware, and I'll 

highlight them. So I would encourage you to consult MSRB rules A-11 and A-12 for these 

and the resources on our website.

The first is to update information on your Form A-12. There is a requirement to keep that 

information accurate and complete and up to date, an outside requirement to update 

information within 30 days of a change. Some of the areas where this is particularly 

important will be for the contacts at your firm listed on the form and the business 

activities that your firm is engaged in. Form A-12 is also the Form to used to make a 

change in the information to reflect a withdrawal from registration. And if a firm is a 

municipal advisor and dealer, then you could select on the Form the remaining registration 

category of dealer and effectively withdraw as a municipal advisor. If your firm is a 

municipal advisor only, then you can select withdrawal and leave no ongoing registration
category.

In addition to keeping Form A-12 up to date, the MSRB has an annual affirmation process 

that happens in about the first half of each January. And in that time, there's a requirement 

to go into the system and affirm that the information is complete. That affirmation step 

must be performed by a person that has been listed on the A-12 Form as the primary 

regulatory contact, optional regulatory contact if there is one, or the compliance contact.

For more information about this, you can consult FAQs on our website and the MSRB

registration manual, also available on our website.

The other ongoing area is to keep current with fees, as I mentioned, to support the costs of 

your self-regulatory organization. There is an initial registration fee of $100, and an annual 

registration fee of $500 that's due each October 31st. If your firm is a dealer and municipal 

advisor, it need only pay one initial registration fee and one $500 annual registration fee.

For municipal advisors, there's also a annual professional fee of $300 per MA-I submitted to 

the SEC on the behalf of your firm. So for this year, the first professional fees are due 10 

days after the acceptance of your Form MA by the SEC, but after that transition, each year,

they will be due at the end of April, based on the number of MA-Is you have on file with the 

SEC as of January 31st of that same year, and those will be invoiced in early April and due 

at the end of the month.

So we've gone a little over. I apologize. But thank you for your time and attention. And 

thank you to my panelists, John Cross and Jessica Kane, for sharing their expertise and 

answering questions on the SEC registration process.

[applause]

John Cross: Thank you very much.

Drew Bowden: Ladies and gentlemen, we'll have a short break, and panel two will begin at

11:00 a.m.

Ladies and gentlemen, panel two is about to begin.

Male Speaker 2: ...center is doing to assess compliance with the new fiduciary obligations, 

and hopefully we will then leave some time for questions at the end of the presentation 

today.

So let’s get started. As you know, because you're sitting here today, the Dodd-Frank Act 

made important changes to oversight of the municipal securities markets. Among other 

things, it provided that municipal advisors owe an express fiduciary duty to the municipal 

entities that they advise. The specific statutory writing is, “A municipal advisor and any 

person associated with such municipal advisor shall be deemed to have a fiduciary duty to 

any municipal entity for whom such municipal advisor acts as a municipal advisor, and no 

municipal advisor may engage in any act, practice, or course of business which is not 

consistent with a municipal advisor's fiduciary duty or that is in contravention of any rule of 

the MSRB.” So that’s a lot, and we are going to try to unpack that for you this morning. I 

think it is on. And now? This is on. Great. So now we are all technologically ready to go.

Understanding your fiduciary duty is critical. It’s a core of being a good municipal advisor, 

and while MSRB is in the process of issuing guidance -- and you are going to hear from Mike 

and Ben about the guidance in a few minutes -- it’s generally recognized that a fiduciary 

duty encompasses both a duty of loyalty and a duty of care. Under the duty of loyalty, a
fiduciary is required to act in his or her client’s best interest without regard to his or her 

own financial or other interests. It is also required to disclose conflicts of interest that

might impair his or her ability to fulfill the duty of loyalty and not to undertake engagements 

in which those conflicts cannot be managed. Under the duty of care, a fiduciary must be 

qualified to undertake the engagement, take time to collect information about his or her 

client’s needs, and consider whether a recommended transaction will serve the client's best

interest.

And while our purpose today is to help you understand your legal requirements, I do want to

take a minute just to give you an overall rule of thumb that I think is helpful in thinking 

about the issues. And I didn’t come up with this. Lori Richards, one of our former heads of 

OCIE, in a speech to investment advisors back in 2006, said that in all likelihood you and 

your employees are going to get your fiduciary duties right if your decisions every day, large 

and small, are motivated by doing what is right by your clients. To keep this core fiduciary 

principle in mind, your clients should be well-served. Your friends will reduce your risk and, 

dare I say, avoid scandal.

Now, on the theme of doing what is right by your client, I’m going to take a few minutes to 

highlight a few key areas where market participants have not historically done right by their 

clients. Many of them involve outright alleged fraud or other abuses that I hope you will 

quickly recognize to be inconsistent with the fiduciary duties of loyalty and care. Let’s start 

out with an area that is always near and dear to our hearts in Chicago: payoffs. In 2008, 

the commission filed a civil complaint against Birmingham Mayor Larry Langford; the 

chairman of a broker-dealer, William Blount; and their mutual friend, Albert LaPierre. The 

complaint alleged that while Langford served as president of the County Commission of 

Jefferson County, Alabama, he accepted more than $156,000 in undisclosed cash and 

benefits over two years from Blount. In turn, Langford used his influence to select Blount’s 

firm to participate in every Jefferson County municipal bond offering and security-based 

swap agreement during 2003 and 2004, earning his firm over $6.7 million in fees. It was a 

very lucrative business for him, comprising over 70 percent of the firm’s annual revenue for 

virtually no work on any of the transactions. Now, recognizing that it would be obviously 

inappropriate to hand an envelope of cash over to the mayor, the complaint alleged that 

Langford and Blount concealed the payments by using their longtime friend, LaPierre, an 

Alabama-registered political lobbyist, as a conduit. Now, it turned out that the payments 

between Blount and Langford were only part of a larger payment scheme that was allegedly 

being orchestrated by two directors of JPMorgan Securities.

In 2009, the commission filed a civil complaint against Charles LeCroy and Douglas 

MacFaddin and administrative proceedings against JPMorgan Securities. In these actions, 

the commission alleged that between October 2002 and November 2003, LeCroy and 

MacFaddin directed over $8 million in payments from JPMorgan Securities to close friends of 

Jefferson County Commissions who either owned or worked at local broker-dealer firms.

The local broker-dealers, including Blount’s firm, had no official role and performed few, if 

any, services for the transactions. In connection with the payments, county commissioners, 

including Langford, voted to select JPMorgan Securities as managing underwriter and swap 

provider for the largest municipal auction rate securities and swap agreement transaction in 

JPMorgan’s history.

Now, if you think about it just briefly, $8 million in payments. Well, what did they get for 

that? What they got was billions of dollars -- up to $5 billion in notional amount for the 

transactions they did. So, although the payments themselves were large, the amount of 

business scam result was extremely large. Although labeled as work on the transactions, 

the SEC alleged that LeCroy and MacFaddin knew that the payments were sham
transactions. How'd the SEC make that allegation? Well, there were taped conversations in 

which they were referred to as payoffs, the price of doing business and giving away free 

money. And of course, the firm incorporated the cost of the unlawful payments by charging 

Jefferson County higher interest rates on the swap transactions. On the cross, all of the 

three commission actions, the allegation was that the participants in the schemes failed to 

disclose any of the payments inherent in the conflicts of interest raised by them, either to 

the county or to investors, in the bond offerings or to the county in the relevant swap 

transactions.

So those are some, you know, payoffs, but let’s talk about noncash payments. Let’s talk 

about some entertainment. In 2012, the commission charged former Detroit officials and the

investment advisor to the city pension funds in an influence peddling scheme. In that case,

the commission filed a civil complaint against former Detroit Mayor Kwame Kilpatrick; former

City Treasurer Jeffrey Beasley; and pension fund advisor MayfieldGentry and its CEO, 

Chauncey Mayfield, alleging that Kilpatrick and Beasley, who are trustees to the city pension 

funds, solicited and received $125,000 or above private jet travel and other perks paid for

by MayfieldGentry.

At the time, MayfieldGentry was recommending to trustees that the pension funds invest 

about $117 million in real estate investment trusts controlled by the firm.

Female Speaker:

You are the first person to attend this meeting. To stop the music, press the star key.

[music] 

[laughter]

Male Speaker 2: This segues back to the entertainment. 

[laughter]

Michael Post: I don’t know if this entertainment would influence me that much. 

[laughter]

Male Speaker 2: So getting back to our story, the expenses clearly appeared to be 

entertainment related because they included items like $40,000 some odd dollars for private 

jet travel for the entourage to fly out to Las Vegas, $7,000 for hotel rooms at the Venetian 

Resort Hotel, $2,700 in golfing fees, $5,300 for private limousine service, and of course

$300 for Mr. Kilpatrick to get a massage because it’s very stressful to use that much money 

for free. The commission alleged that Kilpatrick and Beasley and Mayfield did not tell

anyone about the entertainment expenses at the time that the trustees were voting to 

invest $117 million with Mayfield’s firm.

However, I do want to caution you that entertainment does not need to be quite this 

extravagant, including trips to Las Vegas, to still raise potential fiduciary concerns. I wanted 

to highlight rating agency trips.

In 2009, the commission brought several administrative proceedings against RBC Capital 

Markets and Merchant Capital for advancing or reimbursing travel and entertainment 

expenses for city officials to travel to New York for meetings with rating agencies as part of 

the process of issuing bonds. So you had an official reason for making the travel. You were
going to discuss the bonds with your rating agencies. But according to the facts in the 

complaint, city officials traveled to New York with family members, and while they were 

there, family members went to entertainment and sporting events and had nice dinners, 

and it was reimbursed or the funds were advanced by the firms. And according to the 

complaint, after -- I mean according to the allegations, after receiving instructions from a 

representative of the city regarding the activities of interest to city officials and their

families, RBC organized the activities for each trip and then advanced payment for nearly all 

of the expenses incurred by the city officials and their family members. RBC then obtained, 

with the knowledge and approval of city officials, reimbursement for all the expenses -- and 

you are going to recognize this schematic -- and of course they were billed through as a

cost of issuance and taken from the bond proceeds at closing.

So, you know, I highlighted what I thought -- I hope are areas where you recognize an 

inherent problem with payments. As municipal advisors, you need to understand that any 

payments that you make to municipal officials directly or indirectly in cash in a payment or 

gift will raise fiduciary concerns. You also should understand that your receipt of anything 

of value from underwriters or other market participants who are seeking access to your 

municipal clients will raise similar fiduciary concerns. And the one other item I wanted to 

raise is to consider your duty in a situation in which you become aware of payments being 

made, even though you are not personally involved in the payments yourselves.

The next area I wanted to cover briefly falls under the general topic of giving advice without 

adequate training or failure to place your client’s interests ahead of your own. And the one 

case I wanted to highlight in that area was advice to municipal school districts provided by 

Stifel Nicolaus. In 2011, the commission charged Stifel Nicolaus and his vice president, 

David Nowak, with defrauding five Wisconsin school districts by selling them unsuitably risky 

and complex investments funded largely with borrowed money. The complaint alleged that 

Stifel and Nowak created a proprietary program to help the school districts fund retiree 

benefits by investing in notes linked to the performance of synthetic collateralized debt 

obligations, synthetic CDOs, they alleged made sweeping assurances to the school districts 

that it would take 15 Enrons, meaning the catastrophic collapse of 15 investment-grade 

companies, for the investments to fail. In reality, the danger of losing the entire investment 

was significantly different and based upon much lower default rates than represented.

Other alleged issues included that certain CDO providers had expressed concerns about the 

investments, such as the heavy use of leverage in connection with sales to municipal school 

district and -- districts, and some of them had actually declined to participate. Other things 

that were allegedly not disclosed were that the portfolio in the first transaction in a series of 

transactions performed poorly right from the outset. And not surprisingly in this case, all of 

the investments failed. School districts lost not only the entire principle they invested, but 

they had borrowed heavily and lost that money as well. The commission, in this particular 

case, also brought several administrative proceedings against RBC Capital Markets for

selling the CDOs to school districts in the first place. And when taking a look at the 

allegations against both Stifel and RBC, I just thought it was interesting to note that in the 

allegations, there is a flavor of both RBC and Stifel trying to pass the buck between each 

other as to who was responsible for properly explaining and assessing the suitability of the 

investments to the school districts in the first place.

I think it is important that as municipal advisors, you understand that to the extent that this 

is within the scope of your engagement, that buck is going to stop with you in helping your 

client to assess the suitability of the transactions that you are recommending. And, you 

know, the takeaway here, I think, is that it is important to understand that you need to 

assess your qualifications to undertake advice, particularly on complex and risky products.
Make sure you take the time to understand your client’s needs and objectives. And make 

sure that the product meets their needs and objectives.

One other area I wanted to cover briefly was disclosure cases and particularly in the context 

of a series of commission proceedings that have been filed against state issuers for failure

to disclose adequately underfunded pension liabilities in connection with bond offerings. In

the last two years, the commission has brought cases against both the state of Illinois and 

the state of Kansas, and the issues in the cases have involved complex historical structural 

underfunding problems with both states. They’ve involved miscommunications between 

various state agencies on who's responsible for making the perfect disclosures. And it 

involved, at times, complex actuarial accounting issues. And I raise those topics because to 

the extent that you have been retained to assist an issuer in assessing its disclosures in 

connection with an official statement, keep in mind that pension liabilities are on the radar. 

They’re complex. And make sure that you are taking appropriate steps to understand and 

assess the issues with your municipal clients. And the takeaway from the administrative 

proceeding in Illinois that I wanted to share with you was what the commission said in that 

case, it was relying on prior carryover disclosures and Page-Turner reviews during group 

conference calls. The state and its advisors did not scrutinize the institutionalized 

description of the pension plan funding adequately and made little affirmative effort to 

collect potentially pertinent information from knowledgeable sources, in particular actuaries 

for the hedge and systems and the states' Commission on Government Forecasting and 

Accountability.

The last claim I wanted to touch on briefly before turning it over to Michael and Benjamin is 

the issue of lying about your qualifications when seeking municipal business. Over time, the 

commission has brought a number of actions against investment advisors for exaggerating 

asset center management or exaggerating a client base. One particular case I wanted to 

point out quickly was that in 2013 the commission brought civil administrative proceedings 

against the CEO of an investment advisory firm for lying to CalPERS and other current and 

potential clients about the amount of money being managed by the firm. The CEO falsely 

certified to CalPERS that his firm met its minimum AUM requirement and, once gaining the 

CalPERS business, went on to tout that relationship with other clients. So, you know, in

your situation, obviously, being accurate in your representations about who your client base 

is and what your qualifications are is going to be very important moving forward.

At this point, having laid the groundwork for what I hope examples [inaudible] in fiduciary 

duties, I’m going to turn over to Michael and Ben and talk to you about guidance and 

helping you avoid such catastrophic problems as you structure your agreements with your 

clients.

Michael Post: Thank you, Tom. We’ll talk about the MSRB's draft rule G-42 and some detail

about where it is in the overall rulemaking process. It’s important to bear in mind -- well, I

think you’ll see as we go into some of the detailed provisions of the draft that they follow 

some of these broad categories that Tom has described have occurred in cases, at least for

investment advisors in particular, that also owe a fiduciary duty to their clients. But it's 

important to bear in mind that the fiduciary duty of a municipal advisor to a municipal entity 

client is imposed by Dodd-Frank, and a breach of that duty is a violation of Dodd-Frank,

even if the very particular issue isn’t addressed by an MSRB rule. So G-42 is really an effort 

by the Board to provide guidance on some of the subjects that it is anticipated will come up

most frequently.

But in the debate about whether regulations should be principles based or more 

prescriptive, principles based being more flexible and then prescriptive potentially providing
greater clarity to market participants, I think that the fiduciary duty standard in Dodd-Frank 

itself is probably the most general sort of flexible principle in existence in financial services 

regulation. So that is important to bear in mind. The Board, since the SEC's adoption of a 

final definition of municipal advisor last September, has been developing and prioritizing this

core standards and core duties rule. So in January, the board published a draft rule and

received 44 comments on it. And after carefully considering the comments and considering

changes to the draft in response to them, the board determined to re- propose a revised

draft rule and received another 19 comments on that. The commenters seemed to generally

welcome the board’s effort to re-propose and seek additional input and generally welcomed

many of the revisions that have been made compared with the initial draft rule. And the

Board has considered those additional comments and the draft rule overall and the next step

that you can anticipate would be the Board filing a proposed rule with the Securities and

Exchange Commission. There will be another comment period at the SEC level in that

process and the proposed rule could change yet again in response to those comments if the

Board determines to file an amendment to the proposed rule. So what we’ll do today is we’ll

talk about the last public draft rule with the caveat that it’s still in process and may change

based on the Board's recent consideration of the second round of comments and may 

change even further in the rulemaking process at the SEC. But I think that it will be 

instructive nevertheless because the provisions that we’ll describe will raise for you most of 

the kind of significant issues that arise and, I think, give you a sense, I hope, at least for 

the rationale of the Board to date to try to address some of the things that it was 

anticipated will come up most frequently.

