[Federal Register Volume 79, Number 209 (Wednesday, October 29, 2014)]
[Notices]
[Pages 64423-64430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25669]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73415; File No. SR-MSRB-2014-06]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, Consisting of Proposed New Rule G-44, on Supervisory
and Compliance Obligations of Municipal Advisors; Proposed Amendments
to Rule G-8, on Books and Records To Be Made by Brokers, Dealers and
Municipal Securities Dealers; and Proposed Amendments to Rule G-9, on
Preservation of Records
October 23, 2014.
I. Introduction
On July 24, 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 new
Rule G-44, on supervisory and compliance obligations of municipal
advisors and proposed amendments to Rule G-8, on books and records to
be made by brokers, dealers and municipal securities dealers, and
proposed amendments to Rule G-9, on preservation of records. The
proposed rule change was published for comment in the Federal Register
on August 5, 2014.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 72706 (July 29, 2014)
(the ``Proposing Release''), 79 FR 45546 (August 5, 2014).
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The Commission received eight comment letters on the proposal.\4\
On October 17, 2014, the MSRB responded to the comments \5\ and filed
Amendment No. 1 to the proposed rule change.\6\ The Commission is
publishing this notice to solicit comments on Amendment No. 1 to the
proposed rule change from interested persons and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
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\4\ See Letters to Secretary, Commission, from Tamara K. Salmon,
Senior Associate Counsel, Investment Company Institute (``ICI''),
dated August 19, 2014 (the ``ICI Letter''); David L. Cohen, Managing
Director and Associate General Counsel, Securities Industry and
Financial Markets Association (``SIFMA''), dated August 21, 2014
(the ``SIFMA Letter''); Dave A. Sanchez (``Sanchez''), dated August
25, 2014 (the ``Sanchez Letter''); Michael Nicholas, Chief Executive
Officer, Bond Dealers of America (``BDA''), dated August 26, 2014
(the ``BDA Letter''); Anonymous Attorney, dated August 26, 2014 (the
``Anonymous Attorney Letter''); Nathan R. Howard, Counsel, National
Association of Independent Public Finance Advisors (``NAIPFA''),
dated August 26, 2014 (the ``NAIPFA Letter''); Cristeena G. Naser,
Vice President, American Bankers Association (``ABA''), dated August
26, 2014 (the ``ABA Letter''); and Joshua Cooperman, Cooperman
Associates (``Cooperman''), dated August 30, 2014 (the ``Cooperman
Letter'').
\5\ See Letter to Secretary, Commission, from Michael L. Post,
Deputy General Counsel, MSRB, dated October 17, 2014 (the ``MSRB
Response Letter''), available at http://www.sec.gov/comments/sr-msrb-2014-06/msrb201406-9.pdf.
\6\ See Letter to Secretary, Commission, from Michael L. Post,
Deputy General Counsel, MSRB, dated October 17, 2014 (the ``MSRB
Amendment Letter''), available at http://www.sec.gov/comments/sr-msrb-2014-06/msrb201406-10.pdf. In Amendment No. 1, the MSRB
partially amended the text of the original proposed rule change to
(i) revise paragraphs .01 and .02 of the Supplementary Material to
Rule G-44 to expand the applicability of the provision, requiring a
municipal advisor's written supervisory procedures to address how
its supervision is adequate even without having separate
supervisors, to account for instances of self-supervision that may
occur in firms that are not sole proprietorships; (ii) amend the
text of Rule G-44(e) to reference Rule G-8(h)(v)(A)-(E) rather than
Rule G-8(h)(iii); and (iii) amend the text of Rule G-9(k) to
reference Rule 15Ba1-8(d) under the Act rather than Rule 15a1-8(d)
under the Act.
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II. Description of the Proposed Rule Change
As further described in the Proposing Release, the MSRB states that
the purpose of the proposed rule change is to establish supervisory and
compliance obligations of municipal advisors when engaging in municipal
advisory activities. Proposed Rule G-44 utilizes a primarily
principles-based approach to supervision and compliance in order to,
among other things, accommodate the diversity of the municipal advisor
population, including small and single-person entities. Proposed Rule
G-44 is accompanied by proposed amendments to Rules G-8 and G-9 to
establish fundamental books-and-records requirements for municipal
advisors, including those related to their supervisory and compliance
obligations.\7\
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\7\ See supra note 3.
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Proposed Rule G-44
In the Proposing Release, the MSRB stated that proposed Rule G-44
follows a widely accepted model in the securities industry consisting
of a reasonably designed supervisory system complemented by the
designation of a chief compliance officer (``CCO''). The proposed rule
draws on aspects of existing supervision and compliance regulation
under other regimes, including those for broker-dealers under rules of
the MSRB and Financial Industry Regulatory Authority (``FINRA'') and
for investment advisers under the Investment Advisers Act of 1940
(``Advisers Act'').\8\
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\8\ Id.
