MSRB NOTICE 2013-10 (MAY 1, 2013)

REQUEST FOR COMMENT ON PROPOSED SOPHISTICATED MUNICIPAL MARKET PROFESSIONAL RULES

The Municipal Securities Rulemaking Board (“MSRB”) is seeking comment on proposed rules that would streamline and codify existing guidance regarding the application of MSRB rules to transactions with Sophisticated Municipal Market Professionals (“SMMPs”) currently set forth in interpretive guidance to MSRB Rule G-17. The proposed changes would create a new definitional rule, D-15, defining an SMMP and a new general rule, G-48, on the regulatory obligations of brokers, dealers and municipal securities dealers (“dealers”) to SMMPs.

Comments should be submitted no later than June 12, 2013, and may be submitted in electronic or paper form. Comments may be submitted electronically by clicking here. Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314. All comments will be available for public inspection on the MSRB’s website.[1]

Questions about this notice should be directed to Lawrence P. Sandor, Deputy General Counsel, or Darlene Brown, Assistant General Counsel, at 703-797-6600.

BACKGROUND

On July 9, 2012, the MSRB issued an interpretive notice to Rule G-17 revising prior guidance on the application of MSRB rules to transactions with SMMPs.[2] The rules proposed below preserve the substance of that guidance but codify it into two proposed rules that define an SMMP and describe the application of the following obligations to SMMPs: (1) time of trade disclosure; (2) transaction pricing; (3) suitability; and (4) bona fide quotations.

PROPOSED SMMP RULES

The proposed SMMP rules do not change the substance of the restated SMMP notice.[3] The MSRB believes that a new definitional rule, together with a general rule that describes the regulatory obligations of dealers working with SMMPs, will underscore the differences between dealers’ obligations to non-SMMPs and SMMPs, while highlighting the eligibility standards for being an SMMP.

CURRENT INTERPRETIVE GUIDANCE

Contemporaneous with the adoption of the proposed SMMP rules, and those related to time of trade disclosures[4] and suitability,[5] the MSRB proposes deleting four Rule G-17 interpretive notices that will be superseded in their entirety by these rules.[6] 

RELATIONSHIP WITH PROPOSED TIME OF TRADE DISCLOSURE AND SUITABILITY RULES

The proposed SMMP rules are part of the MSRB’s review of Rule G-17 and related interpretive guidance. Because of the interdependencies of the proposed time of trade disclosure rule,[7] the proposed revisions to the suitability rule[8] and the proposed SMMP rules, the MSRB intends to file each of these rule proposals with the Securities and Exchange Commission at the same time, once they have been approved by the MSRB.

REQUEST FOR COMMENT

The MSRB is requesting comment from market participants and other interested parties on the proposed SMMP rules set forth below. Specifically, the MSRB requests that commenters address the following questions:

  1. Will the proposed codification of existing SMMP guidance impose any particular burden on dealers or provide any material benefit to dealers?
  2. Is there any aspect of the restated SMMP notice that has been eliminated that should be included in the definitional or general rule? If so, please identify the guidance and state why it should be included in the new rules.
  3. Will the proposed SMMP definitional rule make it easier for dealers and institutional customers to understand who qualifies as an SMMP?
  4. Will the proposed SMMP general rule make it easier for dealers and institutional customers to understand the alternative regulatory obligations applicable to a dealer’s business with an SMMP?

May 1, 2013

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TEXT OF PROPOSED SMMP RULES

Rule D-15: Sophisticated Municipal Market Professional           

The term “sophisticated municipal market professional” or “SMMP” shall mean a customer of a broker, dealer or municipal securities dealer that is:

(A) a bank, savings and loan association, insurance company, or registered investment company; or

(B) an investment adviser registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or

(C) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million; and,

for which the broker, dealer or municipal securities 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 and investment strategies in municipal securities, and affirmatively indicates that it is exercising independent judgment in evaluating the recommendations of the broker, dealer or municipal securities dealer.

*** Supplementary Material: -----------------------

.01 Reasonable Basis Analysis. As part of the reasonable basis analysis, the broker, dealer or municipal securities dealer should consider the amount and type of municipal securities owned or under management by the customer. 

.02 Customer Affirmation. A customer may affirm that it is exercising independent judgment either orally or in writing, and such affirmation may be given on a trade-by-trade basis, on a type-of-municipal-security basis (e.g., general obligation, revenue, variable rate, etc.), or on an account-wide basis.

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Rule G-48: Transactions with Sophisticated Municipal Market Professionals

A broker, dealer, or municipal securities dealer’s obligations to a customer that it reasonably concludes is a Sophisticated Municipal Market Professional, or SMMP, shall be modified as follows:

(a) Time of Trade Disclosure.  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.

(b) Transaction Pricing.  The broker, dealer, or municipal securities dealer shall not have any obligation under Rule G-18 to take action to ensure that transactions meeting all of the following conditions are effected at fair and reasonable prices:

(1) the transactions are non-recommended secondary market agency transactions;

(2) the broker, dealer, or municipal securities dealer’s services with respect to the transactions have been explicitly limited to providing anonymity, communication, order matching, and/or clearance functions; and

(3) the broker, dealer, or municipal securities dealer does not exercise discretion as to how or when the transactions are executed.

(c) Suitability.  The broker, dealer, or municipal securities dealer shall not have any obligation under Rule G-19 to perform a customer-specific suitability analysis. 

(d) Bona Fide Quotations.  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.


[1] Comments are posted on the MSRB website without change. Personal identifying information such as name, address, telephone number, or email address, will not be edited from submissions. Therefore, commenters should submit only information that they wish to make available publicly.

[2] Restated Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market ProfessionalsInterpretive Notice dated July 9, 2012, (the “restated SMMP notice”).

[3] The proposed definition of SMMP includes a reference to the term “investment strategies,” consistent with inclusion of that term in the proposed suitability rule published for comment on March 11, 2013. See MSRB Notice 2013-07 (March 11, 2013).

[6] MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure Obligations under MSRB Rule G-17Interpretive Notice dated November 30, 2011, ; Application of MSRB Rules to Transactions in Auction Rate SecuritiesInterpretive Notice dated February 19, 2008,; Restated Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market ProfessionalsInterpretive Notice dated July 9, 2012,; and Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market ProfessionalsInterpretive Notice dated April 30, 2002, .