Notice2021-17830
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Amendments to Rule G-10, on Investor and Municipal Advisory Client Education and Protection, and Rule G-48, on Transactions With Sophisticated Municipal Market Professionals, To Amend Certain Dealer Obligations
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 20, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 159 (Friday, August 20, 2021)</title>
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[Federal Register Volume 86, Number 159 (Friday, August 20, 2021)]
[Notices]
[Pages 46890-46896]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17830]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92677; File No. SR-MSRB-2021-04]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change Consisting of
Amendments to Rule G-10, on Investor and Municipal Advisory Client
Education and Protection, and Rule G-48, on Transactions With
Sophisticated Municipal Market Professionals, To Amend Certain Dealer
Obligations
August 16, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on August 2, 2021 the Municipal Securities
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the MSRB. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB filed with the Commission a proposed rule change
consisting of amendments to MSRB Rule G-10, on investor and municipal
advisory client education and protection, and MSRB Rule G-48, on
transactions with sophisticated municipal market professionals
(``SMMPs'') (collectively, the ``proposed rule change''). The proposed
rule change would clarify the scope of the requirements for brokers,
dealers and municipal securities dealers (collectively, ``dealers'') to
provide the required notifications under Rule G-10 to those customers
who would best be served by the receipt of the information and make
accompanying amendments to Rule G-48 to exclude SMMPs from certain
requirements under Rule G-10.\3\
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\3\ Under MSRB Rule D-9, a ``customer'' means ``any person other
than a broker, dealer, or municipal securities dealer acting in its
capacity as such or an issuer in transactions involving the sale by
the issuer of a new issue of its securities.''
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If the Commission approves the proposed rule change, the MSRB will
announce the effective date of the proposed rule change no later than
10 days following Commission approval. The effective date will be no
later than 30 days following Commission approval.
The text of the proposed rule change is available on the MSRB's
website at <a href="http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2021-Filings.aspx">www.msrb.org/Rules-and-Interpretations/SEC-Filings/2021-Filings.aspx</a>, at the MSRB's principal office, and at the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
In 2017, the MSRB amended Rule G-10 with the goal of, among other
things, modernizing the rule and extend the rule's application to
municipal advisors.\4\ Prior to that time, the rule only applied to
dealers and required dealers to provide a customer with a paper copy of
the MSRB's investor brochure after a customer had made a complaint to
the dealer.\5\ Recognizing this requirement did not afford customers
the best use of the information in a timely manner, the 2017 amendments
replaced the post-
[[Page 46891]]
complaint delivery requirement with more timely delivery requirements.
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\4\ See Exchange Act Release No. 79801 (January 13, 2017), 82 FR
7898 (January 23, 2017) (File No. SR-MSRB-2016-15). The 2017
amendments created similar obligations for municipal advisors to
provide their municipal advisory clients with certain notifications.
The text of the amendments addressed the scope of Rule G-10
obligations for municipal advisors by specifically defining
``municipal advisory client'' for purposes of Rule G-10 to include
``either a municipal entity or obligated person for whom the
municipal advisor engages in municipal advisory activities, as
defined in rule G-42(f)(iv), or a broker, dealer, municipal
securities dealer, municipal advisor, or investment adviser (as
defined in section 202 of the Investment Advisers Act of 1940) on
behalf of whom the municipal advisor undertakes a solicitation of a
municipal entity or obligated person, as defined in Rule 15Ba1-1(n),
17 CFR 240.15Ba1-1(n), under the Act.''
\5\ See Exchange Act Release No. 24764 (July 31, 1987), 52 FR
29459 (August 7, 1987) (File No. SR-MSRB-87-6).
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Rule G-10, as designed, serves to educate and protect investors and
municipal advisory clients by providing them with information about the
MSRB rules designed to protect them and the process for filing a
complaint with the appropriate regulatory authority. The rule currently
requires dealers and municipal advisors (collectively, ``regulated
entities'') to provide certain notifications to customers and municipal
advisory clients, respectively, once every calendar year. More
specifically, Rule G-10 requires regulated entities to provide, in
writing, which may be made electronically, the following information
(``required notifications''):
(i) A statement that the regulated entity is registered with the
SEC and the MSRB;
(ii) The website address for the MSRB; and
(iii) A statement as to the availability to the customer or
municipal advisory client of a brochure that is available on the MSRB's
website that describes the protections that may be provided by MSRB
rules, and how to file a complaint with an appropriate regulatory
authority.\6\
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\6\ See MSRB's ``Information for Municipal Securities
Investors,'' available at https://www.msrb.org/~/media/Files/
Resources/MSRB-Investor-Brochure.ashx?la=en and ``Information for
Municipal Advisory Clients,'' available at https://www.msrb.org/~/
media/Files/Resources/MSRB-MA-Clients-Brochure.ashx?la=.
