[Federal Register Volume 77, Number 72 (Friday, April 13, 2012)]
[Notices]
[Pages 22367-22372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8878]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66772; File No. SR-MSRB-2012-05]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change Consisting of a
Restatement of an Interpretive Notice Concerning the Application of
MSRB Rule G-17 to Sophisticated Municipal Market Professionals
April 9, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``the Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on March 26, 2012, the Municipal Securities
Rulemaking Board (``Board'' or ``MSRB'') 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 is filing with the SEC a proposed rule change consisting
of a restatement of an interpretive notice (the ``Existing SMMP
Notice'' and the ``Restated SMMP Notice,'' respectively) concerning the
application of MSRB Rule G-17 (on conduct of municipal securities and
municipal advisory activities) to sophisticated municipal market
professionals (``SMMPs''). Because of the relationship between the
proposed rule change and FINRA Rule 2111 (on suitability), the MSRB
requests that the proposed rule change be made effective on July 9,
2012, which is the date on which FINRA Rule 2111 will become effective.
The text of the proposed rule change is available on the MSRB's Web
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2012-Filings.aspx, 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
[[Page 22368]]
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
Existing Definition of SMMP
Under the Existing SMMP Notice, a dealer is permitted to treat an
institutional customer \3\ as an SMMP if the dealer has reasonable
grounds for concluding the following and other known facts do not
contradict such a conclusion:
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\3\ For purposes of the Existing SMMP Notice, an institutional
customer is defined as ``an entity, other than a natural person
(corporation, partnership, trust, or otherwise), with total assets
of at least $100 million invested in municipal securities in the
aggregate in its portfolio and/or under management.''
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The customer has timely access to the publicly available
material facts concerning a municipal securities transaction;
The customer is capable of independently evaluating the
investment risk and market value of the municipal securities at issue;
and
The customer is making independent decisions about its
investments in municipal securities.
Although the Existing SMMP Notice permits a dealer to have an
investor attest to SMMP status ``as a means of streamlining the
dealers' process for determining that the customer is an SMMP,'' it
also provides that a dealer may not rely on such an attestation if the
dealer knows or has reason to know that the investor lacks
sophistication concerning a municipal securities transaction based on a
number of factors set forth in the notice.
Access to Material Facts. As to the first part of the definition of
SMMP, access to material facts, the Existing SMMP Notice provides that
a dealer's analysis may depend on the customer's resources to
investigate the transaction (e.g., research analysts) and the
customer's ready access to established industry sources for
disseminating material information concerning the transaction (e.g.,
the predecessors of the MSRB's Electronic Municipal Market Access
(``EMMA'') System and the MSRB's Real-Time Trade Reporting System
(``RTRS''), rating agency data, and other indicative data sources).
Independent Evaluation of Investment Risk and Market Value. As to
the second part of the definition of SMMP, independent evaluation of
risk and market value, the Existing SMMP Notice identifies the
following relevant factors:
The customer's use of one or more consultants, investment
advisers, research analysts or bank trust departments;
The customer's general level of experience in municipal
securities markets and specific experience with the type of municipal
securities under consideration;
The customer's ability to understand the economic features
of the municipal security;
The customer's ability to independently evaluate how
market developments would affect the municipal security under
consideration; and
The complexity of the municipal security or securities
involved.
Independent Investment Decisions. As to the third part of the
definition, independent investment decisions, the Existing SMMP Notice
provides that such a determination will depend on the nature of the
relationship between the dealer and the institutional customer and
provides that the following considerations may be relevant:
Any written or oral understanding that exists between the
dealer and the institutional customer regarding the nature of the
relationship between the dealer and the institutional customer and the
services to be rendered by the dealer;
The presence or absence of a pattern of acceptance of the
dealer's recommendations;
The use by the institutional customer of ideas,
suggestions, market views, and information relating to municipal
securities obtained from sources other than the dealer; and
The extent to which the dealer has received from the
institutional customer current comprehensive portfolio information in
connection with discussing potential municipal securities transactions
or has not been provided important information regarding the
institutional customer's portfolio or investment objectives.
Application of Existing SMMP Definition
The Existing SMMP Notice addresses a dealer's obligations to an
SMMP under Rule G-17 (on fair dealing), Rule G-18 (on execution of
transactions), Rule G-19 (on suitability), and Rule G-13 (on
quotations).