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In summary, proposed Rule G-44 would require:
A supervisory system reasonably designed to achieve
compliance with applicable securities laws;
Written supervisory procedures;
The designation of one or more municipal advisor
principals to be responsible for supervision;
Compliance processes reasonably designed to achieve
compliance with applicable securities laws;
An annual certification regarding those compliance
processes;
The designation of a CCO to administer those compliance
processes; and
At least annual reviews of compliance policies and
supervisory procedures.
The proposed amendments to Rules G-8 and G-9, in summary, would
require each municipal advisor to make and keep records of its:
Written supervisory procedures;
Designations of persons as responsible for supervision;
Written compliance policies;
Designations of persons as CCO;
Reviews of compliance policies and supervisory procedures;
and
Annual certifications regarding compliance processes.
Paragraph (a) of proposed Rule G-44 is the core provision, which
would require all municipal advisors to establish, implement and
maintain a system to supervise their municipal advisory activities and
those of their
[[Page 64424]]
associated persons that is reasonably designed to achieve compliance
with all applicable securities laws and regulations, including
applicable MSRB rules (defined as ``applicable rules''). Paragraph (a)
specifies that final responsibility for proper supervision rests with
the municipal advisor. Subparagraph (a)(i) requires the establishment,
implementation, maintenance and enforcement of written supervisory
procedures reasonably designed to achieve compliance with applicable
rules. Paragraph .01 of the Supplementary Material specifies several
factors that municipal advisors' written supervisory procedures must
take into consideration, including the advisor's size, organizational
structure, nature and scope of activities, number of offices,
disciplinary and legal history of its associated persons, the
likelihood that associated persons may be engaged in relevant outside
business activities, and any indicators of irregularities or misconduct
(i.e., ``red flags''). This guidance allows municipal advisors to
tailor their supervisory procedures to, among other things, their size,
particular business model and structure. Paragraph .01 also requires in
the case of a municipal advisor with any associated persons permitted
under all applicable law to supervise their own activities, the written
supervisory procedures must address the manner in which, in the absence
of separate supervisory personnel, such procedures are nevertheless
reasonably designed to achieve compliance with applicable rules.\9\
Paragraph .02 of the Supplementary Material emphasizes the flexibility
of the proposed rule to accommodate small municipal advisor firms, even
those with only one associated person. Proposed Rule G-44(a)(i) also
specifies requirements to promptly amend supervisory procedures (i) to
reflect changes in applicable rules and (ii) as changes occur in the
municipal advisor's supervisory system; and to communicate the
procedures and amendments to the municipal advisor's relevant
associated persons.
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\9\ See supra note 6.
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Proposed Rule G-44(a)(ii) would require municipal advisors to
designate one or more municipal advisor principals to be responsible
for the supervision required by the proposed rule. Paragraph .03 of the
Supplementary Material specifies the authority and specific
qualifications required for municipal advisor principals designated as
responsible for supervisory functions. According to the proposed rule,
they must have the authority to carry out the supervision for which
they are responsible, including the authority to implement the
municipal advisor's established written supervisory procedures and take
any other action necessary to fulfill their responsibilities. They also
must have sufficient knowledge, experience and training to understand
and effectively discharge their supervisory responsibilities.\10\
Paragraph .03 of the Supplementary Material also specifies that, even
if not designated as a supervisory principal, whether a person has
responsibility for supervision under the proposed rule would depend on
whether, under the facts and circumstances of a particular case, the
person has the requisite degree of responsibility, ability or authority
to affect the conduct of the employee whose behavior is at issue.
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\10\ The MSRB intends to propose amendments to MSRB Rules G-2
and G-3 to create the ``municipal advisor principal''
classification, define the term and require qualification in
accordance with the rules of the Board. The MSRB expects those
changes to become effective well in advance of the proposed
implementation dates of the proposed rule change. Although the MSRB
does not expect a municipal advisor principal examination to be in
place by the time of the implementation dates of the proposed rule
change, the MSRB may develop such an examination in the future. The
absence of such an examination does not preclude the creation of the
classification.
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Paragraph (b) of proposed Rule G-44 would require municipal
advisors to implement processes to establish, maintain, review, test
and modify written compliance policies and supervisory procedures.
Proposed Rule G-44(b) would specify that the reviews of compliance
policies and supervisory procedures must be conducted at least
annually. Paragraph .04 of the Supplementary Material would provide,
however, that municipal advisors should consider the need, in order to
comply with all of the other requirements of the proposed rule, for
more frequent reviews. The paragraph also would provide guidance on
what, at a minimum, municipal advisors should consider during their
reviews of compliance policies and supervisory procedures. These
considerations include any compliance matters that arose since the
previous review, any changes in municipal advisory activities and any
changes in applicable law.