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Given there has been a reasonable implementation period to allow
the MSRB time to obtain meaningful insight on the operation of the
rule, the MSRB conducted a retrospective review of the obligations
under Rule G-10. The MSRB identified an opportunity to reduce certain
compliance burdens by re-evaluating the potential benefits of the rule
to better align the scope of the rule's application. The proposed rule
change is specific to the dealer obligations under Rule G-10 and the
MSRB is not proposing to modify municipal advisors' obligations under
the rule because the obligation municipal advisors have under Rule G-10
is already limited in scope in that a municipal advisor must provide
the required notifications promptly after the establishment of a
municipal advisory relationship, as defined in MSRB Rule G-42(f)(v), or
promptly, after entering into an agreement to undertake a solicitation,
as defined in Rule 15Ba1-1(n), 17 CFR 240.15Ba1-1(n), under the Act,
and then no less than once each calendar year thereafter during the
course of that agreement. The obligation dealers currently have under
Rule G-10 is broader in that each dealer must provide the required
notifications to all customers, including SMMPs, even if those
customers have not effected any transaction in municipal securities and
may never effect a transaction in municipal securities.\7\ Recognizing
that MSRB Rule G-48 underscores the differences between dealer
obligations to non-SMMP customers and SMMP customers, the MSRB also
assessed whether a modification to Rule G-48 was warranted.
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\7\ On December 7, 2020, the MSRB issued MSRB Request for Input
on Strategic Goals and Priorities, available at https://
www.msrb.org/~/media/Files/Regulatory-Notices/RFCs/2020-
19.ashx??n=1, with a comment period deadline of January 11, 2021.
Two commenters recommended changes to certain dealer obligations
under Rule G-10. See Letter from Mike Nicholas, Chief Executive
Officer, Bond Dealers of America (BDA), dated January 11, 2021. See
also Letter from Leslie Norwood, Managing Director and Associate
General Counsel and Bernard Canepa, Vice President and Assistant
General Counsel, Securities Industry and Financial Markets
Association (SIFMA), dated January 11, 2021.
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Proposed Amendments to Rules G-10 and G-48: Dealer Obligation To Make
Required Notifications
I. Customer Receipt of Required Notifications
The proposed amendment to Rule G-10(a), would require dealers to
provide the notifications to those customers for whom a purchase or
sale of a municipal security was effected and to each customer who
holds a municipal securities position. Narrowing the scope to those
customers that engage in municipal securities transactions would reduce
the burden of remitting the notifications unnecessarily to all
customers, while ensuring that dealers remit the notifications to
customers who would most benefit from receiving them. Customers who do
not receive the notifications directly pursuant to Rule G-10(a) will
still have access to them as section (b) of Rule G-10 would require
each dealer to have the required notifications available on its website
for the benefit of such customers. As a result, the MSRB does not
believe there is a detrimental impact to such customers and believes
that not receiving the notifications may avoid confusion for customers
who currently receive such notifications even though they have not
effected a municipal securities transaction or hold municipal
securities.
The proposed rule change would also amend Rule G-48 to modify a
dealer's obligation under Rule G-10. Specifically, the proposed
amendment to add section (f) to Rule G-48 would allow a dealer to make
the notifications available on its website rather than remit the
notifications to an SMMP pursuant to Rule G-10(a).\8\ The MSRB believes
that customers who meet the definition of SMMPs under Rule D-15 are
sophisticated in their understanding of the municipal market. In the
event that an SMMP is seeking the information found in the required
notifications, including the MSRB's website address, dealer
registration status and how to file a complaint with the appropriate
regulatory agency, a sophisticated customer is likely to know the
information, or seek access to it from the dealer's or MSRB's website.
The proposed amendment to Rule G-48 balances the burden on dealers to
remit the required notifications to SMMPs against the usefulness of
SMMPs receiving such notifications when the information is otherwise
readily available. This modified obligation dealers have with respect
to SMMPs is proposed section (f) of Rule G-48, in keeping with the
placement of other modified obligations for transactions with SMMPs
under Rule G-48.
