Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Amendments to Rule G-16 on Periodic Compliance Examination and Rule G-9 on Preservation of Records, 67503-67506 [2011-28243]
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Federal Register / Vol. 76, No. 211 / Tuesday, November 1, 2011 / Notices
20 days from the date of the Postal
Service’s filing for public comment. 39
CFR 3010.13(a)(5). Comments by
interested persons are due no later than
November 7, 2011.
Commission rule 3010.13(b) further
provides that public comments are to
focus primarily on whether the planned
price adjustments comply with the
following mandatory requirements
under the PAEA:
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(1) Whether the planned rate adjustments
measured using the formula established in
section 3010.23(b) are at or below the annual
limitation established in section 3010.11; and
(2) whether the planned rate adjustments
measured using the formula established in
section 3010.23(b) are at or below the
limitations established in section 3010.28.
Participation and designated filing
method. Participation in some
Commission proceedings requires
interested persons to file notices of
intervention prior to, or in conjunction
with, submitting other documents. This
approach does not apply in this type of
case. Instead, interested persons are to
submit comments electronically via the
Commission’s Filing Online system,
unless a waiver is obtained. Instructions
for obtaining an account to file
documents online may be found on the
Commission’s Web site (https://
www.prc.gov), or by contacting the
Commission’s Docket Section staff at
(202) 789–6846.
Persons without access to the Internet
or otherwise unable to file documents
electronically may request a waiver of
the electronic filing requirement by
filing a motion for waiver with the
Commission. The motion may be filed
along with any comments the person
may wish to submit in this docket.
Persons requesting a waiver may file
hardcopy documents with the
Commission either by mailing or by
hand delivery to the Office of the
Secretary, Postal Regulatory
Commission, 901 New York Avenue
NW., Suite 200, Washington, DC 20268–
0001 during regular business hours by
the date specified for such filing. Any
person needing assistance in requesting
a waiver may contact the Docket Section
at (202) 789–6846. Hardcopy documents
will be scanned and posted on the
Commission’s Web site.
Official publication. The Commission
directs the Secretary to arrange for
prompt publication of this order in the
Federal Register.
Appointment of Public
Representative. In conformance with 39
U.S.C. 505, the Commission appoints
Cassandra L. Hicks to represent the
interests of the general public in this
proceeding.
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VII. Ordering Paragraphs
It is ordered:
1. The Commission establishes Docket
No. R2012–3 to consider planned price
adjustments in rates and fees for market
dominant postal products and services
identified in the Postal Service’s
October 18, 2011 Adjustment Notice.
2. Comments by interested persons on
the planned price adjustments are due
no later than November 7, 2011.
3. Pursuant to 39 U.S.C. 505, the
Commission appoints Cassandra L.
Hicks to represent the interests of the
general public in this proceeding.
4. The Commission directs the
Secretary of the Commission to arrange
for prompt publication of this notice in
the Federal Register.
By the Commission.
Shoshana M. Grove,
Secretary.
[FR Doc. 2011–28214 Filed 10–31–11; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65631; File No. SR–MSRB–
2011–19]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed
Rule Change Consisting of
Amendments to Rule G–16 on Periodic
Compliance Examination and Rule
G–9 on Preservation of Records
October 26, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on October 13, 2011, the Municipal
Securities Rulemaking Board (‘‘Board’’
or ‘‘MSRB’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the MSRB. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB is filing with the SEC a
proposed rule change consisting of
amendments to Rule G–16, on periodic
compliance examination, in order to
permit the examination of brokers,
dealers, and municipal securities
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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dealers (‘‘dealers’’) that are members of
the Financial Industry Regulatory
Authority (‘‘FINRA’’) at least once each
four calendar years, rather than at least
once each two calendar years as
currently prescribed by Rule G–16.
Further, the MSRB is filing with the SEC
a proposed rule change consisting of
amendments to Rule G–9, on
preservation of records, which would
require dealers to retain certain records
for four years, rather than three years as
currently prescribed by Rule G–9.