Rule G-17. Just prior to the adoption of the Existing SMMP Notice,
the SEC approved another MSRB notice \4\ in which the MSRB interpreted
Rule G-17 to require brokers, dealers, and municipal securities dealers
(``dealers'') to disclose to customers at or before the time of trade
all material facts about a transaction known by the dealer, as well as
all material facts about a security reasonably accessible to the market
from established industry sources.\5\ The Existing SMMP Notice provides
that, when a dealer effects a non-recommended secondary market
transaction with an SMMP, its affirmative Rule G-17 disclosure duty
concerning material facts available from established industry sources
will be deemed satisfied. The Existing SMMP Notice does not alter a
dealer's duty not to engage in deceptive, dishonest, or unfair
practices under Rule G-17 or under the federal securities laws. In
essence, it puts the dealer's disclosure obligations to SMMPs when
effecting non-recommended secondary market transactions on a par with
inter-dealer disclosure obligations. The Existing SMMP Notice provides
that, as in the case of an inter-dealer transaction, in a transaction
with an SMMP, a dealer's intentional withholding of a material fact
about a security, when the information is not accessible through
established industry sources, may constitute an unfair practice that
violates Rule G-17.
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\4\ MSRB Interpretive Notice Regarding Rule G-17, On Disclosure
of Material Facts (March 20, 2002) (the ``2002 Rule G-17 Notice'').
\5\ The 2002 Rule G-17 Notice was updated in 2009 to reflect,
among other things, the addition of EMMA as an established industry
source. See MSRB Guidance On Disclosure and Other Sales Practice
Obligations to Individual and Other Retail Investors in Municipal
Securities (July 14, 2009). The 2009 Notice also extended the Rule
G-17 affirmative disclosure obligation to ``material information.''
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Rule G-18. Rule G-18 provides that each dealer, when executing a
transaction in municipal securities for or on behalf of a customer as
agent, must make a reasonable effort to obtain a price for the customer
that is fair and reasonable in relation to prevailing market
conditions. The Existing SMMP Notice provides that a dealer effecting a
non-recommended secondary market agency transaction to an SMMP is not
required to take further actions to ensure that the transaction is
effected at a fair and reasonable price, if its 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 a transaction is executed. The Existing
SMMP Notice then states that this interpretation of Rule G-18 is
[[Page 22369]]
particularly relevant to dealers operating alternative trading systems,
stating that dealers operating such systems may be merely aggregating
the buy and sell interest of other dealers or SMMPs. A footnote to the
Existing SMMP Notice says that the same interpretation would apply to a
broker's broker when executing an agency transaction for another
dealer.
Rule G-19. Under Rule G-19, in the case of a recommended
transaction, a dealer must have a reasonable basis for recommending a
particular security (``reasonable-basis suitability''), as well as
reasonable grounds for believing the recommendation is suitable for the
customer to whom it is made, based upon information available from the
issuer of the security or otherwise and based upon the facts disclosed
by the customer or otherwise known about the customer (``customer-
specific suitability''). The Existing SMMP Notice provides that, when a
dealer has reasonable grounds for concluding that an institutional
customer is an SMMP, the dealer's customer-specific suitability
obligation is fulfilled.
Rule G-13. Under Rule G-13, no dealer may distribute or publish, or
cause to be distributed or published, any quotation relating to
municipal securities, unless the quotation is bona fide (i.e., the
dealer making the quotation is prepared to execute at the quoted price)
and the price stated in the quotation is based on the best judgment of
the dealer of the fair market value of the securities that are the
subject of the quotation at the time the quotation is made. In general,
any quotation disseminated by a dealer (including the quotation of an
investor) is presumed to be a quotation made by the dealer and the
dealer is responsible for ensuring compliance with the bona fide and
fair market value requirements with respect to the quotation. However,
if a dealer disseminates a quotation that is actually made by another
dealer and the quotation is labeled as such, then the quotation is
presumed to be a quotation made by such other dealer and not by the
disseminating dealer. In such a case, the disseminating dealer is only
required to have no reason to believe that either: (i) The quotation
does not represent a bona fide bid for, or offer of, municipal
securities by the maker of the quotation or (ii) the price stated in
the quotation is not based on the best judgment of the maker of the
quotation of the fair market value of the securities.