Paragraph (c) of proposed Rule G-44 would require municipal
advisors to designate one individual as their CCO. Paragraph .05 of the
Supplementary Material would explain the role of a CCO and the
importance of that role. Specifically, a CCO is a primary advisor to
the municipal advisor on its overall compliance scheme and the policies
and procedures that the municipal advisor adopts in order to comply
with applicable law. To fulfill this role, a CCO should have competence
in the process of (1) gaining an understanding of the services and
activities that need to be the subject of written compliance policies
and written supervisory procedures; (2) identifying the applicable
rules pertaining to those services and activities; (3) developing
policies and procedures that are reasonably designed to achieve
compliance with applicable law; and (4) developing programs to test
compliance with the municipal advisor's policies and procedures.\11\
Paragraph .05 would further explain that the CCO can be a principal of
the firm or a person external to the firm; though, in that case, the
person must have the described competence and the municipal advisor
retains ultimate responsibility for its compliance obligations. This
approach to the CCO function in the proposed rule, which would give
municipal advisors the option to outsource the CCO role, follows the
approach applicable to investment advisers under the Advisers Act.\12\
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\11\ These qualifications of a CCO draw on those specified in
FINRA's CCO requirement for its member firms. See FINRA Rule 3130
Supplementary Material .05.
\12\ See Section 202(25) of the Advisers Act, 15 U.S.C. 80b-
2(25), and Rule 206(4)-7, 17 CFR 275.206(4)-7.
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Paragraph .06 of the Supplementary Material specifies that the CCO,
and any compliance officers that report to the CCO, shall have
responsibility for and perform the compliance functions required by the
proposed rule. Paragraph .07 of the Supplementary Material provides
that a municipal advisor's CCO may hold any other position within the
municipal advisor, including senior management positions, so long as
the person can discharge the duties of CCO in light of all of the
responsibilities of any other positions. This guidance is especially
relevant to small municipal advisors, including sole proprietorships
and other one-person entities. It makes clear that a single individual
may, for example, serve under appropriate circumstances as chief
executive officer (``CEO''), supervisory principal and CCO. In
addition, as discussed above, the CCO may be external to the firm, such
as an outside consultant.
Paragraph (d) of proposed Rule G-44 would require municipal
advisors to have their CEO(s) (or equivalent officer(s)) annually
certify in writing that the municipal advisor has in place processes to
establish, maintain, review, test and modify written compliance
[[Page 64425]]
procedures and written supervisory procedures reasonably designed to
achieve compliance with applicable rules. FINRA member firms that also
are municipal advisors are already required under FINRA Rule 3130 to
make annually a substantially similar certification with respect to
applicable federal securities laws and regulations, including MSRB
rules. In light of this existing FINRA requirement, proposed Rule G-
44(d) would provide for an exception from the annual certification
requirement for municipal advisors that are subject to a substantially
similar FINRA requirement. Paragraph .08 of the Supplementary Material
provides that the execution of the certification and any consultation
rendered in connection with the certification does not by itself
establish business line responsibility.
Paragraph (e) of proposed Rule G-44 would provide an exemption for
banks engaging in municipal advisory activities in the exercise of bank
fiduciary powers from Rule G-44 and the related books and records
requirements if the municipal advisor certifies in writing annually
that it is, with respect to those activities, subject to federal
supervisory and compliance obligations and books and record
requirements that are substantially equivalent to the supervisory and
compliance obligations in Rule G-44 and the books and records
requirements of Rule G-8(h)(v)(A)-(E). The ability to so certify and
utilize this exemption is provided because it is unnecessary for a
municipal advisor to comply with each other provision of proposed Rule
G-44 if it is subject to substantially equivalent supervisory and
compliance obligations as part of the extensive federal regulatory
regime to which banks are already subject.
Paragraph (f) of proposed Rule G-44 would provide a definition of
the term ``municipal advisor'' for purposes of the rule as a person
that is registered or required to be registered as a municipal advisor
under Section 15B of the Act and rules and regulations thereunder.
Proposed Amendments to Rules G-8 and G-9
The proposed amendments to Rules G-8 \13\ and G-9 would be the
first revisions to those rules to address the books and records that
must be made and preserved by municipal advisors registered or required
to be registered with the SEC. As a fundamental element, new Rule G-
8(h)(i) would require each municipal advisor to keep all of the general
business records described in Exchange Act Rule 15Ba1-8(a)(1)-(8). New
Rule G-8(h)(v) would require each municipal advisor to make and keep
records related to its supervisory and compliance obligations. It would
require each municipal advisor to make and keep its written supervisory
procedures and written compliance policies, records of designations of
persons as CCO and of persons responsible for supervision, records of
reviews of its written compliance policies and written supervisory
procedures, annual certifications as to compliance processes, and, if
applicable, certifications regarding the exemption for federally
regulated banks.
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\13\ Proposed Rule G-8(h) includes reserved subparagraphs (ii)-
(iv) for books and records provisions that the MSRB may propose in
relation to other rules for municipal advisors. The MSRB will make
conforming changes to this proposal as appropriate depending on
relevant future rulemaking actions by the MSRB and SEC.
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The proposed amendments to Rule G-9 would require each municipal
advisor to preserve the books and records described in Rule G-8(h),
including records related to the municipal advisor's supervisory and
compliance obligations, for a period of not less than five years. This
five-year preservation requirement would be consistent with the
requirement of Exchange Act Rule 15Ba1-8 (on books and records to be
made and maintained by municipal advisors).\14\ New subsection (h) to
Rule G-9 would require, however, that records of the designations of
persons responsible for supervision and designations of persons as CCO
be preserved for the period of designation of each person designated
and for at least six years following any change in such designation.