The text of the proposed rule change
is available on the MSRB’s Web site at
https://www.msrb.org/Rules-andInterpretations/SEC–Filings/2011–
Filings.aspx, at the MSRB’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
MSRB included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The Board has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to facilitate the modernization
of the examination process for dealers
and to permit greater flexibility in the
administration of periodic compliance
examinations in order to focus more
closely on those dealers that, by virtue
of various identified factors, pose the
greatest risk to investors and other
market participants, as well as to the
municipal securities market on a
systemic basis.
Periodic examinations of regulated
entities are an important component of
the regulatory oversight process.
Examinations are intended to detect
wrongful conduct, including violations
of the federal securities laws and selfregulatory organization rules. Pursuant
to Section 15B(b)(2)(E) of the Securities
Exchange Act of 1934 (the ’’ Exchange
Act’’), MSRB rules must provide for the
periodic examination of municipal
securities brokers, municipal securities
dealers, or municipal advisors
(‘‘regulated entities’’) to determine
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compliance with Section 15B of the
Exchange Act, the rules and regulations
thereunder, and MSRB rules. The same
provision requires that the MSRB
specify the minimum scope and
frequency of the examinations and that
the examination rules be designed to
avoid unnecessary regulatory
duplication or undue regulatory burden
for any regulated entity.
Section 15B(c)(7) of the Exchange Act
provides that the periodic examination
of regulated entities shall be conducted
by (a) A registered securities association
in the case of dealers that are members
of the registered securities association,
(b) the appropriate regulatory agency
(‘‘bank regulators’’) in the case of
dealers that are not members of a
registered securities association, and
(c) the SEC, or its designee, in the case
of municipal advisors. There is one
securities association registered with the
SEC—FINRA. Approximately 1,800
MSRB registered dealers are members of
and examined by FINRA, with the
remaining dealers registered with the
SEC as municipal securities dealers and
examined primarily by the various
federal bank regulators.
Rule G–16 currently provides that, at
least once every two calendar years,
dealers must be examined in accordance
with Section 15B of the Exchange Act,
in order to determine whether the
dealers are in compliance with all
MSRB rules and applicable provisions
of the Exchange Act. Separately, FINRA
examines its members pursuant to a
risk-based approach at least every four
calendar years. In order to comply with
Rule G–16, FINRA and the MSRB agreed
to a protocol allowing for a
questionnaire to be completed by
certain firms every two calendar years.
These dealers are typically less active in
the municipal securities market and,
therefore, pose less overall risk to
market participants. The questionnaire,
entitled the Alternative Municipal
Examination (‘‘AME’’) module, was
implemented in 1998, after review by
SEC and MSRB staff.
The AME is used as an off-site
examination for low-risk dealers that:
(a) Conduct a limited municipal
securities business; (b) do not conduct
a public finance business; and (c) are
not otherwise identified as high risk
firms for regulatory purposes. The AME
is necessarily general and not tailored to
the specific business of any one firm. It
relies on each responding dealer to self
report rule violations and to certify that
the information provided is truthful and
accurate.
After many years of experience with
the AME, the MSRB and FINRA believe
that a more risk-based examination
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protocol should be implemented and
that Rule G–16 should be amended to
allow for up to a four year examination
cycle for FINRA-member firms,
consistent with FINRA’s requirement for
cycle examinations of all other FINRA
members. This would also allow FINRA
to integrate the municipal securities
cycle examination program more closely
with its overall cycle examination
program, and redeploying staff
resources from administering the AME
to participating in the risk-based
examination program would foster more
meaningful oversight. Moreover, over
the last few years, there have been
significant advances in information
technology, particularly with the
development of the MSRB’s Real-time
Transaction Reporting System and
Electronic Municipal Market Access
system. These advancements in
information technology and
transparency have enabled FINRA to
develop robust automated surveillance
reviews of municipal securities
transactions. FINRA is now able to
review municipal securities transactions
and other activity remotely, in order to
identify potential MSRB rule violations
by dealers. These tools permit FINRA
staff to conduct near real-time
surveillance of certain municipal
securities activities.
