News & Insights

Finra Issues Guidance On Member Firms’ Supervisory Obligations When Participating In Investment Related Activities With Municipal Clients

FINRA recently issued Regulatory Notice 19-28 addressing member firms’ supervisory responsibilities as it pertains to customer accounts owned by municipal entities. The guidance was issued to clarify misconceptions surrounding the definition of the term “municipal advisors” and to ensure compliance with relevant FINRA and SEC regulations.

The term “municipal advisor” refers to any individual, who is not a municipal entity or an employee of a municipal entity, that provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities.  The Dodd-Frank Act requires individuals acting as “municipal advisors” to register with the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB).

Recent FINRA examinations found that certain member firms were engaged in investment-related activities with municipal clients, but were not registered as municipal advisors as required by the Dodd-Frank Act. FINRA discovered that these member firms did not have reasonably designed supervisory systems and controls to determine whether they were required to register as municipal advisors.

In the Regulatory Notice, FINRA reminded member firms that engage in investment-related activities with municipal clients that they must establish, maintain and enforce supervisory systems and controls pursuant to FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System) reasonably designed to prevent and detect unregistered municipal advisory activity and non-compliance with its attendant obligations. We recommend our brokerage firm clients have policies and procedures in place to identify new and existing municipal client accounts, as well as a system of procedures designed to ensure compliance with applicable municipal advisors rules as required by the SEC, MSRB and FINRA.