This six-year preservation requirement is supported by, among other
things, the importance of such documents in later ascertaining the
identity of responsible persons during particular periods of time.
Moreover, it would be consistent with the current provisions of Rule G-
9 for records of similar designations by brokers, dealers and municipal
securities dealers.
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\14\ See 17 CFR 240.15Ba1-8(b)(1).
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The proposed amendments to existing Rule G-9(e) would expressly
provide that municipal advisors may retain records using electronic
storage media or by other similar medium of record retention, subject
to the retrieval and reproduction requirements of Rule G-9. The
allowance for this means of compliance would be made generally
applicable, so as to expressly accommodate the use of electronic
storage media by dealers as well as municipal advisors.
Proposed Rule G-9(i) would require compliance with Exchange Act
Rule 15Ba1-8(b)(2) and (c),\15\ regarding records related to the
formation and cessation of business. Proposed Rule G-9(j) would require
non-resident municipal advisors to comply with Exchange Act Rule 15Ba1-
8(f),\16\ regarding records of non-resident municipal advisors.
Proposed Rule G-9(k) would provide that whenever a record is preserved
by a municipal advisor on electronic storage media, if the manner of
storage complies with Exchange Act Rule 15Ba1-8(d),\17\ it will be
deemed to be preserved in a manner that is in compliance with the
requirements of Rule G-9. This provision would give municipal advisors
the choice to comply with either the SEC's or the MSRB's preservation
requirements.
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\15\ 17 CFR 240.15Ba1-8(b)(2) & (c).
\16\ 17 CFR 240.15Ba1-8(f).
\17\ 17 CFR 240.15Ba1-8(d).
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III. Summary of Comments Received and the MSRB's Response
As noted previously, the Commission received eight comment letters
on the proposed rule change and a response letter from the MSRB.\18\
The commenters generally support the proposed rule change.\19\ However,
some commenters asked for further clarification and provided
suggestions to the proposed rule change.\20\ The MSRB has responded to
the commenters, as discussed below.\21\
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\18\ See supra notes 4 and 5.
\19\ Id.
\20\ Id.
\21\ See MSRB Response Letter.
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1. Flexibility for Small Municipal Advisors
BDA commented that proposed Rule G-44 provides too much flexibility
for small firms by allowing them to determine and make accommodations
for themselves simply because of their size, and that those
accommodations should be circumscribed.\22\ Alternatively, Cooperman
commented that the proposed Rule G-44 imposes regulatory burdens on
small municipal advisors and particularly sole proprietors that are not
necessary, appropriate or logical to the protection of the municipal
clients of such advisors.\23\ NAIPFA stated that proposed Rule G-44
appropriately accommodates small and single-person municipal advisors
by, among other things, allowing supervisory systems to
[[Page 64426]]
be tailored to the size of the firm.\24\ However, NAIPFA suggested
exempting single-person firms from developing a compliance manual to
the extent such firms are not otherwise required to maintain policies
pursuant to any other applicable laws.\25\ NAIPFA also believes the
imposition of supervisory obligations on sole proprietors is likely not
necessary or appropriate since such individuals will be obligated to
monitor their own compliance thereby making a requirement that they
maintain supervisory procedures superfluous.\26\
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\22\ See BDA Letter.
\23\ See Cooperman Letter.
\24\ See NAIPFA Letter.
\25\ Id.
\26\ Id.
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Sanchez stated that compliance with proposed Rule G-44(a) and (b),
paragraph .04 of the Supplementary Material and the associated
recordkeeping requirements should be deemed a sufficient supervisory
system for municipal advisors with a single associated person.\27\
Sanchez suggested deleting the last sentence of paragraph .02 of the
Supplementary Material, which requires that written supervisory
procedures of municipal advisors with a single associated person
address the manner in which, in the absence of separate supervisory
personnel, such procedures are nevertheless reasonably designed to
achieve compliance with applicable rules.\28\
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\27\ See Sanchez Letter.
\28\ Id.
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In response to comments, the MSRB acknowledged that proposed Rule
G-44 contains standards that may vary based on firm size and that the
MSRB deliberately drafted the rule to give firms flexibility to tailor
their supervisory systems accordingly, striking an appropriate balance
between burdens on, and flexibility for, small municipal advisors.\29\
MSRB also stated that the approach set forth in proposed Rule G-44
seems particularly appropriate for an industry in which many
participants are becoming regulated at the federal level for the first
time.\30\
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\29\ See MSRB Response Letter.
\30\ Id.
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With respect to paragraph .02 of the Supplementary Material, the
MSRB believes this provision is important to ensuring all municipal
advisors establish meaningful procedures that will satisfy the minimum
standard established by proposed Rule G-44.\31\ The MSRB stated that
developing appropriate systems and documenting and following written
procedures is a well-established practice among businesses, regardless
of size, for facilitating compliance with regulation in a broad range
of other areas (e.g., taxes, human resources). Additionally, the MSRB
noted that FINRA's consolidated supervision rule (FINRA Rule 3110)
includes a substantially similar requirement. Although the provision
will always apply to sole proprietorships, the MSRB believes it is
relevant to other firms in which associated persons may be otherwise
permitted to supervise their own activities. Accordingly, the MSRB
filed Amendment No. 1 to revise the rule text to expand the
applicability of the requirement to all firms with associated persons
who supervise their own activities.\32\
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\31\ Id.