It is also apparent that the municipal
securities business has changed
dramatically over the last few years. The
industry has consolidated and a small
number of large firms account for the
majority of public finance business. The
top five underwriters accounted for over
50 percent, by par amount, of primary
offerings in 2010 and 2011. 3 The top 10
underwriters accounted for over 70
percent of the underwritings, by par
amount, in 2010 and 2011, and the top
200 accounted for almost 100 percent of
the underwritings, by par amount, in
2010 and 2011. According to data
gathered by the MSRB, the top 10
dealers executed approximately 55
percent of all municipal securities
transactions reported to the MSRB in
2010 and 2011. The top 50 dealers
executed approximately 80 percent of
all such transactions in 2010 and 2011,
and the top 200 dealers executed
approximately 96 percent of all such
transactions. By par amount, the top 200
dealers executed approximately 98
percent of all municipal securities
transactions reported to the MSRB in
2010 and 2011. The remaining
approximately 1,600 firms are less
active in the municipal securities
3 All 2011 figures are through September 2011.
Underwriting statistics are provided by Thomson
Reuters.
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market, engage solely in the sale of
interests in 529 College Savings Plans,
or effect municipal securities
transactions primarily as an
accommodation to their customers.
Generally, these firms are not engaged
in financial advisory activities or
municipal securities underwriting,
research, or trading. They, therefore, do
not pose systemic risk to the market in
these areas.
With input from the MSRB, consistent
with Section 15B(b)(4) of the Exchange
Act, FINRA is enhancing its risk
assessment approach to rank dealers by
certain risk factors, as well as by size
and scope of business, to determine
their examination cycle frequencies,
which under the proposed rule change
would range from one to four years,
rather than every two years as currently
prescribed by Rule G–16. It is
anticipated that, based on the analysis
of the various identified risks and
related factors, those firms that
represent higher risks, as well as firms
that pose a systemic threat based on the
scope and scale of their underlying
municipal securities activities, would be
examined on an annual basis. Other
firms would be examined less
frequently, every two to four years,
depending on the risk ranking and size
of their municipal securities business
and the firm’s overall business model.
At a minimum, all firms would be
examined at least once every four
calendar years. Cycle examination
frequencies for dealers would be reassessed at least on an annual basis.
FINRA would continue to conduct offsite surveillance of municipal securities
activity and ‘‘cause’’ examinations as
needed. ‘‘Cause’’ examinations are
event-driven and typically initiated as a
result of customer complaints,
regulatory tips, and other information
sources identified by FINRA via its
regulatory oversight process.
The MSRB believes that using
quantitative and qualitative criteria to
rank dealers by appropriately identified
risk measures and size no less
frequently than on an annual basis
provides better protection for investors,
municipal entities, and other market
participants, since FINRA’s resources
will be focused on those firms that pose
the greatest risk to investors, municipal
entities and the market. Such firms will
be subject to in-depth examinations
tailored to the specific municipal
securities activities they conduct.
Finally, the MSRB has proposed a
rule change requiring dealers that are
FINRA members to retain certain
records for four years, rather than for
three years, under Rule G–9 in order to
ensure that the records are available at
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those firms that are examined every four
calendar years.
2. Statutory Basis
The MSRB has adopted the proposed
rule change pursuant to Section
15B(b)(2)(E) of the Exchange Act, which
provides that the MSRB’s rules shall:
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provide for the periodic examination in
accordance with subsection (c)(7) of
municipal securities brokers, municipal
securities dealers, and municipal advisors to
determine compliance with applicable
provisions of this title, the rules and
regulations thereunder, and the rules of the
Board. Such rules shall specify the minimum
scope and frequency of such examinations
and shall be designed to avoid any
unnecessary regulatory duplication or undue
regulatory burdens for any such municipal
securities broker, municipal securities dealer,
or municipal advisor.
