Notice2022-13814
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change Consisting of Amendments to MSRB Rule G-19 Regarding Regulation Best Interest for Certain Municipal Securities Activities of Bank Dealers and MSRB Rule G-48 Regarding Quantitative Suitability for Institutional Sophisticated Municipal Market Professionals
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
June 29, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 124 (Wednesday, June 29, 2022)</title>
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[Federal Register Volume 87, Number 124 (Wednesday, June 29, 2022)]
[Notices]
[Pages 38795-38802]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-13814]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 95145; File No. SR-MSRB-2022-02]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change Consisting of
Amendments to MSRB Rule G-19 Regarding Regulation Best Interest for
Certain Municipal Securities Activities of Bank Dealers and MSRB Rule
G-48 Regarding Quantitative Suitability for Institutional Sophisticated
Municipal Market Professionals
June 23, 2022.
I. Introduction
On April 29, 2022, the Municipal Securities Rulemaking Board (the
``MSRB'' or ``Board'') filed with the Securities and Exchange
Commission (the ``SEC'' or ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder,\2\ a proposed rule change to consisting of amendments
to: (i) MSRB Rule G-19, on suitability of recommendations and
transactions, and (ii) MSRB Rule G-48, on transactions with
sophisticated municipal market professionals (``SMMPs'') \3\
(collectively, the ``proposed rule change'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Under MSRB Rule D-15, on the term sophisticated municipal
market professional, ``[t]he term `sophisticated municipal market
professional' or `SMMP' is generally defined by three essential
requirements: the nature of the customer; a determination of
sophistication by the broker, dealer or municipal securities dealer
[]; and an affirmation by the customer; as specified [therein].''
See MSRB Rule D-15.
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The proposed rule change would align MSRB Rule G-19 to the
Commission's Rule 15l-1 under the Exchange Act (``Regulation Best
Interest'') \4\ for certain municipal securities activities of bank
dealers \5\ (the ``Best Interest Amendments''). In addition, the
proposed rule change would amend MSRB Rule G-48 to modify the
quantitative suitability obligation of brokers, dealers, and municipal
securities dealers (collectively, ``dealers'' and, individually, each a
``dealer'') by eliminating the quantitative suitability obligation for
recommendations in circumstances where a dealer does not have actual
control or de facto control over the account of an Institutional SMMP
(the ``Institutional SMMP Amendment'').\6\
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\4\ 17 CFR 240.15l-1; see also Exchange Act Release No. 86031
(June 5, 2019), 84 FR 33318 (July 12, 2019) (File No. S7-07-18)
(``Regulation Best Interest Adopting Release'').
\5\ Consistent with the definition set forth in MSRB Rule D-8,
the term ``bank dealer'' as used herein means ``a municipal
securities dealer which is a bank or a separately identifiable
department or division of a bank as defined in rule G-1 of the
Board.'' Such references in the proposed rule change shall be
collectively to ``Bank Dealers'' or individually to a ``Bank
Dealer.'' See also MSRB Rule D-11, which defines the term associated
persons (indicating that the term bank dealer as used in MSRB rules
shall generally refer to the associated persons of a bank dealer
unless the context otherwise requires or a rule of the Board
otherwise specifically provides).
\6\ The term ``Institutional SMMP'' is used herein as defined
below under the discussion Background and Purpose of the
Institutional SMMP Amendment. The Institutional SMMP definition used
herein would not encompass any natural person customers who qualify
as ``retail customers'' under the definitions of Regulation Best
Interest, such as certain natural persons with significant total
assets, who might otherwise meet the status requirements of an SMMP.
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The proposed rule change was published for comment in the Federal
Register on May 10, 2022.\7\ The public comment period closed on May
31, 2022, and no comment letters were received on the proposed rule
change. As described further below, the Commission is approving the
proposed rule change.
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\7\ Exchange Act Release No. 88829 (May 4, 2022) (the
``Notice''), 87 FR 28084 (May 12, 2020) (MSRB-2022-02).
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II. Description of Proposed Rule Change
As described further below, the proposed rule change consists of
the Best Interest Amendments and the Institutional SMMP Amendment.
[[Page 38796]]
A. Background and Purpose of the Best Interest Amendments
The MSRB stated that the proposed Best Interest Amendments would
amend MSRB Rule G-19 to extend the obligations of Regulation Best
Interest to Bank Dealers when making recommendations to retail
customers of municipal securities transactions or investment strategies
involving municipal securities (collectively, ``retail municipal
recommendations'' and, individually, each a ``retail municipal
recommendation'').\8\ The MSRB also stated that the Best Interest
Amendments are intended to improve investor protection in the municipal
securities market by ensuring that retail customers are afforded the
investor protections provided by Regulation Best Interest, regardless
of whether a retail municipal recommendation received by a retail
customer is made by a Broker-Dealer \9\ or a Bank Dealer.
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\8\ Notice, 87 FR at 28084.
\9\ The term ``Broker-Dealer'' is used here as defined below
under the following discussion Background on the Commission's
Regulation Best Interest.
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B. Background on the Commission's Regulation Best Interest
On June 5, 2019, the SEC adopted Regulation Best Interest, which
established a new standard of conduct for broker-dealers, and the
natural persons who are associated persons of such broker-dealers
(collectively, ``Broker-Dealers'' and, individually, each a ``Broker-
Dealer''), when making a recommendation to a retail customer of any
securities transaction or investment strategy involving securities.\10\
As defined in Regulation Best Interest, the term ``retail customer''
generally refers to any natural person, or the legal representative of
such person, who receives and uses a recommendation from a Broker-
Dealer primarily for personal, family, or household purposes.\11\
Regulation Best Interest enhanced the Broker-Dealer standard of conduct
beyond previously existing suitability obligations, such as those then
required by MSRB Rule G-19, on suitability, for such retail customers
and aligned the applicable standard of conduct with the reasonable
expectations of retail customers.\12\
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\10\ See, generally, Regulation Best Interest Adopting Release.
\11\ 17 CFR 240.15l-1(b)(1) (``Retail customer means a natural
person, or the legal representative of such natural person, who (i)
[r]eceives a recommendation of any securities transaction or
investment strategy involving securities from a broker, dealer, or a
natural person who is an associated person of a broker or dealer;
and (ii) [u]ses the recommendation primarily for personal, family,
or household purposes.'') For discussion of what it means for a
retail customer to ``use'' a recommendation, see the SEC staff's
Frequently Asked Questions on Regulation Best Interest, available at
<a href="https://www.sec.gov/tm/faq-regulation-best-interest">https://www.sec.gov/tm/faq-regulation-best-interest</a>.