So the initial sections of the rule provide for the core standards of conduct, and as 

mentioned by Tom, the Board has broad regulatory -- broad rulemaking authority over 

municipal advisors to prevent fraudulent and manipulative practices, but it also has

authority to

-- to adopt rules reasonably designed to prevent actions that are inconsistent with

the statutory fiduciary duty. The rule sets forth the basic standards and brings these 

relationships, I think, into kind of the sphere of regulated relationships elsewhere in the

financial services industry. So if you think about a broker/customer, investment

advisor/client, and now with municipal advisor/client, the rule speaks to some of the things

like the disclosure to the client of all material conflicts of interest, the documentation of the

relationship, the making of only suitable recommendations, the standards for reviewing the

recommendations that may be made to the client by others, and addressing the subject of

principle transactions. And then there are some other specific prohibitions in the draft rule

related to compensation and fees, payments to obtain or retain business, and other matters.

The duties in the draft rule are non-exhaustive on several levels. There’s the broad principle

in the statutory fiduciary duty, I mentioned, and the rule also -- the draft rule says that its 

requirements don’t displace any more restrictive requirements in state law or other law. So 

it will be important to consider, even if something isn’t specifically addressed by G-42, if 

adopted, to consider other sources of law that might apply to your activities, namely state 

and other law. The rule provides that each municipal advisor in the conduct of municipal 

advisory activities for obligated person clients, owes a duty of care and a municipal advisor

advising a municipal entity client owes the fiduciary duty, which will include a duty

of care and a duty of loyalty.

The duty of care: There is some guidance on what, at a minimum, the duty of care 

encompasses and there’s a requirement that the advisor possess the degree of

knowledge and expertise necessary to provide its client with informed advice. There also

is a draft requirement to make reasonable inquiry as to the facts that are relevant to a

client’s
determination whether to proceed with a course of action or the facts that form the base of 

advice provided to the client. And there is a draft requirement to conduct a reasonable 

investigation to determining that -- to determine that the municipal advisor is not basing a 

recommendation on materially inaccurate or incomplete information. There is some

guidance on the duty of loyalty that it at a minimum would require the municipal advisor to

deal honestly and in the utmost good faith with its client and to act in the client’s best

interests, irrespective of the financial or other interests of the municipal advisor. A

municipal advisor to a municipal entity client would be required to eliminate or provide full

and fair disclosure of each material conflict of interest, and the duty of loyalty would

preclude a municipal advisor from engaging in municipal advisory activities with a particular

client if it couldn’t manage or mitigate its conflicts of interest in a way that would permit it

to act in the municipal entity's best interest.

So those are some of the basic standards, and I gave you an overview of some of the 

different aspects of the proposed regulation of this relationship. I’ll turn it over to Ben to 

talk about -- in detail about the provisions on the disclosure of conflicts of interest and the 

documentation of the relationship.

Ben Tecmire: Thanks, Mike. Like Mike mentioned earlier, the rule contains provisions 

regarding disclosure of conflicts of interest. It is an important part of many of the 

profession's fiduciary duties as it is a part of -- will be called part of the municipal advisor --

sorry -- regulatory regime. In the area of disclosures at or prior to engaging in municipal 

advisory activities, an advisor would need to fully and fairly disclose its -- disclose to its 

client, in writing, all material conflicts of interest. Disclosures would need to be sufficiently 

detailed to inform the client of the nature, implications, and potential consequences of each 

conflict. Such disclosures would also need to include an explanation of how the advisor 

addresses or intends to manage or mitigate each conflict.

As currently drafted, material conflicts would include actual or potential conflicts of interests 

that could reasonably be anticipated to impair the advisors ability to render unbiased and 

competent advice to or on behalf of the obligated person client or fulfill its fiduciary duty to 

its municipal entity client. Material conflicts would also include advice, services, or products 

provided to or on behalf of the client by an affiliate of the municipal advisor if related to the 

municipal advisory activities, also payments to obtain or retain the client’s municipal 

advisory business or payments received from third parties to enlist the municipal advisor's 

recommendation of its services or any transactions or financial products. Conflicts that may 

arise from compensation from advisory activities -- that is contingent on the size or closing 

of any transaction to which a municipal advisor is providing advice -- may also be a conflict

-- material conflict. Draft rule would require municipal advisor to disclose to the client any 

legal or disciplinary events that are material to a client’s evaluation of the municipal advisor 

or the integrity of its management or advisor personnel. Lastly, the draft rule would also 

require disclosure of other engagements and relationships of the municipal advisor that 

might reasonably impair the advisor's ability to either render unbiased advice or competent 

advice to its client or to fulfill its fiduciary duty. If a municipal advisor concludes that it has 

no known material conflict of interest based on an exercise of reasonable diligence by the 

advisor, the municipal advisor must provide documentation to the client to that effect.

During the first public comment process, some commenters raised concerns that initial draft 

rule failed to adequately address issues associated with the provisions of inadvertent or 

incidental advice which may cause a firm to be considered a municipal advisor under SEC 

rules. Commenters observed that a firm could render advice and trigger the application of 

certain provisions of the initial draft rule absent a decision by the firm and the prospective 

client to enter into a client -- municipal advisory client relationship. This could implicate the
application of requirements to disclose conflicts of interest and requirements for the 

documentation of the municipal advisory relationship.

In response to these commenters and comments, supplementary material has been added 

to help address some practical issues related to the timing for conflicts disclosure and the 

documentation of the relationship. In the last current public draft of the rule, in the event 

of a municipal advisor inadvertently engages in municipal advisory activity and does not 

intend to continue the municipal advisory activities or enter into an advisory relationship, 

the advisor would be required to properly provide a dated document that includes a 

disclaimer that the advisor did not intend to provide advice and that effective immediately

has ceased engaging in municipal advisory activities. Also a notification that such municipal 

entity or obligated person should be aware that the disclosure of material conflicts of

interest and other information as required by the rule have not been provided. It must also

include a representation that the advisor has in good faith undertaken reasonable efforts to 

identify the advice it has inadvertently provided. Finally, request confirmation that the 

municipal entity or obligated person received the documentation. An advisor is also 

required to conduct a review of its supervisory and compliance policies and procedures for 

the purpose of ensuring that the reasonably designed to prevent inadvertent advice to 

municipal entities and obligated persons. To be clear, this provision of the rule would not 

serve as a safe harbor from a violation of SEC municipal advisor registration rules or MSRB 

registration rules.

Next, we’ve elected to discuss the documentation associated with the municipal advisory 

relationship that would be required under the draft rule. So under the draft rule, municipal 

advisors must evidence each of their municipal advisory relationships in writing prior to, 

upon or promptly after the establishment of that relationship. The provision of the 

requirement would not require a contract be created and would not necessitate or 

replacement of an existing contract between a municipal advisor and its client. The writing 

would only need to require -- would only require to be delivered to the client and would not 

need to be signed by the client. Some of the information that must be included in this 

documentation of the municipal advisory relationship are the form and basis of any direct or 

indirect compensation, description of the type of information regarding legal or disciplinary 

events requested by the SEC on Form MA and Form MA-I, and information identifying where 

the client can electronically access the most recent Form MA and each most recent Form

MA-I. It must also include the date of the last material change to a legal or disciplinary 

event on the Form MA or Form MA-I filed with the SEC. Also it must include the scope of 

activities to be performed and any limitations on the scope of the engagement. Also it must 

include the date, triggering event, or means for the termination of the municipal advisory 

relationship or, if none, a statement that there is none and any terms related to the 

withdrawal from the municipal advisory relationship. During the terms of the municipal 

advisory relationship, documentation of the advisory relationship must be promptly

amended and supplemented only if there is a material change or addition. Finally, the 

documentation must be promptly -- then promptly delivered to the client. I am going to 

turn it over to Mike, and I apologize if it is a little robotic, but there is a lot of detail that we 

want to make sure that we convey. So...

Michael Post: A couple of observations about the sections that Ben detailed: The provision 

for the inadvertent advice is there, and the rationale was that if a person has provided 

inadvertent advice and perhaps wasn’t registered, there are already compliance issues that 

that step has triggered without the person also having to be potentially in violation of an 

MSRB rule because they didn’t disclose conflicts beforehand and because they didn’t 

document a relationship that people didn’t intend to create in the first place. So it really is
an effort to sort of tailor the requirements and not impose burdens or potentially additional 

rule violations where they wouldn’t make sense. Let’s see. I had another observation. 

Perhaps it will come to me.

So I’ll move on to the suitability of recommendations and the review of recommendations of 

others. For -- the draft rule has a fairly detailed provision on this subject, and again, this is

-- for those of you familiar with suitability obligations of the broker-dealer or suitability 

obligations for market participants regulated by the CFTC, a lot of this will sound very 

familiar. So a municipal advisor, under the draft rule, that makes a recommendation of

a municipal securities transaction or municipal financial product or reviews the

recommendation of another party, if requested by the municipal entity or obligated person 

client and it is within the scope of the engagement, must determine based on information 

obtained through reasonable diligence whether the recommended transaction or financial

product is suitable for the client. And a determination of whether the transaction or product 

is suitable must be based on a list of several factors, including the client’s financial situation 

and needs, the client’s objectives, risk tolerance, liquidity needs, experience with municipal 

securities transactions or municipal financial products generally or of the type and

complexity being recommended, the financial capacity of the client to withstand changes in

market conditions during the term of the product or the period in which the municipal 

securities are expected to be outstanding, and any other material information known by the

municipal advisor about the client and the municipal securities transaction or product after 

reasonable inquiry.

In addition to this determination of whether the transaction or product is suitable, the

municipal advisor would then be required to inform the client about the material risk and

benefits of the transaction and its structure, the basis on which the municipal advisor

believes that the transaction or product is suitable or not, and whether the municipal advisor

considered reasonably feasible alternatives that could have also -- could also serve the

client’s objectives.

Again, like FINRA requirements related to the suitability obligation and CFTC requirements

similarly related, there’s a know-your-customer -- or know-your-client requirement

analogous to the know-your-customer requirement. And under that, a municipal advisor

would be required to use reasonable diligence in regard to the maintenance of the municipal

advisory relationship to know and retain the essential facts concerning the client and

concerning the authority of each person acting on behalf of such client. And the essential

facts, for purposes of knowing your client, include those that are required to effectively

service the municipal advisory relationship with the client; to act in accordance with any

special directions from the client; understand the authority of each person acting on behalf of

the client; and comply with applicable laws, regulations, and

rules. The draft rule requires -- it has a diligence standard in connection with each kind of 

undertaking, whether it be making a recommendation or reviewing the recommendations of

others. And there’s a kind of overarching principle that the client is empowered to control 

the scope of the relationship.

So the review of the recommendations of others, for example, only triggers obligations on 

the part of the municipal advisor if it is within the scope of the relationship. And you’ll 

recognize that these provisions about reviewing of recommendations of others can dovetail 

nicely with the IRMA exemption that is provided under the SEC final registration rule.

So I’ll discuss one of the specific prohibitions, and that’s related to principal transactions 

with your client. And there was a proposal in the initial draft rule to prohibit principal 

transactions with the client and the -- a number of comments addressed that subject in the
first round and sought clarity about the scope of the prohibition. So the revised draft rule 

significantly narrows and clarifies the scope of the prohibition. There was some concern

that a principal transaction -- even though there was reference in the rule to the client being

a counter party, for example -- might encompass the mere provision of professional services

and receipt of payment for those professional services or could include very basic banking 

products like cash deposit accounts. So the draft rule continues to provide that a municipal

advisor would be prohibited from engaging in principal transactions with a client. It’s

limited to municipal entity clients to which the municipal advisor would owe a fiduciary duty 

under Dodd-Frank. But it’s important to note that municipal advisors in their dealings really 

with all persons are already subject to MSRB Rule G-17, which is the kind of fundamental or

basic fair-dealing rule. In response to the comments the Board provided in the revised draft a 

definition of engaging in a principal transaction and drew on some of the language in the 

Investment Advisors Act addressing principal transactions between investment advisers and

their clients. And so it defines those transactions as acting as a principal for one’s own 

account, selling to or purchasing from the municipal entity client any security, or entering 

into any derivative, guaranteed investment contract, or other similar financial product.

So now I’ll discuss some of the other specific prohibitions related to compensation fees and 

some other matters. So there are specific prohibitions in the draft rule against excessive 

compensation in relation to the municipal advisor services that were actually performed. 

And in response to comments, the revised draft rule adds supplementary material to give 

guidance on the factors that would be considered in determining whether compensation is 

excessive, and those factors are derived largely from existing MSRB guidance on excessive 

compensation for dealers. Those factors are: the municipal advisor's level of expertise, the 

complexity of the municipal securities transaction or financial product that was being 

advised on, whether the municipal advisor's fee is contingent upon the closing of the 

transaction or financial product, length of time spent on the engagement, and whether the 

advisor is paying any other relevant costs related to the transaction or financial product.

There’s a specific provision that would prohibit municipal advisors from delivering an invoice 

for fees or expenses for municipal advisory activities that does notaccurately reflect the

services performed or the personnel that performed those services. But in response to

comments, there is clarification in the re-proposal that the draft rule wouldn’t prohibit a

municipal advisor from providing a discount of the fee as compared to the services that were

actually performed as long as that discount is openly disclosed to the client. The municipal

advisor would be prohibited from making payments for the purpose of obtaining or retaining 

business to any person other than reasonable fees that are paid to another registered 

municipal advisor for solicitation of a municipal entity or obligated person. And this is in 

recognition of the Dodd-Frank Act -- Dodd-Frank Act's grant of rulemaking authority to the 

MSRB over municipal advisors that undertake solicitations of municipal entities. Otherwise, 

draft G-42 is speaking to the core standards of conduct or core duties of non-solicitor 

municipal advisors, and the MSRB anticipates taking up the issue of the duties of solicitors in

a separate rulemaking initiative. There is also a specific prohibition on the making of 

materially false or misleading representation about the capacity, resources, or knowledge of 

the municipal advisor to obtain or retain municipal advisory business.

So that concludes the overview of the provisions of the draft rule G-42. I’d caution again 

that the rule is still in process and subject to change, but we hope that that overview at 

least raises flags or raises some of the issues that you can anticipate an eventual rule

addressing and to prompt any questions that you may have. And I think at this time, I’ll 

turn it back to Tom to keep us on track.

Male Speaker 2: Great. At this point, I’m going to turn over to Bonnie, who is going to 

provide a little bit of flavor for what FINRA is currently doing in assessing and reviewing
fiduciary obligations during their examinations.

Female Speaker 1: Okay. Thanks, Tom. And we’ve certainly gone from the SEC starting us

off with some cases of real failure to the MSRB on their role and ways to avoid it, and we 

thought it would be helpful to talk about what FINRA examination staff may do in reviewing 

municipal advisory activity in advance of rulemaking but currently while your activity is

going on. And for the folks in the room or also listening on the webcast, you know, some of 

the techniques and questions that an examiner may use may be helpful for you to use 

thinking about your own business activities and particularly the fiduciary obligation that 

arises out of undertaking a municipal advisory activity.

Now, as Ed Wegener mentioned at the -- in his opening remarks, FINRA, we’re the 

organization that examines broker-dealers. But we think that some of these questions and 

techniques may apply across the board. One of the first steps an examiner will do when he 

or she arrives at your firm or is in contact with you is really focus on where you are acting 

as a municipal advisor and identify those engagements. That’s where you are going to owe 

the municipal entity a fiduciary obligation. This obligation arises either when you’re getting 

advice or recommendation on the issuance of securities or on investment strategies and for 

the broker-dealers in audience it’s typically when your purchasing, selling, making 

recommendations about securities on the investment of proceeds or brokerage of escrow 

receipts.

So here are three sample questions that FINRA examiners may ask, and this will help you 

think about your own obligations: The first is does your firm have a reasonable means to 

determine the circumstances under which you are acting as a municipal advisor? For 

example how does your firm identify when it is making a recommendation or giving advice 

to a municipal entity? And in fact, I could have thrown in here how do you identify your 

municipal entity clients -- separate them from your others, because that’s when the 

municipal limit of fiduciary obligation attaches. But once you are hired as a municipal 

advisor, how do you and your employees meet your fiduciary duty for the length of the 

engagement? In other words what does it mean in your firm to have a duty of care and to 

meet the duty of loyalty? How do you identify conflicts of interest -- there certainly was a 

lot of talk about that -- manage them and then disclose them to the municipal entity? So in 

short the communications that you have with your customers, the training you do with your

employees, your policies, your procedures, your supervision -- it all has to be consistent and 

aligned reflecting how you think about and answer these types of questions about your

fiduciary obligations.

