[Federal Register Volume 79, Number 49 (Thursday, March 13, 2014)]
[Notices]
[Pages 14321-14325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-05456]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71665; File No. SR-MSRB-2013-07]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change Consisting of
Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations,
Proposed Revisions to MSRB Rule G-19, on Suitability of Recommendations
and Transactions, Proposed MSRB Rules D-15 and G-48, on Sophisticated
Municipal Market Professionals, and the Proposed Deletion of
Interpretive Guidance
March 7, 2014.
I. Introduction
On September 17, 2013, the Municipal Securities Rulemaking Board
(the ``MSRB'') filed with the Securities and Exchange Commission (the
``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change consisting of new MSRB Rule G-47
(time of trade disclosures), new MSRB Rules D-15 and G-48
(sophisticated municipal market professionals or ``SMMPs''), and
amendments to MSRB Rule G-19 (suitability). The proposed rule change
was published for comment in the Federal Register on October 22,
2013.\3\ The Commission received two (2) comment letters in response to
the proposed rule change.\4\ On January 14, 2014, the MSRB responded to
the comments.\5\ On January 16, 2014, the Commission published an order
to solicit comments from interested persons and to institute
proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change
(``Proceedings Order.'').\7\ The Commission received no comment letters
in response to the Proceedings Order. The Commission is approving the
proposed rule change.\8\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 70593 (October 1, 2013), 78 FR
62867 (October 22, 2013) (Notice of Filing of a Proposed Rule Change
Consisting of Proposed MSRB Rule G-47, on Time of Trade Disclosure
Obligations, Proposed Revisions to MSRB Rule G-19, on Suitability of
Recommendations and Transactions, Proposed MSRB Rules D-15 and G-48,
on Sophisticated Municipal Market Professionals, and the Proposed
Deletion of Interpretive Guidance) (``Proposing Release''). The
comment period closed on November 12, 2013.
\4\ Letters from Tamara K. Salmon, Senior Associate Counsel,
Investment Company Institute to Elizabeth M. Murphy, Secretary, SEC,
dated November 1, 2013 (``ICI Letter'') and David L. Cohen, Managing
Director/Associate General Counsel, Securities Industry and
Financial Markets Association, to Elizabeth M. Murphy, Secretary,
SEC, dated November 12, 2013 (``SIFMA Letter'').
\5\ See Letter from Michael L. Post, Deputy General Counsel,
MSRB, to Elizabeth M. Murphy, Secretary, SEC dated January 14, 2014
(``Response'').
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Exchange Act Release No. 71326 (January 16, 2014), 79 FR
3909 (January 23, 2014) (Order Instituting Proceedings 2013-SR-MSRB-
07). The comment period closed on February 13, 2014.
\8\ The text of the proposed rule change is available on the
MSRB's Web site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2013-Filings.aspx, at the MSRB's principal office, and at
the Commission's Public Reference Room.
---------------------------------------------------------------------------
II. Description of Proposal
As further described in the Proposing Release, the MSRB states that
it has examined its interpretive guidance related to time of trade
disclosures, suitability, and SMMPs and proposes to consolidate this
guidance and codify it into several rules: a new time of trade
disclosure rule (proposed Rule G-47), a revised suitability rule (Rule
G-19), and two new SMMP rules (proposed Rules D-15 and G-48).
Additionally, the proposed revisions to Rule G-19 are designed to
harmonize the MSRB's suitability rule with the Financial Industry
Regulatory Authority's (``FINRA'') suitability rule.\9\
---------------------------------------------------------------------------
\9\ See FINRA Rule 2111.