Section 15B(c)(7) of the Exchange Act
further provides that periodic
examinations of dealers shall be
conducted by a registered securities
association, in the case of dealers that
are members of such association. FINRA
is currently the only registered
securities association.
The proposed rule change will
accomplish this mandate by providing
FINRA with the flexibility to establish a
risk-based examination program for
municipal securities that is consistent
with its other examination programs. By
conforming the municipal securities
examination program to FINRA’s other
examination programs and integrating
the municipal securities examination
program into FINRA’s overall
examination protocol, the new program
should reduce regulatory duplication
and undue burden on dealers that are
FINRA members by fostering an
integrated regulatory examination
protocol and targeting those firms for
more frequent examinations that pose a
greater risk to investors and other
market participants and have a greater
impact on the marketplace.
With input from the MSRB, consistent
with Section 15B(b)(4) of the Exchange
Act, FINRA is enhancing its risk
assessment approach to rank dealers by
certain risk factors, as well as by size
and scope of business, to determine
their examination cycle frequencies,
which under the proposed rule change
would range from one to four years,
rather than every two years as currently
prescribed by Rule G–16. It is
anticipated that, based on the analysis
of the various identified risks and
related factors, those firms that
represent higher risks, as well as firms
that pose a systemic threat based on the
scope and scale of their underlying
municipal securities activities, would be
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17:04 Oct 31, 2011
Jkt 226001
examined on an annual basis. Other
firms would be examined less
frequently, every two to four years,
depending on the risk ranking and size
of their municipal securities business
and the firm’s overall business model.
At a minimum, all firms would be
examined at least once every four
calendar years. Cycle examination
frequencies for dealers would be reassessed at least on an annual basis.
FINRA would continue to conduct offsite surveillance of municipal securities
activity and ‘‘cause’’ examinations as
needed. ‘‘Cause’’ examinations are
event-driven and typically initiated as a
result of customer complaints,
regulatory tips, and other information
sources identified by FINRA via its
regulatory oversight process.
The MSRB believes that using
quantitative and qualitative criteria to
rank dealers by appropriately identified
risk measures and size no less
frequently than on an annual basis
provides better protection for investors,
municipal entities, and other market
participants, since FINRA’s resources
will be focused on those firms that pose
the greatest risk to investors, municipal
entities and the market. Such firms will
be subject to in-depth examinations
tailored to the specific municipal
securities activities they conduct. The
risk-based examination protocol is
consistent with Sections 15B(b)(2)(E)
and 15B(c)(7) of the Exchange Act in
that the examinations by FINRA would
be tailored to each individual regulated
entity to determine compliance with
MSRB rules and applicable federal law
and would be designed to avoid any
unnecessary regulatory duplication or
undue regulatory burdens.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Board does not believe that the
proposed rule change will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. The
change would provide FINRA with
greater flexibility to carry out the
periodic compliance examinations of its
members mandated by Sections
15B(b)(2)(E) and 15B(c)(7) of the
Exchange Act, in accordance with a
risk-based approach that is based on the
risk posed by regulated entities to
investors and the marketplace and the
impact of the regulated entity’s
municipal securities business on the
marketplace. All such regulated entities
that pose greater risk and have a higher
impact on the municipal securities
market would be inspected more
frequently, and all such regulated
entities that pose less risk to the market
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67505
and have a lower impact on the
municipal securities market would be
inspected less frequently. All dealers
that are members of FINRA would be
examined at least every four calendar
years.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
As the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–MSRB–2011–19 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–MSRB–2011–19. 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
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Federal Register / Vol. 76, No. 211 / Tuesday, November 1, 2011 / Notices
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the MSRB’s offices.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–MSRB–2011–19 and should
be submitted on or before November 22,
2011.
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.4
Kevin M. O’Neill,
Deputy Secretary.