\12\ Regulation Best Interest Adopting Release, 84 FR at 33319.
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In this regard, Regulation Best Interest imposes the following
``general obligation'' on Broker-Dealers, stating a broker, dealer, or
a natural person who is an associated person of a broker or dealer,
when making a recommendation of any securities transaction or
investment strategy involving securities (including account
recommendations) to a retail customer, shall act in the best interest
of the retail customer at the time the recommendation is made, without
placing the financial or other interest of the broker, dealer, or
natural person who is an associated person of a broker or dealer making
the recommendation ahead of the interest of the retail customer.\13\
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\13\ 17 CFR 240.15l-1(a)(1). Regulation Best Interest provides
that this general obligation is satisfied only if a Broker-Dealer
complies with four component obligations: (i) an obligation to make
certain prescribed disclosures, before or at the time of the
recommendation, about the recommendation and the relationship
between the retail customer and the Broker-Dealer (the ``Disclosure
Obligation'') (see 17 CFR 240.15l-1(a)(2)(i)); (ii) an obligation to
exercise reasonable diligence, care, and skill in making a
recommendation (the ``Care Obligation'') (see 17 CFR 240.15l-
1(a)(2)(ii)); (iii) an obligation to establish, maintain, and
enforce written policies and procedures reasonably designed to
address conflicts of interest (the ``Conflict-of-Interest
Obligation'') (see 17 CFR 240.15l-1(a)(2)(iii)); and (iv) an
obligation to establish, maintain, and enforce written policies and
procedures reasonably designed to achieve compliance with Regulation
Best Interest (the ``Compliance Obligation'') (see 17 CFR 240.15l-
1(a)(2)(iv)).
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In response to the Commission's adoption of Regulation Best
Interest, on May 1, 2020, the MSRB filed a proposed rule change with
the Commission to harmonize Regulation Best Interest with certain MSRB
rules applicable to related municipal securities activities of Broker-
Dealers.\14\ The Commission approved these proposed amendments on June
25, 2020.\15\
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\14\ See Exchange Act Release No. 88828 (May 6, 2020), 85 FR
28082, File No. SR-MSRB-2020-02 (hereinafter, the ``Broker-Dealer
Harmonization Filing''), available at <a href="https://msrb.org/-/media/Files/SEC-Filings/2020/MSRB-2020-02-Notice.ashx">https://msrb.org/-/media/Files/SEC-Filings/2020/MSRB-2020-02-Notice.ashx</a>?.
\15\ See Exchange Act Release No. 89154 (June 25, 2020), 85 FR
39613 (July 1, 2020), File No. SR-MSRB-2020-02, available at <a href="https://msrb.org/-/media/Files/SEC-Filings/2020/MSRB-2020-02-Federal-Register.ashx">https://msrb.org/-/media/Files/SEC-Filings/2020/MSRB-2020-02-Federal-Register.ashx</a>?.
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C. Discussion of Regulation Best Interest's Current Applicability to
Bank Dealers
By its terms, Regulation Best Interest does not apply to retail
municipal recommendations made by Bank Dealers, because Bank Dealers in
exempted securities have an exception from Broker-Dealer status under
the Act and Regulation Best Interest applies only to Broker-
Dealers.\16\ As a result, Bank Dealers presently are not required to
comply with Regulation Best Interest and, therefore, retail investors
may not benefit from its enhanced standard of conduct when receiving
recommendations from Bank Dealers.\17\
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\16\ Notice, 87 FR at 28085.
\17\ See Broker-Dealer Harmonization Filing, 85 FR at 28083, n.
5 (discussing how Bank Dealers are not subject to Regulation Best
Interest by the terms of the SEC's rules and indicating the Board's
intent to issue a request for comment regarding extending the
requirements of Regulation Best Interest to Bank Dealers). Notably,
all Bank Dealer recommendations, including retail municipal
recommendations, are presently subject to the longstanding
suitability obligations provided by MSRB rules, including MSRB Rule
G-19 and, when applicable, MSRB Rule G-48. Notice, 87 FR at 28085,
n. 13.
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D. Application of Regulation Best Interest to Bank Dealers
The MSRB stated that the proposed Best Interest Amendments would
amend MSRB Rule G-19 to require a Bank Dealer to comply with Regulation
Best Interest to the same extent as if it were a Broker-Dealer when
making a retail municipal recommendation.\18\ Consequently, a Bank
Dealer would have to act in the best interest of the retail customer at
the time a retail municipal recommendation is made, without placing the
financial or other interests of the Bank Dealer ahead of the interest
of the retail customer.\19\ Correspondingly, the Bank Dealer would have
to comply with the Commission's component obligations of Regulation
Best Interest to the same extent as if it were a Broker-Dealer,
including Regulation Best Interest's Disclosure Obligation,\20\ Care
Obligation,\21\ Conflict-of-Interest Obligation,\22\ and Compliance
Obligation.\23\
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\18\ Notice, 87 FR at 28085.
\19\ Id.
\20\ 17 CFR 240.15l-1(a)(2)(i).
\21\ 17 CFR 240.15l-1(a)(2)(ii).
\22\ 17 CFR 240.15l-1(a)(2)(iii).
\23\ 17 CFR 240.15l-1(a)(2)(iv).
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Under the proposed Best Interest Amendments, the component
obligations of Regulation Best Interest would apply to those municipal
securities activities associated with a retail municipal recommendation
within the overall context of a Bank Dealer business model. The MSRB
stated that it believes that any SEC guidance with respect to the
understanding and application of Regulation Best Interest would be
equally applicable to Bank Dealers.\24\
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\24\ Notice, 87 FR at 28085.
