MSRB NOTICE 2000-33 (NOVEMBER 17, 2000)


On September 28, 2000, the Municipal Securities Rulemaking Board (“MSRB”) published a Notice and Draft Interpretive Guidance on Dealer Responsibilities in Connection with Both Electronic and Traditional Municipal Securities Transactions (“the Draft Guidance”). In the course of several informal conversations with industry members concerning the MSRB’s statements about dealers’ customer-specific suitability obligations and whether a dealer is making a recommendation to customers, the MSRB has become aware that readers of the Draft Guidance may have misunderstood certain aspects of the intended guidance. It appears that readers have interpreted the Draft Guidance to say that the MSRB believes that every time a dealer posts an inventory listing it has made a recommendation to its retail customers. In addition, readers have interpreted the Draft Guidance to state that, if a dealer has customer-specific suitability obligations, it must screen its inventory to fulfill its suitability obligations.

The specific statements made in the MSRB’s Draft Guidance were not intended to convey those meanings or to expand the generally accepted definition of recommendation in the context of the suitability rules. In publishing the Draft Guidance, the MSRB intended to be consistent with existing customer suitability analysis by recognizing that historically the determination of whether a dealer is making a recommendation has been made by reference to all relevant facts and circumstances. Thus, the MSRB expressly stated that, “[a]s to whether a dealer is making a recommendation to customers, the MSRB believes that the determination will depend upon the facts and circumstances, specifically including the sophistication of the customer and the nature of the relationship between the dealer and the customer.”[1] By expressly stating that the sophistication of the customer and the nature of the relationship may be a relevant fact, the MSRB intended to provide more leeway to the analysis of the facts and circumstances, rather than less.

After quoting the SEC’s most recent published statement on recommendations in the municipal securities market,[2] the MSRB noted that, “it is possible that a retail customer will believe that a dealer that sends its listing to its customers is making a recommendation, while a sophisticated market professional may recognize it simply as a list of available inventory, without any recommendation having been made or implied.”[3] The MSRB statement was only meant as an illustration of a possible difference between a dealer’s relationship with a retail customer and a sophisticated market professional. In this example the MSRB intended the term “sends” to mean the active forwarding of information to a retail customer. Further, the MSRB intended to indicate that, depending upon the totality of the relevant facts and circumstances, such sending might (but would not necessarily) constitute a recommendation to a retail customer.

In addition, when the MSRB noted that “when recommendations are made, either implicitly or explicitly, in an electronic context, dealers can fulfill their suitability obligations through the use of appropriately designed screen-based inquiries that will limit a customer’s access to suitable investment choices,”[4] the MSRB was simply intending to inform dealers that it believes that suitability obligations can be fulfilled on-line. The MSRB is not suggesting that the example is the best or only way to fulfill suitability obligations on-line. The example is only a generalized illustration of the principle that dealers can assess and fulfill suitability obligations on-line without the potentially cumbersome intervention of a live broker.

The comment period on the Draft Guidance ends December 1, 2000. The MSRB urges industry members to comment on any or all aspects of the Draft Guidance.

November 17, 2000

[1] Draft Guidance at p. 17.

[2] The statement was made in the 1994 Release adopting the continuing disclosure amendments to SEC Rule 15c2-12, Exchange Act Release No. 34961 (November 10, 1994) at note 143.

[3] Draft Guidance at p. 17 (emphasis added).

[ 4] Id.