\32\ See MSRB Amendment Letter.
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2. Annual Certification
Several comment letters addressed the proposed annual certification
requirement in proposed Rule G-44. ICI supports the proposed annual
certification requirement as drafted because it is consistent with the
requirements imposed on FINRA members pursuant to FINRA Rule
3130(b).\33\ Anonymous Attorney supports the exception from the annual
certification for municipal advisors that are subject to FINRA Rule
3130.\34\ While BDA supports the MSRB's effort to ensure alignment of
its annual certification requirement with FINRA Rule 3130, it stated
that proposed Rule G-44 should require all municipal advisors to
complete a periodic self-certification regarding the meeting of
professional qualification standards by its associated persons, as well
as to certify to the municipal advisor's ability to comply, and history
of complying, with all applicable regulatory requirements.\35\ NAIPFA
opposes any self-certification requirement, unless some objective basis
can be provided that indicates such a requirement would result in a
decrease in the number of compliance violations.\36\
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\33\ See ICI Letter.
\34\ See Anonymous Attorney Letter.
\35\ See BDA Letter.
\36\ See NAIPFA Letter.
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Sanchez commented that the regulatory purpose of the annual
certification requirement as to compliance processes in proposed Rule
G-44(d) is unclear because the associated recordkeeping requirements
essentially already require the equivalent of an annual
certification.\37\ In addition, Sanchez does not believe the annual
certification would foster discussion between persons responsible for
compliance matters and upper management, and questions whether such a
provision is necessary for small municipal advisors, particularly sole
proprietors, in light of Section 15B(b)(2)(L)(iv) of the Act.\38\
Finally, Sanchez believes there would be no ``harmonizing'' benefit
achieved by imposing the annual certification requirement similar to
FINRA's requirement because the vast majority of registered municipal
advisors are not FINRA members, and FINRA members would be specifically
exempted from proposed Rule G-44(d).\39\
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\37\ See Sanchez Letter.
\38\ Id.
\39\ Id.
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In response to the comments, the MSRB stated that the certification
requirement would result in the creation, maintenance and modification
of robust written supervisory procedures that would promote compliance
with all applicable rules.\40\ The MSRB noted that requiring the
broader certification proposed by BDA would reduce the harmonization
between the MSRB and FINRA certifications, which is an aspect of the
proposal that BDA and ICI specifically support.\41\ The MSRB also noted
that it would be an unnecessary burden at this time to require a
broader certification such as the one proposed by BDA.\42\
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\40\ See MSRB Response Letter.
\41\ Id.
\42\ Id.
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In response to Sanchez's comments, the MSRB stated that requiring
each firm's chief executive officer (or equivalent officer) to provide
an annual certification would help ensure that compliance processes are
given sufficient attention at the highest levels of management and
would help promote compliance, without adding a significant burden.\43\
The MSRB further stated that the annual certification requirement will
foster discussion between compliance personnel and upper management, as
it creates accountability for, and incentivizes, the chief executive
officer (or equivalent officer) to ensure that the certification is
truthful and otherwise satisfies proposed Rule G-44(d).\44\ The MSRB
acknowledged that the benefit from certification of fostering
discussion does not exist in sole proprietorships and perhaps some very
small firms, but stated that the benefits from certification can extend
beyond fostering such discussion.\45\ The MSRB believes the annual
certification requirement would help ensure that municipal advisors
have in place a compliance framework
[[Page 64427]]
that would allow them to adapt compliance efforts to an evolving
business and regulatory environment, and promote prompt maintenance and
modification of compliance programs.\46\ In addition, the MSRB believes
this requirement includes multiple accommodations for small municipal
advisors and is consistent with Section 15B(b)(2)(L)(iv) of the
Act.\47\
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\43\ Id.
\44\ Id.
\45\ Id.
\46\ Id.
\47\ Id.
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3. Comparison to Rule G-27
Sanchez suggested replacing the proposed timing standard for
amending written supervisory procedures and communicating such
amendments to associated persons (i.e., ``promptly'') to the standard
in MSRB Rule G-27(c)(iii) (i.e., ``as appropriate within a reasonable
time after changes occur'').\48\ Sanchez stated the Rule G-27 standard
is more reasonable and will be less confusing for entities that are
registered as both broker-dealers and municipal advisors.\49\ Sanchez
also stated the proposed standard of ``prompt amendment'' and ``prompt
communication'' is vague and more burdensome than the standard the MSRB
requires of other regulated activities without any apparent
justification.\50\
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\48\ See Sanchez Letter.
\49\ Id.
\50\ Id.