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[[Page 38797]]
E. Application of the Disclosure Obligation to Bank Dealers
Consistent with Regulation Best Interest's Disclosure Obligation,
the proposed Best Interest Amendments would require a Bank Dealer,
prior to or at the time of the retail municipal recommendation, to
provide to its retail customer, in writing, full and fair disclosure
of: (a) all material facts relating to the scope and terms of the
relationship with the retail customer, including: (i) that the Bank
Dealer is acting as a municipal securities dealer with respect to the
retail municipal recommendation; (ii) the material fees and costs that
apply to the retail customer's transactions, holdings, and accounts;
and (iii) the type and scope of services provided to the retail
customer, including any material limitations on the securities or
investment strategies involving securities that may be recommended to
the retail customer; \25\ and (b) all material facts relating to
conflicts of interest that are associated with the retail municipal
recommendation.\26\
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\25\ The MSRB offered the example that, if the applicable legal
charter of a Bank Dealer only permits a Bank Dealer to conduct
municipal securities activities or, in fact, a Bank Dealer's
business model is limited to municipal securities activities, then
the Bank Dealer generally would be required to accurately disclose
the fact that it only engages in transactions involving municipal
securities and, therefore, will only make recommendations to a
retail customer regarding transactions involving municipal
securities. Notice, 87 FR at 28085, n. 18.
\26\ Notice, 87 FR at 28085.
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F. Application of the Care Obligation to Bank Dealers
Consistent with Regulation Best Interest's Care Obligation, the
proposed Best Interest Amendments would require a Bank Dealer to
exercise reasonable diligence, care, and skill to: (a) understand the
potential risks, rewards, and costs associated with any retail
municipal recommendation, and have a reasonable basis to believe that a
retail municipal recommendation could be in the best interest of at
least some retail customers; (b) have a reasonable basis to believe
that the retail municipal recommendation is in the best interest of a
particular retail customer, based on that retail customer's investment
profile and the potential risks, rewards, and costs associated with the
recommendation, and does not place the financial or other interest of
the Bank Dealer ahead of the interest of the retail customer; (c) have
a reasonable basis to believe that a series of retail municipal
recommendations, even if in the retail customer's best interest when
viewed in isolation, is not excessive and is in the retail customer's
best interest when taken together in light of the retail customer's
investment profile and does not place the financial or other interest
of the Bank Dealer ahead of the interest of the retail customer.\27\
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\27\ Notice, 87 FR at 28086.
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G. Application of the Conflict-of-Interest Obligation to Bank Dealers
Consistent with Regulation Best Interest's Conflict-of-Interest
Obligation, the proposed Best Interest Amendments would require a Bank
Dealer to establish, maintain, and enforce written policies and
procedures reasonably designed to: (a) identify and at a minimum
disclose, in accordance with its Disclosure Obligation, or eliminate,
all conflicts of interest associated with such retail municipal
recommendations; (b) identify and mitigate any conflicts of interest
associated with such retail municipal recommendations that create an
incentive for a natural person who is an associated person of the Bank
Dealer to place the interests of the Bank Dealer or such associated
person ahead of the interest of the retail customer; (c)(i) identify
and disclose any material limitations placed on the securities or
investment strategies involving securities that may be recommended to a
retail customer and any conflicts of interest associated with such
limitations, in accordance with its Disclosure Obligation, and (ii)
prevent such limitations and associated conflicts of interest from
causing the Bank Dealer to make retail municipal recommendations that
place the interest of the Bank Dealer ahead of the interest of the
retail customer; and (d) identify and eliminate any sales contests,
sales quotas, bonuses, and non-cash compensation that are based on the
sales of specific municipal securities or specific types of municipal
securities within a limited period of time.\28\
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\28\ Id.
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H. Application of the Compliance Obligation to Bank Dealers
Consistent with Regulation Best Interest's Compliance Obligation,
the proposed Best Interest Amendments would require a Bank Dealer to
establish, maintain, and enforce written policies and procedures
reasonably designed to achieve compliance with Regulation Best
Interest.\29\
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\29\ Id.
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I. Purpose and Intent of the Best Interest Amendments
The MSRB stated that it proposed the Best Interest Amendments to
MSRB Rule G-19 for purposes of enhancing the standard of investor
protection in the municipal securities market and enhancing fairness
and efficiency in the municipal securities market by promoting
regulatory parity among Bank Dealers and Broker-Dealers.\30\ Specific
to enhancing the standard of investor protection, the MSRB noted that
it believes that all retail customers receiving a retail municipal
recommendation should benefit from the enhanced investor protections
afforded by Regulation Best Interest, regardless of whether such a
retail customer is a customer of a Broker-Dealer or a Bank Dealer. \31\
Currently, retail customers of Bank Dealers are not afforded the
protections of Regulation Best Interest when receiving a retail
municipal recommendation from a Bank Dealer.\32\ The MSRB also stated
that, as the proposed Best Interest Amendments would require a Bank
Dealer to comply with the enhanced standard of conduct required by
Regulation Best Interest, the MSRB believes that the Best Interest
Amendments would improve overall investor protection in the municipal
securities market.\33\
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\30\ Id.
\31\ Id.
\32\ Id.
\33\ Id.
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Specific to promoting regulatory parity, the MSRB stated that it
believed that the proposed Best Interest Amendments would establish a
uniform regulatory standard in the municipal securities market by
requiring the same standard of conduct for Bank Dealers and Broker-
Dealers when making retail municipal recommendations.\34\ The MSRB
noted that this uniform standard would enhance the fairness and
efficiency of the municipal securities market by ensuring Bank Dealers
have regulatory obligations and burdens when engaging in retail
municipal recommendations that are equivalent to the regulatory
obligations and burdens of Broker-Dealers when engaging in the same
municipal securities activities.\35\ The MSRB stated that this
uniformity would better ensure that Bank Dealers do not have a
competitive advantage in the municipal securities market by operation
of a less burdensome regulatory standard of conduct and, thereby,
mitigate the potential for regulatory arbitrage.\36\
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\34\ Id.
\35\ Id.
\36\ Id.
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[[Page 38798]]
J. Background and Purpose of the Institutional SMMP Amendment
The MSRB stated that the proposed Institutional SMMP Amendment
would amend MSRB Rule G-48 to modify the current obligation to perform
a quantitative suitability analysis for recommendations where the
dealer does not have actual control or de facto control over the
account of an SMMP who is not a retail customer \37\ under Regulation
Best Interest (collectively, ``Institutional SMMPs'' and, individually,
each an ``Institutional SMMP'').\38\
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\37\ See supra note 11 for the applicable definition of ``retail
customer'' and related citation. Any customer meeting such
definition of retail customer pursuant to Regulation Best Interest
would not be considered an Institutional SMMP for the purposes of
the proposed Institutional SMMP Amendment and its modification to
MSRB Rule G-48. For purposes of MSRB rules, such a customer meeting
the definition of a ``retail customer'' would receive the
protections afforded by Regulation Best Interest.