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
[FR Doc. 2011–28243 Filed 10–31–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65626; File No. SR–
NYSEAMEX–2011–82]
Self-Regulatory Organizations; NYSE
Amex LLC; Notice of Filing of
Proposed Rule Change Expanding the
Scope of Potential ‘‘Users’’ of Its CoLocation Services To Include Any
Market Participant That Requests To
Receive Co-Location Services Directly
From the Exchange and Amending Its
Price List To Establish a Fee for Users
That Host Their Customers at the
Exchange’s Data Center
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October 26, 2011.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on October
14, 2011, NYSE Amex LLC (the
‘‘Exchange’’ or ‘‘NYSE Amex’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
4 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to expand the
scope of potential ‘‘Users’’ of its colocation services to include any market
participant that requests to receive colocation services directly from the
Exchange. In addition, the Exchange
proposes to amend its Price List to
establish a fee for Users that host their
customers at the Exchange’s data center.
The text of the proposed rule change is
available at the Exchange, the
Commission’s Public Reference Room,
and https://www.nyse.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange operates a data center
in Mahwah, New Jersey from which it
provides co-location services to Users.4
For purposes of its co-location services,
the term ‘‘User’’ currently includes any
‘‘ATP Holder,’’ as that term is defined
in NYSE Amex Options Rule
900.2NY(4) and any ‘‘Sponsored
Participant,’’ as that term is defined in
NYSE Amex Options Rule
900.2NY(77).5 The Exchange proposes
to expand the scope of potential Users
of its co-location services to include any
market participant that requests to
receive co-location services directly
from the Exchange.6 Under the
4 See Securities Exchange Act Release No. 63274
(November 8, 2010), 75 FR 69722 (November 15,
2010) (SR–NYSEAmex–2010–101).
5 Id. at note 7.
6 As is the case today, prospective Users must
agree to, and be capable of satisfying, any
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Fmt 4703
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proposed rule change, Users could
therefore include ATP Holders,
Sponsored Participants, non-ATP
Holder broker-dealers and vendors. The
Exchange anticipates that the potential
additional Users would provide, for
example, hosting, service bureau,
technical support, risk management,
order routing and market data delivery
services to their customers while the
User is co-located in the Exchange’s
data center.7 As is the case with all
Exchange co-location arrangements,
neither a User, nor any of its customers,
would be permitted to submit orders
directly to the Exchange unless such
User or customer is an ATP Holder or
a Sponsored Participant. All existing colocation terms, conditions, facilities,
services, and applicable fees would
apply to these potential new Users.
The Exchange also proposes to amend
its Fee Schedule to establish a fee
applicable to Users that provide hosting
services to their customers (‘‘Hosted
Users’’) at the Exchange’s data center.
‘‘Hosting’’ would be a service offered by
a User to a Hosted User and could
include, for example, a User supporting
its Hosted User’s technology, whether
hardware or software, through the
User’s co-location space. Specifically,
the Exchange proposes to charge each
User a fee of $500.00 per month for each
Hosted User that the User hosts in the
Exchange’s data center. Users would
independently set fees for their Hosted
Users and the Exchange would not
receive a share of any such fees.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Securities Exchange
Act of 1934 (the ‘‘Act’’),8 in general, and
furthers the objectives of Section
6(b)(4) 9 and 6(b)(5) of the Act,10 in
particular, because it provides for the
equitable allocation of reasonable dues,
fees, and other charges among its
members and issuers and other persons
using its facilities and is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
applicable co-location fees, requirements, terms and
conditions established from time to time by the
Exchange.
7 The Exchange anticipates that a User’s
customer(s) could include, under certain
circumstances, other Users of the Exchange’s colocation services.
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(4).