The Existing SMMP Notice provides that, if a dealer disseminates
the quotation of an SMMP and it is labeled as such, the disseminating
dealer will be held to the same standard as if it were disseminating a
quotation made by another dealer. The notice says that the following
factors are relevant to the dealer's assessment of whether
dissemination of the SMMP's quotation may be considered to be a
violation of Rule G-13 by the dealer: (i) Complaints received from
dealers and investors seeking to execute against such quotations, (ii)
a pattern of an SMMP failing to update, confirm or withdraw its
outstanding quotations so as to raise an inference that such quotations
may be stale or invalid, or (iii) a pattern of an SMMP effecting
transactions at prices that depart materially from the prices listed in
the quotations in a manner that consistently is favorable to the SMMP
making the quotation.
Considerations for Change
Increased Availability of Information about Municipal Securities.
In 2002, the MSRB decided to adopt a definition of SMMP that differed
from certain other regulatory definitions of investors considered
sophisticated enough to receive special treatment under the federal
securities law. The SMMP definition was closely modeled on an NASD
interpretation of its suitability rule,\6\ which contained a comparable
list of factors found relevant to an investor's independent evaluation
of risk and independent investment decisions. A notable difference was
that the definition of SMMP also looked to whether the investor had
access to material facts. A key factor in the MSRB's decision was the
lack of information available about municipal securities at that time.
Since the adoption of the existing definition of SMMP, there has been a
vast increase in the availability of information about municipal
securities reasonably accessible by institutional investors regardless
of the amount of their holdings of municipal securities (e.g., on EMMA,
from rating agencies, and from other information vendors).
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\6\ See IM-2310-3. Suitability Obligations to Institutional
Customers.
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New FINRA Institutional Suitability Rule. Effective July 9, 2012,
the NASD guidance on institutional suitability will no longer be in
effect. It will be replaced by FINRA Rule 2111, which adopts a
different approach to a FINRA member's customer-specific duty of
suitability to an ``institutional account.'' \7\ Under FINRA Rule 2111,
a dealer's customer-specific suitability obligation to an institutional
customer will be considered satisfied if (1) the dealer has a
reasonable basis to believe that the institutional customer is capable
of evaluating investment risks independently, both in general and with
regard to particular transactions and investment strategies involving a
security or securities and (2) the institutional customer affirmatively
indicates that it is exercising independent judgment in evaluating the
dealer's recommendations. There will no longer be a detailed listing of
factors, such as that found in the Existing SMMP Notice. The MSRB
generally considers it desirable from the standpoint of reducing the
cost of dealer compliance to maintain consistency with FINRA rules,
absent clear reasons for treating transactions in municipal securities
differently.
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\7\ The term ``institutional account'' will be defined in the
same manner as under MSRB Rule G-8(a)(xi). MSRB Rule G-8(a)(xi)
defines ``institutional account'' as: the account of (i) a bank,
savings and loan association, insurance company, or registered
investment company; (ii) an investment adviser registered either
with the 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 (iii) any other entity
(whether a natural person, corporation, partnership, trust, or
otherwise) with total assets of at least $50 million.
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Proposal to Restate SMMP Notice
Revised Definition of SMMP. Because the quality and availability of
information concerning municipal securities has improved substantially
since 2002, and to maintain consistency with the revised FINRA
suitability rule for institutional customers, the MSRB proposes to
retain the concept of an SMMP, but revise its definition so that it is
consistent with the new FINRA suitability rule for institutional
customers. Specifically, the MSRB proposes that an ``SMMP'' be defined
as an ``institutional customer \8\ of a dealer 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) affirmatively
indicates that it is exercising independent judgment in evaluating the
recommendations of the dealer.''
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\8\ ``Institutional customer'' would be defined as a customer
with an institutional account (as defined under MSRB Rule G-
8(a)(xi).
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The MSRB also proposes to include the following statement in the
Restated SMMP Notice's discussion of the definition of SMMP: ``As part
of the reasonable basis analysis required by clause (1), the dealer
should consider the amount and type of municipal securities owned or
under management by the institutional customer.''
