[Federal Register Volume 79, Number 152 (Thursday, August 7, 2014)]
[Notices]
[Pages 46290-46292]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18651]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72743; File No. SR-MSRB-2014-04]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change Consisting of
Proposed Amendments to Rule G-3, on Classification of Principals and
Representatives, Numerical Requirements, Testing, Continuing Education
Requirements; Rule G-7, on Information Concerning Associated Persons;
and Rule G-27, on Supervision
August 1, 2014.
I. Introduction
On June 6, 2014, the Municipal Securities Rulemaking Board (the
``MSRB'' or ``Board'') filed with the Securities and Exchange
Commission (the ``SEC'' or ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder,\2\ a proposed rule change consisting of proposed
amendments to Rule G-3, on classification of principals and
representatives, numerical requirements, testing, continuing education
requirements; Rule G-7, on information concerning associated persons;
and Rule G-27, on supervision. The proposed rule change was published
for comment in the Federal Register on June 24, 2014.\3\ The Commission
received one comment letter on the proposal.\4\ This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-72425 (June 18,
2014), 79 FR 35829 (June 24, 2014) (the ``Notice'').
\4\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from David L. Cohen, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association,
dated July 15, 2014 (``SIFMA Letter'').
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II. Description of the Proposed Rule Change
The MSRB states that the proposed rule change would: (1) Amend MSRB
Rule G-3(a) to limit the scope of permitted activities of a limited
representative--investment company and variable contracts products
(``Limited Representative'') to sales to and purchases from customers
of municipal fund securities; (2) eliminate the Financial and
Operations Principal (``FINOP'') classification, qualification and
numerical requirements in MSRB Rule G-3(d); (3) clarify in
Supplementary Material .01 to Rule G-3 that references to sales include
the solicitation of sales of municipal securities; and (4) make certain
technical amendments to (i) re-title Rule G-3 and its subparagraph (a)
and define the Limited Representative classification, (ii) reorganize
Rules G-3 and G-7(a), and (iii) remove references to the FINOP in Rules
G-7 and G-27.\5\
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\5\ See supra note 3.
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1. Proposed Changes to Rule G-3(a)--Limited Representative
According to the MSRB, the proposed rule change will better align
the activities permitted of Limited Representatives with the
competencies tested in the Limited Representative--Investment Company
and Variable Contracts Products Examination (``Series 6 examination'')
administered by the Financial Industry Regulatory Authority
(``FINRA'').\6\ Currently, Limited Representatives are individuals
whose activities, with respect to municipal fund securities,\7\ may
include (1) underwriting or sales; (2) research or investment advice
with regard to underwriting or sales; or (3) any other activities that
involve communication, directly or indirectly, with public investors
with regard to underwriting or sales. According to the MSRB, Limited
Representatives qualify as such by, among other requirements, passing
the Series 6 examination.\8\
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\6\ Id.
\7\ Under MSRB Rule D-12, ``municipal fund security shall mean a
municipal security issued by an issuer that, but for the application
of Section 2(b) of the Investment Company Act of 1940, would
constitute an investment company within the meaning of Section 3 of
the Investment Company Act of 1940.''
\8\ See supra note 3.
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The MSRB has represented that the proposed rule change would narrow
the activities permitted of Limited Representatives exclusively to
sales to and purchases from customers of municipal fund securities.\9\
The MSRB stated that the proposed rule change is appropriate because
the Series 6 examination focuses on purchases and sales activities,
commensurate with the scope of permissible activities under NASD Rule
1032(b).\10\ The MSRB believes that individuals engaging in activities
other than sales of municipal fund securities should be required to
take and pass the Municipal Securities Representative Qualification
Examination (``Series 52 exam''), which tests the basic competency to
perform the activities described in MSRB Rule G-3(a)(i)(A).\11\
According to the MSRB, the proposed rule change would harmonize MSRB
and FINRA rules by limiting the activities of individuals solely
qualified by having passed the Series 6 examination to sales-related
activities and, under MSRB rules, exclusively to municipal fund
securities sales-related activities.\12\
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\9\ Id.
\10\ NASD Rule 1032(b) has been incorporated in the FINRA Manual
and continues to be referred to as an NASD rule.
\11\ See supra note 3.
\12\ Under NASD Rule 1032(b), individuals who have taken and
passed the Series 6 examination may only engage in sales activity
related to investment company and variable contracts products.
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2. Elimination of MSRB's FINOP Requirement
According to the MSRB, the proposed rule change also would
eliminate the MSRB FINOP classification and the requirement that
certain dealers designate at least one such principal (collectively
referred to herein as the ``FINOP requirement'').\13\ The MSRB
conducted a review of the professional qualification requirements in
Rule G-3 and determined that the FINOP requirement in Rule G-3(d) is
unnecessary and duplicative of other regulations, such as NASD Rule
1022(b).\14\ According to the MSRB, the responsibilities and duties of
FINOPs pertaining to municipal securities are not unique, and FINRA
rules establish general responsibilities and duties for such
individuals.\15\ The MSRB believes that FINRA's regulation of FINOPs is
more appropriate in that the core responsibilities of a FINOP pertain
to the dealer's financial reports and supervision of the dealer's
activities
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under the financial responsibility rules.\16\
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\13\ See supra note 3.
\14\ Id.
\15\ Id.
\16\ Id.