10 15 U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 76, Number 211 (Tuesday, November 1, 2011)]
[Notices]
[Pages 67503-67506]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28243]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65631; File No. SR-MSRB-2011-19]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change Consisting of
Amendments to Rule G-16 on Periodic Compliance Examination and Rule G-9
on Preservation of Records
October 26, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on October 13, 2011, the Municipal Securities
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the MSRB. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB is filing with the SEC a proposed rule change consisting
of amendments to Rule G-16, on periodic compliance examination, in
order to permit the examination of brokers, dealers, and municipal
securities dealers (``dealers'') that are members of the Financial
Industry Regulatory Authority (``FINRA'') at least once each four
calendar years, rather than at least once each two calendar years as
currently prescribed by Rule G-16. Further, the MSRB is filing with the
SEC a proposed rule change consisting of amendments to Rule G-9, on
preservation of records, which would require dealers to retain certain
records for four years, rather than three years as currently prescribed
by Rule G-9.
The text of the proposed rule change is available on the MSRB's Web
site at https://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, at the MSRB's principal office, and at the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to facilitate the
modernization of the examination process for dealers and to permit
greater flexibility in the administration of periodic compliance
examinations in order to focus more closely on those dealers that, by
virtue of various identified factors, pose the greatest risk to
investors and other market participants, as well as to the municipal
securities market on a systemic basis.
Periodic examinations of regulated entities are an important
component of the regulatory oversight process. Examinations are
intended to detect wrongful conduct, including violations of the
federal securities laws and self-regulatory organization rules.
Pursuant to Section 15B(b)(2)(E) of the Securities Exchange Act of 1934
(the '' Exchange Act''), MSRB rules must provide for the periodic
examination of municipal securities brokers, municipal securities
dealers, or municipal advisors (``regulated entities'') to determine
[[Page 67504]]
compliance with Section 15B of the Exchange Act, the rules and
regulations thereunder, and MSRB rules. The same provision requires
that the MSRB specify the minimum scope and frequency of the
examinations and that the examination rules be designed to avoid
unnecessary regulatory duplication or undue regulatory burden for any
regulated entity.
Section 15B(c)(7) of the Exchange Act provides that the periodic
examination of regulated entities shall be conducted by (a) A
registered securities association in the case of dealers that are
members of the registered securities association, (b) the appropriate
regulatory agency (``bank regulators'') in the case of dealers that are
not members of a registered securities association, and (c) the SEC, or
its designee, in the case of municipal advisors. There is one
securities association registered with the SEC--FINRA. Approximately
1,800 MSRB registered dealers are members of and examined by FINRA,
with the remaining dealers registered with the SEC as municipal
securities dealers and examined primarily by the various federal bank
regulators.
Rule G-16 currently provides that, at least once every two calendar
years, dealers must be examined in accordance with Section 15B of the
Exchange Act, in order to determine whether the dealers are in
compliance with all MSRB rules and applicable provisions of the
Exchange Act. Separately, FINRA examines its members pursuant to a
risk-based approach at least every four calendar years. In order to
comply with Rule G-16, FINRA and the MSRB agreed to a protocol allowing
for a questionnaire to be completed by certain firms every two calendar
years. These dealers are typically less active in the municipal
securities market and, therefore, pose less overall risk to market
participants. The questionnaire, entitled the Alternative Municipal
Examination (``AME'') module, was implemented in 1998, after review by
SEC and MSRB staff.
The AME is used as an off-site examination for low-risk dealers
that: (a) Conduct a limited municipal securities business; (b) do not
conduct a public finance business; and (c) are not otherwise identified
as high risk firms for regulatory purposes. The AME is necessarily
general and not tailored to the specific business of any one firm. It
relies on each responding dealer to self report rule violations and to
certify that the information provided is truthful and accurate.
After many years of experience with the AME, the MSRB and FINRA
believe that a more risk-based examination protocol should be
implemented and that Rule G-16 should be amended to allow for up to a
four year examination cycle for FINRA-member firms, consistent with
FINRA's requirement for cycle examinations of all other FINRA members.