---------------------------------------------------------------------------
In connection with the rule changes described above, the MSRB
proposed to delete certain interpretive guidance affected by these rule
changes from the MSRB's Rule Book. Additionally, in the Proposing
Release, the MSRB indicated that it did not intend to preserve the
relevant guidance, because doing so ``would not advance the MSRB's goal
to streamline its rulebook.'' \10\ In its Response, the MSRB
articulated a different approach. Specifically, to address a commenter
concern, the MSRB stated that it will archive on its Web site the
existing guidance that is to be deleted from the Rule Book in
connection with the proposed rule change.\11\ Moreover, the MSRB states
that ``[t]o the extent that past interpretive guidance does not
conflict with any MSRB rules or interpretations thereof, it remains
potentially applicable, depending on the facts and circumstances of a
particular case.'' \12\
---------------------------------------------------------------------------
\10\ See Proposing Release at 21 (responding to a SIFMA comment
regarding proposed Rule G-47). See also Proposing Release at 4,
describing the MSRB's streamlining goals (``The structure of
Proposed G-47 (rule language followed by supplementary material) is
the same structure used by FINRA and other selfregulatory
organizations (``SROs''). The MSRB intends generally to transition
to this structure for all of its rules going forward in order to
streamline the rules, harmonize the format with that of other SROs,
and make the rules easier for dealers and municipal advisors to
understand and follow.'')
\11\ See Response at 2. See also discussion of comments, below.
\12\ Response at 2.
---------------------------------------------------------------------------
A. Rule G-47 on Time of Trade Disclosures
MSRB Rule G-17 provides that, in the conduct of its municipal
securities or municipal advisory activities, each broker, dealer,
municipal securities dealer (``dealer''), and municipal advisor must
deal fairly with all persons and may not engage in any deceptive,
dishonest or unfair practice. The MSRB has interpreted Rule G-17 to
require a dealer, in connection with a municipal securities
transaction, to disclose to its customer, at or prior to the time of
trade, all material information about the transaction known by the
dealer, as well as material information about the security that is
reasonably accessible to the market.\13\ The MSRB stated in the
Proposing Release that it has issued extensive interpretive guidance
discussing this time of trade disclosure obligation in general, as well
as in specific scenarios. Proposed Rule G-47 is designed to consolidate
most of the previously issued guidance into rule language which the
MSRB believes would ease the burden on dealers and other market
participants who endeavor to understand, comply with and enforce these
obligations. The MSRB asserted that the proposed codification of the
interpretive guidance on time of trade disclosure obligations is not
intended to, and will not, substantively change the current
obligations. Rather, the MSRB maintained that the codification is an
effort to consolidate the current obligations into streamlined rule
language.
---------------------------------------------------------------------------
\13\ See, e.g., MSRB Answers Frequently Asked Questions
Regarding Dealer Disclosure Obligations Under MSRB Rule G-17
(November 30, 2011).
---------------------------------------------------------------------------
A summary of proposed Rule G-47 is as follows:
1. General Disclosure Obligation
Proposed Rule G-47(a) states that dealers cannot sell municipal
securities to a customer, or purchase municipal securities from a
customer, without disclosing to the customer, at or prior to the time
of trade, all material information known about the
[[Page 14322]]
transaction and material information about the security that is
reasonably accessible to the market. The rule applies regardless of
whether the transaction is unsolicited or recommended or whether it
occurs in a primary offering or the secondary market. The proposed rule
provides that the disclosure can be made orally or in writing.
Proposed Rule G-47(b) states that information is considered to be
``material information'' if there is a substantial likelihood that the
information would be considered important or significant by a
reasonable investor in making an investment decision. The proposed rule
defines ``reasonably accessible to the market'' as information that is
made available publicly through ``established industry sources.''
Finally, the proposed rule defines ``established industry sources'' as
including the MSRB's Electronic Municipal Market Access
(``EMMA''[supreg]) \14\ system, rating agency reports, and other
sources of information generally used by dealers that effect
transactions in the type of municipal securities at issue.
---------------------------------------------------------------------------
\14\ EMMA is a registered trademark of the MSRB.
---------------------------------------------------------------------------
2. Supplementary Material
In addition to stating the general disclosure obligation, proposed
Rule G-47 includes supplementary material describing the disclosure
obligation in more detail. Proposed supplementary material .01 provides
that dealers have a duty to give customers a complete description of
the security, which includes a description of the features that would
likely be considered significant by a reasonable investor, and facts
that are material to assessing potential risks of the investment. This
section of the proposed supplementary material further provides that
the public availability of material information through EMMA, or other
established industry sources, does not relieve dealers of their
disclosure obligations. Section .01 of the proposed supplementary
material also provides that dealers may not satisfy the disclosure
obligation by directing customers to established industry sources or
through disclosure in general advertising materials. Finally, section
.01 of the proposed supplementary material states that whether the
customer is purchasing or selling the municipal securities may be a
consideration in determining what information is material.