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\8\ In order for a customer to be deemed an SMMP, MSRB Rule D-15
requires dealers to determine the nature of the customer, the
customer's sophistication level, and also requires a customer
affirmation, as specified in the rule.
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II. Exception for Dealers Subject to Carrying Agreements
The proposed amendments to Rule G-10 would apply to all dealers,
with two general exceptions: (i) A dealer that does not have customers,
or (ii) a dealer that is a party to a carrying agreement in which the
carrying dealer has agreed to comply with the requirement to provide
notifications under the rule. The proposed amendment to section (c) of
Rule G-10 would provide that any dealer that does not have customers,
or who is a party to a carrying agreement in which the carrying dealer
has agreed to comply with the required notification requirements, would
be exempt from the Rule G-10(a) requirements. The MSRB recognizes that
customer accounts may be held at other dealers, subject to a carrying
agreement, and that the carrying dealers are responsible for providing
account statements and trade confirmations. Therefore, the proposed
amendment to Rule G-10(c) is meant to acknowledge common business
practices and facilitate carrying dealers' compliance with the
requirement to provide notifications under the rule, on behalf of other
dealers.\9\ Additionally,
[[Page 46892]]
the proposed amendments would expressly clarify that the dealer would
not be subject to the notifications requirement, under Rule G-10(a), in
cases where dealers conduct a limited business and are not considered
to have customers.
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\9\ The proposed rule change promotes regulatory consistency
with section (b)(2) of FINRA Rule 2267, on Investor Education and
Protection, which provides that any member that does not have
customers or is a party to a carrying agreement where the carrying
firm member complies with the rule is exempt from the requirements
of the rule.
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III. Supplementary Material to Rule G-10
The proposed rule change would include supplementary material under
Rule G-10 that would provide clarity on the timeframe for delivery of
the required notifications. Supplementary Material .01 of Rule G-10
would make clear that the obligation to provide the required
notifications once each calendar year to applicable customers would be
deemed satisfied if dealers deliver the required notifications at a
given point in each calendar year so long as any customers that
effected a transaction in municipal securities or held municipal
securities after that given date in each calendar year receive the
notifications within the following rolling 12-month period. More
explicitly, after a dealer provides the required notifications to the
applicable customers, the ensuing notifications must be provided within
12 months from the date of the preceding notifications, but may be
provided within a shorter time period.\10\ The MSRB believes that the
proposed amendments would foster greater flexibility with respect to
the timing of the required notifications, and would also ensure that
each applicable customer receives the required notification within a
rolling 12-month period; and thereby, ease operational concerns.
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\10\ A dealer may, of course, elect to provide the required
notification more frequently than a rolling 12-month basis.
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For example, assume a dealer opts to remit the required
notifications on June 30, 2022, and in September 2002 a non-SMMP
customer who has never held municipal securities effects a transaction
in municipal securities for the first time. The dealer would not be
required to remit the notifications to that customer in calendar year
2022, but the dealer would be obligated to remit the notification to
that customer, and all other applicable customers, on or before June
30, 2023. In no event may a dealer exceed 12 months without remitting
the notifications to a non-SMMP customer who has effected a transaction
in municipal securities or who holds municipal securities.
The proposed rule change makes technical amendments to streamline
the required notifications by deleting the current provision (a)(ii) of
Rule G-10 and placing the reference to the website address for the
Municipal Securities Rulemaking Board within the proposed amended
provision that re-numbers provision (a)(iii) of Rule G-10 to provision
(a)(ii). The proposed amendments also re-numbers the remainder of Rule
G-10, accordingly.
2. Statutory Basis
Section 15B(b)(2)(C) of the Exchange Act \30\ provides that the
MSRB's rules shall:
be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities and
municipal financial products, to remove impediments to and perfect
the mechanism of a free and open market in municipal securities and
municipal financial products, and, in general, to protect investors,
municipal entities, obligated persons, and the public interest.
The MSRB believes that the proposed rule change is consistent with
Sections 15B(b)(2) \11\ and 15B(b)(2)(C) \12\ of the Exchange Act. Rule
G-10 would continue to be designed to prevent fraudulent and
manipulative acts and the proposed rule change does not diminish such
protections. The proposed rule change would help promote just and
equitable principles of trade, and protect investors, municipal
entities, obligated persons and the public interest by ensuring that
customers who have effected a transaction in municipal securities or
hold a municipal securities position, during the requisite period,
receive information that would be useful to them in understanding the
regulatory framework. The proposed rule change may also avoid confusion
because dealers would not have to provide notifications to customers
who have not effected any municipal securities transactions. More
specifically, the proposed rule change is designed to ensure that
applicable customers receive beneficial information, through the MSRB's
investor brochure, on how to file a complaint about dealers with the
appropriate regulatory authority and an overview of the investor
protections provided by MSRB rules. The required notifications, which
would be provided once each calendar year, are in support of curbing
potential fraudulent and manipulative practices, by creating an
awareness amongst customers of the SEC and MSRB.