Male Speaker 2: And I’d like to mention that while Bonnie is speaking about examinations 

that FINRA is conducting broker-dealer municipal advisor's, I think the approach is likely to 

be applicable to all investment advisors. So, you know, think about those questions in 

general. And I was wondering, Bonnie, if there are any illustrative examples that you may 

have from recent exams that may help flesh this out a little bit?

Female Speaker 1: We do, Tom. And it’s interesting. It does involve what we 

affectionately call an IRMA. I didn’t realize that was controversial. It is awfully hard to spit 

out the rest of it. And -- but there were a lot of questions about that this morning and in 

this example it doesn’t matter whether you are the broker-dealer or the municipal advisor. 

Everyone was at fault. It is really a cautionary tale and it is a practice that should be 

avoided. In this case we had a broker-dealer that wanted to rely on one of those 

exemptions -- the IRMA exemption. And so you’ll recall from Jessica’s remarks that that 

means that an independent registered municipal advisor had been hired by the issuer to 

provide advice and so the broker-dealer was going to be providing advice on the investment
of proceeds on purchasing and selling some securities. It might have been treasuries or 

mortgage specs. And that would have been perfectly fine.

Now let’s stop for a minute. Why would a broker-dealer want to avail itself of that 

exemption? Well, as Mike mentioned, if you are a municipal advisor you can’t engage in 

under the draft rule should it pass -- you can’t engage in principle transactions. And so we 

already have some firms that are -- you know -- avoiding that by hiring -- ensuring that an 

independent registered municipal advisor is hired. And so that was the reason.

However, in this case, the IRMA was not standing side by side, as John Cross had said. This 

IRMA was -- to continue that illustration -- sort of sitting in the corner. The IRMA had been 

hired, but really the hiring was just to give a façade of independence. It wasn’t actually 

evaluating the recommendations being given by the broker-dealer, and it wasn’t giving any 

advice on the quality of those securities to the municipal entity. Now, in this example, both 

the municipal advisor and the broker-dealer were at fault. The municipal advisor failed in

its fiduciary obligation to the municipal entity, and in addition, the broker-dealer failed to 

perfect its reliance on that regulatory exemption. And whether you're at the broker-dealer

or at a municipal advisor, don’t let this happen at your firm.

Male Speaker 2:

I think we still have a few minutes left, and I wanted to get to questions because they’ve 

been coming up pretty fast and furious now. So let’s see if we can go ahead and address a 

couple of the questions right now. The first question was: "Financial advisory contracts 

often provide for a compensation on a per bond basis upon the successful completion of a 

transaction like the issuance of bonds. Is this still consistent with the new fiduciary 

standards?"

Michael Post: Yes, it is consistent with the draft rule, you know, with the caution it’s still in 

process, but the -- really that issue -- raises potential conflicts of interest related with that

form of compensation. And so the draft rule would simply require full and fair disclosure of

that material potential conflict of interest, recognizing that in that instance, the municipal

advisor may be incentivized to provide advice that makes it more likely that the

transaction is going to close or more likely that it’s a larger transaction if the fee is on a perbond basis. And it would -- it would really be then -- the client would be well-informed

about those potentials, and there isn’t any other -- you know, solely based on that, there

isn’t any reason that the relationship can’t continue and that it can’t be productive and a 

beneficial one to the client. But the conflicts of interest would be important to be 

disclosed.

Male Speaker 2: Moving on. Additional questions, then. The next questions relate to can 

we, as a panel, provide some flavor for the documentation of the know-your-customer 

suitability-type documentation that we would expect to see in terms of either the rule or 

from an examination perspective.

Female Speaker 1: I can start it. I can start that. With a municipal entity, if you’ve dealt 

with them before, you know that they are typically governed. They have statutory 

restrictions as well as local investment guidelines. Those are two good places to start as 

well as getting the trading authorization to determine that the person with whom you’re 

transacting is permitted to do so. That’s really a start. Obviously your own suitability 

guidelines at your own firm should apply. Want to add anything to that?

Michael Post: I would just add, I suppose, that there’s going to be a difference between 

record requirements that are very specifically prescribed by MSRB rules and then uses of
records that would be prudent for municipal advisors and -- you know -- worthwhile in the 

exercise of your own business judgment. So the SEC has already adopted, in the final 

registration rules, a host of books and records requirements. So I would urge you to

consult those because they already are addressing the communications sent and received 

by the municipal advisor in the course of its business. There are some additional proposed 

books and records requirements in the [MSRB's] rules, but really, they’re focusing on

specific requirements in each kind of targeted rule, whether it be the proposed supervision

rule or

G-42 or the proposed gifts rule. But a lot of the general or kind of foundational books and 

record requirements, I think you’ll find in the SEC final rules.

Male Speaker 2: Another frequent question that we're getting is some confusion amongst 

the suitability obligation versus fiduciary standard -- you know, why is there a suitability 

obligation in place when, arguably, the fiduciary standard of acting in the best interest of 

the client could cover the entire world here?

Michael Post: Sure. The suitability standard is there because -- well, it will be important in 

that it will be the minimum standard, at least for municipal advisors when they are dealing 

with obligated person clients. So the MSRB has followed the approach that, you know --

signaled in Dodd-Frank--that a fiduciary duty is owed to municipal entity clients and not 

obligated to person clients. Even though the MSRB was granted fairly sweeping rulemaking 

authority, it has not proposed to impose a fiduciary duty on municipal advisors when they’re 

dealing with obligated person clients.

So the -- it’s true the fiduciary duty is going to be -- and I think it’s recognized elsewhere in 

financial services regulation -- a higher standard than a suitability standard because the 

municipal advisor shouldn’t simply make recommendations that are suitable for the client; 

the municipal advisor should only make recommendations that are in the best interests of 

the client. But the suitability standard is still important in the rule for the

recommendations to obligated person clients to which a fiduciary duty is not owed.

Male Speaker 2: And Michael, can you give a little bit of flavor for a situation in which

there may be a range of potentially suitable structures that a municipal entity might pursue? 

How does the -- how does the municipal advisor handle that type of situation while still 

satisfying their fiduciary duty?

Michael Post: I think, typically, the municipal advisor is going to -- I would anticipate,

going to make a singular recommendation. But the draft rule contemplates the potential for 

there to be other alternatives that could serve the client’s objectives. And there was, you

know, in the earlier proposal -- or at times, there was consideration given to imposing an 

obligation on municipal advisors to discuss the reasonable alternatives. But there’s been a 

overarching approach in the MSRB’s development of the rule, really, to allow the municipal 

advisor and the client to largely arrange the relationship between them. And this goes a

long way towards empowering the client. It also goes a long way towards giving the 

municipal advisor some clarity about the obligations that it would have. So while the rule 

wouldn’t permit a municipal advisor to vary the duties that it would owe within the scope of 

the relationship, it does allow the issuer and -- or the client and the municipal advisor to

define the scope of the engagement. So the rule still has what, I guess, you could consider a

sort of a prompting or a flagging because when a recommendation is made, there’s a draft

requirement, a proposed requirement, that the municipal advisor inform the client whether

it has considered other reasonably feasible alternatives that would serve its objectives.

And so I think the anticipation is that that would at least prompt the conversation if the 

client expected the -- a range of alternatives to be considered and they weren’t, the client
would be informed at that point that the municipal advisor did not consider alternatives. If

the client didn’t expect alternatives to be considered, didn’t view itself as compensating the

municipal advisor fairly for that broader scope of engagement, then the client, presumably,

wouldn’t be surprised when at that stage it’s informed that the municipal advisor didn’t

consider alternatives.

Male Speaker 2: We also have a variety of questions that generally deal with the 

intersection between political contributions and potential problems with that raising fiduciary 

duty type conflicts of interest. Can you just speak about how to handle that type of 

situation? Is -- are political contributions going to breach fiduciary duties? Is there a way 

that they should be handled?

Michael Post: Well, there are provisions in the draft rule that speak to payments made. 

There’s a prohibition in the draft on payments made to obtain or retain business except for, 

you know, in certain circumstances- - for example, to another registered municipal advisor 

for solicitation, recognizing that a soliciting municipal advisor is subject to the regulatory 

framework that is currently in place and in the process of being developed, namely, 

registration requirements, rule G-17, there are proposed amendments to G-37 that would 

bring that soliciting municipal advisor under the applicability of those provisions, a

proposed gifts rule, a supervision rule that has already been approved, and is -- would be 

implemented in April of next year.

So there is a rationale for the exception for those payments to a registered solicitor

municipal advisor, but otherwise payments to obtain or retain business, which political 

contributions in some circumstances could fit into, would be prohibited by the draft rule G42. But the MSRB’s existing rule G-37 on political contributions is in the process of being 

proposed to be extended to municipal advisors.

So the same basic approach in the rule where a triggering contribution by a municipal 

finance professional at a broker-dealer, or the dealer, or a PAC controlled by either of those, 

would result in a ban on municipal securities business by that dealer with the relevant 

municipal entity for two years. And this is a -- it could be characterized as sort of a cooling 

off period to sever -- or sever the potential connection between the contribution and

political favors, or at least the appearance of a connection between the contribution and the 

political favors.

So the -- in -- I guess, in sum, there are provisions in draft G-42 on payments to obtain or 

retain business. And the MSRB is in the process of proposing to apply the core elements of 

G-37 to municipal advisors as well.

Male Speaker 2: To round off our hour, because we’re about finished, I just had two more 

questions which relate to the form of the engagement agreements. The first one is: Does 

MSRB anticipate and provide any guidance or templates for a standard engagement 

agreement?

Michael Post: The MSRB is -- does not plan to provide a template. I think a major 

rationale would be some of the things that I alluded to earlier that there’s the overarching 

goal, really, to empower the client, and to allow the client and the municipal advisor to the 

extent it would be appropriate to arrange their relationship and arrange the dealings 

between them.

So rather than the MSRB suggest that the scope of that relationship should be in any 

particular form, it really will be up to the parties to the relationship to do that. But one
thing I wanted to emphasize, again, is that the documentation that the draft rule would 

require is not necessarily a two-party agreement. Such an agreement would comply with 

the rule, you know, if it met -- if it covered the topics that are required to be evidenced in 

the documentation of the relationship. But the documentation of the relationship can be 

unilaterally prepared by the municipal advisor. Of course it would be -- it would need to be 

accurate. So to the extent that it -- to the extent it describes the terms of the relationship 

with the client, those would have to be the actual terms that are the agreement or 

understanding between the municipal advisor and the client. And the writing that’s created 

to document the relationship would need to be updated and provided to the client.

But the approach in the draft rule thus far has not to be -- not to require a contract, or 

agreement, per se, or bilateral agreement. And our understanding has been that in some 

jurisdictions, the -- you know, a two-party agreement or a contract might not necessarily be 

required by the local procurement law or local procurement regulations. So the MSRB did 

not want to impose, based on its development of the rule so far, a requirement that would 

go beyond, sort of, the locally applicable procurement regulations.

Male Speaker 2: And one last question on written contracts. The question was, "Is it going 

to violate proposed G-42 for a municipal advisor to give advice to a prior client before 

entering into a new contract?" And the specific example would be, for example, to 

implement a refunding.

Michael Post: Well, if I understand the question, I think a fiduciary even, you know, this --

assuming maybe municipal entity clients, you know, if you draw analogy perhaps to 

attorneys there are instances where attorneys represent multiple parties in the same matter,

in the same transaction, and it may not be problematic so long as the different parties’

interests are aligned. But it’s common for, you know, in an attorney -- in the attorney area

if the interests of the parties -- multiple clients of an attorney begin to diverge, than

the attorney would need to sort of spin off one or more of the clients to a separate attorney.

So I think that if the interests of the different clients of the municipal advisor or potential 

clients are aligned, then at least in the development of the draft rule so far nothing would 

prohibit the municipal advisor from representing multiple parties. So I would just caution, 

based on an analogy to attorneys, that if the different parties’ interests were materially 

different, or over time did diverge, it might be important for the municipal advisor to 

consider sort of spinning off one of the -- one or more of the clients to another municipal 

advisor, or another sort of arrangement that would be satisfactory to the former client.

Male Speaker 2: Well, with that answer, I think we are now a little bit over our allotted 

time. So I have just a few quick housekeeping items as we finish up our panel, the first one 

being that CPA forms are in the back of the room, right in the center, for anyone who wants 

to take advantage of that. Oh, what’d I say? CPE.

[laughter]

CE forms, unless you want to be a CPA by filling out a form. 

[laughter]

In addition, I wanted to let you know that lunch is not being specifically provided out here. 

But the fed does have a good cafeteria on the fifth floor, has a variety of different options --

grill, salad, hot plates. I’m not getting a cut for pitching their business, but it's good food.
[laughter]

And finally, I wanted to remind you that, to the extent that you choose to go outside of the 

building to have lunch, we are going to start panel three promptly at 1:30 p.m. And please 

make sure that you leave time because you’re going to have to go back through security to 

get back into the building. With that, thank you very much, and we’ll see you after lunch.

[applause]

Dan Gregus: Good afternoon, everyone. My name is Dan Gregus. I am the acting 

associate director for Broker-Dealer Examinations in the Chicago Regional Office of the SEC. 

And I am honored to have with me today Larry Sandor, the deputy general counsel of the 

MSRB, as well as Laura Trotz, the deputy district director of FINRA’s Chicago district office. 

We’re going to be talking about municipal advisors, supervisory, and recordkeeping 

responsibilities.

Before we start, I just -- we wanted to remind you that during the presentation, members 

of the SEC staff will be walking around to take questions that you might want to present to 

the panel near the end of our discussion.

So supervisory responsibilities, and what will we be talking about? I’ll be talking about the 

SEC’s standard of supervision, which is very general, and the records that the SEC requires 

you to keep.

The MSRB has been designated the primary rule making authority in the area of supervision 

of municipal advisors and so Larry will be talking to you about more specific rules that

they’ll have in this area, including the recently approved rule G-44 and the corresponding 

amendments to rules G-8 and G-9. For most of you, your first contact with your regulators

and their interpretation of the rules as they apply to you will probably be in examinations. 

As you may or may not know, the SEC will be examining municipal advisors that are not 

members of FINRA -- essentially, independent municipal advisors and municipal advisors

that are also registered as IAs. We’ll hear more about that in the next panel.

FINRA will be examining municipal advisors that are also members of FINRA, so, essentially, 

broker-dealer municipal advisors. Laura Trotz will be talking about what FINRA will be 

looking for in this area based on her experience dealing with registrants of that type. So 

let’s get to the SEC standard.

The SEC standard can be found in Section 15(b) of the Securities Exchange Act. It really 

says that your firm needs to have procedures that are reasonably designed and

implemented in order to prevent and detect violations of the Federal Securities Laws and the

MSRB rules. This is very general and gives you some flexibility in doing so.

So let me tell you, very generally, what it is that we’ll be looking for over there. As I said, 

there’ll be more details on this in the next panel. But when we come into one of your 

offices, we’ll be looking for a set of procedures. These procedures should be customized to

your firm’s business and not off the shelf. Or if you’ve bought something that’s off the shelf, 

make sure you customize it to your business. There’s nothing surer than if we find some

off-the-shelf procedures where a firm has forgotten to change the name of the firm on the

procedures --

[laughter]
-- for us to not be likely to find that they’re reasonably designed to be customized to your 

business.

Secondly, we’re going to be looking at implementation. And in the area of implementation, 

one of the most important things to show that you’ve implemented these procedures is your 

documentation, which falls right into the rest of our presentation. This is one of the best 

ways to show that you’ve implemented the processes that you have designed in your 

procedures.

Now, before I get to that, let me tell you that rule 15-B derives from -- or this standard 

derives from Section 15(b)4 and 15(b)6 of the Exchange Act, which provide that a firm and 

an individual can be sanctioned for failing reasonably to supervise a person under their 

supervision. This mostly applies to business line supervisors, but I will call your attention to

a fairly recent case still that was brought through the Chicago office called the Ted Urban 

case, where, essentially, this case found that pretty much anyone in management can be 

deemed a supervisor, someone in compliance, a lawyer, possibly even a CEO or president. 

But this is not solely based on your title. It’s only if you are designated or undertake a 

supervisor role or can otherwise affect a conduct in question, such as by hiring and firing. 

And through some of the later discussion today, you’ll -- what -- we’ll talk about designating 

people in this area. So I thought that would be interesting to you. You can find that in the

-- on the SEC’s website under Administrative Proceedings.