Proposed supplementary material .02 provides that dealers operating
electronic trading or brokerage systems have the same time of trade
disclosure obligations as other dealers. Proposed supplementary
material .03 provides a list of examples describing information that
may be material for certain types of securities and in specific
scenarios and, therefore, would require disclosures to a customer.
Finally, proposed supplementary material .04 provides that dealers
must implement processes and procedures reasonably designed to ensure
that material information regarding municipal securities is
disseminated to registered representatives who are engaged in sales to
and purchases from a customer.
B. Rule G-19, on Suitability of Recommendations and Transactions
The amendments described below are designed to more closely
harmonize Rule G-19 with FINRA's suitability rule,\15\ and to
incorporate elements of the MSRB's current interpretive guidance on
suitability into Rule G-19. Proposed Rule G-19 includes Supplementary
Material .01 through .06, which generally tracks Supplementary Material
.01 through .06 in FINRA Rule 2111.\16\
---------------------------------------------------------------------------
\15\ See FINRA Rule 2111.
\16\ The Proposing Release states that ``. . . Rule G-19 will be
interpreted in a manner consistent with FINRA's interpretations of
Rule 2111. If the MSRB believes an interpretation should not be
applicable to Rule G-19, it will affirmatively state that specific
provisions of FINRA's interpretation do not apply.''
---------------------------------------------------------------------------
A summary of the proposed revisions to Rule G-19 is as follows:
1. Account Information
Current MSRB Rule G-19(a) requires dealers to obtain a record of
certain customer information at or before completion of a transaction
in municipal securities. The MSRB did not include a provision
equivalent to current Rule G-19(a) in proposed Rule G-19, because MSRB
Rule G-8 already independently requires dealers to make and keep a
record of this information for each customer. Additionally, by deleting
this provision, the MSRB intends to streamline the rule and more
closely align it with FINRA's suitability rule, which does not contain
this specific requirement.\17\
---------------------------------------------------------------------------
\17\ See FINRA Rule 2111.
---------------------------------------------------------------------------
2. Information Required for Suitability Determinations
The current MSRB suitability rule contains a list of customer
information that dealers must obtain prior to recommending a
transaction to a non-institutional account.\18\ The proposed revisions
to Rule G-19 would expand this list to include additional items from
FINRA's suitability rule \19\ such as: age, investment time horizon,
liquidity needs, investment experience and risk tolerance. The proposed
revision also would delete Rule G-19(b) and replace it with rule
language corresponding to FINRA's suitability rule. The list of
customer information that dealers must assess in the proposed rule
would also include ``any other information the customer may disclose to
the broker, dealer or municipal securities dealer in connection with
such recommendation,'' which corresponds to language in the FINRA
rule.\20\ Therefore, the proposed rule would delete the similar
requirement in current MSRB Rule G-19(c)(ii) which states that, in
recommending a transaction, a dealer shall have reasonable grounds
``based upon the facts disclosed by such customer or otherwise known
about such customer for believing that the recommendation is
suitable.''
---------------------------------------------------------------------------
\18\ See MSRB Rule G-19(b).
\19\ See FINRA Rule 2111(a).
\20\ Id.
---------------------------------------------------------------------------
Further, the proposed revisions to Rule G-19 incorporate the
reasonable-basis suitability terminology from FINRA Rule 2111 in
supplementary material .05(a) and delete section (c)(i) of Rule G-
19.\21\
---------------------------------------------------------------------------
\21\ As noted in the Proposing Release, although this change
deletes the explicit requirement in MSRB Rule G-19(c)(i) for dealers
to consider information available from the issuer of the security or
otherwise in making suitability determinations, the MSRB asserts
that in order to perform a reasonable-basis suitability analysis,
dealers must necessarily consider information available from the
issuer of the security.