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\11\ 15 U.S.C. 78o-4(b)(2).
\12\ 15 U.S.C. 78o-4(b)(2)(C).
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Additionally, for all other customers, including SMMPs, while
dealers will not have to provide the required notifications pursuant to
Rule G-10(a), such dealers would have to make the required
notifications available on their websites in accordance with the rule,
and other applicable MSRB rules and federal securities laws, which is
in furtherance of the public interest. The MSRB believes that the
proposed amendments to Rule G-48 to effectuate the exemption for
remitting notifications to SMMPs, so long as the SMMPs have access to
such notifications on a dealer's website, will facilitate transactions
in municipal securities and help perfect the mechanism of a free and
open market in municipal securities by avoiding the imposition of
regulatory burdens upon dealers where they appear to be unnecessary.
The MSRB currently understands that SMMPs are generally knowledgeable
about the registration status of a dealer and how to file a complaint
if warranted and can access the information on a dealer's website as
needed.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act requires that MSRB rules
not be designed to impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\13\ The
MSRB has considered the economic impact associated with the proposed
rule change, including a comparison to reasonable alternative
regulatory approaches, relative to the baseline.\14\ The MSRB does not
believe that the proposed rule change would impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
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\13\ 15 U.S.C. 78o-4(b)(2)(C).
\14\ See Policy on the Use of Economic Analysis in MSRB
Rulemaking, available at <a href="http://msrb.org/Rules-and-Interpretations/Economic-Analysis-Policy.aspx">http://msrb.org/Rules-and-Interpretations/Economic-Analysis-Policy.aspx</a>. In evaluating whether there was a
burden on competition, the Board was guided by its principles that
required the Board to consider costs and benefits of a rule change,
its impact on capital formation and the main reasonable alternative
regulatory approaches.
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The purpose of amending Rule G-10 is to better refine the
requirement for dealers to provide the required notifications to
specified customers. Rule G-10 was originally designed to protect
investors by providing them with the information necessary through the
investor brochure to file a complaint about their dealers with the
appropriate
[[Page 46893]]
regulatory authority. As discussed above, prior to the 2017 rule
amendments, Rule G-10 only required dealers to send a paper copy of the
brochure outlining protections under MSRB rules to investors who had
already complained to a dealer. The 2017 amendments replaced the post-
complaint delivery requirement with an annual written notification
requirement to all customers of a dealer regardless of whether a
customer ever effects a municipal securities transaction or owns
municipal securities in the account.\15\ To reduce the compliance
burden on dealers and ensure the greatest utility to customers
receiving the notifications, the MSRB proposes to amend Rule G-10(a) to
narrow the obligation of dealers to provide the required notifications
to only customers who traded municipal securities or held a municipal
securities position at the dealer during each calendar year. For all
other customers, dealers would be permitted to make such notifications
available on their websites in accordance with the rule. Similarly, the
MSRB is proposing related amendments to Rule G-48, so that all SMMPs
would be exempt as long as dealers make such notifications available on
their websites.
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\15\ See supra note 4.
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The MSRB assessed other regulatory alternatives and determined that
the proposed amendments to Rule G-10 and Rule G-48 are superior to
these alternatives. One alternative would be to revert the rule back to
the pre-2017 version that contained a post-complaint delivery
requirement and adding the electronic delivery option. By rolling back
the 2017 changes, a dealer would no longer have to provide the
notifications to all customers, regardless of whether they transacted
in municipal securities or own municipal securities. This alternative
would alleviate the burden to dealers of sending out thousands of
notifications to investors but would still not solve the problem of
providing investors with more timely access to information about how to
file a complaint and the protections provided under MSRB rules. Another
alternative would be to amend Rule G-10 to eliminate the annual
notifications delivery requirement. The MSRB already requires dealers
to communicate certain information to investors under Rule G-15, on
customer confirmations.\16\ By amending Rule G-10 to require dealers to
also provide a hyperlink to <a href="http://MSRB.org">MSRB.org</a> and a statement that the dealer is
registered with the SEC and the MSRB, dealers would be able to minimize
their direct outreach to investors by utilizing an existing required
form of communication (i.e., customer confirmations). However, with
this alternative, only customers who have recently transacted in a
municipal security would be notified of the information, but not
customers who hold municipal securities in their accounts.