This would also allow FINRA to integrate the municipal securities cycle
examination program more closely with its overall cycle examination
program, and redeploying staff resources from administering the AME to
participating in the risk-based examination program would foster more
meaningful oversight. Moreover, over the last few years, there have
been significant advances in information technology, particularly with
the development of the MSRB's Real-time Transaction Reporting System
and Electronic Municipal Market Access system. These advancements in
information technology and transparency have enabled FINRA to develop
robust automated surveillance reviews of municipal securities
transactions. FINRA is now able to review municipal securities
transactions and other activity remotely, in order to identify
potential MSRB rule violations by dealers. These tools permit FINRA
staff to conduct near real-time surveillance of certain municipal
securities activities.
It is also apparent that the municipal securities business has
changed dramatically over the last few years. The industry has
consolidated and a small number of large firms account for the majority
of public finance business. The top five underwriters accounted for
over 50 percent, by par amount, of primary offerings in 2010 and 2011.
\3\ The top 10 underwriters accounted for over 70 percent of the
underwritings, by par amount, in 2010 and 2011, and the top 200
accounted for almost 100 percent of the underwritings, by par amount,
in 2010 and 2011. According to data gathered by the MSRB, the top 10
dealers executed approximately 55 percent of all municipal securities
transactions reported to the MSRB in 2010 and 2011. The top 50 dealers
executed approximately 80 percent of all such transactions in 2010 and
2011, and the top 200 dealers executed approximately 96 percent of all
such transactions. By par amount, the top 200 dealers executed
approximately 98 percent of all municipal securities transactions
reported to the MSRB in 2010 and 2011. The remaining approximately
1,600 firms are less active in the municipal securities market, engage
solely in the sale of interests in 529 College Savings Plans, or effect
municipal securities transactions primarily as an accommodation to
their customers. Generally, these firms are not engaged in financial
advisory activities or municipal securities underwriting, research, or
trading. They, therefore, do not pose systemic risk to the market in
these areas.
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\3\ All 2011 figures are through September 2011. Underwriting
statistics are provided by Thomson Reuters.
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With input from the MSRB, consistent with Section 15B(b)(4) of the
Exchange Act, FINRA is enhancing its risk assessment approach to rank
dealers by certain risk factors, as well as by size and scope of
business, to determine their examination cycle frequencies, which under
the proposed rule change would range from one to four years, rather
than every two years as currently prescribed by Rule G-16. It is
anticipated that, based on the analysis of the various identified risks
and related factors, those firms that represent higher risks, as well
as firms that pose a systemic threat based on the scope and scale of
their underlying municipal securities activities, would be examined on
an annual basis. Other firms would be examined less frequently, every
two to four years, depending on the risk ranking and size of their
municipal securities business and the firm's overall business model. At
a minimum, all firms would be examined at least once every four
calendar years. Cycle examination frequencies for dealers would be re-
assessed at least on an annual basis. FINRA would continue to conduct
off-site surveillance of municipal securities activity and ``cause''
examinations as needed. ``Cause'' examinations are event-driven and
typically initiated as a result of customer complaints, regulatory
tips, and other information sources identified by FINRA via its
regulatory oversight process.
The MSRB believes that using quantitative and qualitative criteria
to rank dealers by appropriately identified risk measures and size no
less frequently than on an annual basis provides better protection for
investors, municipal entities, and other market participants, since
FINRA's resources will be focused on those firms that pose the greatest
risk to investors, municipal entities and the market. Such firms will
be subject to in-depth examinations tailored to the specific municipal
securities activities they conduct.
Finally, the MSRB has proposed a rule change requiring dealers that
are FINRA members to retain certain records for four years, rather than
for three years, under Rule G-9 in order to ensure that the records are
available at
[[Page 67505]]
those firms that are examined every four calendar years.