\38\ Notice, 87 FR at 28086.
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As is the case with the reduced customer-specific suitability
obligations currently afforded to Institutional SMMPs under MSRB Rule
G-48(c), the MSRB stated that it believes that dealers transacting with
Institutional SMMPs should have similarly reduced quantitative-
suitability obligations in instances where the dealer does not have
actual control or de facto control over the account of an Institutional
SMMP.\39\ The MSRB noted that this modification would effectively
revert the quantitative suitability standard for Institutional SMMPs
back to the previously existing standard that was in place under MSRB
rules prior to June 30, 2020.\40\ The MSRB stated that the proposed
Institutional SMMP Amendment is intended to improve the efficiency of
the municipal securities market without eroding investor protection by
aligning the compliance burden associated with certain recommendations
made by dealers to the reasonable expectations and capabilities of
Institutional SMMPs--who by their nature are more sophisticated, non-
natural-person customers and must affirmatively indicate their capacity
to (i) exercise independent judgment and (ii) access material
information.\41\
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\39\ Id.
\40\ Id.; see also Broker-Dealer Harmonization Filing, 85 FR at
28082, n. 4. The MSRB notes that it has had a long held prohibition
against ``churning,'' and the MSRB formally ``recast'' this
prohibition as quantitative suitability through an amendment to MSRB
Rule G-19 approved by the SEC in 2014. See also Exchange Act Release
No. 71665 (Mar. 7, 2014), 79 FR 2432 (Mar. 13, 2014), File No. SR-
MSRB-2013-07 (discussing the then-existing MSRB prohibition on
churning and a proposed rule change to recast this prohibition using
the phrase ``quantitative suitability''), available at http://
www.msrb.org/~/media/Files/SEC-Filings/2013/MSRB-2013-07-Fed-Reg-
Approval.ashx?la=en&hash=AEDA0B5509630E25473E9F6F3A3F9C34.
\41\ Notice, 87 FR at 28086-87. See also MSRB Rule G-48(c).
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K. Background on MSRB Rule G-19's Quantitative Suitability Requirements
MSRB Rule G-19 sets the MSRB's baseline investor protection
standards regarding the suitability of recommendations made by dealers
to their customers of purchases, sales, or exchanges of municipal
securities that are not subject to Regulation Best Interest.\42\ Among
other requirements, Supplementary Material .05 of MSRB Rule G-19
enumerates three components of a dealer's suitability analysis when
recommending a transaction or investment strategy involving a municipal
security or municipal securities to a non-retail customer (i.e., a
recommendation that is not subject to Regulation Best Interest).\43\ As
further defined in the text of the rule, MSRB Rule G-19 provides that a
dealer's suitability obligation is composed of (i) reasonable-basis
suitability, (ii) customer-specific suitability, and (iii) quantitative
suitability.\44\ Most relevant to the proposed Institutional SMMP
Amendment of this proposed rule change, quantitative suitability
requires a dealer to have a reasonable basis for believing that a
series of recommended transactions, even if suitable when viewed in
isolation, are not excessive and unsuitable for the customer when taken
together in light of the customer's investment profile, as delineated
in MSRB Rule G-19.\45\ No single test defines excessive activity, but
factors such as the turnover rate, the cost-equity ratio, and the use
of in-and-out trading in a customer's account may provide a basis for a
finding that a dealer has violated the quantitative suitability
obligation.\46\
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\42\ MSRB Rule G-19.
\43\ See the Broker-Dealer Harmonization Filing, 85 FR at 28084.
The Broker-Dealer Harmonization Filing amended MSRB Rule G-19 to
provide that the rule does not apply to recommendations subject to
Regulation Best Interest. Notice, 87 FR at 28087, n. 23.
\44\ Notice, 87 FR at 28087.
\45\ MSRB Rule G-19, Supplementary Material .05(c).
\46\ Id.
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Pursuant to the amendments effectuated by the Broker-Dealer
Harmonization Filing, discussed above and effective as of June 30,
2020, the quantitative suitability obligation of MSRB Rule G-19 no
longer incorporates an element of control in relation to a customer's
account.\47\ As a result, dealers are currently obligated to conduct a
quantitative suitability analysis under MSRB Rule G-19 when making
recommendations to Institutional SMMPs, even in instances where the
dealer does not have actual control or de facto control over the
account.\48\ The obligation applies notwithstanding the fact that
Institutional SMMPs self-identify under MSRB Rule G-48 and MSRB Rule D-
15 as having the willingness and requisite investment sophistication
to, for example, independently evaluate the recommendations of a dealer
and the quality of a dealer's execution, as further discussed
below.\49\
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\47\ Stated differently, as of June 30, 2020, if the obligations
of MSRB Rule G-19 attach to a dealer's recommendation, then the
investor protections regarding quantitative suitability apply
regardless of whether the dealer making the recommendation exercises
any actual control or de facto control over the customer's account.
Notice, 87 FR at 28087, n. 26. The Broker-Dealer Harmonization
Filing amended this language of Supplementary Material .05(c) to
eliminate such control requirements, effectively extending the
requirements of quantitative suitability to any customer account.
See Broker-Dealer Harmonization Filing, 85 FR at 28084. June 30,
2020 was the compliance date for the amendments enacted by the
Broker-Dealer Harmonization Filing. See Broker-Dealer Harmonization
Filing, 85 FR at 28082, n. 4. Pursuant to the Broker-Dealer
Harmonization Filing, the MSRB also notes that this quantitative
suitability obligation applies uniformly to any dealer (i.e., the
same regulatory obligations apply to both Broker-Dealers and Bank
Dealers). Notice, 87 FR at 28087, n. 26.
\48\ Notice, 87 FR at 28087.
\49\ Id. See MSRB Rule D-15(c) (requiring an Institutional SMMP
to ``affirmatively indicate,'' among other things, that it is
exercising independent judgment in evaluating (A) the
recommendations of the dealer and (B) the quality of execution of
the customer's transactions by the dealer).
