Municipal advisors considering disclosure of conflicts of interest would do well to tread carefully, particularly given recent enforcement activity by the Securities and Exchange Commission.

That was a key takeaway from an expert panel at the 2021 Compliance Outreach Program for Municipal Advisors sponsored jointly by the SEC, Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority. Industry panelists, including municipal advisors, attorneys, and regulators, offered insights on managing conflicts of interest disclosures under MSRB Rule G-42.

The panel, which was moderated by MSRB chief regulatory officer, Gail Marshall, agreed that the key considerations for dealing with conflicts of interests are determining whether a potential conflict is material and how to go about disclosing and mitigating it.

Rule G-42 requires a municipal advisor to make full and fair written disclosure of all material conflicts of interest and all legal and disciplinary events that are material to a client’s evaluation of a municipal advisor.

“With respect to conflicts of interest and determining materiality…one great thing about Rule G-42 is that it provides the thresholds,” explained Ed Fierro, senior counsel at Bracewell LLP. “There are identified events in Rule G-42 — -really focused around compensation and the municipal advisor’s ability to provide advice,” —-that are considered by the MSRB to be material conflicts.

Marshall pointed out that those include, but are not limited to: affiliate advice service or products directly related to the municipal advisor’s activities, payments made to obtain the municipal advisor’s business, and payments received to enlist the municipal advisor’s recommendation of a third party’s services.

Material conflicts also stem from any fee-splitting arrangements, compensation-related conflicts, and any other actual or potential conflicts that could reasonably be anticipated to impair the municipal advisor’s ability to provide advice to or on behalf of a client.

Fierro said caution is especially warranted given the SEC’s recent foray into enforcing G-42. The commission brought its first-ever case under the rule last month, charging Choice Advisors and two of its principals with violations that stemmed, in part, from an undisclosed fee-splitting arrangement.

In terms of determining materiality of a potential conflict, Brian Reilly of Ehlers, Inc. said he would argue on the side of conservatism.

“If there is any question at all, we contemplate disclosing it and then the mitigation efforts around that,” Reilly said, adding, “and if there is something that is in a very gray area, then we may seek outside review and consideration and guidance by counsel.”

Fierro agreed, saying that “It’s best to err on the side of caution…and simply provide disclosure to the client, as opposed to trying to convince an examiner or enforcement staff that it wasn’t material after the fact.”

Marshall reminded attendees that “disclosures must be sufficiently detailed to inform the client of the nature, implication, and potential consequences of each potential conflict that you disclose and must include an explanation of how the MA addresses or intends to mitigate each conflict,” Marshall said.

Ashley McAnulty of Stephens, Inc., said Stephens considers whether a potential conflict is important, essential, and relevant. But McAnulty also said that legal and disciplinary disclosures under Rule G-42, “tend to be a little more clear than some of the reporting on the conflicts of interests.”

“With legal and disciplinary disclosures, there is information required to be reported and we do provide that,” McAnulty explained. “When we’ve had an adverse legal or disciplinary action taken against our firm, we disclose that we also provide electronic links to information that will give them the most recent and up to date information.”

Tracie Palmer of Post Oak Municipal Advisors, LLC, stressed the importance of providing disclosures upfront and having a review process in place for revisiting client lists and evaluating new conflicts–particularly with regard to having pre-clearance for outside business activities.

“We have processes in place to ensure that required G-42 conflicts of interests disclosures are given with contracts at the beginning of the municipal advisory relationship and before any issues of securities as well,” Palmer said.

Fierro noted that in any instance, determinations of materiality are going to be based on facts and circumstances, some of which may require broader analysis.

Palmer agreed–with a caveat “Everything is fact specific,” she said. “[When in doubt and when dealing with recommendations of a third party’s services], start with the assumption that this is a conflict of interest.”

While the panelists agreed that instances where a conflict of interest cannot be mitigated are rare, they stressed the importance of good written documentation and substantiation in every case. They also recommend having sound written supervisory procedures and technology and other systems in place to help to stay on top of Rule G-42 rule disclosures.

In terms of parting advice for managing conflicts of interest and complying with MSRB Rule G-42, Palmer said that “it’s better to overdo rather than underdo.” Reilly said, “Disclosure is your friend,” and Fierro reminded attendees to “act in the best interest of the client.”