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\16\ Under Rule G-15(a)(i)(D)(4), the dealer is required to
provide a hyperlink to EMMA[supreg] for publicly available
information on a specific security.
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Benefits and Costs
The MSRB believes by amending the rule to limit the scope of the
delivery obligation to customers who either held or transacted in
municipal securities during a 12-month period, compliance burdens to
dealers would be lessened. The volume of notifications sent by dealers
to customers, many of those who do not own or transact in municipal
securities, and therefore receive no utility from such notifications,
would be reduced. Additionally, other customers of dealers who do not
own or transact in municipal securities would not be subjected to
receipt of additional unnecessary communications, which could create
noise and confusion for these customers. Furthermore, in striving to
focus communications that are appropriate to the customer, the
resulting effect may be that customers pay more attention to
communications from dealers. Finally, dealers may incur savings from
sending out less correspondence to customers due to the narrowed scope
of the dealers' obligations; and due to the flexibility provided
pursuant to the rule and related proposed amendments to Rule G-48 that
exempt other customers and SMMPs.
To evaluate the potential costs to customers, the MSRB divided all
dealer customers into four segments to separately compare the future
expected state to the current baseline state of each group.
<bullet> Customers who currently hold municipal securities and plan
to transact again in the future. These customers would not be impacted
by the proposed amendments to Rule G-10 since they are expected to
receive the required notifications the same way as they receive the
notifications now;
<bullet> Customers who have never held municipal securities and do
not plan to transact in them in the foreseeable future. These customers
are currently receiving the notifications even though they do not hold
any municipal securities nor effect any municipal securities
transactions. The proposed amendments to Rule G-10 would not impact
these customers since the notifications are, likely, not relevant to
these customers;
<bullet> New customers of a dealer. These customers are currently
receiving the notifications by the end of each calendar year
irrespective of their holding of municipal securities or effecting a
transaction in municipal securities. The proposed amendments to Rule G-
10 would impact these customers, as they would not receive a
notification unless they effected a transaction in municipal securities
or held municipal securities at the time the dealer remitted the
notifications that calendar year. However, these customers would
receive the notification the next calendar year and in no event more
than 12 months from the time such customers effected a transaction in
municipal securities or held municipal securities;
<bullet> Existing customers who have never transacted in municipal
securities before but may do so in the future. These customers
currently receive notifications even though they have not transacted or
held a position in municipal securities. Under the proposed amendments
to Rule G-10, these customers would not receive the notifications,
required to be delivered once every calendar year, until such time as
they have a municipal securities transaction or hold a position in
municipal securities. The MSRB has been careful to balance the stated
objective of utility of information to customers against the slight
risk that could be born out of not providing such required
notifications to all customers, once every calendar year. The MSRB
notes that such customers would be able to avail themselves of the
information provided in the notifications by reviewing a dealer's
website. The MSRB also notes that the anecdotal evidence provided by a
commenter shows less than one percent of all existing customers who had
previously not transacted or owned any municipal security would effect
a transaction in municipal securities; \17\ and lastly,
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\17\ Letter from Leslie M. Norwood, Managing Director and
Associate General Counsel, the Securities Industry and Financial
Markets Association (``SIFMA Letter'' or ``SIFMA'') dated June 28,
2021: ``SIFMA members state that their estimated percentage of
customers that effect a municipal securities transaction that have
not previously effected a transaction in municipal securities is
anecdotally reported to be less than 1%.''
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<bullet> SMMPs who have traded municipal securities or hold a
municipal securities position. All SMMPs currently receive annual
notifications, but under the proposed amendments to Rule G-48, these
customers would not receive the notifications; instead, SMMPs would
[[Page 46894]]
still be able to avail themselves of the information provided in the
notifications by reviewing a dealer's website. Since SMMPs affirm to
having a level of sophistication, knowledge and familiarity with the
municipal securities market, these notifications add little benefit for
SMMPs, if any. By exempting the requirement to send notifications to
SMMPs, the proposed amendments would reduce the time and cost burdens
for dealers with minimal reduction in benefits for SMMPs.