The key to the revised definition of SMMP is the requirement that a
dealer have a reasonable basis to believe that an investor is capable
of evaluating
[[Page 22370]]
investment risks and market value independently, both in general and
with regard to particular transactions in municipal securities
(sometimes referred to in this filing as the ``reasonable basis
analysis''). When the MSRB created the existing definition of SMMP,
alternative trading systems for municipal securities were new and
access to material facts about municipal securities was in large part
limited to very large institutional investors. The high threshold for
determining whether an investor would be considered an institutional
customer under the Existing SMMP Notice ($100 million of municipal
securities owned and/or under management) was considered necessary to
make sure that only the most sophisticated institutions and dealers
were likely to use alternative trading systems. The Restated SMMP
Notice would provide that, as part of its reasonable basis analysis, a
dealer should consider the amount and type of municipal securities
owned or under management by the institutional customer. However, there
would no longer be a threshold requirement that a customer own or
manage a certain amount of municipal securities in order to be
considered an SMMP.
The MSRB also proposes that, in the case of the affirmation
described in clause (2) of the revised definition of SMMP (i.e.,
``capable of evaluating investment risks and market value
independently''), customers be allowed to make the affirmation orally
or in writing and to provide the affirmation on a trade-by-trade basis,
on a type-of-municipal-security basis (e.g., general obligation,
revenue, VRDO, etc.), or for all potential transactions for the
customer's account. This would be consistent with the affirmation
requirement of FINRA Rule 2111, so receipt by a dealer of the FINRA
2111 affirmation would also satisfy this requirement.
Application of Revised SMMP Definition. The Restated SMMP Notice
would not change the application of Rules G-18, G-19, and G-13 to
SMMPs. However, it would change the application of Rule G-17 to SMMPs,
under the assumption that institutional customers now have substantial
access to material information about municipal securities. The Existing
SMMP Notice limits the exclusion from the duty to disclose all material
facts to SMMPs to non-recommended transactions. The Restated SMMP
Notice would apply the exclusion to all transactions with SMMPs,
whether recommended or self-directed. The Restated SMMP Notice would
also remove the lists of factors that were deemed by the Board in 2002
to be relevant to the components of the original definition of SMMP. It
would also update the Existing SMMP Notice to reflect developments in
the MSRB's interpretations of Rule G-17 since 2002 and remove endnote 9
to the Existing SMMP Notice, which has been construed by some to lessen
the duty of a broker's broker under Rule G-18 in a manner that is
inconsistent with the Board's proposed Rule G-43 (on broker's
brokers).\9\ Furthermore, it would remove the language that suggests
that transactions on alternative trading systems are done on an agency
basis, because at least one major alternative trading system engages
only in principal transactions.
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\9\ File No. SR-MSRB-2012-04 (March 5, 2012). The MSRB notes
that, under proposed Rule G-43(d)(iii)(A), an alternative trading
system that had any customers (as defined in MSRB Rule D-9) that
were not SMMPs would not be excepted from the definition of
``broker's broker.''
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2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2) of the Securities Exchange Act (``Exchange Act''),
which provides that:
The Board shall propose and adopt rules to effect the purposes
of this title with respect to transactions in municipal securities
effected by brokers, dealers, and municipal securities dealers and
advice provided to or on behalf of municipal entities or obligated
persons by brokers, dealers, municipal securities dealers, and
municipal advisors with respect to municipal financial products, the
issuance of municipal securities, and solicitations of municipal
entities or obligated persons undertaken by brokers, dealers,
municipal securities dealers, and municipal advisors.
Section 15B(b)(2)(C) of the Exchange Act, provides that the rules
of the MSRB 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 proposed rule change is consistent with Sections 15B(b)(2) and
15B(b)(2)(C) of the Exchange Act. Its principal purpose is to remove
impediments to and perfect the mechanism of a free and open market in
municipal securities, particularly in the case of the alternative
trading systems that have been an increasingly important venue for the
provision of secondary market liquidity for municipal securities. New
municipal securities products, such as Build America Bonds, and
decreasing spreads between interest rates on Treasury bonds and
municipal securities, have attracted investors that were not previously
invested in municipal securities to the municipal securities market. At
the same time, the amount of available information about municipal
securities has vastly increased since the Existing SMMP Notice was
approved. While the Restated SMMP Notice would provide that a dealer
should consider the amount and type of municipal securities owned or
under management by the institutional customer, the MSRB no longer
considers it essential that an institutional customer own or manage
municipal securities in order to engage in informed decisionmaking
about municipal securities investments. The MSRB believes it is
appropriate to allow sophisticated investors to trade in municipal
securities on alternative trading systems even though they do not meet
the $100 million threshold of municipal securities owned and/or managed
found in the Existing SMMP Notice. This change would not come at the
expense of investor protection. While the application of the proposed
rule change would not be limited to transactions on alternative trading
systems, the application of certain MSRB rules to such systems has
proven difficult in practice, especially with the increasing use of
computerized algorithmic trading. The MSRB notes that such systems, if
monitored closely and subjected to appropriate rulemaking,\10\ have the
potential to increase pre-trade transparency in the municipal
marketplace, which should eventually improve prices for all investors.