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The MSRB responded that the provision requiring prompt amendments
of written supervisory procedures and prompt communication of such
amendments to associated persons is intended to harmonize proposed Rule
G-44 with FINRA's rule on the maintenance of supervisory procedures in
its consolidated supervision rule.\51\ The MSRB recognizes the proposed
timing standards are different than those provided in the analogous
provision in Rule G-27 and the MSRB may consider amending Rule G-27 in
the future to harmonize it with proposed Rule G-44(a)(i) and the FINRA
rule.
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\51\ See MSRB Response Letter.
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4. Outsourcing CCO Function
BDA commented that the language in paragraph .05 of the
Supplementary Material to proposed Rule G-44, providing that a
municipal advisor retains the ultimate responsibility for its
compliance obligations, whether the CCO is outsourced or not, should be
incorporated into the rule text.\52\ BDA believes some firms will take
a strict reading of the rule text without appropriately considering the
Supplementary Material as a component of their compliance with proposed
Rule G-44.\53\
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\52\ See BDA Letter.
\53\ Id.
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The MSRB responded that it is not relocating the provision into the
rule text because the Supplementary Material would be part of new Rule
G-44, if approved, and the provision's location there is intended to
improve the readability of the rule and does not affect the weight,
significance or enforceability of the provision.\54\ Moreover, the MSRB
stated that BDA's comment that some firms would not appropriately
consider the Supplementary Material when reading proposed Rule G-44 is
speculative in nature and, if fully accepted, could suggest a need to
remove all supplementary material from the rules of the MSRB and other
self-regulatory organizations.\55\
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\54\ See MSRB Response Letter.
\55\ Id.
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5. Bank Trust Departments and Trust Companies
The ABA praised the MSRB's exemption in the proposed Rule G-44(e)
for banks that certify they are subject to federal supervisory and
compliance obligations and books and records requirements that are
substantially equivalent to the supervisory and compliance obligations
of proposed Rule G-44 and the books and records requirements of Rule G-
8(h)(v)(A)-(E), and the ABA requested that a similar exemption be
available for state-chartered trust companies.\56\
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\56\ See ABA Letter.
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The MSRB responded that it would not extend the exemption of
proposed Rule G-44 to bank trust departments or trust companies that
are not federally regulated.\57\ The MSRB stated that the need for
proposed Rule G-44 arises from the MSRB's regulatory oversight of
municipal advisors as provided under the Dodd-Frank Wall Street Reform
and Consumer Protection Act,\58\ which grants the MSRB broad rulemaking
authority to develop a new, federal regulatory framework for municipal
advisors.\59\ The MSRB believes all municipal advisors should be
required, at a minimum, to adhere to federal supervisory and compliance
obligations that are substantially equivalent to those set forth in
proposed Rule G-44, regardless of their other business activities and
regulatory obligations.\60\ MSRB noted that, as ABA acknowledges, not
all states have adopted fiduciary regulations which are substantially
based on the Office of the Comptroller of the Currency's (``OCC'')
rules and not all such state regulations are identical to the OCC's
rules.\61\ As a result of this lack of consistency between, and
potential gaps in, state regulatory regimes, the MSRB stated it was not
extending the exemption of proposed Rule G-44(e) to bank trust
departments or trust companies that are not federally regulated with
regard to relevant activities.
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\57\ See MSRB Response Letter.
\58\ Public Law 111-2013, 124 Stat. 1376 (2010).
\59\ See MSRB Response Letter.
\60\ Id.
\61\ Id.
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6. Recordkeeping Requirements
SIFMA supports the proposed amendments to Rules G-8 and G-9 which
it believes are reasonable and in line with existing MSRB recordkeeping
and record retention requirements.\62\ NAIPFA requested that the
proposed amendments to Rule G-9(h) be amended to state that the records
described in Rule G-8(h)(v)(B) and (D) shall be preserved for the
duration of a person's designation as a supervisor and/or CCO and for
at least five years following any change in such designation.\63\
NAIPFA stated that establishing a six-year requirement when all other
similar retention requirements are five years creates an inconsistent
and overly complex regulatory regime that is not likely to achieve any
appreciable benefit for municipal entities or obligated persons.\64\
Sanchez also suggests a five-year requirement for such records because
he believes imposing a six-year period of record retention is an
unnecessary complexity.\65\
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\62\ See SIFMA Letter.
\63\ See NAIPFA Letter.
\64\ Id.
\65\ See Sanchez Letter.
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In response to comments, the MSRB stated there is a six-year
retention period for records relating to designations of persons
responsible for supervision and as CCO to be consistent with the
current provisions of Rule G-9 for records of similar designations by
brokers, dealers and municipal securities dealers.\66\ MSRB further
stated that the longer requirement is supported by the importance of
such records in ascertaining the identity of responsible persons during
particular periods of time, including for purposes of examination and
enforcement.\67\
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\66\ See MSRB Response Letter.
\67\ Id.