---------------------------------------------------------------------------
3. Discretionary Accounts
Current MSRB Rule G-19(d)(i) provides that dealers cannot effect
transactions in municipal securities with or for a discretionary
account unless permitted by the customer's prior written authorization
that has been accepted in writing by a municipal securities principal.
The MSRB proposed to delete this provision, because there is a
substantially similar provision already included in MSRB Rule G-
8(a)(xi)(I) which requires that, for customer discretionary accounts,
dealers must make and keep a record of the customer's written
authorization to exercise discretionary power over the account, written
approval of the municipal securities principal who supervises the
account, and written approval of the municipal securities principal
with respect to each transaction in the account stating the date and
time of approval.
Current MSRB Rule G-19(d)(ii) states that a dealer cannot effect a
transaction
[[Page 14323]]
in municipal securities with or for a discretionary account unless the
dealer first determines that the transaction is suitable for the
customer or the transaction is specifically directed by the customer
and was not recommended by the dealer. Instead, proposed MSRB Rule G-19
includes a general requirement, providing that a dealer must have a
reasonable basis to believe that a recommended transaction or
investment strategy is suitable for the customer. The MSRB proposed
deleting current Rule G-19(d)(ii) on the basis that: (1) The
suitability obligation is the same for discretionary and non-
discretionary accounts, and therefore, there is no reason to restate
the obligation as it specifically relates to discretionary accounts;
and (2) there is no corresponding provision in FINRA Rule 2111. The
MSRB noted in its Response that it plans to consider adopting a
separate rule addressing discretionary accounts and dealers continue to
owe their customers a duty of fair dealing under MSRB Rule G-17
regarding discretionary accounts.
4. Churning
The proposed revisions to Rule G-19 retain the substance of the
existing MSRB prohibition on churning,\22\ but recast it using the
current terminology of ``quantitative suitability'' used in FINRA's
suitability rule.\23\ The quantitative suitability requirement is
included in proposed Rule G-19, supplementary material .05(c).
---------------------------------------------------------------------------
\22\ See MSRB Rule G-19(e).
\23\ See FINRA Rule 2111, Supplementary Material .05(c).
---------------------------------------------------------------------------
5. Investment Strategies
The proposed amendments to Rule G-19 incorporate the application of
suitability to ``investment strategies.'' Specifically, proposed
supplementary material .03 defines the phrase ``investment strategy
involving a municipal security or municipal securities'' by stating
that it is ``to be interpreted broadly and would include, among other
things, an explicit recommendation to hold a municipal security or
municipal securities.'' This definition is consistent with the
definition of ``investment strategy involving a security or
securities'' in FINRA's suitability rule.\24\ The proposed MSRB
suitability rule, like the FINRA rule, carves out communications of
certain types of material as long as such communications do not
recommend a particular municipal security or municipal securities.\25\
The MSRB stated in the Proposing Release that the list of materials in
proposed Rule G-19, supplementary material .03, differs in minor
respects from the list of materials in FINRA's suitability rule \26\ to
account for unique attributes of the municipal securities market.
---------------------------------------------------------------------------
\24\ See FINRA Rule 2111, Supplementary Material .03.
\25\ Id.
\26\ Id.
---------------------------------------------------------------------------
6. Proposed Technical Revisions to Rule G-8, on Books and Records
MSRB Rule G-8(a)(xi)(F) includes references to MSRB Rule G-
19(c)(ii) and G-19(b). These referenced provisions are not codified as
such in the proposed revisions to MSRB Rule G-19, but the concepts will
remain in the proposed rule. Therefore, the MSRB proposed revising MSRB
Rule G-8(a)(xi)(F) to include a reference to the entire MSRB Rule G-19.
C. Rules D-15 and G-48 on SMMPs
Proposed Rules D-15 and G-48 on SMMPs (the ``proposed SMMP rules'')
consist of a new definitional rule, D-15, defining an SMMP and a new
general rule, G-48, on the regulatory obligations of dealers to SMMPs.