In addition to any costs to customers, dealers would likely incur
some minor costs, relative to the baseline state, to meet the standards
of conduct and duties contained in the proposed rule change. These
changes may include a one-time upfront cost related to revising
policies and procedures, as well as ongoing costs such as compliance
costs associated with limiting the receipt to only the relevant
municipal securities customers for targeted communication outreach.
However, the MSRB believes these costs would be minimal, as firms would
be able to leverage their existing customer database to swiftly
identify the relevant pool of customers eligible for the required
notifications under the proposed rule change.
As to the overall scale of cost reduction to dealers, as well as
potential costs to some customers who may no longer receive the
notifications unless they initiate a transaction in municipal
securities, the MSRB is currently unable to quantify these economic
effects precisely because not all the information necessary to provide
a reasonable estimate is available. For example, the MSRB is interested
in the percentage of dealers' customers who trade or hold municipal
securities for a given calendar year, which would be helpful for the
MSRB to assess the impact of the draft rule amendments. The MSRB sought
the data during the Request for Comment process but was unable to
obtain it. Therefore, the MSRB has considered these benefits and costs
in qualitative terms.
Effect on Competition, Efficiency, and Capital Formation
The MSRB believes that the proposed rule change would neither
impose a burden on competition nor hinder capital formation, as the
proposed rule change would reduce burdens to dealers of remitting the
notifications to all customers by narrowing the scope of the
application of the rule. The MSRB believes that the proposed rule
change would improve the municipal securities market's operational
efficiency by clarifying existing regulatory obligations, further
promoting fair dealings between market participants.
The MSRB does not expect that the proposed rule change would change
the competitive landscape of the municipal securities dealer community,
as the proposed amendments to Rule G-10 and Rule G-48 would be
applicable to all dealers; therefore, the expected benefits and minor
costs would be proportionate to the size and business activities of
each dealer.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
As previously noted, on May 14, 2021, the MSRB published a Request
for Comment, which sought comment on the matters included in the
proposed rule change for a period of 45 days. The MSRB received four
comment letters.\18\ These comments, along with the MSRB's responses,
are discussed below.
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\18\ See Letter from Christopher A. Iacovella, Chief Executive
Officer, American Securities Association (``ASA Letter'' or
``ASA''), dated June 28, 2021; Letter from Michael Decker, Senior
Vice President, Bond Dealers of America (``BDA Letter'' or ``BDA''),
dated June 28, 2021; SIFMA Letter; and Letter from Jennifer Szaro
(``Szaro Letter'' or ``Szaro''), dated May 17, 2021.
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Narrowing the Scope of Customers Receiving the Dealer Notifications
The MSRB sought comment on whether to narrow the scope of customers
who receive the required notifications once every calendar year to
include only those customers of the dealer who have effected
transactions in municipal securities within the prior one-year or who
hold a municipal securities position. All four commenters noted that
the MSRB's draft amendments would ensure that the customers who would
most benefit from receiving the required information would receive the
notifications. Commenters also noted that no longer requiring dealers
to provide such notifications unnecessarily to other customers would
mitigate the compliance burden on dealers.
One commenter, BDA, recommended that the MSRB exempt dealers from
providing issuers the required notifications, stating that ``issuers
are financial professionals who understand the municipal market well
enough to know about the MSRB and do not require additional annual
reminders.'' As a threshold matter, the MSRB does not agree with the
premise that all issuers have the same level of market sophistication
and should have a wholesale exclusion. Pursuant to Rule D-9, an issuer
is a ``customer'' except in the case of a sale by the issuer of a new
issue of its securities. Therefore, in these instances, dealers would
not be required to provide the required notifications to an issuer.\19\
If an issuer is otherwise a customer, a dealer would continue to be
obligated to provide the notifications pursuant to Rule G-10(a) unless
the issuer customer is an SMMP, which would be determined based on the
nature of the issuer, a determination of sophistication by the dealer
and an affirmation by the issuer.\20\ As noted above, with respect to
an SMMP, the proposed amendment to Rule G-48 would allow a dealer to
make the notifications available on its website rather than remit the
notifications to an SMMP pursuant to Rule G-10(a).
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\19\ The MSRB did solicit feedback in the RFC on whether Rule G-
10 should require dealers to provide notifications to issuer clients
at the earliest stage of the underwriter's relationship with such
issuer client when an issuer client has not otherwise engaged a
municipal advisor. A summary of the comments received in response to
this question is discussed in Section C. below.