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L. Background on MSRB Rule G-48 and Modified Regulatory Obligations
MSRB Rule G-48 provides for modified dealer regulatory obligations
under MSRB rules when dealing with certain customers that meet the
definition of a Sophisticated Municipal Market Participant (i.e., an
SMMP).\50\ More specifically, when transacting with an SMMP customer,
Rule G-48 modifies aspects of a dealer's baseline regulatory
obligations in terms of: (i) time of trade disclosures,\51\ (ii)
transaction pricing,\52\ (iii) bona fide
[[Page 38799]]
quotations,\53\ (iv) best execution,\54\ and (vi) suitability.\55\ The
modified regulatory obligations afforded to SMMPs under MSRB rules are
intended to account for the distinct capabilities of certain
sophisticated, non-retail customers and the varied types of dealer-
customer relationships occurring in the municipal securities
market.\56\
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\50\ MSRB Rule G-48.
\51\ MSRB Rule G-48(a) (``The broker, dealer, or municipal
securities dealer shall not have any obligation under Rule G-47 to
ensure disclosure of material information that is reasonably
accessible to the market.'')
\52\ MSRB Rule G-48(b).
\53\ MSRB Rule G-48(d) (``The broker, dealer, or municipal
securities dealer disseminating an SMMP's `quotation' as defined in
Rule G-13, which is labeled as such, shall apply the same standards
regarding quotations described in Rule G-13(b) as if such quotations
were made by another broker, dealer, or municipal securities
dealer.'')
\54\ MSRB Rule G-48(e) (``The broker, dealer, or municipal
securities dealer shall not have any obligation under Rule G-18 to
use reasonable diligence to ascertain the best market for the
subject security and buy or sell in that market so that the
resultant price to the SMMP is as favorable as possible under
prevailing market conditions.'')
\55\ MSRB Rule G-48(c).
\56\ See, e.g., Exchange Act Release No. 67064 (May 25, 2012),
77 FR 32704 (June 1, 2012), File No. SR-MSRB-2012-05 (May 25, 2012)
(approving an MSRB proposed rule change to relax certain
qualifications for a dealer to afford a customer SMMP status in
light of market developments regarding the increased availability of
municipal securities market information and the desire of certain
institutional customers to access alternative trading systems).
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Most relevant to the proposed Institutional SMMP Amendment, Rule G-
48(c) currently modifies the suitability requirements of MSRB Rule G-19
by eliminating the requirement for dealers to conduct a customer-
specific suitability analysis for recommendations made to an
Institutional SMMP.\57\ The operative provision of MSRB Rule G-48
provides that, ``[w]hen making a recommendation subject to Rule G-19
and not Regulation Best Interest, Rule 15l-1 under the Act, a broker,
dealer, or municipal securities dealer shall not have any obligation
under Rule G-19 to perform a customer-specific suitability analysis.''
\58\ This relaxed customer-specific suitability obligation is generally
aligned with the ``independent judgment'' affirmations a customer
seeking SMMP status makes under MSRB Rule D-15. The proposed
Institutional SMMP Amendment would likewise relax the quantitative
suitability obligation for similar reasons, as further described in the
following sections.\59\
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\57\ Id. The amendments to MSRB Rule G-48 enacted by the Broker-
Dealer Harmonization Filing carved out recommendations to customers
that are subject to Regulation Best Interest from the rule's
modified standards. See Broker-Dealer Harmonization Filing, 85 FR at
28084-85.
\58\ MSRB Rule G-48(c).
\59\ See Exchange Act Release No. 71665 (Mar. 7, 2014), 79 FR
14321 (Mar. 13, 2014), File No. SR-MSRB-2013-07 (Sept. 17, 2013)
(codifying the relaxed customer-specific suitability obligation for
recommendations made to SMMPs in MSRB Rule G-48 and the actual
control or de facto control requirement, thereafter eliminated in
2020 as described herein, for the applicability of quantitative
suitability to recommendations made to customers in MSRB Rule G-19).
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M. Background on MSRB Rule D-15 and SMMP Affirmation Requirements
MSRB Rule G-48 incorporates the definition of SMMP under MSRB Rule
D-15 for purposes of defining which customers do (or do not) qualify as
an SMMP for purposes of Rule G-48 and, therefore, MSRB Rule D-15
establishes the scope of potential customers who might qualify for MSRB
Rule G-48's modified obligations.\60\ The SMMP definition in MSRB Rule
D-15 enumerates three components, which separately address: (i) the
minimum qualifying traits and characteristics of an SMMP customer; \61\
(ii) that a dealer must develop a reasonable basis for determining
whether a customer has the requisite level of expertise and
sophistication to be deemed an SMMP customer (the ``SMMP Reasonable
Basis Determination''); \62\ and (iii) the affirmations that a customer
must communicate to the dealer regarding its own investment judgment
and access to information in order to be appropriately deemed an SMMP
customer (the ``SMMP Customer Affirmations'').\63\
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\60\ MSRB Rule G-48.
\61\ MSRB Rule D-15(a) (a customer is only eligible to be
treated as an SMMP if the customer is: (i) a bank, savings and loan
association, insurance company, or registered investment company,
(ii) a registered investment advisor, or (iii) a person or entity
with total assets of at least $50 million).
\62\ MSRB Rule D-15(b) (a customer is only eligible to be
treated as an SMMP if the dealer has developed a reasonable basis to
believe that the customer is capable of evaluating investment risks
and market value independently, both in general and with regard to
particular transactions and investment strategies in municipal
securities. In addition, Supplementary Material .01 of MSRB Rule D-
15 states that, as part of the reasonable-basis analysis, the dealer
should consider the amount and type of municipal securities owned or
under management by the customer).
\63\ MSRB Rule D-15(c).
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With respect to the SMMP Customer Affirmations, MSRB Rule D-15(c)
provides that the customer must affirmatively indicate to the dealer
that (i) it is exercising independent judgment in evaluating the
recommendations of the dealer; the quality of execution of the
customer's transactions by the dealer; and the transaction price for
non-recommended secondary market agency transactions as to which the
dealer's services have been explicitly limited to providing anonymity,
communication, order matching and/or clearance functions and the dealer
does not exercise discretion as to how or when the transactions are
executed; \64\ and (ii) it has timely access to material information
that is available publicly through established industry sources as
defined in MSRB Rule G-47(b)(i) and MSRB Rule G-47(b)(ii) (i.e.,
``material information'' from ``established industry sources,'' such as
EMMA website information and rating agency reports).\65\
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\64\ See MSRB Rule D-15(c)(1) (``The customer must affirmatively
indicate that it: (1) is exercising independent judgment in
evaluating: (A) the recommendations of the dealer; (B) the quality
of execution of the customer's transactions by the dealer; and (C)
the transaction price for non-recommended secondary market agency
transactions as to which (i) the dealer's services have been
explicitly limited to providing anonymity, communication, order
matching and/or clearance functions and (ii) the dealer does not
exercise discretion as to how or when the transactions are executed
. . .'').
