WASHINGTON — Independent financial advisors are criticizing the Municipal Securities Rulemaking Board’s draft changes to its rule on gifts and gratuities, warning they don’t go far enough to eliminate conflicts of interest.

The advisors issued the warning in a comment letter on the draft amendments, which would expand Rule G-20 to cover muni advisors as well as broker-­dealers.

The draft revised rule, released by the MSRB in February, would ban municipal advisors from making gifts and gratuities worth more than $100 per year “in relation to” their muni-advisor activities, including solicitation of advisory business. But like the existing rule, the draft would exempt “occasional gifts” of meals or tickets to sporting and theatrical events and other entertainment hosted by municipal advisors.

That exception is triggering concerns among independent FAs, who are urging the board to eliminate it from the rule for broker-dealers as well as for muni advisors.

“Historically, the MSRB has taken a hands-off, see-no-evil, hear-no-evil approach to 'occasional gifts’ and now seeks to continue this practice,” wrote Colette Irwin-Knott, president of the National Association of Independent Public Finance Advisors and a partner at H.J. Umbaugh & Associates in Indianapolis.

In its April 1 comment letter, NAIPFA urged the MSRB to adopt a straightforward rule: no single gifts worth more than $100 and a $250 annual cap on gifts and gratuities. As guidance, NAIPFA looked to G-37 on political contributions, which limits muni finance professionals in broker-dealer firms to making no more than $250 in contributions to issuer officials or candidates for whom they are entitled to vote.

Without such modifications, NAIPFA said, draft Rule G-20 creates the possibility that an issuer employee could receive a $100 gift and a gratuity of dinner and 18 holes of golf, and then additional meals and entertainment throughout the year. Such a scenario, according to the FA group, would enhance the risk that gifts to issuer employees might influence their muni-advisor hiring and retention decisions, the very “pay-to-play” practice the rule seeks to curtail.

“When employees and elected officials make business decisions that are not based on matters such as qualifications or costs, and instead based on who has given the most lavish gift or gratuity, it is the municipal entity itself that ultimately suffers,” Irwin-Knott said.

Under the existing rule, occasional gifts cannot be so frequent or extensive that they raise “any question of propriety.”

In the notice accompanying the draft rule, the MSRB said the ban would cover a gift or gratuity by a muni advisor that could reasonably be viewed as an attempt to “curry favor” with a municipal entity or issuer for the purpose of securing a muni-advisor engagement.

Still, NAIPFA said, broker-dealers and muni advisors “will likely be able to influence decisions without violating the rule.” The group also urged the MSRB to amend the draft rule to extend the gift-and-gratuity ban to family members of issuer employees.

In the February notice, the board cited a 2007 interpretation of Rule G-20, which said that the payment of lavish or excessive entertainment and travel expenses incurred by family members of issuer employees could be “ 'especially problematic.’ ”

NAIPFA also asked the MSRB to revise the draft rule to include gifts and gratuities given by broker-dealers for the purpose of soliciting municipal securities business. The group noted that the draft rule creates an “unacceptable double standard,” only curtailing such gifts by muni advisors.

In a separate comment letter dated April 1, David Levy, a principal with Municipal Regulatory Consulting in West Windsor, N.J., raised concerns about whether draft Rule G-20 would apply to charitable donations sought by issuer employees, such as a local mayor who asks a potential muni advisor to donate to the United Way.

According to Levy, draft G-20 is unclear about whether such contributions would qualify as gifts or gratuities. He also raised concerns about when and whether charitable contributions might be covered by Rule G-17’s ban on unfair practices.

Either way, he said: “There is no need or reason for any uncertainty in this area.”

Since these situations arise in the normal course of business, he added, the MSRB should provide guidance about charitable solicitations to market participants, and release any such guidance for public comment. Other market participants are asking the board for clarification as well.

In a comment letter dated April 5, the Securities Industry and Financial Markets Association asks the MSRB to clarify that gifts by muni advisors to individuals would be covered by Rule G-20, but gifts to entities would not be. SIFMA also urged the board to confirm that the draft amendments to G-20 do not “exceed the reach” of the current rule, but simply extend the existing rule framework from broker-dealers to municipal advisors.

“We understand that the MSRB intends for the proposed amendments to apply to municipal advisors in the same fashion as Rule G-20 currently does to municipal securities dealers,” wrote Leslie Norwood, SIFMA’s managing director and associate general counsel. “SIFMA welcomes such an approach, which will promote predictability and consistency across regulatory regimes.”

The MSRB is expected to consider the comments and then propose rule changes. They would have to be approved by the SEC to become effective.

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