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Currently, MSRB Rule G-3(d) requires that every dealer, excluding
bank dealers or certain other dealers identified by reference to the
SEC net capital rule, designate at least one FINOP, including its chief
financial officer.\17\ According to the MSRB, given the exclusions in
the rule, only a limited number of dealers are required to designate an
individual as a FINOP, and under Rule G-3(d)(ii) these individuals must
be qualified in accordance with FINRA rules.\18\ As such, individuals
seeking qualification as a FINOP must pass the Financial and Operations
Principal Qualification Examination (``Series 27 examination'')
administered by FINRA.\19\ According to the MSRB, the Series 27
examination focuses primarily on financial reporting requirements, net
capital requirements, customer protection rules, and other regulations
relevant to the role of a chief financial officer or similar financial
officer at an investment firm.\20\ The MSRB stated that the examination
tests few concepts specifically related to MSRB rules or municipal
securities, and the MSRB believes that adding additional municipal
securities content to the examination would likely be at odds with
regulatory priorities.\21\
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\17\ MSRB Rule G-3(d)(i) excludes from the financial and
operations principal requirement, any ``bank dealer or a broker,
dealer or municipal securities dealer meeting the requirements of
subparagraph (a)(2)(iv), (v) or (vi) of rule 15c3-1 under the Act or
exempted from the requirements of Rule 15c3-1 in accordance with
paragraph (b)(3) thereof.''
\18\ See supra note 3.
\19\ Id.
\20\ Id.
\21\ Id.
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The MSRB further stated that a dealer's municipal securities
principal would remain responsible for supervising its municipal
securities activities, including its operations (such as processing,
clearance and safekeeping of municipal securities), pursuant to Rule G-
3(b)(i) and G-27(b)(ii)(C).\22\ The MSRB believes that the municipal
securities principal requirement ensures sufficient oversight of the
operations activities of dealers pertaining to municipal securities
transactions.\23\
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\22\ Id.
\23\ Id.
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3. Rule G-3 Supplementary Material .01
Supplementary Material .01 makes clear that the term ``sales'' in
Rule G-3 also includes the solicitation of sales.\24\ According to the
MSRB, including the solicitation of sales would apply to all references
to sales in the rule and would serve to clarify the permissible
activities of municipal securities professionals that are appropriately
registered to engage in, or to supervise, sales to and purchases from
customers of municipal securities.\25\
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\24\ Id.
\25\ Id.
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4. Technical and Conforming Amendments
To clarify certain MSRB rules and to conform other rules to the
rules amended by the proposed rule change, the MSRB proposed several
technical amendments.\26\ The MSRB believes that these non-substantive
changes will provide clarity and promote a better understanding of MSRB
rules.\27\ First, the MSRB proposed to simplify the title of Rule G-3
by changing it to the more self-explanatory: ``Professional
Qualification Requirements.'' \28\ Second, (i) the heading of Rule G-
3(a) would be changed to incorporate the Limited Representative
classification, (ii) paragraph (a)(i)(C) of Rule G-3 would be added to
define the Limited Representative classification, (iii) paragraph
(a)(ii)(C) would be renumbered as new paragraph (a)(ii)(B)(3), with
slight modification to make it consistent with paragraph (a)(i)(C), and
(iv) the introductory paragraph preceding Rule G-3(a) would be amended
to eliminate the reference to the FINOP while also adding references to
municipal securities sales limited representatives, limited
representative--investment company and variable contracts products, and
municipal fund securities limited principals.\29\ Third, Rule G-7(a)
would be amended to add Limited Representatives and general securities
principals to the list of associated persons.\30\ Fourth, the MSRB
proposed to delete Rule G-3(g)(ii), waiver of qualification
requirements with respect to the FINOP, as such an exemption would be
rendered moot by the elimination of the FINOP classification.\31\
Lastly, the proposed rule change would make conforming changes by
eliminating references in Rule G-7 and G-27 to the FINOP.\32\
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\26\ Id.
\27\ Id.
\28\ Id.
\29\ Id.
\30\ Id.
\31\ Id.
\32\ Id.
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III. Summary of Comment Received
The Commission notes that it received only one comment letter.\33\
The comment letter expressed general support and agreement with the
proposed rule change.\34\
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\33\ SIFMA Letter.
\34\ Id.
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IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change,
as well as the SIFMA Letter. 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. In particular,
the proposed rule change is consistent with Section 15B(b)(2)(C) of the
Act, which provides that the MSRB's 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.\35\ The Commission believes that the proposed rule
change is consistent with Section 15B(b)(2)(C) of the Act because the
proposed rule change would better align the responsibilities of the
Limited Representative with the competencies a Limited Representative
is tested for. The Commission also believes the proposed rule change
would result in consistent regulatory treatment of Limited
Representatives by the MSRB and FINRA, thereby reducing potential
dealer confusion. In addition, the Commission believes the proposed
rule change will ease burdens on dealers by eliminating the FINOP
requirement. The Commission notes that the MSRB has represented the
FINOP requirement is unnecessary and duplicative of other regulations
and that municipal securities principals will continue to be
responsible for overall supervision of the municipal securities
activities of dealers.
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\35\ 15 U.S.C. 78o-4(b)(2)(C).
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In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition, and
capital formation.\36\ The Commission believes that the proposed rule
change includes accommodations that help promote efficiency and legal
certainty. Specifically, the Commission does not
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believe that the proposed rule change would impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. In addition, the Commission believes, as discussed above,
that the proposed rule change will ease burdens on dealers and reduce
compliance costs by clarifying dealer obligations and eliminating
regulatory redundancy.
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\36\ 15 U.S.C. 78c(f).
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For the reasons noted above, the Commission believes that the
proposed rule change is consistent with the Act.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\37\ that the proposed rule change (SR-MSRB-2014-04) be, and hereby
is, approved.
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\37\ 15 U.S.C. 78s(b)(2).
For the Commission, pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-18651 Filed 8-6-14; 8:45 am]
BILLING CODE 8011-01-P