So now that I bring that up, I will talk about recordkeeping in a little more detail and to --

hopefully, to help you assure that you’re in compliance with your responsibilities. SEC Rule

15-B 1-8 sets forth the recordkeeping requirements for municipal advisors. I’m going to go 

over the areas that it requires pretty quickly because the list can be found in the rule and 

you can check it back and it’s pretty straight forward. And I want to be able to focus on a 

couple of other concepts pertaining to this recordkeeping. They’re not really discussed in

the rule or not very specifically discussed in the rule but can be found in the release which is 

in much more detail in the CFR section.

So the first thing that you need to keep are communications sent and received by the firm. 

You’ll find in the rule that this also includes internal communications. In the CFI you’ll find 

that this also should include electronic communications. That includes communications on 

your websites, in your emails and instant messaging. This can be found specifically at page

397 of the CFR in footnote 1341. So see how much time I’m saving you already?

[laughter]

You also have to keep and produce checkbooks, bank statements, ledgers, and other 

financial records. In addition to that, you must keep and produce every version of policies 

and procedures that you had in place in the last five years. And when I say the last five 

years here, it’s important for you to remember that for the future. But the last five years 

here means everything after July 1st, 2014, whenever -- I say that because that’s the 

effective date of the procedures.

In addition to those procedures, keeping those procedures for five years, you have to keep 

them for the first two in an easily accessible place. And remember that concept because it 

comes up a couple times out in this rule, and it is defined by how quickly you have to 

produce these records. You need to keep documents material to your recommendation or 

anything that memorializes your recommendation. You also have to keep all written 

agreements with municipalities, their employees, or obligated persons. And Mr. Cross 

described what obligated persons are: essentially, a fancy name for municipal conduit
borrowers.

On top of these records, you need to keep lists, lists of all associated persons with your firm 

in the last five years, lists of all municipalities and obligated persons who engage your 

services in the last five years, anyone that the municipal advisor paid to solicit municipal 

business on its behalf or anyone who paid the municipal advisor to solicit municipal business 

for it. You must also keep a list of people who are designated as written consent of service 

of process for all of your employees.

Next, we’ll talk about the retention periods for these records. For all documents, you need 

to keep them for five years. This five years even applies after termination of the municipal 

advisor. So if you were miss -- a municipal advisor for two years, you need to continue to 

keep those records on hand for another three years to meet the five year requirement. And 

you must notify the SEC in that situation where the documents will be preserved. 

Organizational records must be kept for three years after termination. Electronic storage of 

these records is permitted, though. We’ll talk about some specific requirements pertaining 

to that later.

First, let’s talk about the general requirements for all records. Again, they must be easily 

accessible and legible. This makes sense because remember these records are required for 

a reason. We expect you to be using these to conduct your business one, and two, most 

relevant to this panel, these are the records you’re going to have to look at in order to do a 

proper job of supervision of what’s going on in the firm.

This -- the next concept is, I think, a very important one, and this one is discussed -- it’s 

mentioned in the statute, but it’s discussed in much more detail in the CFR. So I’ll jump to 

this site for that. But when the SEC or some other regulator asks you for these documents, 

they must be produced promptly. Well, that is not specifically defined in the statute, but if 

you look in the CFR at pages 399 to 400, footnote 1347, what this means, in most cases, 

those records must be produced immediately, you know, within a few hours. Or I’ll say 

loosely, the next day. And I say that because it doesn’t really say that even in the CFR, but 

here’s what it says in terms like -- of the outside time period you could produce these 

documents. It specifically says, only in unusual circumstances would a municipal advisor be 

permitted to delay producing records for more than 24 hours.

Now, I can’t tell you what an unusual circumstance would be but I can tell you a couple of 

things from experience that are not unusual circumstances. One, that it will be a large 

number of records. That’s not unusual. Everyone -- many of the firms we deal with talk 

about producing a large number of records and, with the technology available, it is not 

considered an unusual circumstance.

Secondly, stating that the records are hard to collect will also not be considered an unusual 

circumstance. Why is that? Because, as I stated earlier, one of the general requirements 

for all records is that they’re easily accessible. So, they cannot be easily accessible and 

hard to collect at the same time. And that goes beyond not complying with the

recordkeeping requirements because, as I stated, these are the records we’re expecting you 

to be using to do your supervision of your firm. So they have to be easily available to your

supervisors before they’re ever easily available to us.

Now, here’s a few special requirements for electronic storage. First of all, there must be 

safeguards in place to prevent destruction and alteration. This is not -- this next thing is --

in terms of a safeguard is not in the statute, it’s not on the CFR, it’s just based on 

something that I’ve seen in my own experience with other records of this type and that’s a
called using a worm standard, W-O-R-M. Read once, write many. It doesn’t solve the 

access problem, but it helps keep the documents preserved from being altered when you 

kept -- when kept in an electronic form. You also, therefore, must limit access and 

authorization to the people who can get at these records in order to assure, again, to 

protect against their destruction and alteration.

Now let me -- before I go into the next section and if -- and whether or not I do, let me ask, 

are there any nonresident muni advisors in the audience? No? So we’ll do this quickly, in 

case there’s someone on the webcast, but there’s special requirements for the non-resident 

muni advisors which are simply they must report their domestic address to the SEC where 

records will be kept or sign an undertaking to produce records domestically when requested.

That being the case, I’m going to turn this over right now to Larry Sandor, who can tell you 

more about the MSRB rules.

Larry Sandor: Thank you very much, Dan. Can everybody hear me okay? Great. And I 

wanted to talk a little bit about the new MSRB rule G-44, but we’ve heard some comments 

from municipal advisors that while there aren’t any rules in effect yet, so what I have to 

comply with, what do I have to supervise? And I just wanted to make sure that we were 

clear on this.

The statute itself, as we talked about this morning, has a fiduciary duty or requirement for 

municipal advisors in providing advice to their municipal entity clients. But in addition to 

that, there’s a statutory antifraud provision. And the MSRB has promulgated a number of 

rules. Some of them are very administrative. But of course, our registration rule, A-12, we 

talked about earlier; G-17, the fair dealing rule; and now G-44. So this is probably the

most substantive rule that we’ve adopted, and I’m going to -- so I’m going to go into quite 

a bit of detail about the supervisor and compliance obligations under new rule G-44.

On October 23 of this year, the SEC approved the new rule, G-44, on supervisory and 

compliance obligations of municipal advisors. The SEC also approved amendments to the 

MSRB’s books and records rules, rule G-8 and G-9, to require municipal advisors to preserve 

certain records. And this is corresponding to some of the record retention requirement that 

Dan just spoke about.

The rule changes become effective on April 23 of next year. So G-44 goes into effect on

April 23 of next year with the exception of G-44D, which is the annual certification provision, 

and that becomes effective on April 23 of 2016. So let me be clear on this: It’s important

that municipal advisors start now -- start preparing now to comply with the new rule, which 

will be in effect in April of next year. And then we would expect that the certification, the 

first certification, would be completed by April 23 of 2016. So if you haven’t started the 

preparation, if you haven’t familiarized yourself with the rule, we’ll walk through the

elements of the rules so that you’re grounded in it and can start preparing for April of next 

year.

We also have had questions about the format of our rules. And before I start talking about 

G-44, I should say that we recently underwent a review of our rules and decided that we 

would have rule text and then supplementary material that we would start incorporating, 

similar to other self-regulatory organizations. And so you’ll notice in G-44 there is rule text 

and also supplementary material. Now you should treat that supplementary material as 

having the same weight as the rule text.

So a cornerstone of our regulatory framework is rule G-44 which is, as I said, establishes
supervisory and compliance obligations of municipal advisors when they’re engaging in 

municipal advisory activities. The rule utilizes a primarily principles based approach to 

supervision and compliance so as to accommodate, really, the diversity of municipal

advisors that are represented here today and throughout the country. So we recognize that 

municipal advisors are of many different sizes, from sole proprietors to very large firms.

And this rule, as I’ll talk about in more detail, is a principal-based rule that allows for the

flexibility to supervise a firm of any size.

Rule G-44 really is intended to promote a robust compliance and a set of supervisory 

policies and procedures while providing that flexibility to accommodate different sizes and 

types of firms. Of course, effective supervision and compliance oversight are fundamental 

to preventing and detecting violations of the Federal Securities laws and MSRB Rules. So 

rule G-44 has several basic elements which I’ll discuss in more detail, but I’ll just list the 

elements and then we’ll go through them one by one so that you’re have a clear 

understanding of each one.

The first is that you have to have a supervisory system that’s reasonably designed to 

achieve compliance with applicable laws, rules and regulations so, an overall supervisory 

system.

The next two are really components of that first requirement of having a supervisory system 

and that is that you have written supervisory procedures that are reasonably designed to 

achieve compliance with applicable laws and regulations. And you have to designate one or 

more principals to be responsible for supervising the municipal advisory activities of the 

municipal advisor.

Next, you have to compliance processes that are reasonably designed to achieve compliance 

with applicable laws and regulations. And at least an annual review of the compliance and 

supervisory policies and procedures. You are also are required to designate a chief 

compliance officer to administer the municipal advisors compliance program. I happened to 

notice from the attendee list that there were a number of CCOs that had signed up, how 

many of you in your current businesses are the chief compliance officer? So maybe a third to

a half of the room. So you’re obviously familiar with the regulatory scheme. Perhaps, as we

know, there are a number of municipal advisors that are also registered as broker- dealers,

and you’re -- you fill that role for the broker-dealer, many that are registered as investment

advisors, and you fill that role. And obviously, in creating this rule, we understood and

borrowed from the regulatory scheme for investment advisors and broker-dealers.

And the last element is an annual written certification by the chief executive officer or 

equivalent that the municipal advisor has in place a process -- processes to establish, to 

maintain, review, test, and modify the written compliance and supervisory procedures that 

are reasonably designed to achieve compliance with the law.

So let’s talk about each one of those elements and break them down. The first is an overall 

supervisory system. Municipal advisors have to establish the -- implement and maintain a 

system to supervise the municipal advisory activities of the firm. And the supervisory 

system must be reasonably designed to achieve compliance with those laws. It must 

include, as I said, there are two subsets, two elements of the system. One is written 

supervisory procedures, which we’re going to talk a lot about. And two is the designation of 

one or more municipal advisor principals to supervise the municipal advisory activities of the 

firm.
The MSRB has stated that a municipal advisor with few associated persons, or even one if 

it’s a sole proprietorship, can have a sufficient supervisory system. The rule permits one

person to be designated as responsible for supervision and the written supervisory 

procedures may be tailored to the size of the municipal advisor. But, be clear that the final 

responsibility for proper supervision rests with the municipal advisor, itself.

So let’s talk about the first subset of this system which is the WSPs, or Written Supervisory 

Procedures. Municipal advisors must establish and implement and maintain those written 

supervisory procedures that are reasonably designed to insure that the municipal advisory 

activities of the firm and its associated persons are in compliance with applicable securities 

laws, rules and regulations. Now, a question had been raised during the comment process 

as to whether or not those written supervisory procedures have been -- have to be 

separate. And what we said in response is that that the written supervise -- that there is 

flexibility in designing the supervisory system and the written supervisory procedures, but 

to the extent to that there distinctions between the municipal advisory rules established by 

the MSRB and others, that we would expect that there would be separate written 

supervisory procedures for the municipal advisor activities.

Also importantly, those written supervisory procedures, as Dan said, can’t simply sit on the 

shelf, they must be promptly amended to reflect changes that occur in applicable laws and 

regulations. And also as changes occur in the municipal advisor supervisory systems. And 

also, this is important, those changes must be promptly communicated to all associated 

persons to whom they are relevant based on their individual activities and responsibilities in 

the firm.

I often say that written supervisory procedures are living, breathing documents. They 

shouldn’t just sit on the shelf, they shouldn’t have another firm’s name on them [laughs], of 

course. And they should be reviewed frequently and updated frequently. So whether

drafted in house or by a law firm or consultant, it’s important that they be updated promptly 

to reflect changes in the firm’s business or the law and promptly communicated to written 

personnel.

Also, those written supervisory procedures must take into consideration the firm’s size, their 

structure, the nature and scope of the municipal advisory activities, of course. The number 

and location of offices, the disciplinary and legal history of the associated persons in the

firm and the likelihood that those associated persons may be engaged in relevant outside 

business activities. And also consider any red flags such as indicators of irregularities or 

misconduct. So basically, you’re going to tailor, as Dan said, those written supervisory

procedures to the size business model and structure of the firm.

Where under applicable law an associated person may supervise his or her own activities, 

the written supervisor procedures must address the manner in which any absence of a 

separate supervisor, those written supervisory procedures are reasonably designed to 

achieve compliance with applicable law.

The next element is the designation of a municipal advisor principal. So the rule requires 

municipal advisors, as I said when I started, to designate one or more municipal advisor 

principals to be responsible for supervising the municipal advisory activities of the firm. 

We’ve been asked during the comment process if you can designate a firm -- a principal by 

title, or do you have to designate the particular name of that individual? And the answer is 

that there is flexibility as to how you document who is the written supervisory -- municipal 

advisory principal for a particular activity. We were also asked if it has to be in the written 

supervisory procedures if -- or if it can be in a separate document. And again, we said that
there’s flexibility as to where you document who those principals are or that principal is.

However you do it, you must be clear as to who is responsible for that activity. Because 

firms have problems in other areas, in broker-dealers and other entities, where it has not 

been clear as to who has been designated as the principal for a particular activity. And you 

don’t want finger pointing between different people saying, I wasn’t responsible for that 

activity. So, make it clear and make sure it’s documented however you do it. But there is 

flexibility in that regard.

So a municipal advisor principal, I haven’t really talked a little bit about what that means. 

It’s a specific designation. The MSRB is going to be filing shortly amendments to rule G-3 

which will establish two professional qualifications classifications. One, a municipal advisor 

representative, and those are the individuals engaged in municipal advisory activities that 

you’ve identified on the Form MA-I and also a municipal advisor principal.

The rule amendment to rule G-3 that we are going to be filing with the SEC will require, if 

approved, that the -- any municipal advisor representative and principal must take and pass 

the municipal advisor representative qualification exam, which will be, as I mentioned in my 

opening comments, available next year. The amendments would provide for a one year 

grace period for those individuals, the reps and the principals that must take the exam, to 

take it and pass it. And also under the proposed amendments to rule G-3, each firm would 

be required to designate a municipal advisor principal to be responsible for the overall 

municipal advisory activities of the firm. So, I wanted you to be aware of what that

principal designation meant and what would be required.

Under G -- rule G-44, just going back to G-44, municipal advisor principals, under the rule, 

must be vested with authority to supervise their areas of responsibility. And so -- and also 

under rule G-44, municipal advisor principals must have sufficient knowledge, experience 

and training to understand and effectively discharge their responsibilities. So this is very 

important. If you designate someone as a principal, I think it’s pretty clear, but I want to 

state it clearly, that they have to understand the activity that they’re supervising. If they’ve 

been designated to supervise advice regarding municipal derivatives, they should

understand that area. Or, advice regarding the issuance of municipal bonds, they should 

understand that area. So it’s important that the principal, if they’ve been designated to 

supervise an area, understand it. And they must also have the authority to implement the

established written supervisory procedures and take any other action necessary to fulfill 

their responsibilities. In other words, they can’t be supervisor in name only.

Rule G-44 makes clear that a person not designated as a principal, may be deemed to be a 

principal if under the facts and circumstances the person has the requisite degree of 

responsibility, ability or authority to effect the conduct of the employee whose behavior is at 

issue. So, in other words, based on the facts and circumstances you may be deemed the 

principal based on your responsibility, ability and authority to effect the conduct of the 

employee whose behavior is at issue, even if you’re not specifically named in the written 

supervisory procedures or otherwise.

So, just to recap, you can’t be a supervisor just in name only. You have to have the ability 

to discharge your responsibilities. And conversely, you may be a supervisor even if you’re 

not named if you’re actually conducting the supervisory activities.

Next, let’s talk about the next element of the rule which is the compliance processes. 

Municipal advisors must implement processes to establish, maintain, review, test and 

modify written compliance policies and supervisory procedures. And municipal advisors
must conduct no less frequently than annually a review of the compliance and supervisory 

policies and procedures. So while the rule requires that the minimum of an annual review, 

municipal advisors should consider whether more frequent reviews are necessary to comply 

with rule G-44. So you must do it at least annually, but you may want to consider the need 

to do it more frequently than annually based on your obligations under G-44.

We were asked in the common process if the municipal advisor could conduct the municipal 

advisor review together with, for example, an investment advisor review for efficiency. And 

the rule does provide that flexibility to conduct those reviews together, if they make sense 

for your business. When reviewing the policies and procedures the municipal advisor should 

consider a number of things so we’ll go through what you should consider in the review.