A summary of proposed Rules D-15 and G-48 is as follows:
Proposed Rule D-15 defines the term ``sophisticated municipal
market professional'' or ``SMMP'' as a customer of a dealer that is a
bank, savings and loan association, insurance company, or registered
investment company; or an investment adviser registered 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 any other entity with total assets of at least $50
million. Proposed Rule D-15 further requires that the dealer have 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, and that the customer affirmatively indicate that
it is exercising independent judgment in evaluating the recommendations
of the dealer.
The supplementary material to proposed Rule D-15 addresses the
reasonable basis analysis and the customer affirmation. Section .01
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. Section .02 states that 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, or on an account-wide basis.
Proposed Rule G-48 describes the application of certain obligations
to SMMPs. More specifically, the proposed rule provides that a dealer's
obligations to a customer that it reasonably concludes is an SMMP are
modified as follows: (1) With respect to the time of trade disclosure
obligation in proposed Rule G-47, the dealer would not have any
obligation to disclose material information that is reasonably
accessible to the market; (2) with respect to transaction pricing
obligations under Rule G-18, the dealer would not have any obligation
to take action to ensure that transactions meeting certain conditions
set forth in the proposed rule are effected at fair and reasonable
prices; (3) with respect to the suitability obligation in Rule G-19,
the proposed rule provides that the dealer would not have any
obligation to perform a customer-specific suitability analysis; and (4)
with respect to the obligation regarding bona fide quotations in Rule
G-13, the dealer disseminating an SMMP's quotation which is labeled as
such would be required to apply the same standards described in Rule G-
13(b) for quotations made by another dealer.
III. Summary of Comments Received and the MSRB's Response
On October 22, 2013, the Commission published the MSRB's proposed
rule change in the Federal Register.\27\ The comment period ended on
November 12, 2013, and the Commission received two (2) comment letters
in response to the proposed rule change.\28\ Both commenters expressed
general support for the proposed rule change but sought further changes
or clarification as discussed below.\29\ The MSRB responded to comments
in a letter dated January 14, 2014.\30\ On January 16, 2014, the
Commission published the Proceedings Order in the Federal Register to
provide interested parties an opportunity to consider the MSRB's
proposed treatment of past interpretive guidance, as set forth in the
Response.\31\ The Commission received no comment letters in response to
the Proceedings Order.
---------------------------------------------------------------------------
\27\ See supra note 3.
\28\ See supra note 4.
\29\ See ICI Letter and SIFMA Letter.
\30\ See supra note 5.
\31\ See supra note 7.
---------------------------------------------------------------------------
[[Page 14324]]
A. General Support for the Proposed Rule Change
Both commenters expressed support for harmonizing MSRB Rule G-19
with FINRA's suitability rule.\32\ One commenter noted that it supports
the efforts by the MSRB to provide clarity to regulated entities by
developing new or revised rules that highlight core principles.\33\
---------------------------------------------------------------------------
\32\ ICI Letter and SIFMA Letter.
\33\ See SIFMA Letter.
---------------------------------------------------------------------------
B. Suggestions for Changes to Proposal
1. Include Suitability Guidance Regarding 529 Plans
One commenter recommended that the MSRB incorporate into Rule G-19
existing interpretive guidance relating to suitability assessments for
529 college savings plans.\34\ The commenter noted that that inclusion
would, among other things, ``[e]liminate the confusion that may result
from MSRB registrants believing that the MSRB's suitability rule
contains all relevant information relating to their suitability
obligations. . . .'' \35\
---------------------------------------------------------------------------
\34\ ICI Letter.
\35\ Id.
---------------------------------------------------------------------------
The MSRB responded by explaining that the guidance is not proposed
to be codified in Rule G-19 because the MSRB may propose a separate
rule addressing 529 plans in the future, and the relevant guidance will
remain intact until such time as the MSRB may adopt such a rule.