\20\ See Rule D-15 on the definition of the term ``Sophisticated
Municipal Market Professional.'' In order to deem a customer an
SMMP, a dealer is required to determine the nature of the customer
and the customer's sophistication level, and also requires the
customer's affirmation, as specified in Rule D-15. In addition, this
determination must be reasonable, including an analysis of the
amount or type of securities owned or under management by the
customer. See Rule D-15, Supplementary Material .01.
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BDA also requested that the MSRB eliminate the annual requirement
to provide notifications to customers who do not hold a municipal
securities position at the dealer at calendar year-end. BDA stressed
that modifying the proposed rule language in such a way would diminish
the burden on dealers of looking through stock records to identify
municipal securities customers for whom dealers no longer hold
positions because they were either transferred, sold or matured
entirely prior to the stock record review. The MSRB believes that the
proposed rule change requiring the notifications to those customers who
effected transactions in municipal securities or who hold a municipal
securities position, coupled with the supplementary material on the
sequencing of such notifications, strikes the right balance in
providing investor protections and reducing regulatory burdens. The
MSRB does not believe the rule should be narrowed further as BDA
suggests.
Additionally, BDA suggested that municipal advisors should not be
obligated to provide municipal advisory clients with the required
notifications promptly after the establishment of a municipal advisory
relationship or
[[Page 46895]]
entering into an agreement to undertake a solicitation and annually
thereafter during the course of the agreement. BDA asserts that
municipal advisors are already providing such notifications as part of
the municipal advisor engagement letter. While this comment is outside
the scope of the current proposal, MSRB notes the MSRB's municipal
advisory client brochure summarizes key principles of the MSRB rules
designed to protect municipal advisory clients as well as information
on how on how to file a complaint against a municipal advisor with the
appropriate federal regulatory authority--information that is not
customarily provided as part of the municipal advisor engagement
letter. The MSRB continues to believe that requiring municipal advisors
to provide the Rule G-10 notifications to municipal advisory clients
creates an awareness of the protections afforded by the regulatory
framework governing municipal advisory activities.
Exclusion of SMMPs
The MSRB sought comment on whether to exclude SMMPs from receiving
the required notifications, so long as dealers provide such
notifications on their websites (``website-only notifications''). Both
ASA and SIFMA specifically expressed support for the draft amendments,
indicating that the placement of the notifications on dealers' websites
is also in keeping with the modern approach to seek and find electronic
resources on dealers' websites, and provides adequate notice to SMMPs.
SIFMA remarked that SMMPs are, by definition, sophisticated investors
that should not require ``hand-holding'' in order to find information
on the investor brochure on the dealer's website, or elsewhere, or to
otherwise require guidance as to how to file a complaint with the
appropriate regulatory authority. SIFMA also noted that placement of
the customer notifications on dealers' websites provides adequate
notice to SMMPs that have engaged in a municipal securities transaction
or that maintain a municipal securities position.
The MSRB has had the opportunity to evaluate the implementation of
the requirement to provide notifications once every calendar year,
which was adopted in 2017,\21\ has considered these comments as well as
recent stakeholder comments,\22\ and has determined that allowing
dealers to make the required notifications available on their websites
is appropriate for SMMP customers.
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\21\ See supra note 4.
\22\ See supra note 7.
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Dealer Notifications to Issuer Clients Who Are Not Represented by
Municipal Advisors
The MSRB sought comment on whether an issuer in transactions
involving the sale by the issuer of a new issue of its securities who
are not otherwise represented by a municipal advisor should receive the
required notifications from dealers. BDA and SIFMA commented, arguing
strongly against providing such notifications to such issuers, noting
that dealer disclosures to issuers in transactions involving the sale
by the issuer of a new issue of its securities are made in the Bond
Purchase Agreement and engagement letters and that requiring the annual
notifications will add to the complexity of dealer compliance without
greater benefit to such issuer. SIFMA further opined that any such
required notifications should be made in the context of underwriter
disclosures, under Rule G-17. After review of the comments, the MSRB
has determined not to place the additional requirement on dealers to
provide the required notifications to such issuers who are not
otherwise represented by municipal advisors.
529 Plan Customers
The MSRB sought comment on whether to provide an exception to the
notifications requirement that excludes investors in 529 savings plans
from receipt of ongoing notifications after their initial purchase of
units in a 529 savings plan. SIFMA indicated support for the draft
amendments to exclude ongoing notifications to investors of 529 savings
plan. The Szaro letter noted that providing the required notifications
to such customers entails dealer work and expenses that are not
balanced proportionately to the benefit to a customer in receiving the
information. SIFMA and Szaro both favored website-only notifications as
a sensible and reasonable option for dealers who have websites. Given
that 529 savings plans (and other municipal fund securities) are
offered and serviced as a benefit to customers that typically hold
other securities in their brokerage accounts, unintended operational
challenges may be introduced by establishing a different requirement
for the delivery of the required notifications for municipal fund
securities. In reviewing the comments received, the MSRB does not
believe there is compelling information to warrant a change from the
current requirements under Rule G-10.