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7. Requests for Clarification and Guidance
Anonymous Attorney requested clarification on three issues: (1)
Whether a municipal advisor and investment advisor (``MA/IA'') firm's
compliance
[[Page 64428]]
manual must have two separate sets of written supervisory procedures
for municipal advisor and investment advisor activities, and, if so,
whether it would be permissible to incorporate by reference applicable
existing procedures that apply to investment adviser activities, (2)
whether the annual review of the municipal advisor and investment
advisor compliance processes may be conducted jointly, and (3) whether
a principal, designated pursuant to proposed Rule G-44(a)(ii), may be
designated by title or position, instead of as a specific individual,
and, if so, whether it would be acceptable to identify a principal by
reference to a separate document or record.\68\
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\68\ See Anonymous Attorney Letter.
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The MSRB responded that it used a primarily principles-based
approach to proposed Rule G-44 to afford municipal advisors flexibility
in determining the lowest cost means to meet regulatory objectives.\69\
Accordingly, the MSRB believes an MA/IA firm could establish and
conduct its review of written supervisory procedures and compliance
policies, in the manner it deems best, and where requirements are
substantially similar, referencing how the firm will comply with
applicable municipal advisor and investment advisor standards may be
appropriate.\70\ However, the MSRB believes that separate written
supervisory procedures for municipal advisors will need to exist given
that the regulatory regimes are not identical.\71\ The MSRB believes
the flexibility of proposed Rule G-44 extends to a firm's designation
of the appropriate principal(s).\72\
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\69\ See MSRB Response Letter.
\70\ Id.
\71\ Id.
\72\ Id.
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8. Implementation Date
SIFMA requested no less than six months as an implementation period
for proposed Rule G-44.\73\ NAIPFA requested the proposed Rule G-44
have an effective date that is at least ninety days following the date
on which it is enacted.\74\ BDA requested that the implementation
period be delayed until six months after the SEC has approved all
municipal advisor rules and regulations.\75\
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\73\ See SIFMA Letter.
\74\ See NAIPFA Letter.
\75\ See BDA Letter.
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The proposed rule sets forth an implementation period of six months
following the Commission's approval of the proposal except for proposed
Rule G-44(d) which municipal advisors would be required to implement
eighteen months after the Commission approval date. The MSRB responded
that it does not intend to delay implementation of the proposed Rule G-
44 until all municipal advisor rules have been approved by the SEC.
Municipal advisors are currently subject to applicable federal
securities laws and the MSRB believes it is important for firms to have
a supervisory system and compliance processes in place to foster
compliance with those laws and that can be updated as new rules are
adopted.\76\
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\76\ See MSRB Response Letter.
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IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change,
as modified by Amendment No. 1, as well as the eight comment letters
received and the MSRB's response. The Commission finds that the
proposed rule change, as amended by Amendment No. 1, 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 Sections
15B(b)(2), 15B(b)(2)(A)(i) and 15B(b)(2)(C) of the Act. Section
15B(b)(2) of the Act provides that MSRB shall propose and adopt rules
to effect the purposes of that 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.\77\ Section 15B(b)(2)(A)(i) of the Act
provides that the MSRB's rules shall appropriately classify municipal
securities brokers, municipal securities dealers, and municipal
advisors (taking into account relevant matters, including types of
business done, nature of securities other than municipal securities
sold, and character of business organization), and persons associated
with municipal securities brokers, municipal securities dealers, and
municipal advisors.\78\ Section 15B(b)(2)(C) of the Act requires that
the MSRB's rules 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, in general, to protect investors, municipal
entities, obligated persons, and the public interest.\79\ The proposed
rule requires municipal advisors to adopt a supervisory structure and
compliance processes in order to help ensure knowledge of, and
compliance with, applicable securities laws and regulations, including
the Commission's registration, form submission and recordkeeping
requirements for municipal advisors.\80\ The Commission believes that
supervision and compliance functions are fundamental to preventing
securities law violations from occurring, and promoting early detection
and prompt remediation of violations when they do occur.
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\77\ 15 U.S.C. 78o-4(b)(2).
\78\ 15 U.S.C. 78o-4(b)(2)(A)(i).
\79\ See 15 U.S.C. 78o-4(b)(2)(C).
\80\ See Registration of Municipal Advisors, Rel. No. 34-70462
(Sept. 20, 2013) (``Municipal Advisor Registration Adopting
Release''), 78 FR 67467 (Nov. 12, 2013).
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The Commission also finds that the proposed rule change is
consistent with Section 15B(b)(2)(L)(iv), in that it does not impose a
regulatory burden on small municipal advisors that is not necessary or
appropriate in the public interest and for the protection of investors,
municipal entities, and obligated persons.\81\ While the proposed rule
change would affect all municipal advisors, including small municipal
advisors, it is a necessary and appropriate regulatory burden in order
to ensure knowledge of and compliance with applicable securities laws
and regulations. The proposed rule is designed to provide flexibility
to small municipal advisor firms, including those with only one
associated person. Paragraph .02 of the Supplementary Material provides
that a municipal advisor with only one associated person can have a
sufficient supervisory system under proposed Rule G-44. Under the same
paragraph, one person may be designated as responsible for supervision
and the rule would allow for written supervisory procedures to be
tailored based on factors such as the size of the firm.
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\81\ See 15 U.S.C. 78o-4(b)(2)(L)(iv).