\65\ See MSRB Rule D-15(c)(2) (``The customer must affirmatively
indicate that it . . . (2) has timely access to material information
that is available publicly through established industry sources as
defined in Rule G-47(b)(i) and (ii).'')
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The MSRB noted that an institutional customer who self-identifies
as an SMMP has freely affirmed to a dealer its willingness to be
treated as a sophisticated customer with the capacity and resources to
exercise its own independent judgment.\66\ The MSRB stated that, in
this way, the SMMP Customer Affirmations are designed to ensure that
any customer treated as an SMMP has affirmatively and knowingly
provided the grounds on which a dealer may afford such SMMP customer
lesser protections under certain MSRB rules.\67\ As an additional
investor protection safeguard beyond the requirement for SMMP Customer
Affirmations, the SMMP Reasonable Basis Determination also requires a
dealer to have a reasonable basis to believe that an SMMP customer is
capable of evaluating investment risks and market value independently,
both in general and with regard to particular transactions and
investment strategies in municipal securities.\68\ The MSRB noted that,
in this way, the SMMP Reasonable Basis Determination further ensures
that an Institutional SMMP does in fact possess a more sophisticated
understanding of the municipal securities market.\69\ The MSRB noted
that the proposed Institutional SMMP Amendment would not alter the SMMP
Customer Affirmations, the SMMP Reasonable Basis Determination, nor any
of the other definitional elements of MSRB Rule D-15 that must be
satisfied for a customer to qualify as an SMMP.\70\
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\66\ Notice, 87 FR at 28088.
\67\ Id.
\68\ See MSRB Rule D-15(b) and Rule D-15 Supplementary Material
.01.
\69\ Notice, 87 FR at 28088
\70\ Id.
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[[Page 38800]]
N. Purpose and Intent of the Institutional SMMP Amendment to MSRB Rule
G-48
The MSRB stated that the proposed Institutional SMMP Amendment
would amend MSRB Rule G-48 to modify the quantitative suitability
obligations of dealers when effecting transactions for their
Institutional SMMPs.\71\ The proposed Institutional SMMP Amendment
would require a dealer to conduct a quantitative suitability analysis
only in situations where the dealer has actual control or de facto
control over an Institutional SMMP's account.\72\ As stated above, the
proposed amendments to MSRB Rule G-48 would narrowly reinstate the
scope of suitability protections afforded to Institutional SMMPs in
effect prior to the amendments effectuated by the Broker-Dealer
Harmonization Filing, and so should be a familiar regulatory concept to
dealers and Institutional SMMPs alike.\73\
---------------------------------------------------------------------------
\71\ Id.
\72\ Where a dealer exercises actual control or de facto control
over an Institutional SMMP's account, the dealer would still be
required to perform a quantitative suitability analysis in
accordance with Supplementary Material .05 of MSRB Rule G-19.
Relatedly, if an Institutional SMMP limitedly provides its customer
affirmation on a trade-by-trade basis, then the dealer would be
required to comply with all aspects of MSRB Rule G-19, including
both the quantitative suitability requirement and the customer-
specific suitability requirement, for those recommendations for
which the Institutional SMMP did not provide the applicable customer
affirmation. See Supplementary Material .02 of MSRB Rule D-15
(discussing trade-by-trade affirmations).
\73\ Notice, 87 FR at 28088.
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More importantly, because each Institutional SMMP must self-
identify as an SMMP by making the SMMP Customer Affirmations, as well
as fulfill the requirements associated with a dealer's SMMP Reasonable
Basis Determination, the MSRB stated that the proposed Institutional
SMMP Amendment would ease a regulatory burden on dealers that
effectively replicates the sort of analysis an Institutional SMMP is
willing and capable of performing itself.\74\ As a result, the MSRB
noted that the proposed Institutional SMMP Amendment would align the
compliance burden associated with certain recommendations made by
dealers to the reasonable expectations and capabilities of
Institutional SMMPs.\75\
---------------------------------------------------------------------------
\74\ Id.
\75\ Id.
---------------------------------------------------------------------------
Although the MSRB noted that investor protection benefits
associated with requiring dealers to perform a potentially duplicative
suitability analysis can be appropriate in other circumstances,\76\ the
MSRB stated that the compliance burden associated with performing a
quantitative suitability analysis on recommendations made to
Institutional SMMPs outweighs the potential marginal investor
protection benefits.\77\ The MSRB noted that the proposed Institutional
SMMP Amendment would promote efficiency in the municipal securities
market by eliminating a regulatory burden on dealers that potentially
provides a duplicative or unneeded analyses in supplement of an
Institutional SMMPs' own independent and informed judgment.\78\ The
MSRB stated that the proposed Institutional SMMP Amendment would allow
dealers to redirect the resources associated with this regulatory
burden to other more productive market activities.\79\
---------------------------------------------------------------------------
\76\ Notice, 87 FR at 28088-89. For example, the MSRB believes
that the obligation to perform quantitative suitability analyses
under MSRB rules remains appropriate, regardless of the potential
for such duplication, in circumstances of recommendations made to
retail customers; non-retail, institutional customers who fail to
meet the characteristics of an SMMP; and/or non-retail customers who
have declined to make the affirmations necessary to be appropriately
deemed an SMMP. Notice, 87 FR at 28089, n. 46.
\77\ Notice, 87 FR at 28089.
\78\ Id.
\79\ Id.
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III. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change.
The Commission finds that the proposed rule change is consistent with
the requirements of the Exchange Act and the rules and regulations
thereunder applicable to the MSRB.
In particular, the Commission believes that the proposed rule
change is consistent with the provisions of Exchange Act Section
15B(b)(2)(C), which provides, in part, 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,
and 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.\80\
---------------------------------------------------------------------------
\80\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
A. Commission Findings for the Best Interest Amendments
The Commission finds that the proposed Best Interest Amendments are
consistent with Section 15B(b)(2)(C) of the Act \81\ because the
amendments would: (i) prevent fraudulent and manipulative acts and
practices; (ii) promote just and equitable principles of trade; (iii)
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; (iv) remove impediments to and perfect the
mechanism of a free and open market in municipal securities and
municipal financial products; and (v) protect investors, municipal
entities, obligated persons, and the public interest.