2. Differentiate Disclosure Obligations Between Sales to Customers
Versus Purchasers From Customers
One commenter stated that proposed MSRB Rule G-47 should reflect
that there is a different time of trade disclosure obligation when a
dealer is selling a bond to a customer as opposed to when a dealer is
purchasing a bond from a customer arguing that customers should know
the characteristics of the bonds they own.\36\ The commenter
acknowledged that in answer to a similar comment it previously made,
the MSRB clarified in the rule that whether the customer is purchasing
or selling is a factor in determining what information is material and
must be disclosed by the dealer.\37\ The commenter stated that the
modification did ``not go far enough'' and requested that the MSRB
further modify Rule G-47 to include supplementary material explaining
the differences in disclosure obligations.\38\ The MSRB responded this
modification would involve a substantive change to the current
disclosure obligations beyond the scope of this rulemaking and that the
MSRB Board may consider substantive changes as part of a future
initiative.
---------------------------------------------------------------------------
\36\ SIFMA Letter.
\37\ Id.
\38\ Id.
---------------------------------------------------------------------------
3. Extend Implementation Period to One Year
One commenter advocated for a one year implementation period,
stating that the period proposed by the MSRB was too brief given the
scope of the training and system changes required.\39\ The MSRB
responded that it does not believe such a lengthy implementation period
is necessary, noting that the revised rule will largely be consistent
with FINRA's suitability rule, with which many dealers already are
familiar. Nonetheless, to address this concern, the MSRB extended the
effective date for the proposed rule change for an additional 60 days,
to total 120 days following the date of SEC approval.
---------------------------------------------------------------------------
\39\ Id.
---------------------------------------------------------------------------
4. Reflect Reduced Duties to SMMPs Within Rules Governing non-SMMPs
One commenter suggested that rules governing non-SMMPs should also
reflect dealers' reduced duties to SMMPs.\40\ The MSRB responded that
stand-alone rules are more prominent, and that the proposed stand-alone
SMMP rule would address dealers' modified duties in multiple areas
under rules not part of this rulemaking. Additionally, the MSRB noted
that future modifications to dealer obligations with respect to SMMPs
could be accomplished more efficiently by having a stand-alone SMMP
rule. The commenter also suggested that Rule G-19 and proposed Rules G-
47 and G-48 should cross-reference each other stating that cross-
referencing would further the MSRB's objective to provide clarity to
investors, dealers, and regulators.\41\ The MSRB responded that such
cross-references are unnecessary.
---------------------------------------------------------------------------
\40\ Id.
\41\ Id.
---------------------------------------------------------------------------
5. Retain Existing Interpretive Guidance
One commenter asked the MSRB to archive and preserve existing time
of trade disclosure interpretive notices.\42\ As noted previously, the
MSRB stated that it will archive on its Web site the existing guidance
that is to be deleted from the MSRB's Rule Book in connection with the
proposed rule change. The MSRB further responded that to the extent
that past interpretive guidance does not conflict with any MSRB rules
or interpretations thereof, it remains potentially applicable,
depending on the facts and circumstances of a particular case.
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
C. Requests for Clarifications
1. Use of a Preliminary Official Statement (``POS'') To Satisfy Time of
Trade Disclosure Obligations
One commenter noted that dealers, in reliance on previous guidance
indicating that a POS can serve as a primary vehicle for providing time
of trade disclosures, have either delivered or provided access to a POS
to fulfill time of trade disclosure obligations.\43\ The commenter
requested that the MSRB affirm that a POS can serve as a primary
vehicle for providing the required time of trade disclosures under Rule
G-47.\44\ The MSRB found this comment to be outside the scope of the
current proposal because it would require a substantive change, which
the MSRB may consider as part of a future initiative. Nevertheless, in
response, the MSRB stated that existing guidance does not state that
providing mere access to a POS would be a sufficient means of
disclosure, and the adequacy of disclosure depends on facts and
circumstances. The MSRB noted, however, that existing guidance will
continue to be potentially applicable.
---------------------------------------------------------------------------
\43\ Id.
\44\ Id.
---------------------------------------------------------------------------
2. Additional Clarifications
One commenter requested that the MSRB affirm (1) that information
barriers do not need to be dismantled in order to provide time of trade
disclosures, and (2) that time of trade disclosures need not be given
to customers that hold discretionary accounts.\45\ The MSRB indicated
that these requests would require substantive changes to existing
requirements and are thus outside the scope of the current proposal.