Any compliance matters that arose since the prior review, any change in municipal advisory 

activities of the advisor or its affiliates, any changes in applicable rules that might suggest

the need to revise the written compliance policies or supervisory procedures. So for 

example, if you’ve been involved in a merger or an acquisition engaging in new municipal 

advisory activities, perhaps you hired somebody to provide advice regarding the investment 

of bond proceeds, municipal financial products such as derivatives or other areas that you’ve

not been in before. As so you should consider any changes in the nature of your business 

when you conduct your review.

In this regard, each municipal advisor as you know must designate a primary regulatory 

contact under rule A-12 and the MSRB communicates important regulatory information by 

email to such individuals. Rule A-12 requires you to keep that email addresses current so 

that the MSRB can communicate with the municipal advisor. We’ve seen instances where, 

when we’ve tried to communicate with some of the municipal advisors that are registered 

with us, that the email address for that primary regulatory contact has been deactivated 

and obviously that presents a problem because we communicate MSRB regulatory changes 

to the primary regulatory contact through that email address. And you need that 

information in order to consider any applicable changes to MSRB rules when you are 

updating your written supervisory procedures. So please remember to keep all of your

contacts current. It’s a requirement under A-12 that you do so, but in particular the primary 

regulatory contact is very important that you make sure if somebody leaves the firm or if

you change email addresses that you keep that -- those email addresses up to date, on

Form A-12 so that we can effectively communicate any changes with you.

Next, lets talk a little bit about designation of the CCO, as we have established many of you 

in the room, or chief compliance officers. Each municipal advisor must designate, under G44, the CCO. And the CCO, as we pointed out in the rule, has a unique role as the primary

advisor to the firm on its compliance policies and procedures and its overall compliance 

program. The CCO should be able to understand that municipal advisory activities that are 

the subject of the firm’s compliance and supervisory policies and procedures, just as a 

principle, should be able to understand the areas under their responsibility. Based on 

experience and consultation with others, the CCO must be able to identify applicable rules, 

such as MSRB rules, and standards of conduct that pertain to the firm’s municipal advisory 

activities. The CCO must be able to develop or advise others who develop those compliance 

and supervisory policies and procedures and be able to develop programs to test 

compliance with the firm’s policies and procedures.

There should be regular and significant interaction between the CCO and senior 

management regarding the compliance program. How many of you who are CCOs regularly 

meet with -- either sit on an operating or management committee or regularly meet with

the CCO of your firm? So seems like almost all of you that are CCOs have said that. This 

rule is flexible in that the CCO may be a principal of the firm or a non-employee of the firm.
So you can outsource the role but not the responsibility. So if a non-employee is designated 

as a CCO, the municipal advisor retains ultimate responsibility for its compliance obligations. 

The CCO in any of his or her direct reports have responsibility to perform the compliance 

functions described in the rule, however we are clear in the rule that it does not -- we’re not 

limiting or discouraging the participation of other associated persons at the firm in the 

compliance program. And we also have said that the CCO, and this is in recognition, again, 

regarding the flexibility based on the size of the different firms, the CCO may hold other 

positions in the firm including senior management or supervisor principal so long as that 

person can discharge their responsibilities as the CCO. So what does that mean? It means

in a sole proprietorship, one could be both the -- well could be the CEO, the CCO, and the 

supervisory principal of the firm.

Next lets talk about the annual certification. So MSRB rule G-44D, which is as I said goes 

into effect on April 23 of 2016, so you have to have the certification done by that date. 

Requires municipal advisors to have their CEO or equivalent officer annually certify in 

writing that the firm has in place processes to establish, maintain, review, test, and modify 

the written compliance policies and written supervisory procedures, that are reasonable 

designed to achieve compliance with applicable rules. The annual certification requirement 

should help ensure that municipal advisors have in place an effective compliance program. 

You know we’ve been asked during the comment process, is the certification really 

necessary, is it important? And obviously we believe it so, we -- you know the solemn 

nature of a regulatory certification should ensure that the CEO takes time to reflect on the 

compliance program, engage as many of you already do, in a meaningful dialogue with the 

CCO, and gain comfort that the municipal advisor has a process in place to review, update, 

test, and modify its compliance and supervisory policies and procedures. In other words, 

we expected there would be sufficient attention to the compliance program at the highest 

levels of management.

FINRA members that are also municipal advisors are required under a separate FINRA rule

3130 to enter into an annual certification which is substantially similar to the MSRB’s 

certification requirement. And the execution -- so in light of the FINRA requirement, G-44D

provides an exception from the annual certification requirement for municipal advisors that 

are subject to the FINRA certification rule.

Also we were clear that the execution of the certification, and any consultation rendered in 

connection with it, doesn’t by itself establish business line responsibility. The managers, the 

principals, are responsible for supervising the business, so the certification itself doesn’t 

necessarily establish business line responsibility. There is also an exemption for federally 

regulated banks, a bank or separately identifiable department or division of a bank that’s 

engaged in municipal advisory activities if in the exercise of its fiduciary powers so long as it 

certifies annually that it’s subject to federal supervisory compliance and books and records 

requirements that are substantially equivalent to rule G-44 and they’re relevant books and 

requirement of our rule G-8.

Now let us talk -- and just, Dan, if we could for just a minute -- about the books and

records rule. I’m just going to take them all very quickly because I don’t want to run out of 

time, but rule G-8 requires municipal advisors to keep all the books and records that Dan

mentioned under the SEC rules applicable to municipal advisors. Also a record of the

written supervisory procedures, the designations of the persons who are responsible for 

supervision and who are designated as the CCO, the reviews of the written and compliance

policies and written supervisory procedures, and the annual certification as to the

compliance process, or the certification made by the federally regulated banks that I

mentioned. The preservation period for the designations is six years after the end of their
period of designation, and then five years for the other records. So I sped through the 

books and records. I’m sorry. I want to make sure we’re okay on time.

Dan Gregus: Larry, can I ask you a question before I move to Laura [unintelligible] might 

be interested in? I know since you mentioned that in this regulatory scheme, a person can 

be a CEO or a CCO and a supervisory principal all in the same person and, therefore, might 

end up supervising themself in some way. And I think you said that was all right as long as 

there was a reasonable process in place. That seems unusual for a supervisor system, so 

can you talk about what would you think would be reasonable in that set up in terms of the 

process to be supervising yourself?

Larry Sandor: Sure. And we’ve gotten questions on this during the comment process about 

whether or not there had to be a supervisory system set up and written supervisory

procedures and designation of the CCO for a sole proprietorship -- and of course, as I

walked through my comments on the elements on the rule, I tried to make clear that the 

rule provides flexibility for firms of different sizes and provides flexibility whether the firm is 

a sole proprietorship and the individual is charged with its own supervisory -- his or her

own supervisory obligations or in a firm where they may supervise their own activities as 

permitted by applicable law. But the rule does contemplate that one could, for example, 

supervise their own activities, and that could take many forms. It’s really up to the firm to

decide. So if it’s a sole proprietorship, that individual may go back and take a look at their 

own procedures, may go back and took a look at their own processes, their own activities 

from time to time as a check on those activities, or they may retain an outside consultant to 

do that. We know that there are a number of firms that are small firms or sole

proprietorships that have engaged outside consultants to assist, and the rule does provide 

flexibility for a small a firm to designate an outside consultant to serve as the CCO.

Dan Gregus: Thank you.

Laura Trotz: All right, can everybody hear me? All right, so I want to just talk a little bit 

about how FINRA examines for supervisory systems. So all FINRA members are required to 

have a supervisory system in place to provide the business activities they engage in that 

FIRNA engages in, and that includes municipal advisor activities. And much like Dan and 

Larry had said, the procedures that are put together are -- they need to be reasonable 

designed to achieve compliance with the rules and regulations. So that means that most 

importantly that the procedures are tailored to the firm’s business, and Dan’s right, we do 

actually find quite a few firms that have procedures that still say insert firm name here. So 

it’s really important that your system, the supervisory system that you have in place, is 

actually what is captured in those procedures. We do come across firms that have a good 

system in place, but it’s not what’s in their procedures. So those really do need to match. 

But what do those procedures look like? So what we would deem an adequate set of 

procedures would be it details the policy, it identifies who is responsible for supervising that 

area, how frequent they will be reviewing the area, and how they’re going to evidence that 

review. So we look at all of that, and that goes to the record keeping requirements that

Dan and Larry also talked about.

Procedures will also -- periodically, firms will go back through those procedures and make 

sure that they incorporate amendments to rules, new rules that come out, any interpretive 

guidance that might be applicable to the firm. That’s all -- all that information is captured in 

the firm’s procedure and part of that review process.

Firms should also have a process around how they get that information out to the 

associated persons of the firm. So they know what the procedures are and how to carry
those out. Just to back up to -- with the person who is responsible for carrying out the 

procedure, that person should be as Larry had mentioned, that person should be qualified 

and knowledgeable in the area that they are supervising. And that they, more importantly, 

have the authority to carry out those supervisory responsibilities.

So in every FINRA examination, we’re going to look at a firm’s supervisory system and their 

supervisory procedures, and were going to test it. We’re going to look at the particular area 

and just ensure that firm is whatever their procedures say, and their systems say that 

they’re carrying out on that. And that’s it, that process is consistent.

Couple things that I think that firms should want to consider in putting together procedures 

for municipal advisor activities is take a look at your associated person’s outside business 

activities and whether any of that business activities involves providing advice and kind of 

noting any potential conflicts of interest in that area. Take a look at ensuring that 

associated persons are trained and they’re -- especially on the fiduciary duty and other 

aspects of the municipal advisor rule. Steps taken by the firm to meet its fiduciary 

obligations to municipal entities, for example, how the firm identify manages and identifies 

conflicts of interest, how the firm determines whether funds being invested by or for a 

municipal entity, are the proceeds of the issuance of the municipal security, how the firm 

determines whether or not advice or recommendation was given, and how does the firm 

ensure that if the official at the municipal entity is authorized to act on behalf of the entity. 

So just some things to consider when creating those procedures, and then obviously we’ll 

be looking at firms incorporating MSRB rule G-44 into their procedures which will be 

effective like Larry said in April of Next year.

I just wanted to talk about a couple things that we’ve come across in our examinations, I 

would say for the most part what we see are firms that have a good system in place, but 

their procedures don’t accurately reflect that system. So it’s a matter of just updating the 

procedures so they’re consistent. And in some cases procedures they don’t have -- firms 

won’t have procedures that cover particular areas but like I said they’ll amend the 

procedures to incorporate that. But they’re also some other situations we come across and 

these are good things just to think about when trying to figure out what we should be 

addressing in those procedures. So we were at a firm, and this particular firm was hired as 

an , underwriter, and in that role provided a scope of services documents to the issuer, and 

in reading through the scope of services document this is what it said. It said, research, 

review, and analyze the district’s statistical, demographic, and financial data. Determine 

the financing needs of the district and prepare various strategies to best achieve essential 

funding. And it goes on to say, bond proceed management after bond closing within the 

same agreement. So just from that, while it is a financial -- I’m sorry -- the firm actually

undertook these activities, it hadn’t in this case, but had it undertaken the activities with the 

bond closing proceeds, then the firm could have been in violation of municipal advisor rules. 

So it’s important to when you’re going through and putting together your procedures that

you identify potential for this so you can catch that.

Another firm had this in their financial advisory agreement. Says whereas the issuer and 

blank desire to establish relationship which is terminable as provided herein pursuant to 

which blank can place debt securities and or related indebtedness with institutional investors 

as an agent for issuer as well as provide advice pertaining to the structuring and issuance of 

the securities and other matters. So again, you know the firms would not be able to do --

all of the scope of the services without violating rules particularly in the judiciary duty. So 

it’s just things to keep in mind when you’re putting together those procedures.

Dan Gregus: All right, well, we have a couple of questions here. One recurring question
was that the representative and principal exams of municipal advisors seemed to --

somewhat similar to the FINRA licensing requirements. Was there any consideration about 

providing reciprocity to the people who have already gotten series 7, 24, 52, or 53 exams?

Larry Sandor: Yes, that’s a good question, Dan. So, you know, the question was, "Was 

there any consideration given to reciprocity of grandfathering those who had passed another 

examination?" And the board gave that serious consideration and determined that because 

this is a new regime, regulatory regime, from municipal advisors, it was important that all 

municipal advisor representatives -- that is anyone who is engaging in municipal advisory 

activities -- take and pass the examination.

We also received similar questions from those who had been financial advisors for many 

years and asked for an exemption or a grandfathering based on their years of experience. 

But the board had decided not to allow any grandfathering whether based on the 

certification or based on years of experience. So the proposal, which, of course, as I 

mentioned, has not been approved yet -- it’s going to be filed shortly with the SEC -- would 

not permit grandfathering based on certification like that Dan.

Dan Gregus: Thank you. And I noticed that you also both mentioned things about 

qualifications of the principals here and outsourcing. I will say that in our experience we 

have seen issues in this area particularly with outsourced principals in certain situations 

such as FINOP, so something to be careful with. And besides that, often times where it’s 

friends and family that have been hired to be the CCOs, and they’re the principals of the 

firm. Would you say that could also be a red flag in this area?

Larry Sandor: Well, from our perspective, we drafted the rule to provide flexibility for small 

firms to be able to use outside consultants as CCOs. So I don’t believe it’s a red flag that 

you simply decide to avail yourself of the flexibility of the rule and designate someone as

the CCO who is not an employee of the firm. But I would caution you that it’s important 

that whoever is designated, not be designated in name only. Just as I mentioned with the 

principal, that whoever is designated as the CCO actually have the time and the knowledge

to take that responsibility seriously and carry out the functions that are required by rule G44.

Dan Gregus: And I think for both of you, is there a minimum supervisor to municipal 

advisor ratio that your exam team would look for when testing the compliance rule with G44.

Laura Trotz: I think for FINRA, we would just look at the size, the organizational structure, 

how many branch offices, how many reps, and determine the system that’s put together

and whether that appears reasonable based on the business activities of the firm.

Larry Sandor: And of course, we’re not conducting the examination but under the MSRB 

rule, the system has to be reasonably designed to achieve compliance with applicable laws 

and regulation. So we would expect that they would have a sufficient number of principals 

appointed to be able to supervise the various areas of the business, and that those 

principals will have sufficient expertise, knowledge, and training to be able to carry out 

those functions.

Dan Gregus: I have to agree with that. We would not have the minimum ratio. We’re 

going to look to those factors that were mentioned, as well as other things that we’ve seen. 

Like you want to determine -- we’d rather not seen a principal that’s remote from the MA’s, 

sufficient geographic closeness to be effective. And determine how much business each
particular MA’s is doing and whether it’s all in the same offices or in different offices across a 

particular region.

Now another question we have was, with respect to third party solicitors, and how do --

what’s your opinion of where they fall within this supervisory procedure realm?

Larry Sandor: So the MSRB rule G-44 doesn’t draw distinction between different types of 

municipal advisors, if one is designated as a municipal advisorFemale Speaker: 12-6-0-8-3-9-6

Larry Sandor: That’s okay. I think that’s almost our cue that our time is about up, but

we’ll go ahead and finish up this question, and then they can turn to the next panel. So the

MSRB rule G-44 does not draw a distinction between solicitors or other types of municipal 

advisors, so each type of municipal advisor must comply with G-44 and have that system of

supervision in place that is reasonably designed to achieve compliance with the law and be

tailored to the nature of their firm. So you’d expect it to be tailored to the nature of their 

business. Thanks Dan.

Dan Gregus: Laura, have anything to add to that?

Laura Trotz: No, I would echo exactly what Larry said.

Dan Gregus: So what about the situation where you have a computer system? And this is 

asking about adequate collection and maintenance of records. I feel like a computer system 

that automatically backs up your emails and documents continuously and the staffs are 

instructed to identify all municipal advisory work with a code such that searching the code 

will generate all relevant documents. Is that something that is a step towards or is

sufficient record retention in your mind?

Laura Trotz: I think that it meets the requirements of the rule from what you’ve explained. 

The fact that they’re able to identify specifically for municipal advisor records will probably 

help with gathering the documentation if it’s requested during an examination more 

efficiently.

Dan Gregus: Sure. I think they’re --

Larry Sandor: The MSRB rule does stand of course contemplate that records could be

stored in electronic storage medium.

Dan Gregus: It seems like there would have to be some testing though that was done 

periodically that makes sure the employees were coding the documents correctly so that 

they did pull up the documents sufficiently, and/or that the system and the software that 

we’re using with pulling up the documents that were properly coded. Otherwise such a 

system could turn out to be ineffective and then therefore your procedures wouldn’t be 

reasonable if you were relying solely on this. There always has to be some type of backup 

testing to ensure that it’s working the way it should have been.