Website-Only Notifications for All Customers
The proposed amendments to Rule G-10 exclude the required
notifications to customers that have not, and may never, engage in
municipal securities transactions, so long as the dealer has the
notifications available to such customers on its website. Szaro and ASA
suggested removing the requirement for the notifications to be remitted
to customers of the dealer who effected a transaction in municipal
securities or who held a municipal securities position in favor of
making such notifications available to all customers by having the
notifications available only on the dealer's website. Szaro and ASA
stated that customers today prefer to review information about dealers
from dealers' websites and that individualized annual notifications
could be eliminated without threatening investor protections.
The MSRB believes that the proposed rule change strikes the correct
balance by requiring the notifications only to those customers who
would most benefit by their receipt (i.e., customers of the dealer who
effected a transaction in municipal securities or who hold a municipal
securities position) and permitting the notifications to be available
to all customers on a dealer's website. Moreover, the MSRB believes
that receipt of such push notifications is in furtherance of investor
protection, and that such information would not be as easily
ascertained by a customer having to undergo a search for the
information on a dealer's website.\23\
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\23\ SIFMA suggested extending website-only notifications
delivery to municipal advisory clients. As previously mentioned, the
MSRB limited the scope of the RFC to dealer obligations to their
customers and is not modifying municipal advisor's obligations under
the Rule G-10.
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Clarify Timeframe for Delivery of Notifications
SIFMA and BDA stated that the MSRB should clarify the timeframe for
delivery of the annual notifications by modifying the draft proposed
rule language from ``once every calendar year'' to prescribe that
delivery of such notifications should be made ``at least annually'' or
``at least once a year.'' BDA noted that the change in the delivery
timeframe would reduce dealer printing burdens as they may couple these
notifications with other required disclosures.
The MSRB acknowledges that it has previously indicated in the form
of FAQs \24\ that the obligation to provide
[[Page 46896]]
the required notifications ``once every calendar year'' has meant by
the end of each calendar year. The MSRB does not propose to move away
from the current rule text that states the required notifications must
be made ``once every calendar year,'' because this language is
consistent with the language governing the obligations of municipal
advisors to provide the same required notifications to municipal
advisory clients. The MSRB believes that proposed amendments will
provide clarification and flexibility on the sequencing of the required
notifications. Specifically, proposed Supplementary Material .01 allows
a dealer to provide the notifications to the applicable customers at
any given point in each calendar year, but also recognizes that there
may be additional customer(s) that effect a purchase or sale of a
municipal security or hold a municipal security after the notifications
have been delivered that calendar year. Accordingly, Supplementary
Material .01 allows such customers to receive the notifications within
the following rolling 12-month period. The MSRB would revise existing
compliance resources, including the FAQs, as necessary to be aligned
with the proposed rule change.
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\24\ See FAQs on MSRB Rules on Investor and Municipal Advisory
Client Education and Protection (September 2017).
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Permitting Notifications by Clearing Firms Per Agreement
The MSRB sought comment on draft amendments that proposed to
exclude a dealer that is a party to a carrying agreement, where the
carrying dealer provides such required notifications, from the
requirements under Rule G-10. Both SIFMA and BDA generally supported
this provision but suggested clarifying language to reflect the
agreement to undertake the obligation to provide the required
notifications. The MSRB is clarifying the proposed rule language to
reflect firms' agreement about which party will undertake the Rule G-10
notifications obligation.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period of up to 90 days (i) as
the Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet<ls-thn-eq> Send an email to <a href="/cdn-cgi/l/email-protection#e597908980c8868a8888808b9196a5968086cb828a93"><span class="__cf_email__" data-cfemail="bbc9ced7de96d8d4d6d6ded5cfc8fbc8ded895dcd4cd">[email protected]</span></a>. Please
include File Number SR-MSRB-2021-04 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2021-04. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the MSRB. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MSRB-2021-04 and should be submitted on
or before September 10, 2021.
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\25\ 17 CFR 200.30-3(a)(12).
For the Commission, pursuant to delegated authority.\25\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-17830 Filed 8-19-21; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.