THE SHORT ANSWER
MSRB Rule G-42 requires a municipal advisor to owe its municipal entity client a fiduciary duty that includes loyalty and care, to disclose all material conflicts of interest and material legal or disciplinary events in writing before or when municipal advisory activities begin, to have and disclose a reasonable basis for believing any recommended transaction or product is suitable, and to document the relationship, compensation and scope in a dated writing.
The MSRB's standards-of-conduct rule for municipal advisors requires an advisor to owe its municipal entity client a fiduciary duty that includes loyalty and care, to disclose all material conflicts of interest and any material legal or disciplinary events in writing before or when the work begins, to have and disclose a reasonable basis for any recommendation, to document the relationship in a dated writing, and to observe prohibitions on excessive compensation, fee-splitting and most payments to obtain engagements.
Congress supplied the frame: 15 U.S.C. §78o-4(c)(1) deems a municipal advisor, and any person associated with it, to have a fiduciary duty to any municipal entity for which it acts as a municipal advisor, and Exchange Act Section 15B(b)(2)(L) directs the MSRB to write municipal advisor rules that prevent conduct inconsistent with that duty.
The MSRB adopted the rule under that mandate, the SEC approved it in Release No. 34-76753 on December 23, 2015, and MSRB Notice 2016-03 set the effective date at June 23, 2016; the rule applies to non-solicitor municipal advisors.
Registration and the definition of municipal advisory activity are covered in the guide to what a municipal advisor does; this page stays on what the conduct rule itself requires.
| What the rule requires | The standard | Where in the rule |
|---|---|---|
| Fiduciary duty | Loyalty and care for a municipal entity client; a duty of care for an obligated person client | (a)(i), (a)(ii) |
| Conflict and disciplinary disclosures | Full and fair written disclosure before or when municipal advisory activities begin | (b) |
| Suitability | A reasonable basis for any recommended transaction or product, with the basis disclosed to the client | (d) |
| Engagement documentation | A dated writing delivered prior to, upon or promptly after the relationship begins | (c) |
| Prohibitions | Excessive compensation, materially inaccurate invoices, false or misleading statements about the advisor's capacity in RFP responses, fee-splitting with underwriters and undisclosed fee-splitting with providers of investments or services, most payments to obtain engagements, and principal transactions with a municipal entity client on the same or a directly related issue or product, with an exception in Supplementary Material .14 for specified fixed income securities | (e) |
What duty of care and loyalty does the rule impose?
Under paragraph (a)(i), a municipal advisor to a municipal entity client is subject, in the conduct of all municipal advisory activities for that client, to a fiduciary duty that includes a duty of loyalty and a duty of care.
Under paragraph (a)(ii), an obligated person client, such as a nonprofit hospital borrower, is owed a duty of care only; the statute's deemed fiduciary duty runs to municipal entities.
The duty of care, in Supplementary Material .01, requires the advisor to possess the degree of knowledge and expertise needed to give the client informed advice, to make reasonable inquiry into the relevant facts, and to have a reasonable basis for the advice and for representations in any certificate the advisor signs, including information provided for an official statement.
The duty of loyalty, in Supplementary Material .02, requires the advisor to deal honestly and with utmost good faith and to act in the client's best interests without regard to the financial or other interests of the municipal advisor.
Where the advisor cannot manage its conflicts, the loyalty standard does not let it proceed anyway: it must not take the engagement.
The duty runs to the advisor's client rather than to bondholders; the MSRB glossary assigns the fiduciary role for bondholders to the trustee, the financial institution with trust powers that acts under the bond contract and that often also serves as custodian, paying agent, registrar or transfer agent.
An underwriter sits outside this framework, and the MSRB's interpretive notice to underwriters requires an underwriter in a negotiated deal to disclose at the earliest stages, for example in an RFP response, that its role is arm's-length and that unlike a municipal advisor it has no federal fiduciary duty to the issuer.
Why an issuer might engage an independent advisor rather than rely on the underwriter is developed on the independent advisor versus underwriter page.
What disclosures does the rule require?
Before or when municipal advisory activities begin, paragraph (b) requires full and fair written disclosure of all material conflicts of interest and of any material legal or disciplinary events, and a written statement that there are none if that is the case.
The conflicts the rule lists are services an affiliate provides to the client, payments to obtain engagements, payments received from a third party to enlist the advisor's recommendation under (b)(i)(C), fee-splitting arrangements between the advisor and any provider of investments or services to the client, conflicts arising from compensation contingent on the size or closing of a transaction under (b)(i)(E), and any other conflicts.
Material legal or disciplinary events may be disclosed by reference to the advisor's Forms MA and MA-I.
Supplementary Material .05 adds that the disclosures must explain how the advisor manages or mitigates each conflict.
In bond-proceeds work these categories come up around a Bidding Agent's fee: mGIC acts as an independent Bidding Agent, its fee is paid by the winning provider rather than the issuer, and it is equal to or below the safe-harbor maximum in the Treasury arbitrage regulations and disclosed under those regulations' disclosure requirement.
The disclosure duty reaches arrangements on the provider side of the trade: paragraph (b) requires full and fair written disclosure of all material conflicts of interest, and Supplementary Material .05 requires the disclosure to explain how the advisor manages or mitigates each conflict.
What the Treasury safe harbor adds on the fee's size and records is covered on the Bidding Agent fees page.