Laura Trotz: Yeah, I would agree on that. You want to make sure that if we’re asking for 

specific records that we get the entire request and not miss any.

Dan Gregus: Here’s another question that came in: Rule G-44D proposes an annual 

certification requirement as -- so the firm’s compliance procedures. This seems very similar, 

again, to FINRA’s annual certification rule for broker-dealers. Will firms have to comply with
both requirements?

Larry SandorAs I mentioned in my comments, if a firm is obligated to comply with FINRA’s 

annual certification requirement, they can comply with that requirement in lieu of the MSRB 

requirement. So if you’re subject to FINRA’s annual certification requirement, there is an 

exception -- or an exemption for you.

Dan Gregus: Great. And then, finally, is there -- we’ve talked about the differences and the

flexibility of the rules. Is there any type of exemption from the supervisory rules, or are 

there modified supervisory standards for single person or small municipal advisors?

Larry Sandor So we did get that request during the comment process, requests that small 

firms or small proprietorships be exempted from the supervisory rules. Along the same 

lines of the question you asked earlier about whether an individual can supervise him or 

herself, and the MSRB has determined that the rule provides for the flexibility for 

supervisory system for any size firm. So there is no exemption or exclusion for small firms 

or self-proprietorships. All size firms must comply with G-44.

Dan Gregus: All right, thank you. And thank you for your attention. The next panel will 

be at 2:45 p.m., so we’re going to have a short break here. And I’ll be here for the rest of 

the afternoon.

[applause]

Robert Miller: Good afternoon, everyone. We’re about to begin our last panel, which is 

called the examination process. I am Robert Miller; I’m a supervisor attorney with the 

commission's OC office in Washington, D.C. Next to me is Steve Vilim. Steve is an 

examination manager in our Chicago regional office. Next to Steve is Cindy Freelander. 

Cindy is the director of the Fixed Income Regulation and Operations Group at FINRA. And 

next to Cindy is Shawn O'Neill. Shawn is associate district director in the Chicago district 

office of FINRA.

As I said, our examination panel will discuss the examination process, but before we get 

into the details of the examination process. I wanted to just tell a little quick story. A 

couple weeks ago my assistant director and I were out in Portland, Oregon. I think I see 

some of you from that conference and we got really good questions about what to expect 

for when the SEC comes on what they should be prepared for, but one of the kind of weird 

things we got was folks seem to be very intimidated by the SEC, by the examination group. 

And that’s something that we normally don’t get, so I think I was quoted in a bond buyer 

saying that "We don’t come in guns-a-blazing." I think I’ll put that on my tombstone one 

day.

[laughter]

But I did want to, as part of going over, just to let folks know what they can expect from 

examinations staff at the commission as well as examination staff from FINRA. But before 

we get into the details of that, I wanted to circle back to something that Drew mentioned 

earlier. He mentioned the role of OC and the commission, at one point he mentioned that

we conduct exams, he also mentioned that we have outreach programs. In addition to what

Drew mentioned earlier, there’s something that OC and SEC is starting now. It’s called an 

MA examination initiative. And that examination initiative has three parts. The first part 

which is actual what we’re into today is the engagement phase and that’s the part where we 

reach out to restaurants such as yourself and I think in the case with MA’s, we put
something on the SEC’s website announcing who the SEC is, who the OC is, what to expect 

when you’re coming to an exam. The next part is examination phase and Steve will go into 

a little more detail that will give an overview of the day to day exam process and what it 

should like. In respect to MA’s, I just want to let folks know that some of the areas that we 

may be covering as part of our overview will be obviously MA registration MA compliance 

with fiduciary duty, disclosure, fair dealing, supervision, books and records, employee 

training, and employee qualifications. I think some of these topics , or most all, we’ve 

touched on today but I want to put focus on notice again that these are just some of the 

areas we’ll be coming to look at, there may be others depending on any additional rules and 

regs put out by the commission MSRB or FINRA. The last part examination in this view will 

be in foreign policy. And that might be in a form of taking what information we get in exams 

and letting the commission know what’s going on, or the possibility of putting out a paper or 

report identifying some of the issues we’ve come across and conduct in exams. So that’s 

kind of an overview what to expect an examination initiative. I turn it over to my college 

Steve Vilim to give a little more detail in the exam process. Steve.

Steve Vilim: Thank you, Robert. Hopefully everyone can hear me. My name is Steve Vilim,

I’m an exam manager here in the Chicago region. I just want to thank you for giving me the

opportunity to speak to you today about what are the typical exam process that the SEC will

conduct for a municipal advisor only. I have the duty to explain to you in about ten minutes

what our exams sometimes cover over weeks or several months, so I’ll do my best. I tried

actually doing this with my son, he is only six year old. And after I got done he said Dad are

they going to be in trouble? And I said hopefully no trouble, no trouble.

Let’s get into the different stages of a typical SEC examination. There’s four. There’s the 

pre-exam, the fieldwork, post-fieldwork, and the closing stage. And lets walk through the 

first stage. It’s actually the pre-exam. Here, our staff is going to obviously going to want 

to learn a little more about you as a firm, now obviously we have our own databases but 

we’re going to be reaching out to you to get a little bit more of a high level about your 

business and how are the operations. For example, we’re going to really want to know 

about what your target markets are, possibly looking at your top revenue firms that you’re 

dealing with and maybe count any source of referrals of how you keep your business. 

Obviously, your supervisors structure, which I think the other panels have discussed pretty

thoroughly, for us who are going to want to know how that’s operating as well. So these are 

just some of the initial things we are going to want in our opening calls to you guys. But at

the same time, too, we’re going to be sending to you one of our initial document request 

letters and some of the information we’re going to want to get that in advance before we 

come to visit your firm, and this, typically, is given to you a couple weeks in advance before

we show up so there won’t be any surprises. And we do anticipate getting all those items 

on the first day of arrival when we come to your firm. And at the same time, too, when we 

reach out to you, some people may pause it or some people will say, "Well, how do I know 

I’m dealing with the SEC?" Obviously, you can exchange emails with the person you’re

dealing with, or you can actually look at the SEC’s website, and each of the regions has the 

main number, so you can call into them, and they can patch you to the actual examiners 

just in case.

Some of you may ask yourself, "Well, how big are these teams coming out?" You know, 

each team is made up -- the whole team is not coming out, but the team structure for each 

of these exams will consist of a assistant regional director; an exam manager, such as 

myself; a team leader; and possibly one or two staff members; and then we have an 

attorney advisor. So we have a full house to watch you guys. But as far as individuals 

actually coming out to conduct the exam, it typically will be an exam manager, a team 

leader, and possibly one or two staff members. Again, it depends on the size of your firm
and also depends on the scope of what we’re looking for. And again, those are some of the 

items that you hope you gauge on how big an air reach you may need for us. But at the 

same time too we send our initial request letter out, you’re also going to get -- the firm’s 

going to receive form 1662 I’m sorry, 1661 that actually lists out -- it’s called title 

supplementary information other than a subpoena, but it walks through, basically, six areas 

of what the rights are as for us as the SEC examining and what your rights are.

Let me just walk through these really fast. It discusses our authority for requesting 

documentation, it talks about the effects of not supplying the requested documentation or 

refusal to allow inspection, reminds your firms of the penalties providing false statements 

and documents, it describes the commissions principle uses of this information, it lists those 

routine uses which includes making files available to any United States attorneys or state 

prosecutors, and also then the south of freedom information act in case your firm wants to 

send to us written acknowledgement before we give documentation over you have a first 

chance to take a look at it. So that is the Form 1661. That information is available on the 

SEC’s website so you can download that and take a look at that before you actually get it.

So once we get all that information, the initial information before we get to your firm, we’re 

obviously in the second stage is going to kick in and that is our fieldwork. This exam stage 

typically takes about a week, could be shorter could be longer again depends on the size of 

your firm and what we’re looking for or looking at. So you can imagine when we show up 

we’re going to definitely request another opening interview with your firm to again go over 

any remaining business items that we didn’t discuss on the first call, we’re going to want to 

walk through the remaining request items, make sure we have everything. At the same 

time too get that acknowledgement of that form 1661 that’s signed by your firm.

During the fieldwork I think it’s -- we cover pretty heavily we’re going to be focusing on 

seven core areas and Robert, you just mentioned them. But I think -- let me back pedal 

here, about I think I may have skipped over what the request letter from the items maybe 

asked for. There’s initially -- I mean again this is a typical type of exam there could be up

to say for example, 20 items that we’re requesting and it’s broken out into three areas. I’m 

not going to go through each of the individual items, but I can walk through at least some

of the section areas so you can see what we’re looking for.

So for example on the general information, again we’re going to look for all agreements and 

contracts between your firm and any affiliates that you have. We’re going to be looking for

a copy for any of the minutes that your firm’s management committee has, a list of all 

services provided by your first and possibly copies of all contracts and agreements, a

description of any referral fees and consulting fees arraignments that you may have, a list of 

any and all complaints, litigations, arbitration involving your firm. And then when it comes

to the financial records we’re going to be looking for the balance sheet, income statement, 

trial balance, adjusted trial balance, and adjusted entries. Am I going to fast? Yeah okay,

I’ll slow down. It’s a lot of coffee.

Robert Miller: Steve, I think, as you mentioned, this is not an exhaustive list, so you’re 

just giving --

Steve Vilim: Oh, yeah. And I apologize; I do speak a little fast. And also, too, as a 

general ledger, cash receipts, and disbursements journal, bank statements, account recs of 

all those firms, the bank accounts.

And now we get into the last section of the municipal business. Obviously, this is your core 

business. We want, again, a list, a description of all the municipalities to which your firm
rendered services, including any amounts or fees received, and then a description of the 

types of services provided. So obviously, this would cover, if you’re dealing -- for example, 

advising on offerings and also you're transaction based, we’re going to want to get a list of all

of your marketing materials, literature, and advertisements used by the firm; copy of any 

documents that was material to making a recommendation to a municipal entity; and for 

samples, the deals that you were acting as a financial advisor for a municipal offering; and 

copies of the final transcripts and all electronic communication records of the lead advisor. 

And then, obviously, definitely copy of your written supervisory procedures; compliance 

procedures; your ethics policies; and then, finally, the firm’s training schedules and

supporting documentations that were provided to the registered advisors.

Okay. As I mentioned, we’re going to be going over the seven areas that was already 

previously discussed. Obviously, you know, once we get the documentation from the 

original request list and we start going through the actual support, it’s expected that we’re

going to have additional questions and follow up for your firm. So at that point, we’re going 

to most likely want to interview some of the financial advisors that are providing the advice. 

At this point, at this time, we’re going to also provide to those individuals a form, our form

16-62. It’s similar to the form 16-61 except it’s just targeted towards the individual. And 

prior to our interview with that individual, he’s going to have to read it and acknowledge 

that he’s read it and give us a copy of it back with his signature.

And for the moment here -- I know I have just a couple minutes to speak, but I want to go 

over some of those seven areas of our core that Robert initially mentioned and maybe just 

focus on a couple of the items and give you a direction of some of the things we may be 

looking for when we’re out there in the field. Obviously for registration we want to make 

sure your firm is registered appropriately, and once the rules are finalized on the actual 

licensing of the advisors and make sure they are adequately and properly licensed and 

passed their tests.

For the fiduciary duty -- I know we’ve had a whole panel on it and discussed pretty heavily 

about what’s right and what’s wrong. You know, an additional item that we obviously are 

going to be focusing on is again the services that you’re providing to your municipal entities. 

We want to make sure that whatever you agree to comply with, that you’re actually going to 

follow up and do it in the best manner, in the best interest of the client. So if you’re 

recommending those complex structures and numerous municipal offerings does it make 

sense for the issuer? And again too, when we look at what you tell us what the services are 

that you’re providing to the municipal issuer, for example, is your duty to look over the 

official statement, are you the ones out there and getting the data and putting it in there? If 

so, we’re going to look for that. Are you the one running the numbers behind that actual 

modeling for the underwriting? If you are, we’re going to look for that. And again we just 

want to make sure that you’re doing this in the best interest of the client and making sure 

that it is reasonable, fair, and it’s not going to contain any material misstatements.

The other item that we want to focus on too is obviously fair dealing. We had a whole other 

panel talk about the practices that we see here in Chicago, but that deals with unethical

play to pay type of practices. But in this issue too we are also going to look for any kind of,

I think it was referred to before, again is undisclosed conflicts of interest. You know, looking 

at whether the financial advisor actual has invested interest in the project being

underwritten for that issuer. And then lastly, the suitability of the transactions, again

looking at what kind of transaction based recommendations you’re giving to the assurers, 

who are obviously going to have to take a look at that as well.

Supervision, I think, was handled pretty well. Obviously, we will be looking at your controls
you put in place over the reps and make sure it's reasonable. One of the things, you know, 

obviously is a trip up or you can definitely tell if your supervisor process is not up to snuff is 

if you start having weaknesses or deficiencies if you find them yourselves. Or if definitely if 

examiners come in-- If we start finding problems in different areas. Obviously it's a red flag 

for your supervision process as well. They kind of go hand in hand. Books and records, 

again, it's been covered in when you get the request letter. It's the same information we

are going to be wanting to get from your firm.

And then, finally, it's the training qualifications of your reps. Obviously, you want to see if 

the firm is taking this seriously and providing adequate training to them and how often. So 

then this is -- again, this is all happening in the first week we are out in the field, and if, for 

some reason, we decide that's enough for the fieldwork and we go back, before we leave, 

we will give your firm a preliminary exit interview. It's just a walkthrough, and if we do 

have potential items we want to raise to your attention, we'll bring it to you at that time. If 

not, we'll make sure we get a wrap-up of open items, the list we requested.

And we go back and enter into our third phase, which is a post-fieldwork stage. Here, this 

could take -- unfortunately, it depends on how much we're looking at and the nature of the 

business or your firm. It could take several weeks to, possibly, several months. So I would 

imagine -- you could imagine initial follow-up requests from the staff and also possibly more 

interviews with some of the advisors. And then once after all that is done and the staff feels 

comfortable with its analysis we enter into our fourth stage which is I call the closing stage. 

So there's two things that could happen possibly in your closing stage. You may get the

call-- Well definitely going to get a call to say here's your final exit. And two things can 

happen. You can then get a what is considered a no comment letter. So here, this letter

just basically says we conducted an exam of your firm and it's closed. The other thing that

could happen is obviously if the staff determines that there's items that warrant your 

attention. This is deficiency in so the rules and regulations. We will then list them out to

you and let you know. Then after that you have about -- you definitely have 30 calendar 

days to respond once you get a letter from us. And in that response to us you can have the 

option to agree or disagree. Obviously we love if you agree with all our findings. If you

choose to disagree, that's your right. And just to let you know though when you disagree 

we have to he staff have to take a look at your response letter and determine if whether or 

not what you're saying makes sense. Maybe we possibly missed something. But if not, 

you'd anticipate a letter follow-up back to you letting you know our position. And typically,

it would usually stop at that point, but I've seen letters go back and forth a couple of times.

So just wanted to let you know the whole reporting process and timeframe for those four 

stages. And in addition to -- it's one thing I wanted to at least point out, too, as we talk 

about, the process of conducting exams and dealing with you as advisors on a professional 

level, you know, if you ever come across any kind of -- you think is kind of corrupt 

municipal advisors, you know, we do have an office [unintelligible]. So I do encourage you

anyone that you want to tip, complaint, or referral. We do have an office that would handle 

that and accept that, and that's on our SEC's website. So with that, I think I could turn it 

over, then, to Cindy. What an examiner would do on a media examination.

Cindy Friedlander: Okay, thanks, Steve. Today's program has been a really great way for 

FINRA, the SEC, and the MSRB to demonstrate publicly what has been really been taking 

place behind the scenes for quite some time with respect to how we're collaborating and 

cooperating on the municipal advisory exam process. We've been meeting monthly to 

discuss areas of mutual concern. And earlier today, Ed Wagner talked a little bit about our 

risk space exam process and the transparency that we've tried to impart into, you know, 

what you lost with respect to exams.
So I thought I would elaborate on some of those points. Ed did mention that FINRA employs

a risk based exam process. Most of FINRA's front-line regulatory operations takes place

within two departments at FINRA. The member regulation department which has 15 district 

offices across the country and our market regulation department which conducts a more 

centralized surveillance of the market in a couple of locations. In some matters, there are 

areas of common concern between those two departments such as trading, mark-ups, that 

kind of thing. Municipal advisor won't be one of those areas. Member regulation will

be primarily responsible for examining FINRA members that are municipal advisors. 

Member regulation examines all 4100 FINRA members on a four year cycle. And that cycle

is based on perceived risks at those member firms. So what does that mean? Risk is a 

word that gets used a lot. So I think I'll break it down for you in very high level terms. 