2. Statutory Basis
The MSRB has adopted the proposed rule change pursuant to Section
15B(b)(2)(E) of the Exchange Act, which provides that the MSRB's rules
shall:
provide for the periodic examination in accordance with subsection
(c)(7) of municipal securities brokers, municipal securities
dealers, and municipal advisors to determine compliance with
applicable provisions of this title, the rules and regulations
thereunder, and the rules of the Board. Such rules shall specify the
minimum scope and frequency of such examinations and shall be
designed to avoid any unnecessary regulatory duplication or undue
regulatory burdens for any such municipal securities broker,
municipal securities dealer, or municipal advisor.
Section 15B(c)(7) of the Exchange Act further provides that
periodic examinations of dealers shall be conducted by a registered
securities association, in the case of dealers that are members of such
association. FINRA is currently the only registered securities
association.
The proposed rule change will accomplish this mandate by providing
FINRA with the flexibility to establish a risk-based examination
program for municipal securities that is consistent with its other
examination programs. By conforming the municipal securities
examination program to FINRA's other examination programs and
integrating the municipal securities examination program into FINRA's
overall examination protocol, the new program should reduce regulatory
duplication and undue burden on dealers that are FINRA members by
fostering an integrated regulatory examination protocol and targeting
those firms for more frequent examinations that pose a greater risk to
investors and other market participants and have a greater impact on
the marketplace.
With input from the MSRB, consistent with Section 15B(b)(4) of the
Exchange Act, FINRA is enhancing its risk assessment approach to rank
dealers by certain risk factors, as well as by size and scope of
business, to determine their examination cycle frequencies, which under
the proposed rule change would range from one to four years, rather
than every two years as currently prescribed by Rule G-16. It is
anticipated that, based on the analysis of the various identified risks
and related factors, those firms that represent higher risks, as well
as firms that pose a systemic threat based on the scope and scale of
their underlying municipal securities activities, would be examined on
an annual basis. Other firms would be examined less frequently, every
two to four years, depending on the risk ranking and size of their
municipal securities business and the firm's overall business model. At
a minimum, all firms would be examined at least once every four
calendar years. Cycle examination frequencies for dealers would be re-
assessed at least on an annual basis. FINRA would continue to conduct
off-site surveillance of municipal securities activity and ``cause''
examinations as needed. ``Cause'' examinations are event-driven and
typically initiated as a result of customer complaints, regulatory
tips, and other information sources identified by FINRA via its
regulatory oversight process.
The MSRB believes that using quantitative and qualitative criteria
to rank dealers by appropriately identified risk measures and size no
less frequently than on an annual basis provides better protection for
investors, municipal entities, and other market participants, since
FINRA's resources will be focused on those firms that pose the greatest
risk to investors, municipal entities and the market. Such firms will
be subject to in-depth examinations tailored to the specific municipal
securities activities they conduct. The risk-based examination protocol
is consistent with Sections 15B(b)(2)(E) and 15B(c)(7) of the Exchange
Act in that the examinations by FINRA would be tailored to each
individual regulated entity to determine compliance with MSRB rules and
applicable federal law and would be designed to avoid any unnecessary
regulatory duplication or undue regulatory burdens.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The change would
provide FINRA with greater flexibility to carry out the periodic
compliance examinations of its members mandated by Sections
15B(b)(2)(E) and 15B(c)(7) of the Exchange Act, in accordance with a
risk-based approach that is based on the risk posed by regulated
entities to investors and the marketplace and the impact of the
regulated entity's municipal securities business on the marketplace.
All such regulated entities that pose greater risk and have a higher
impact on the municipal securities market would be inspected more
frequently, and all such regulated entities that pose less risk to the
market and have a lower impact on the municipal securities market would
be inspected less frequently. All dealers that are members of FINRA
would be examined at least every four calendar years.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or
(ii) as to which the self-regulatory organization consents, the
Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-MSRB-2011-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-MSRB-2011-19. 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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
[[Page 67506]]
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the MSRB's
offices.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-MSRB-2011-19
and should be submitted on or before November 22, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28243 Filed 10-31-11; 8:45 am]
BILLING CODE 8011-01-P