The MSRB stated that it may consider these requests if the MSRB Board
undertakes to amend the rule in the future.
---------------------------------------------------------------------------
\45\ Id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change,
as well as the comment letters received and the MSRB's response, and
finds that the proposed rule change is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to the
MSRB. In particular, as discussed below, the proposed rule change is
consistent with Section 15B(b)(2)(C) of the Act, which, among other
things, provides that the MSRB's
[[Page 14325]]
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, 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.\46\
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The disclosure of material information about a transaction to
investors and the performance of a meaningful suitability analysis are
central to the role of a dealer in facilitating municipal securities
transactions. Proposed Rule G-47, on time of trade disclosures,
codifies current interpretive guidance and protects investors by
requiring dealers to make disclosures to customers in connection with
purchases and sales of municipal securities. These required disclosures
are designed to prevent fraudulent and manipulative acts and practices
by dealers, and promote just and equitable principles of trade, by
requiring dealers to disclose information about a security and
transaction that would be considered significant or important to a
reasonable investor in making an investment decision. Similarly, the
proposed revisions to Rule G-19, on suitability, further these purposes
by requiring dealers and their associated persons to make only suitable
recommendations to customers and fosters more efficient regulation by
harmonizing the rule with FINRA's suitability rule. The proposed
revisions to Rule G-19 are also aligned with a recommendation of the
SEC in its 2012 Report on the Municipal Securities Market that the MSRB
consider ``amending Rule G-19 (suitability) in a manner generally
consistent with recent amendments by FINRA to its Rule 2111, including
with respect to the scope of the term `strategy' . . . . .'' \47\ The
Commission believes that the proposed rule, which would require a
dealer to have a reasonable basis in recommending an investment
strategy, enhances investor protection. Specifically, by interpreting
the term ``investment strategy'' broadly, the MSRB will provide
important protections to investors who receive this type of
recommendation. Moreover, the Commission believes that the MSRB,
through it Response, has addressed commenters' concerns, other than
those it determined are outside the scope of the current proposal.
---------------------------------------------------------------------------
\47\ See http://www.sec.gov/news/studies/2012/munireport073112.pdf at 141.
---------------------------------------------------------------------------
In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation.\48\ The Commission found significant that the
proposed changes related to time-of-trade disclosure and SMMPs involve
no substantive change to existing requirements. Additionally, the rule
changes could ease burdens on dealers and promote competition by
clarifying certain core dealer obligations and the reduced obligations
when transacting business with SMMPs.
---------------------------------------------------------------------------
\48\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
Furthermore, harmonizing MSRB Rule G-19 with the FINRA suitability
rule enhances efficiency in the market by enabling those dealers that
are dually registered with the MSRB and FINRA to establish and
implement one suitability standard.\49\ Although one commenter implied
that further efficiency could be attained by including suitability
guidance relating to 529 plans within proposed Rule G-19, the commenter
did not indicate that the proposed rule created inefficiencies.
Moreover, the Commission notes that the existing guidance relating to
529 plans continues to apply and understands that the MSRB may
determine to propose a separate rule for 529 plans in the future.
---------------------------------------------------------------------------
\49\ See Attachment to ICI Letter.
---------------------------------------------------------------------------
The Commission also believes that the MSRB's Response includes
certain accommodations that help promote efficiency and do not impede
competition. Specifically, the MSRB's retention of its interpretative
guidance and the continuing applicability of such guidance to the
extent it does not conflict with any MSRB rules or interpretations
provides continuity to dealers. Moreover, the MSRB's extension of the
implementation period from 60 to 120 days gives additional time, if
needed, for dealers to establish or modify their compliance systems.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to the MSRB, and in
particular, Section 15B(b)(2)(C) of the Act. The proposal will become
effective 120 days following the date of this order.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\50\ that the proposed rule change (SR-MSRB-2013-07) be, and hereby
is, approved.
---------------------------------------------------------------------------
\50\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
---------------------------------------------------------------------------
\51\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05456 Filed 3-12-14; 8:45 am]
BILLING CODE 8011-01-P