Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Consisting of Amendments to Rule G-16, on Periodic Compliance Examination, and Rule G-9, on Preservation of Records, 79738-79741 [2011-32754]

Download as PDF 79738 Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices 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 principal office of the Exchange. 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–BX– 2011–85 and should be submitted on or before January 12, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–32752 Filed 12–21–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65992, File No. SR–MSRB– 2011–19] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Consisting of Amendments to Rule G– 16, on Periodic Compliance Examination, and Rule G–9, on Preservation of Records jlentini on DSK4TPTVN1PROD with NOTICES December 16, 2011. I. Introduction On October 13, 2011, the Municipal Securities Rulemaking Board (‘‘MSRB’’ or ‘‘Board’’), filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change consisting of amendments to Rule G–16, on periodic compliance examination, and Rule G–9, on preservation of records. The proposed 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 19:17 Dec 21, 2011 Jkt 226001 rule change was published for comment in the Federal Register on November 1, 2011.3 The Commission received two comment letters regarding the proposed rule change and the MSRB’s response to those comment letters.4 On December 12, 2011, the MSRB filed with the Commission, pursuant to Section 19(b)(1) of the Exchange Act 5 and Rule 19b–4 thereunder,6 Partial Amendment No. 1 (‘‘Amendment No. 1’’) to the proposed rule change.7 The Commission is publishing this notice and order to solicit comment on Amendment No. 1 and to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of the Proposed Rule Change, As Modified by Amendment No. 1 to the Proposed Rule Change Pursuant to Section 15B(b)(2)(E) of the Exchange Act,8 MSRB rules must provide for the periodic examination of municipal securities brokers, municipal securities dealers, or municipal advisors (‘‘regulated entities’’) to determine 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 9 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 3 See Securities Exchange Act Release No. 65631 (October 26, 2011), 76 FR 67503 (November 1, 2011) (the ‘‘Commission’s Notice’’). 4 See letter from David L. Cohen, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated November 21, 2011 (‘‘SIFMA Letter’’); letter from Tamara K. Salmon, Associate General Counsel, Investment Company Institute (‘‘ICI’’), dated November 22, 2011 (‘‘ICI Letter’’); and letter from Lawrence P. Sandor, Senior Associate General Counsel, Municipal Securities Rulemaking Board (‘‘MSRB’’), dated December 12, 2011 (‘‘MSRB Letter’’). 5 15 U.S.C. 78s(b)(1). 6 17 CFR 240.19b–4. 7 Amendment No. 1 to the proposed rule change requested that the Commission approve the amendment to Rule G–9 with an effective date that is six months from the date of the approval order. The text of Amendment No. 1 and the MSRB Letter are available on the MSRB’s Web site at https:// www.msrb.org, at the principal office of the MSRB, and at the Commission’s Public Reference Room. 8 15 U.S.C. 78o(b)(2)(E). 9 15 U.S.C. 78o(c)(7). PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 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 E:\FR\FM\22DEN1.SGM 22DEN1 jlentini on DSK4TPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices 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. The municipal securities business has also 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 2011.10 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. With input from the MSRB, consistent with Section 15B(b)(4) of the Exchange Act,11 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, 10 All 2011 figures are through September 2011. Underwriting statistics are provided by Thomson Reuters. 11 15 U.S.C. 78o(b)(4). VerDate Mar<15>2010 19:17 Dec 21, 2011 Jkt 226001 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 is also proposing to change MSRB Rule G–9 to require dealers that are FINRA members to retain certain records for four years, rather than for three years, in order to ensure that the records are available at those firms that are examined every four calendar years. III. Discussion of Comments and MSRB’s Response As previously noted, the Commission received two comment letters on the original proposed rule change.12 Both commenters expressed support for the proposed amendments to Rule G–16, which would allow FINRA and the MSRB to establish a risk-based compliance program consistent with FINRA’s requirement for cycle examinations of all other FINRA members. One commenter, however, did 12 See PO 00000 supra note 4. Frm 00094 Fmt 4703 not support the proposed amendments to Rule G–9, which would extend certain recordkeeping requirements from three to four years, stating that such change is not warranted to support the proposed changes to the frequency of the cycle examinations.13 ICI stated that it supported the proposed revisions because they should result in a more efficient examination process without diminishing the effectiveness of the MSRB’s oversight. ICI further stated that changes in technology and in the municipal securities business