The MSRB also generally considers it desirable from the standpoint of
reducing the cost of dealer compliance to maintain consistency with
FINRA rules, absent clear reasons for treating transactions in
municipal securities differently.
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\10\ The MSRB notes that proposed MSRB Rule G-43 would provide
for additional regulation of such alternative trading systems.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change would
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act, since it would apply
equally to all dealers that have SMMP customers, whether alternative
trading systems or not.
[[Page 22371]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
On November 8, 2011, the MSRB requested comment on the original
version of the proposed rule change.\11\ The MSRB received comment
letters from (1) Alternative Regulatory Solutions, LLC (``ARS''); (2)
Bond Dealers of America (``BDA''); (3) Securities Industry and
Financial Markets Association (``SIFMA''); and (4) TMC Bonds L.L.C.
(``TMC''), formerly The MuniCenter.
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\11\ See MSRB Notice 2011-63 (November 8, 2011).
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Safe Harbor. The original version of the Restated SMMP Notice on
which comment was requested proposed a safe harbor for satisfaction of
the dealer's reasonable basis analysis. Most of the comments concerned
that safe harbor. The reasonable basis analysis portion of the
definition of SMMP is referred to in this discussion of comments as the
``general rule.'' SIFMA said that the safe harbor was too restrictive.
It requested that: (1) The types of assets owned or under management
required by the safe harbor not be limited to municipal securities, and
(2) the attestation requirement of the safe harbor \12\ either be
eliminated entirely or eliminated for certain types of institutional
customers (i.e., banks, savings and loan associations, insurance
companies, registered investment companies, and federally- or state-
registered investment advisers). SIFMA said that, if the assets
required for the safe harbor were required to be municipal securities,
the dollar threshold should be reduced from $50 million to $25 million
of municipal securities owned or under management. TMC said that the
safe harbor should require ownership and/or management of at least $50
million of direct fixed income securities. BDA advocated that an
institutional investor with at least $25 million of fixed income
securities should qualify for the safe harbor without the need for an
attestation. ARS recommended that the attestations of the general rule
and the safe harbor be combined and that all attestations be required
to be in writing. ARS also recommended that the safe harbor requirement
of $50 million of municipal securities be determined on an average
annual basis and asked how often a dealer would be required to verify
this asset concentration.
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\12\ Both the general rule and the safe harbor contained
``attestation'' requirements, unlike the version of the SMMP
definition in the proposed rule change.
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The MSRB has determined to eliminate the safe harbor from the
proposed rule due to a concern that the amount of municipal securities
owned or managed by a customer does not necessarily equate to
sophistication. Nevertheless, the Restated SMMP Notice would provide
that, as part of its reasonable basis analysis, a dealer should
consider the amount and type of municipal securities owned or under
management by an institutional customer.
As to ARS's comment concerning the frequency with which the $50
million threshold of the safe harbor would need to be measured, while
the safe harbor has been eliminated, the question is still relevant to
the frequency with which dealers would need to take steps to reassess
their reasonable basis determinations with respect to their
institutional customers. Dealers should monitor their reasonable basis
determinations as frequently as they consider prudent, just as they
would need to do so if they planned to treat natural persons with total
assets of at least $50 million as institutional customers under either
FINRA Rule 2111 or the Restated SMMP Notice.\13\
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\13\ The following statement from FINRA Regulatory Notice 11-02
(January 2011) is useful: a broker-dealer must know its customers
not only at account opening but also throughout the life of its
relationship with customers in order to, among other things,
effectively service and supervise the customers' accounts. Since a
broker-dealer's relationship with its customers is dynamic, FINRA
does not believe that it can prescribe a period within which broker-
dealers must attempt to update this information. As with a
customer's investment profile under the suitability rule, a firm
should verify the ``essential facts'' about a customer under the
know-your-customer rule at intervals reasonably calculated to
prevent and detect any mishandling of a customer's account that
might result from the customer's change in circumstances. The
reasonableness of a broker-dealer's efforts in this regard will
depend on the facts and circumstances of the particular case. Firms
should note, however, that SEA Rule 17a-3 requires broker-dealers
to, among other things, attempt to update certain account
information every 36 months regarding accounts for which the broker-
dealers were required to make suitability determinations.