---------------------------------------------------------------------------
\81\ Id.
---------------------------------------------------------------------------
i. Prevent Fraudulent and Manipulative Acts and Practices
The Commission finds that the proposed Best Interest Amendments
would prevent fraudulent and manipulative acts and practices by
extending the enhanced standards of conduct required by Regulation Best
Interest to the retail municipal recommendations of Bank Dealers. As
noted by the Commission in the adopting release for Regulation Best
Interest, Regulation Best Interest enhances the broker-dealer standard
of conduct beyond existing suitability obligations.\82\ Specifically,
the proposed Best Interest Amendments would mandate Bank Dealers act in
the best interest of the retail customer at the time the recommendation
is made (without placing the financial or other interest of the Broker-
Dealer ahead of the interest of the retail customer).\83\ As such, the
Commission finds that the proposed Best Interest Amendments would
enhance the quality of Bank Dealer retail municipal recommendations.
---------------------------------------------------------------------------
\82\ Regulation Best Interest Adopting Release, 84 FR at 33318.
\83\ Notice, 87 FR at 28085.
---------------------------------------------------------------------------
The Commission further finds that the proposed Best Interest
Amendments would address conflicts of interest in connection with Bank
Dealer retail municipal recommendations, by establishing, maintaining,
and enforcing policies and procedures reasonably designed to identify
and fully and fairly disclose material facts about conflicts of
interest (and in instances where it is determined that disclosure is
insufficient to reasonably address the conflict, to mitigate, or in
certain
[[Page 38801]]
instances, eliminate the conflict).\84\ Therefore, the Commission finds
that reducing the potential harm to retail customers that may be caused
by conflict of interest in connection with Bank Dealer retail municipal
recommendations.
---------------------------------------------------------------------------
\84\ Notice, 87 FR at 28086.
---------------------------------------------------------------------------
By enhancing the quality of Bank Dealer recommendations to retail
customers and mitigating harm to retail customers from potential
conflict of interest, the Commission believes that the proposed Best
Interest Amendments would prevent potential fraudulent and manipulative
acts and practices and promote the protection of the retail customers
of Bank Dealers.\85\
---------------------------------------------------------------------------
\85\ Regulation Best Interest Adopting Release, 84 FR at 33318.
---------------------------------------------------------------------------
ii. Promote Just and Equitable Principles of Trade
The Commission finds that the proposed Best Interest Amendments'
mandate of a uniform standard among Broker-Dealers and Bank Dealers
when making recommendations to retail customers in municipal securities
would promote just and equitable principles of trade within the
municipal securities market. Specifically, the proposed Best Interest
Amendments would ensure Bank Dealers have regulatory obligations and
burdens when engaging in retail municipal recommendations that are
generally equivalent to the regulatory obligations and burdens of
Broker-Dealers (when engaging in the same municipal securities
activities).\86\ The Commission notes that this uniformity would better
ensure that Bank Dealers do not have a competitive advantage in the
municipal securities market by operation of a less burdensome
regulatory standard of conduct. Therefore, the Commission finds that
the proposed Best Interest Amendments will mitigate the potential for
regulatory arbitrage and thereby promote just and equitable principles
of trade.
---------------------------------------------------------------------------
\86\ Notice, 87 FR at 28086.
---------------------------------------------------------------------------
iii. 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
The Commission finds that the proposed Best Interest Amendments
would foster cooperation and coordination between the MSRB, SEC, and
other regulators by aligning the suitability obligations of MSRB Rule
G-19 with the suitability obligations of Regulation Best Interest. \87\
The Commission notes that such alignment would establish a uniform
standard of suitability obligations among Broker-Dealers and Bank
Dealers when making retail municipal recommendations, creating
regulatory clarity regarding retail municipal recommendations. As such,
the Commission finds that the proposed Best Interest Amendments will
foster greater cooperation and coordination among the authorities that
examine Broker-Dealers and Bank Dealers for compliance with MSRB rules,
as well as authorities that enforce those rules.
---------------------------------------------------------------------------
\87\ Notice, 87 FR at 28085.
---------------------------------------------------------------------------
iv. Remove Impediments to and Perfect the Mechanism of a Free and Open
Market in Municipal Securities and Municipal Financial Products
The Commission finds that the proposed Best Interest Amendments
would remove impediments to, and perfect the mechanism of, a free and
open market in municipal securities by creating a uniform regulatory
standard for retail municipal recommendations. By establishing one
standard for retail municipal recommendations, the Commission finds
that the proposed Best Interest Amendments would eliminate confusion
about duties Bank Dealers (with retail customers and non-retail
customers) owe to retail customers regarding municipal securities
recommendations.\88\ The Commission further notes that having one
standard of retail municipal recommendations would also eliminate
confusion about the duties retail customers (who have accounts with
both Bank Dealers and Broker-Dealers) can expect from Bank Dealers and
Broker-Dealers regarding municipal securities recommendations. The
Commission finds that the Best Interest Amendments would reduce Bank
Dealers' and retail customers' confusion regarding the duties
associated with providing retail municipal recommendation. As such, the
Commission holds that the proposed Best Interest Amendments remove
impediments to the municipal security market, removing uncertainty
surrounding retail municipal recommendations.
---------------------------------------------------------------------------
\88\ Id.
---------------------------------------------------------------------------
v. Protect Investors, Municipal Entities, Obligated Persons, and the
Public Interest
The Commission believes that the proposed Best Interest Amendments'
revision to MSRB Rule G-19 will protect investors by ensuring Bank
Dealers comply with the heightened regulatory requirements of the
Commission's Regulation Best Interest rather than current MSRB G-
19.\89\ By uniformly applying the investor protections provided by
Regulation Best Interest, the proposed Best Interest Amendments would
ensure that a retail customer will receive the enhanced investor
protections of Regulation Best Interest, regardless of whether a
Broker-Dealer or a Bank Dealer makes retail municipal recommendation.
In doing so, the Commission finds that the proposed Best Interest
Amendments thereby protect investors, municipal entities, obligated
persons, and the public interest.
---------------------------------------------------------------------------
\89\ Id.