First we kind of take a look at the firm in terms of quantitative analysis. Revenue, number

of reps, number of branch offices, OSJs, that kind of thing. We look at that in terms of the 

firm's impact on the market. So you can probably name off the top of your head the ten 

most impactful firms in the securities market. And those are the firms that we're going to 

be examining most frequently, as frequently as annually.

Other firms might be on a two, three, or four year cycle depending on our risk based 

analysis. We also look at more qualitative factors such as things like what types of business 

a firm is engaged in, the number of customer complaints a firm has received, disciplinary 

history, a culture of compliance. The examiners that go into the firm all the time and talk to 

the firm kind of know what's going on at that firm. We have regulatory coordinators that

are constantly monitoring what's happening at that firm. So a firm's exam cycle may be 

shortened or lengthened based on these qualitative factors at each firm. Then every year

we conduct a risk analysis of each firm and we actually have a qualitative and quantitative

analysis that occurs during every -- latter half of every year to develop the exam cycle for 

the following year. That process is currently underway, and municipal advisor activity will

definitely be one of the things that we'll be looking at.

Certain types of risks are identified as standard priorities each year and we do communicate 

those risks to each firm through an annual priorities letter that we send every firm as early 

as possible in the year. Usually early January. We also post that on the website so it's 

publicly avail so members of the public can see what we're looking at that year. And it

really does change from year to year, reflects the dynamic nature of the securities market 

that helps us allocate our resources according to the risks that we've identified and it does

influence the-- So what examiners are going to focus on at a particular firm if priorities

have been identified and the firm is involved in those priorities, we will most likely be taking 

a look at those things when we come on site. Municipal advisor was identified as a priority

for 2014 and it likely will be identified as a priority for 2015.

We also work very closely with the MSRB to identify exam priorities not only for municipal 

advisors but municipal securities broker-dealers as well. We've already begun examining 

municipal advisors so during 2014 we reviewed the dually registered municipal advisor 

broker-dealers that were already scheduled for municipal securities exams during the latter 

half of 2014. After the rule became effective on July 1st. For 2015 we will not be looking at 

every single municipal advisor that's been registered, but we will take into consideration the 

level of activity at each municipal advisor. Final registration data is not quite yet available. 

We're using other outside sources of data to identify municipal advisors and the level of

their activity. We'll also be looking for potential unregistered municipal advisor activity and 

maybe this is some comfort to those of you in the room you are really trying to comply with 

the rules and learn as much as possible as much as you can about this area and apply the 

rules correctly. Because FINRA members are all brokers we think that there is great
potential for firms that have municipal entity clients. They may not realize that making a 

recommendation in terms of transaction to one of those clients may make them a municipal 

advisor, so we have conducted mandatory training for every municipal-- For every member 

regulation examiner this year to sensitive them to that fact. That any firm they walk into 

regardless of whether that firm is registered as a municipal advisor may be engaging in 

municipal advisor activity. Other firms may have made a conscious decision to avail 

themselves of one of the exemptions or exclusions that are available in the statute and the 

rule we want to be looking at whether the firm is applying those exclusions and the 

exemptions appropriately. We've also developed municipal advisor specific exam 

procedures, questionnaires that examiners can use. We do business activity reviews with 

every firm that we're going into. So we have a basic set of questions to ask, to kind of drill 

down, to see if whether a firm is engaged in municipal advisory activity. In certain regions 

of the country where there are high concentrations of municipal advisors we might a 

specialized exam team going in, particularly in New York, so that those exams are so very 

well versed in municipal advisory activity and be able to talk to your friends about it in 

depth.

To ensure consistency between FINRA and SEC plans we are meeting on a monthly basis.

We have a working group that kind of goes over issues that are really coming up on some of 

the center exams. Answered questions get interpretations from the office of municipal

securities and MSRB staff. And as MSRB continues to develop its new rules, we get a really 

good understand of what is required by those rules and how to apply them. So I think at 

this point I will turn it over to Shawn to talk to you a little bit more about specifics of a 

center exam and what you can expect.

Shawn O'Neill: Thanks, Cindy. When she talked, she primarily talked about examinations 

that were being conducted on behalf of municipal advisor firm non broker-dealer, non FINRA 

members. So my comments really are going to rest primarily-- Exclusively, I should say, on 

those broker-dealers that are members of FINRA. And I am curious if I could just have a 

show of hands how many FINRA members do we have here in the audience right now. All 

right, and of those people that raised their hand. How many have been examined in the 

past, let's say, 12 months? Quite a few. So the reason I asked that was we've certainly at 

FINRA changed the way we conduct examinations, and I think those of you who raised your 

hands, you've seen the way, or at least the changes that we've implemented with respect to 

the examinations. So most of our-- Actually all of our examinations done in the cycle space 

where we show up on site are now done electronically. Gone are the days where we send 

requests out and say we'll be there in two weeks, give us documents and we show up and 

there's boxes and banker's boxes and reams of paper all over place.

So now what we do is we announce the exam roughly 60 days prior to us going on site and 

from that moment when we announce the exam, going forward we'll make requests, have 

conversations, and we start getting the records electronically. So instead of showing up to 

your firm, let's say, November 1st and starting the exam, the exam is pretty much started 

now, well in advance of the day that we actually show up on site. And the reasons are 

many, but I think primarily what we want to do is we want to make sure we're appropriately 

risk scoping the examinations and by getting the documents early, by getting conversations 

with the firm, I think that's assuring we're having those meaningful conversations and 

scoping the exams appropriately. There's similarities in terms of how we conduct exams

versus how Steve indicated the SEC does exams for the MA firms. Some differences that I'll 

elaborate on as well. One is that for those FINRA members in this room, each of you has an

assigned coordinator, a regulatory coordinator, and he or she is responsible for know your

firm, being your primary contact with FINRA. Well, and similarly also providing our staff 

with the surveillance and information that they need in order to conduct the exams. So
what that means is, our coordinators play an integral part in the examination process. 

Primarily that process leading up to the part where we go on site, right? What they do is, 

they will have ongoing conversation and dialog with your firm, even if we may not be going 

on site to conduct the exam. So let's say for example, you're not on our docket for the 

year, but the coordinator is having ongoing conversations with your firm regarding your 

municipal advisor business. On the other hand, if we are going to your firm they are also 

going to have those conversations.

Some of the questions that they're going to ask: They'll want to know what types of muni 

advisor business activities have you engaged in. Are you engaged in the type of activity 

that FINRA described where you're making investment recommendations with respect to 

proceeds from a bond offering. Are you advising state and local government regarding

public finance alternatives. Or are you assisting state and local governments with respect to 

evaluating other advisors. So questions like that help us specifically target our risk reviews

that we want to focus on. They also-- Our coordinators are also going to want to know

what your role is as an advisor. Are you a financial advisor, are you a third party marketer, 

are you a solicitor, are you a placement agent, are you a finder, are you a [unintelligible]

advisor? And again, all of the answers we get to those questions will help us tailor and 

focus how we conduct reviews. We're going to want to determine how the firm attained MA 

business. Was it done through a negotiation process, was it done through a bidding

process, was it done through a referral program, was it done through, perhaps, a 

recommendation made by an affiliate of the advisor? Our coordinators are going to ask and 

want to know about how the firm is compensated with respect to this MA business. We'll 

also want to know to the extent your firm is supplying any exclusions or exemptions from

the MA. We want to know the basis for that as well.

Laura's panel that preceded this one talked a lot about supervision, and one of the reviews 

that we will conduct with respect to the FINRA space is Cindy touched on this in her 

comments about us being really risk based. And in that regard in order to be risk based 

what we need to do is we need to get a really solid understanding of firm systems and 

controls. So we may not necessarily dive beyond systems and controls, in other words we 

may not test everything is every single case but what we really want to do is get an 

understanding of how the firm supervises and what processes you have in place to monitor 

and effectively regulate this MA space.

And I think the first place we start and I think you've heard this several time today is with 

the firm procedures. And I'm not going to regurgitate what's been said before but suffice to 

say we're going to look at the procedures, we're going to make sure they're adequate and 

that they address the current rules and regulations. I think the preliminarily right now I 

think the findings that we're seeing, perhaps more so than anything made me deal with 

procedural deficiencies and firms that need to beef up certain procedures. The other thing 

we want to see is certainly is the firm identified any designated supervisors for this

business. Important to us to make sure that this is being appropriately supervised. We also

want to make sure that the firm is conducting an annual review of the business. Certainly

under FINRA rules, but since we're dealing with municipal activity under MSRB rule G-27, the 

firm is required to conduct annual reviews of the business under G-27D, I believe it is. So to 

the extent the firm is engaged in this business, we want to make sure that they're 

conducting an, or will be conducting annual review of this business space.

We also want to make sure that they're including or will include the part of their annual 

compliance meeting. Again to the extent your firm engages in this business as a FINRA 

member, we want to make sure this is included in your annual compliance meeting and also 

as important is training and on going training for your reps and employees that engage in
this business. It's a key component to our reviews and we want to make sure that the 

FINRA members are appropriately training and providing ongoing training for it's associated 

person. Laura also touched briefly upon the concept of outside business and it's interesting 

because what I am reading from you right now is it's kind of a key to a sneak peek if you 

will at what our examiners do so what I am sharing with you quite frankly is the review that 

our examiners actually do are considerable is respect to exams. And two of the things that 

we will consider in this space for systems and controls is whether or not your firm has 

employees or associate persons that are employed or affiliated with an external MA, an

external municipal advisor. So not necessarily one that's a broker-dealer but one away from 

the broker-dealer.

So the question we would want to know with how is the firm reviewing this activity, 

specifically from two components. One is how are they monitoring and ensuring that there 

may be any recommendations being made by this employee to this outside MA. And then 

also review any potential conflicts that may exist as a result of his or her relationship with 

that outside MA. The other outside business concern and -- maybe not concern but option 

that firms should be aware of is to the extent an employee or associated person is involved 

with a municipal entity, like a local school board. And so we would consider that to be an 

outside business to some extent. And then, again, how is the firm reviewing that activity 

and then show, again, that that employee isn't making recommendations or, if they're 

making recommendations, how are they appropriately supervising that and, again, 

considering any potential conflicts that may exist in their role on that school board with any 

potential recommendations that are being made.

Before I forget, also, what I want to do is just kind of look Cindy in real quick here and just 

kind of give you the dynamic and relationship between Cindy and the district offices. So I

do work for the Chicago district office, I’ve been there for almost 17 years, started out as an

examiner. And Cindy has a really good -- and Bonnie, too. Both of them have a really great 

working relationship with the districts and they’re a really integral part to our examination

program. And to the extent we run across any unusual or maybe some situations that 

maybe we don’t have the expertise in or we haven’t seen before, we routinely pick up the 

phone, call Cindy and Bonnie. I don’t know if -- do I call you more than anybody?

[laughter]

Robert Miller: That’s probably right.

Cindy Friedlander: You’re high on the list.

Shawn O'Neill: I’m high on the list. I’m high-maintenance, right? So -- but the point is I 

think we have a really great relationship, and I think even to the extent that we run across 

things that might need for the vetting, Cindy will reach out to MSRB or other folks as well to 

kind of get some expertise and opinion on that.

The other thing that we talk about is investment proceeds, and I think I’ve heard this at 

least three or four times today, and certainly Cindy mentioned this as well, and I suspect 

that -- I guess, you know, it’s an incorrect assumption I had before learning more about the 

municipal advisory space that I initially thought that this would only apply to firms that are 

engaged in the public finance business. But lo and behold, there’s this concept in there of a 

broker dealer can be subject to the MA’s rules if they are making recommendations to 

municipal entities with respect to bond proceeds. So that doesn’t mean -- this could be 

firms that never, ever engage in underwriting, that never ever engage in any public finance 

activities, but they’ve got these customers that they’re making these recommendations to, 

and they may or may not know the source of funds. So this is something that our
examiners, like Cindy said, have been trained to look for, that we will be looking for. So 

certainly we’re not really considering firms that are registered or need to be registered in 

the advisory space, also though that aren’t registered [unintelligible] on this activity, they 

need to be registered.

Conflicts of interest: I think Steve talked a little bit about that. I think previous panels 

talked about that. So we certainly are considering the conflicts of interest in our reviews 

when we conduct examinations. In terms of the actual reviews that we conduct while we’re 

on site, I think the first place we start with as examiners is we review the engagement 

letters. And what we’re looking for is we’re looking for compensation in these engagement 

letters, we want to understand how the firm is being compensated, how the reps are also 

being compensated, and how are fees being set for the type of business? We’re looking for 

disclosures being made by the municipal adviser to the municipal entity. We want to make 

sure that the conflicts of interest are being appropriately disclosed. We want to make sure 

that compensation and the scope of engagement is complete and adequate. We’re looking 

to make sure that disclosures are being made timely, early in the process, not later in the 

process. We want to make sure that firms receive written acknowledgement so that the 

broker dealers are receiving actual written acknowledgement from the municipal entity that 

they received a disclosure. And we also want to make sure that the broker dealer has a 

fundamental understanding and done some due diligence to make sure that the municipal 

entity actually understands what it is that they’re attesting to and signing off on. I think we 

talked earlier this morning about suitability, so to the extent that we have a broker dealer 

making recommendations to a municipal entity with bond proceeds, we certainly are looking 

at that recommendation for suitability. We’re also making sure that the person that’s acting 

on behalf of the municipal entity has the requisite authority to make those decisions. We 

also want to make sure that firms aren’t tripping up in their role as an adviser, so they’re 

taking into consideration -- I think Laura talked about this in a couple of scenarios that she 

mentioned, one of them was a case that my team worked on. But we want to make sure 

that to the extend they’re engaged as a municipal adviser, they’re not also simultaneously

engaging in underwriting activities with that same issue -- or regarding that same issue with 

securities. We’ve seen some firms that have come close to violating -- at least I have --

that come close to violating that, but I have not -- I think maybe you’ve seen a few that 

have come into that space of problems.

In terms of books and records, I think Steve talked about some of the books and records, 

interestingly. For those that are only municipal advisers, non-broker dealers in this room, 

we will ask our broker dealers for almost the exact same records as we ask the non-broker 

dealer firms for, so we’re going to be asking for correspondence, most likely we’ll be looking 

at email. We’re going to be asking for the firm to check books, bank statements, general 

ledger, we’re going to ask for procedures and all copies and all versions of the firm’s 

procedures. We’re going to ask for any agreements they’ve had with municipal entities. 

We’re going to ask for a list of municipalities that they’ve engaged in this business, or plan 

on engaging. We’re going to be asking for training materials. So, again, very similar

records that Steve and his team are asking for. In terms of, you know, I think the folks here 

that are broker dealers have a fairly good understanding of what to expect in our exams,

but let me just kind of go over that real quickly. So, unlike Steve’s group where it sounds

like they send an attorney adviser, maybe an associate director and manager and staff, in 

our exams, we primarily will send an exam manager, someone to report to me and then 

examiners that report to that exam manager. The size of the team can be anywhere from 

one person to six, sometimes maybe more than six, but very rarely more than six. And the 

amount of time on site presumably should be less now that we’re conducting our reviews 

through this workspace and now that we’re conducting a lot of our reviews in our office 

before we come on site. So, the process is much like the process Steve described, and that
is we show up on site, again, presuming we’ve done a lot of the work in the office, what 

we’re going to do is follow up with the appropriate firm personnel, ask some questions if we 

have follow-up questions, finish the review, then conduct an exit conference with the firm. 

And then once the exit conference is done, we work diligently to make sure that we get our 

final exam report out to the firm which identifies any issues. Or if there are no issues, then 

a statement to the firm within 60 days of the exit. If we can’t get the exam report out to 

you within 60 days, the manager or me will call the firm and kind of give you a status check 

of where we’re at in that process and when you can kind of expect that exam report. So 

that’s really kind of at a very high level discussion centered on what we do with the firm’s 

municipal advisory space.

Cindy Friedlander: And if I could, I’d just like to follow up on the point that Sean made 

about reaching out to me and my team. We’re a central point of contact for all things 

municipal within FINRA, and so we do bring these types of issues that come up on exams to 

the working group that I described with the SEC and the MSRB, and that really helps ensure 

that we’re all consistent between the SEC and FINRA in terms of exam findings. We also --

you may have heard that there’s another venues, we employ what we call disposition

groups and for certain areas, there is a group of regulatory specialists in a particular area, 

including attorneys, who review exam findings and municipal securities is one of them. So 

for MSRB rules, and we will employ this for municipal adviser rules as well, we review all the 

exam findings across the country to make sure that the dispositions are consistent. So just 

because a firm is examined by the Chicago district office doesn’t mean it will have a harsher 

penalty for a violation than someone -- a firm that was examined out of a New York district 

office, for example.