Paragraph (e) then backs the disclosure regime with prohibitions: excessive compensation, materially inaccurate invoices, false or misleading statements about the advisor's capacity in RFP responses, fee-splitting with underwriters, undisclosed fee-splitting with providers of investments or services, most payments to obtain engagements and, for a municipal entity client, principal transactions on the same or a directly related issue or product, under (e)(i)(A) through (E) and (e)(ii), with an exception in Supplementary Material .14 for specified fixed income securities.
| Fee-splitting under paragraph (e) | Scope of the ban |
|---|---|
| With underwriters | Unconditional |
| With providers of investments or services to the client | Reaches undisclosed arrangements |
From the issuer's side, GFOA's guidance on selecting and managing municipal advisors recommends merit-based selection through a competitive RFP or RFQ process, fees presented in a standard format with not-to-exceed amounts identified, and periodic reviews of the relationships.
That selection process is developed on the choosing a reinvestment advisor page.
What does the rule require for suitability?
Under paragraph (d), a municipal advisor that recommends a municipal securities transaction or a municipal financial product must have a reasonable basis to believe the recommendation is suitable for the client.
The advisor must tell the client its evaluation of the material risks and benefits of the recommendation, the basis for its suitability conclusion, and whether it investigated or considered other reasonably feasible alternatives.
The same duties apply when the client asks the advisor to review a recommendation made by another party, so long as that review falls within the scope of the engagement.
Supplementary Material .09 lists the factors that bear on the suitability determination, and Supplementary Material .10 sets the related know-your-client requirement.
On mGIC's side of that analysis, its reinvestment advisory reviews cover a fund's objectives, permitted investments, draw schedules, credit terms, market conditions and timing, and the products it evaluates and competitively bids are guaranteed investment contracts, full-flex repurchase agreements and structured Treasury portfolios, none of which it sells.
How those products differ is covered in the comparisons of a GIC with a full-flex repo and of an agreement with owned securities.
Supplementary Material .03 addresses the related situation in which the client chooses a course of action contrary to the advisor's advice.
What documentation does the rule require?
Paragraph (c) requires the advisor to evidence each municipal advisory relationship in a dated writing created and delivered to the client prior to, upon or promptly after the establishment of the relationship.
The writing must state:
- the form and basis of compensation
- the conflict and disciplinary disclosures required by paragraph (b)
- a description of the legal and disciplinary events information on Forms MA and MA-I, with where to find it electronically
- the date of the last material change to those disclosures
- the scope of the engagement and any limits on it
- the termination date or the trigger for termination
- the withdrawal terms
Supplementary Material .06 requires the writing to be amended promptly for material changes.
The recordkeeping rules connect on the back end: MSRB Rule G-8(h) requires municipal advisors to keep the records SEC Rule 15Ba1-8 lists plus records tied to specific MSRB rules, including a copy of any document the advisor created that was material to its review of a recommendation by another party or that memorializes the basis for a suitability determination.
What those records look like across an advisor's files is covered on the municipal advisor recordkeeping page, and the issuer-side versions land in the bond file described on the compliance file page.
Supplementary Material .07 gives an advisor that gave advice inadvertently a cure: it can avoid the paragraph (b) and paragraph (c) requirements if it meets the listed conditions, including a disclaimer that, effective immediately, it has ceased engaging in municipal advisory activities.
Supplementary Material .08 adds that municipal advisors may also be subject to fiduciary or other duties under state or other laws.
Read together, the duty, the disclosures, the suitability standard and the documentation requirement give an issuer a concrete set of things to ask about, with the paragraph (e) prohibitions standing behind them.
mGIC is an independent, SEC-registered municipal advisor and Bidding Agent founded in 2002 that sells no proprietary investment product and does not act as principal in the investments it evaluates, and more on the firm is on the about mGIC page.
For a free, no-obligation reinvestment review of a construction fund, reserve fund or escrow investment, you can work with an SEC-registered advisor through the contact page.
Final conclusions about what the rule requires on a specific engagement, and about any issue's legal and tax questions, belong to bond counsel and tax counsel.
Frequently asked questions
When did MSRB Rule G-42 take effect?
The SEC approved the rule in Release No. 34-76753 on December 23, 2015, and MSRB Notice 2016-03 set the effective date at June 23, 2016, the same date the related amendments to MSRB Rule G-8 took effect.
Does Rule G-42 apply to solicitor municipal advisors?
The rule is written for non-solicitor municipal advisors, and the duties described on this page should be read within that scope.
What happens if a municipal advisor gives advice inadvertently?
Supplementary Material .07 provides a cure: an advisor that inadvertently gave advice can avoid the disclosure and documentation requirements if it meets the listed conditions, including a disclaimer that, effective immediately, it has ceased engaging in municipal advisory activities.
Can state law impose duties on a municipal advisor beyond Rule G-42?
Yes. Supplementary Material .08 states that municipal advisors may also be subject to fiduciary or other duties under state or other laws.
What does the rule say when a client rejects the advisor's advice?
Supplementary Material .03 addresses cases in which a client chooses a course of action contrary to the advisor's advice.
Sources
- MSRB Rule G-42
- MSRB Notice 2016-03
- 15 U.S. Code § 78o–4
- MSRB Rule G-8
- MSRB Rule G-17, Interpretive Notice Concerning the Application of MSRB Rule G-17 to Underwriters
- MSRB, Application of the Content Standards to Advertisements by Municipal Advisors under MSRB Rule G-40 (June 2023)
- GFOA, Selecting and Managing Municipal Advisors
- MSRB Glossary of Municipal Securities Terms, 3rd ed. (Aug. 2013)
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
