MSRB Requests Comment on Updating the Definition of Sophisticated Municipal Market Professional

Date: November 8, 2011

Contact: Jennifer A. Galloway, Chief Communications Officer
             (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) is requesting comment on updating its definition of “sophisticated municipal market professional” (SMMP) to reflect changes in availability of municipal market information and recent changes to the Financial Industry Regulatory Authority’s (FINRA) rules on suitability for institutional accounts. The proposed updates are a precursor to the MSRB’s evaluation of its rules regarding electronic trading systems.

The MSRB recognizes that certain sophisticated investors do not require the same protections as other investors in the municipal market. The MSRB issued guidance in 2001 and 2002 on the electronic trading of municipal securities intended to ensure that only the most sophisticated investors were likely to use electronic trading systems. A municipal securities dealer’s determination of whether an investor is an SMMP under this guidance is based on factors that consider the investor’s access to material facts about a transaction and the investor’s capability of evaluating investment risk and market value of municipal securities. These factors were modeled on those used by the National Association of Securities Dealers (now FINRA) in its suitability rule for institutional customers.

Since the MSRB issued its definition of SMMP, the information available about municipal bonds has increased substantially, including information provided through the MSRB’s Electronic Municipal Market Access (EMMA®) website and other information vendors. These sources have made the material facts about municipal bonds more readily available. Since this time, FINRA has also revised its institutional suitability rule.

In order to reflect the greater accessibility of municipal securities information and to promote consistency in market regulation, the MSRB is requesting comment on defining SMMP as a “customer with an institutional account that: (1) the dealer has a reasonable basis to believe is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities, and (2) attests that it is exercising independent judgment in evaluating the recommendations of the dealer.” The MSRB is also proposing a safe harbor that may be used by dealers in satisfying the “reasonable basis” requirement.

“MSRB rules need to reflect the increased transparency in the municipal market brought about by technological innovations,” said MSRB Executive Director Lynnette Kelly Hotchkiss. “This proposed update also considers the compliance benefits of working with other regulators to create a consistent set of requirements for municipal market professionals.”

Comments should be submitted no later than December 13, 2011.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.