So that’s kind of how it works within FINRA in terms of providing guidance to the staff -- not 

only with respect to the end of the exam, but all the way through the exam -- as they 

complete the process.

Robert Miller: All right. Well, I think we have a couple of questions from the audience that 

I’ll just read. Steve, I think this first one is for you. "How often should a municipal adviser 

expect to be visited from the SEC?"

Steve Vilim: Oh, that’s a good question. Again, it’s going to depend on the final registration

of the municipal advisers only. So obviously, we want to, I think, take it over a several-year

period, two-year period across the regions. They’ll be conducting examinations of the

municipal adviser-only firms, the newly registered ones, and spread that over a

period of two years. And then after that, it’s depending on, I guess, our risk-based focus of 

your firm. So obviously, if you’re a higher risk, then I would imagine, after that, you would

get possibly more examinations.

Robert Miller: So this won’t be on a cycle basis like FINRA exactly?

Steve Vilim: No, no, it won’t.

Robert Miller: Okay. The other question is will the commission -- or "Does commission 

have reports similar to FINRA’s focus reports? Will it contain a lot of the MA information --

financials, et cetera?"

Steve Vilim: I don’t believe that we -- that’s been, I guess, included, as far as your MA 

form, when you submitted it. So that’s the reason why we’re going to be asking for most of 

that data again when we show up.
Robert Miller: Okay. Another question we got -- again, to Steve -- is "I understand that 

when you arrive on site that you will interview individual municipal advisers. If so, will that 

interview take the place of you or your staff speaking with a chief compliance officer?"

Steve Vilim: No, that’s going to be in addition to it. As I mentioned, when we get to the 

firm, we’re going to want to know the general business of the firm, the supervisory 

structure. Obviously, the supervisory structure, a lot of its the compliance individuals 

typically sometimes serve as a point of contact. That’s what I’m familiar with, definitely on 

the BD side when we conduct our exams. I've seen municipal advisers, sometimes can be 

sole proprietary, or you can have, I'd say, an outside chief compliance officer. That person

may or may not be available at the time, but we do encourage that the compliance officer to 

attend those interviews and those meetings.

Robert Miller: And I know this had come up at a previous conference I attended, Steve. 

So you come in, your group comes in, you want to interview people. Do they need to have 

an -- do need to have attorney present? Do they need to have counsel? What’s the next 

step?

Steve Vilim: That’s your decision. If you feel comfortable with the adviser speaking freely 

to us, that’s great. If you don’t, then yes, please have your counsel available.

Robert Miller: Do we have any more questions? Yes, sir?

Male Speaker 3: Can we drill down to the suitability issue? I understand the SEC 

historically has put suitability from the investor’s point of view. Like outside commodities 

and that sort of thing. But what about from the issuer point of view? What’s the -- what --

what's the basis? And I can give you lots of examples in my practice as to 

recommendations that I believe is suitable. And suitability varies between my clients.

Male Speaker 3: A lot has -- depends on their risk tolerance. That’s probably the major 

difference between them. Some are a little bit more risk-averse than others. It was 

suggested this morning that maybe we need a standard set of suitability standards that we 

have. But how do ours -- how do we apply ours to theirs? I mean, mine may not be theirs, 

but they’re plenty comfortable with theirs. If you like, I could provide examples, but I 

wonder if we can get into that a little bit.

Robert Miller: So before you ask, Steve, I just need one point of clarification: So with 

meeting advisers, there will be a fiduciary duty standard? With obligated persons there’ll be 

a suitability standard?

Steve Vilim: Yeah, my client's a generally obligated person, so I understand to be a 

suitability standard.

Robert Miller: Okay. So I would think, overall, you would use a standard similar to what 

FINRA has, and that’s knowing your customers. So it won’t -- one standard will not fit 

everybody. It’ll just -- depending on your customer and your customer’s business and what 

they’re looking for and their knowledge.

Steve Vilim: A lot of their knowledge will be the result of what I’ve researched for them

and presented, I believe, in a comprehensive and unbiased manner because, end of the day, 

I don’t really -- I really don’t care what they do as long as -- it's helpful that they’ve made a 

conscious decision that they’re comfortable with. Yeah, I’ve not had a case where it’s been 

just way off the wall somewhere. There’s a central tendency to these -- to the decisions
they’ll make, but variations, too. And I’ve had cases where they’ve done something that 

maybe I would not have done. I would've -- if it were up to me, and it’s not, I would’ve 

done something a little different than what they ultimately decided to do. Is that okay?

Robert Miller: I mean, I think -- and Steve and I have both done broker-dealer exams 

where that’s -- something similar has come up where the rep has said, you know, maybe 

you should do this or this, and the person says, well, no, I’m going to do x, y, and z. So 

what I’m saying is that I think the more you can document that you’ve had those

discussions and you’ve brought it to their attention, I think that will put you on solid ground. 

I mean, it’s all going to be facts and circumstances, but I think it’s just something like that.

You’re going to have to document and show that you brought it to their attention and they 

just decided to go a different way.

Shawn O'Neill: And I would like to just interject. I think it also depends, too, on the 

specification of the -- your client. So are you -- are you talking about corporations that 

you’re dealing with?

MaleSpeaker3:Nonprofit hospitals. 

Robert Miller: Nonprofit hospitals. 

Cindy Freelander: So these --

Male Speaker 3: Generally, smaller community hospitals.

Cindy Freelander: -- do they have investment policies, generally, or no? 

Male Speaker 3: With -- in terms of investments of their own funds, yes

Shawn O'Neill: Okay.

Steve Vilim: I'm sorry.

Male Speaker 3:-- on which I rely heavily for recommendations with respect to

investing bond proceeds.

Steve Vilim: Yeah, I mean, I would take a look at definitely their past history, their 

experience, how sophisticated they are. Getting -- as Robert talked about, too, is 

documenting your discussions with them so that it’s clear to them about what you’re trying 

to recommend to them and how sophisticated they are. And also, Dan has mentioned, too, 

understand their policies, their investment policies and their boards policies, and if you’re 

making presentations to the boards at all, make sure they’re very clear on what you’re 

providing to them and their knowledge of the products.

Male Speaker 3:-- Well, I'm thinking of one case in particular where they've had

investment policy because they had their own money and needed to put together a policy of

how to invest it. In terms of borrowing money, they’d really never done it before, just in a

small way. And Robert, this is the example I provided at the NAMA conference a few weeks

ago. And you and your colleague kind of rolled your eyes when I said, "They’ve never issued

debt before." And it was a -- it was a financing that involved Radian Insurance-backed

auction rate securities with a Lehman swap and a reserve fund invested with AIG.

Steve Vilim: Right. And they --
Male Speaker 3:-- Guess what?

Robert Miller: They all failed. Yeah, I remember the scenario.

Male Speaker 3:-- And looking back on it, what we knew at the time, I still believe it was a

solid recommendation. They were very comfortable with what they did. When it -- when it 

started to unravel, nobody was pointing any fingers, you know, you recommended this. It’s 

like, okay, let’s roll up the sleeves and do something about it. We’re not going to stand idly 

by and take our lumps. Let’s see how we can fix it, which is what we did in the beginning of 

the summer of ‘07, when Radian first experienced difficulty. So they were comfortable with 

it. Nobody -- there were no recriminations at all.

And looking back on the -- my -- the work we had done to present to their governing board, 

very state of the art. And it was based on what we knew at the time. It was very solid. So 

knowing what I know now, I wouldn’t recommend that, but at the time, it made sense. And 

they were probably among my least risk-averse clients, so that, you know, they saw an 

opportunity to save money based on what we could tell, and they thought the risk was work 

it.

But in an examination, how are you going to come to these judgments as to whether 

recommendations were suitable? It's -- part of it is knowing the client. And I’d been 

working with them a couple years at that point, so I knew them pretty well. But how is an 

examiner going to know these situations?

Robert Miller: Well, I think, for the most part, as we mentioned even back in the NAMA 

conference, it’s not our job to kind of second guess you. I think the scenario you described, 

it was, you know, the perfect storm, I believe somebody said, where everything just kind of 

happened at once. So we wouldn’t go back and say aha, you should’ve recommended this, 

that, or the other thing.

I think what is key, though, that all of us have said, you know, again, if you’re looking at 

something that’s either outside of their wheelhouse or something that they’re not familiar, 

or even if it is, the more documentation you have, the better for our examiners in terms of 

looking at it and saying, well, you know, person x or firm y or MA z did everything a 

reasonable person could do, and it just was a bad situation. As opposed to saying, "Well, 

we did everything we could." And we’d say, "Well, show us how you came to that

conclusion." And you said, "Well, I just talked to him on Monday, and he said that’s what he 

was interested in."

Steve Vilim: And I think the other thing, too, I'd like to point out, too, is that we’ll take a 

look at your firm, right? If this is your practice in recommending these types of products, 

that actually lends to your support. But if this is something you’re just brand newly getting 

into and you’re pitching this thing, we’re going to start questioning whether or not, you 

know, the statistics --

Male Speaker 3:-- Well --

Steve Vilim: -- yeah.

Male Speaker 3:-- -- don’t call it me pitching it. It was not -- these are not my products.

Steve Vilim: Okay.
Male Speaker 3:-- It was -- really had not been in a position to recommend this sort of

thing before because I deal with weaker-credit clients, and this was one of the first ones

that qualified for bond insurance. None of the rest of them were insurable. So I said,

"Well, gee, now we’ve got Radian Insurance interested in this, this opens up these other 

possibilities."

Steve Vilim: Okay.

Male Speaker 3:-- So I knew it was out there; I’d never done it before. It's a function

of the type of clients I have.

Steve Vilim: Right.

Robert Miller: So I think, as Steven mentioned -- and again, just to reiterate, we would 

have to look at the whole totality. It’s difficult to give you a black and white answer now 

without --

Male Speaker 3:-- Well, I know, I know, I’m just --

Robert Miller: -- looking at everything and --

Male Speaker 3:-- But I could see the suitability issue getting to be a major point of

contention with, you know, with all due respect, with SEC staff who have never looked at

these issues before.

Robert Miller: Right.

Shawn O'Neill: You know, I guess what I would add to that -- and I agree with what

Robert said. From the FINRA perspective, the suitability issue, we run across this not just in 

the muni space, but in other security spaces as well. And the biggest problem we have with 

our examining staff is that the firm can’t document or evidence how they came to that 

conclusion or how they came to that determination. And to the extent that the firm has

that documentation and they could tell us that story with the documents, I think, in most 

cases than not, I think we walk away satisfied that it appeared suitable.

Robert Miller: Another question over here.

Male Speaker 5: Specifically related to non-dealer MAs, I’m curious what you’ve done with 

your staff to bring them up to speed on our strange little world.

Steve Vilim: Sure. So what we’ve done and we’re continuing to do, we’re continuing to 

have training for our staff. We’ve gone over the new MA rules. We’re having a training later 

on this year to go over the details, and we’ll focus on the areas that we’re going to be 

looking at as part of the SEC examination program. We’re working with FINRA and the

MSRB to get an understanding of the rules and regs with respect to the MAs. We will also, 

as Cindy mentioned, kind of -- we're working together to make sure that we’re consistent

on how we look at certain factual circumstances. So we are educating our examiners on 

this brand new world, and we’re continuing to -- we will continue to do so in the future.

Shawn O'Neill: And the other thing I’d like to point out, too, as part of the OC's exam 

process, we have a National Exam Program, and we have working groups, and I’m one of 

the chairs, or the co-head, of the Fixed Income Working Group, and we meet on a regular 

basis to go over, you know, new topics, and particularly in this arena. And we do have
dedicated special examiners who come from the industry and understand what you guys are 

going through. So based on that and the monthly meetings and the other outreach that 

Robert’s talking about, that’s definitely -- our examiners are getting up to speed.

Male Speaker 6: Can I just ask what’s the -- what's the objective of the review of fees

and fee arrangements during examination?

Steve Vilim: Fees and fee --

Male Speaker 6: What’s the objective of that review, that --

Steve Vilim: So what’s the objective of reviewing fees and fees arrangements? I mean, it 

could be one of several things. It could be done as part of our review for fiduciary duty. It 

could come into supervision. It could come into pay to play. It could be a whole set of 

issues. It also could be part of the books and records requirements review.

Robert Miller: Do we have any more questions? All right, I think that’s it. Well, thanks, 

everybody, for being here. I appreciate your participating.

[applause]

Male Speaker 2: If everyone could just wait, Dan Gregus is going to do closing remarks.

Dan Gregus: Thank you, everybody. As we’re winding down today’s program, I just want to

mention a couple of housekeeping matters to start, and that is that soon after this program

has ended, you’ll be getting an email with an evaluation form, which we’d appreciate you 

taking a look at and getting back to us. It helps us determine what we’re doing a good job 

here, what other issues we should target, it helps us to serve you, because while our

objective is to protect investors, we also serve you at least to the extent that consistent 

compliance promotes confidence in the industry and is better for everyone. So we’d

appreciate you filling out those forms if you get a chance. Secondly, I just want to remind 

you all that people who are looking to get CPE credit can still drop their forms off in the back

there if you want to do so.

And I also want to remind you about the resources that are on both the thumb drive you 

received from the MSRB and in the packets that we provided you. Many of the statutes and 

regulations we look for, there’s either links to those in those packets or information in the 

MSRB electronically. And I want to thank the fed for providing us with this wonderful space 

and with the technological assistant who sent out the information on a webcast. I want to 

thank the speakers for their efforts here, and I hoped that they provide you useful 

information. I want to thank the FINRA and MSRB as well for their sponsorship of this 

program. I hope that this has lifted the veil a little bit for you with respect to the SEC’s, 

FINRA’s, and the MSRB’s thoughts and thought processes as we go forward in this area.

And we look forward to being -- at least initially being a learning experience where we come 

to your firm and if we don’t find a fraud or a serious conflict that has not been disclosed, we 

would hope that you would look at us as helping you improve your compliance going

forward, to prevent something like that from happening in the future. And we look forward 

to working with you and learning as you are at the beginning of this process. So, with that, 

I want to thank you all again for attending, and I also want to turn it over to my colleague

Michael Post from the MSRB to make additional closing remarks.

Michael Post: Thank you. I appreciate very much the opportunity to make some closing 

remarks. I can say on behalf of the MSRB and myself personally, and I think it’s safe to say
the SEC and FINRA, we appreciate the opportunity to engage with members of the industry 

and particularly members of the municipal advisor community and hope that these really 

are sort of a win-win. I know that we appreciate hearing some of the practical implications 

of our rules and rule proposals, and hearing some of the practical concerns that you have. 

And I personally have enjoyed the conversations that I’ve had with a number of you at the 

breaks and in between sessions.

I wanted to talk a little bit about the things that you can do after today. One of them is I’d 

urge you to sign up, if you haven’t already, for MSRB email updates. And these are the 

easiest way to keep up with the regulatory, educational or technology activities of the

MSRB. We recognize that your industry’s deeply affected by the developing regulatory

framework for municipal advisors and I hope that, in the past, you’ve had the opportunity

to avail yourselves of many of the things that the MSRB has been doing in the past year in

terms of materials for you on preparing for regulation, participating in the rule-making

process, and getting to

know your regulator. And we’ve conducted webinars on each of the municipal advisor rule 

proposals. We’ve also held more lengthy comment periods for each municipal advisor rule 

proposal as traditionally has been allowed for rule proposals to give you the

opportunity to digest, participate in the webinar, and make meaningful comments and 

participate in the process. In addition to the flash drives, I wanted to encourage you to 

avail yourself of additional resources for municipal advisors on the MSRB’s webpage. We

also

have a recently launched education center that has tools for different market participants, 

including issuers.

And I would suggest that you consider a couple things that you could point your clients to 

that may be of benefit to them. One is that the MSRB has developed a functionality in EMMA 

for issuers to receive email reminders to prompt them when continuing disclosures are due 

and help ensure that those continuing disclosures are made on a timely basis. The second

is that your clients can develop customized issuer homepages on EMMA and the MSRB is 

happy to work with issuer personnel on that and set up appointments to work with them

and walk them through the process. So I think that this event, and Cindy spoke to it earlier,

is a good example of the close working relationship that exists, particularly in this space, 

between the SEC, FINRA, and the MSRB, and we believe it’s very helpful and we like to hope

-- like to think that it’s better for the marketand better for the municipal advisory community

that the three regulatory organizations that are striving to carry out their different

mandates under Dodd-Frank and fulfill their different functions are communicating very well 

together and have close working relationships.

So thank you very much for attending today, for your time, and we’ll look forward to 

hearing from you in the future. Thank you.

[applause]

[end of transcript]