---------------------------------------------------------------------------
B. Commission Findings for the Institutional SMMP Amendment
The Commission finds that the proposed Institutional SMMP Amendment
is consistent with Section 15B(b)(2)(C) \90\ of the Act in that such
amendment would remove impediments to and perfect the mechanism of a
free and open market in municipal securities and municipal financial
products, without materially diminishing the prevention of fraudulent
and manipulative acts and practices; or the protect investors,
municipal entities, obligated persons, and the public interest.
---------------------------------------------------------------------------
\90\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
Specifically, the Commissions finds that the proposed Institutional
SMMP Amendment would remove impediments to and perfect the mechanism of
a free and open market in municipal securities and municipal financial
product by eliminating the current requirement to perform a
quantitative suitability analysis for recommendations in circumstances
where the dealer does not have actual control or de facto control over
an Institutional SMMP's account.\91\ The Commission notes that ending
this requirement could eliminate potentially duplicative analyses
undertaken by dealers on behalf of Institutional SMMPs. In particular,
the Commission notes that Institutional SMMPs have already affirmed
their capacity and expertise to conduct such analyses for themselves,
and presumably, the Institutional SMMPs presumably have taken upon
themselves to perform such analyses.
---------------------------------------------------------------------------
\91\ Notice, 87 FR at 28088.
---------------------------------------------------------------------------
Therefore, the Commission believes that the proposed Institutional
SMMP Amendment would facilitate transactions in municipal securities
and remove impediments to and perfect the mechanism of a free and open
market in
[[Page 38802]]
municipal securities by reducing a compliance burden.
The Commission further believes that proposed Institutional SMMP
Amendment would not materially diminish the prevention of fraudulent
and manipulative acts and practices under MSRB Rule G-19, as amended by
the proposed Best Interest Amendments, by incorporating the concepts of
actual control or de facto control.\92\ Specifically, the Commission
believes that reinstating control elements would help address potential
scenarios in which the ability of an Institutional SMMP to exercise
independent judgment is undermined or circumvented. Such a situation
may occur when a dealer may not have formal discretionary authority
over an Institutional SMMP's account, but nevertheless exercises de
facto control over the account (to, for example, engage in churning
activity in clear contravention of an Institutional SMMP's investment
interests). The Commission further finds that the proposed
Institutional SMMP Amendment's incorporating the actual control or de
facto control elements maintains baseline investor protections for
Institutional SMMPs in such scenarios of greater dealer impropriety or
intentional wrongdoing.
---------------------------------------------------------------------------
\92\ Notice, 87 FR at 28088.
---------------------------------------------------------------------------
Similarly, the Commission believes that the proposed Institutional
SMMP Amendment will not materially diminish the protection of
investors, municipal entities, and obligated person, and the public
interest provided by MSRB Rule G-19, as amended by the proposed Best
Interest Amendments. Specifically, under the proposed Institutional
SMMP Amendment, new institutional customers, who otherwise would
qualify as SMMPs but desire the additional investor protections
afforded by quantitative suitability under MSRB Rule G-19, may decline
to provide the required affirmations under MSRB Rule D-15.\93\ The
Commission notes that, under the proposed rule change, existing
Institutional SMMPs could withdraw their SMMP status and obtain the
suitability protections afforded by MSRB Rule G-19. The Commission
believes this ability to self-identify as an Institutional SMMP will
help ensure that those institutional customers who desire additional
investor protection can secure them under MSRB rules, which would then
require a dealer to undertake a quantitative suitability analysis.
Accordingly, the Commission finds that the proposed Institutional SMMP
Amendment would not materially diminish essential safeguards for
investor protection.
---------------------------------------------------------------------------
\93\ Notice, 87 FR at 28090.
---------------------------------------------------------------------------
In approving the proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation.\94\ Exchange Act Section
15B(b)(2)(C) \95\ 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.
---------------------------------------------------------------------------
\94\ 15 U.S.C. 78c(f).
\95\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The Commission does not believe that the proposed Best Interest
Amendments would impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act because
the proposed rule change would align MSRB rules with the requirements
of Regulation Best Interest. As such, the proposed Best Interest
Amendments will reduce the potential for regulatory arbitrage and any
attendant disruption it could have caused in the competitive landscape
between Broker-Dealers and Bank Dealers regarding retail municipal
recommendations. Consequently, the proposed Best Interest Amendments
will not impose any burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act, because it
establishes a uniform regulatory environment for all retail municipal
recommendations.
The Commission further believes that the proposed Institutional
SMMP Amendment would not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Exchange Act
because the proposed rule change would be equally applicable to all
dealers. As such, the Commission finds that any benefits or burdens to
competition would be evenly applied to all such firms transacting with
institutional customers. Therefore, neither the proposed Best Interest
Amendments nor the proposed Institutional SMMP Amendment do not impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The Commission has also reviewed the record for the proposed rule
change and notes that the record does not contain any information to
indicate that the proposed rule change would have a negative effect on
capital formation. Further, the Commission finds that the possible
increased investor protection offered by the proposed Best Interest
Amendments and the possible operational efficiency proposed
Institutional SMMP Amendments could foster greater faith in the
integrity of the municipal security market, increasing participation in
this market, thereby increase capital formation.
The Commission also finds that the proposed rule change includes
provisions that help promote efficiency. In particular, the Commission
believes the proposed Best Interest Amendments may improve Broker
Dealers and Bank Dealers' effectiveness in providing retail municipal
recommendations by promoting a uniform standard of suitability
requirements (for example, increasing compliance efficiency for firms
who have both Broker-Dealer and Bank Dealer subsidiaries). The
Commission also notes that the proposed Institutional SMMP Amendment
may improve the operational efficiency of the municipal securities
market. By reintroducing the element of actual control or de facto
control with respect to Institutional SMMP accounts that would trigger
a dealer's quantitative suitability obligation, the Commission finds
that the proposed Institutional SMMP Amendment could eliminate
potentially duplicative analyses undertaken by dealers on behalf of
Institutional SMMPs.
The Commission received no comment letters on the proposed rule
change.
For the reasons noted above, the Commission believes that the
proposed rule change is consistent with the Exchange Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\96\ that the proposed rule change (SR-MSRB-2022-02) be,
and hereby is, approved.
---------------------------------------------------------------------------
\96\ 15 U.S.C. 78s(b)(2).
\97\ 17 CFR 200.30-3(a)(12).
For the Commission, pursuant to delegated authority.\97\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-13814 Filed 6-28-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on June 29, 2022.
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.