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In addition, the Commission finds that the proposed rule change is
consistent with Section 15B(b)(2)(G) of the Act which provides that the
MSRB's rules shall prescribe records to be made and kept by municipal
advisors and the
[[Page 64429]]
periods for which such records shall be preserved.\82\ The proposed
rule change would require each municipal advisor to make and keep all
of the general business records described in Exchange Act Rule 15Ba1-
8(a)(1)-(8) as well as records of written supervisory procedures and
compliance policies, designations of persons as CCO and of persons
responsible for supervision, reviews of the adequacy of written
compliance policies and written supervisory procedures, the annual
certifications as to compliance processes, and, if applicable, annual
certifications regarding the exemption for federally regulated
fiduciary activities of banks. The proposed rule change also contains
preservation requirements for the required records.
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\82\ See 15 U.S.C. 78o-4(b)(2)(G).
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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.\83\ The Commission believes the proposed rule change
includes accommodations that help promote efficiency such as an
exemption for federally regulated banks in proposed Rule G-44(e) and an
exemption to the annual certification requirement for municipal
advisors that are subject to a substantially similar certification
requirement by FINRA.
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\83\ 15 U.S.C. 78c(f).
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The Commission believes the proposed rule takes into account
competitive concerns that could arise as a result of the costs
associated with the supervision and compliance requirements that could
lead some municipal advisors to exit the market, curtail their
activities or consolidate with other firms. By utilizing a primarily
principles-based approach to supervision and compliance, the proposed
rule is designed to provide flexibility to small municipal advisor
firms, including those with only one associated person, allowing
municipal advisors to tailor their supervisory procedures to, among
other things, their size, particular business model and structure.
Moreover, the Commission continues to believe ``that the market for
municipal advisory services is likely to remain competitive despite the
potential exit of municipal advisors, consolidation of municipal
advisors, or lack of new entrants into the market.'' \84\
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\84\ Municipal Advisor Registration Adopting Release, 78 FR
67467, at 67608.
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The Commission believes that the effect of the proposed rule is
beneficial and that the changes will enhance investor confidence by
promoting robust supervisory policies and procedures, programs and
controls that can be flexibly applied to account for the diversity of
the municipal advisor population, including small municipal advisors
and sole proprietorships.
As noted above, the Commission received eight comment letters on
the filing. The Commission believes that the MSRB, through its
responses and through proposed changes in Amendment No. 1, has
addressed commenters' concerns.
For the reasons noted above, including those discussed in the MSRB
Response Letter and MSRB Amendment Letter, the Commission believes that
the proposed rule change, as amended by Amendment No. 1, is consistent
with the Act.
V. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the 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-2014-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2014-06. 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
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the MSRB. 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-2014-06 and should be
submitted on or before November 19, 2014.
VI. Accelerated Approval of Proposed Rule Change as Modified by
Amendment No. 1
The Commission finds good cause for approving the proposed rule
change, as amended by Amendment No. 1, prior to the 30th day after the
date of publication of notice in the Federal Register. As discussed
above, Amendment No. 1 amends the proposed rule change by: (i) Revising
paragraphs .01 and .02 of the Supplementary Material to Rule G-44 to no
longer limit the requirement in paragraph .02 that written supervisory
procedures address the manner in which, in the absence of separate
supervisory personnel, such procedures are nevertheless reasonably
designed to achieve compliance with applicable rules for municipal
advisors with a single person and expand its application to apply to
all firms with any associated person permitted under applicable law to
supervise their own activities and move the text from paragraph .02 or
paragraph .01 of the Supplementary Material in light of the revised
scope of the provisions; (ii) amending the text of Rule G-44(e) to
reference Rule G-8(h)(v)(A)-(E) rather than Rule G-8(h)(iii); and (iii)
amending the text of Rule G-9(k) to reference Rule 15Ba1-8(d) under the
Act rather than Rule 15a1-8(d) under the Act.\85\
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\85\ See MSRB Amendment Letter.
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The MSRB has proposed the revisions included in item (i) of the
previous paragraph to expand the applicability of the provision,
requiring a municipal advisor's written supervisory procedures to
address how its supervision is adequate even without having separate
supervisors, to account for instances of self-supervision that may
occur in firms that are not sole proprietorships. The MSRB believes the
revision more properly identifies and captures the subset of municipal
advisors for which the written supervisory procedures must address the
additional matter. The MSRB is proposing the two technical revisions in
items (ii) and (iii) in the previous
[[Page 64430]]
paragraph to indicate the correct cross-references.
The Commission believes that Amendment No. 1 does not alter the
substance of the original proposed rule change and are consistent with
the purpose of the original proposed rule change and do not raise
significant new issues. Accordingly, the Commission finds good cause
for approving the proposed rule change, as modified by Amendment No. 1,
on an accelerated basis, pursuant to Section 19(b)(2) of the Act.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\86\ that the proposed rule change (SR-MSRB-2014-06), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\86\ 15 U.S.C. 78s(b)(2).
For the Commission, pursuant to delegated authority.\87\
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\87\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25669 Filed 10-28-14; 8:45 am]
BILLING CODE 8011-01-P