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As to ARS's suggestion that the affirmation be required to be in
writing, although it appears that many dealers plan to rely on written
affirmations, the MSRB is not requiring that the affirmations be in
writing in view of the goal to be consistent with FINRA Rule 2111
unless a different rule is justified.
General Rule. SIFMA noted that the original version of the Restated
SMMP Notice would have required an attestation from each institutional
customer, while FINRA Rule 2111 requires an affirmation. It asked that
the MSRB language track the FINRA rule precisely and requested
clarification that the FINRA Rule 2111 affirmation would suffice for
the SMMP affirmation. BDA questioned how a dealer could satisfy the
reasonable basis requirement of the general rule absent use of the safe
harbor and suggested that the list of factors set forth in the Existing
SMMP Notice be retained. It said that, at a minimum, the MSRB should
make it clear that there is no negative implication to the deletion of
the list and that the deletion of the list is not an indication that
the considerations are no longer considered relevant by the MSRB. BDA
objected to the need for attestations from investors even under the
general rule and suggested that a dealer should be able to inform its
customer that the dealer considers the customer to be an SMMP, capable
of exercising independent judgment and evaluating market risks and
market value. As to customers that qualify as SMMPs under the current
notice, BDA requested that the MSRB provide a transition rule that
would permit dealers six months within which to obtain the required
attestations from customers that meet the current definition of SMMP.
TMC questioned whether attestations from customers that meet the
current definition of SMMP would be required.
The MSRB has changed the words ``affirmatively attest'' in the
definition of SMMP to ``affirmatively indicate'' to track precisely the
affirmation language of FINRA Rule 2111 and wishes to clarify that the
FINRA Rule 2111 customer affirmation would satisfy the SMMP affirmation
requirement. The MSRB has also determined to recommend that the
proposed effective date of the restated SMMP notice be the same as that
of FINRA Rule 2111, which is July 9, 2012. No exception from the
affirmation requirement would be provided, because under FINRA Rule
2111 affirmations must be received from all institutional customers as
to which dealers plan to avail themselves of the institutional
customer-specific suitability exception. Companies that already provide
qualified institutional buyer (QIB) lists for dealers are already in
the process of obtaining the required FINRA Rule 2111 affirmations from
institutional customers.
As to BDA's comment on the list of factors that the restated notice
would eliminate, the factors in the existing SMMP notice may actually
have the practical effect of serving as a constraint on a dealer's
ability to conclude that a customer is an SMMP. The text of the
existing SMMP notice that precedes the list of factors follows:
The MSRB has identified certain factors for evaluating an
institutional investor's sophistication concerning a municipal
securities transaction and these factors are discussed in detail
below. Moreover, dealers
[[Page 22372]]
are advised that they have the option of having investors attest to
SMMP status as a means of streamlining the dealers' process for
determining that the customer is an SMMP. However, a dealer would
not be able to rely upon a customer's SMMP attestation if the dealer
knows or has reason to know that an investor lacks sophistication
concerning a municipal securities transaction, as discussed in
detail below.
Because the list of factors may actually serve as a constraint on
the dealer's reasonable basis determination, when FINRA Rule 2111
eliminated a very similar list of factors, the MSRB decided to
eliminate the list from the restated SMMP notice as well. This provides
more flexibility to a dealer as to how it will satisfy the reasonable
basis requirement of the general rule. The MSRB wishes to clarify that
dealers might find those factors useful but would not be required to
consider them.
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 (i) as the Commission may
designate up to 90 days of such date 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 Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-MSRB-2012-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-MSRB-2012-05. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site 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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the MSRB's offices. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MSRB-2012-05 and should be submitted on
or before May 4, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8878 Filed 4-12-12; 8:45 am]
BILLING CODE 8011-01-P