provide the MSRB greater access to information on registrants, thereby reducing the need for frequent examinations of registrants. Finally, ICI stated that in instances where there is cause for the MSRB to conduct more frequent examinations of a particular registrant, its ability to do so is not impeded by the revisions. Although SIFMA believes that the current examination cycle appears to be working adequately, SIFMA supports the proposed rule change. SIFMA stated that the proposed rule change would facilitate the modernization of the examination process for dealers and 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, other market participants, and the municipal securities market. SIFMA further stated, however, that it believes that such identified factors should be specifically enumerated by FINRA and the MSRB after further discussions with interested market participants. SIFMA concluded that changes to a dealer’s examination cycle frequency should not be implemented until this process is complete. Additionally, SIFMA stated that since the voluminous real-time transaction data received by the MSRB on a daily basis has allowed FINRA to develop robust automated surveillance reviews of municipal securities transactions, it is critical that such data be leveraged to maximize the efficiency of on-site visits. The MSRB noted that FINRA is the designated examination and enforcement authority for its members that are MSRB registered dealers. The MSRB further noted that although the MSRB provides advice and consultation on examination and enforcement matters, the authority for such examinations rests solely with FINRA for its member firms. While the MSRB has generally described the considerations in determining the 13 See Sfmt 4703 79739 E:\FR\FM\22DEN1.SGM SIFMA Letter. 22DEN1 jlentini on DSK4TPTVN1PROD with NOTICES 79740 Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices frequency of a dealer’s examinations, such as the size and scope of its business, the MSRB believes it important to maintain confidentiality of the specific risk factors and not make them a matter of negotiation. Moreover, the MSRB stated that the risk factors are dynamic, and additional risk factors may be utilized as new risks emerge and existing risks are mitigated by market conditions or business practices. The MSRB believes that it would not be in the public interest to refrain from changing a dealer’s examination cycle until there is disclosure and consultation with market participants. The MSRB stated that it agrees that transaction reporting by dealers provides an important source of information regarding dealer activity in the municipal securities market, and that the information is, and will continue to be, of value in surveillance and examinations of dealers. With respect to the proposed changes to MSRB Rule G–9, SIFMA stated that the current three year/six year/and lifetime record-keeping categories as set forth in Rule G–9 are sufficient and have long been an industry standard. SIFMA believes that the proposed four-year record-keeping requirement is unnecessarily burdensome for member firms, and that the MSRB’s only stated reasoning for increasing the retention period for certain records is to mirror the proposed four-year examination cycle. SIFMA further stated that, in order to function efficiently, dealers should be subject to consistent recordkeeping requirements across product lines. SIFMA also stated that satisfying these regulations requires dealers to implement procedures, technology and training and that a well-established standard such as the current one should not be changed without a more comprehensive discussion of all related issues, including cost estimates compared to anticipated benefits. In addition, SIFMA stated that realtime transaction data is available for review on a daily basis. SIFMA noted that when a periodic examination is conducted, FINRA reviews a sampling of transactions occurring during the period of review. SIFMA stated that the substantial costs of requiring additional record-keeping for all dealers (especially those dealers that are examined on an annual or semi-annual basis) so that certain records would be available to review at those dealers that are examined in year four of the proposed four-year review cycle (i.e., dealers with the smallest footprint or risk profile) should be weighed against the nominal benefit of allowing FINRA to review a VerDate Mar<15>2010 19:17 Dec 21, 2011 Jkt 226001 few records from ‘‘year one’’ for that subset of dealers. The MSRB stated that the proposed rule change is not a significant departure from current record-keeping standards and will not impose an unnecessary burden on dealers that are already subject to a variety of different record retention requirements. Rule G–9 provides that, for dealers that are FINRA members, certain records must be retained for three years, while other records must be retained for six years or for the life of the enterprise. The proposal would extend the record retention obligation for certain records by one year. The MSRB stated that the retention of these records for one additional year is necessary to accommodate the four-year examination cycle for certain FINRA-member dealers and serves a clear regulatory purpose. SIFMA also noted that, to their knowledge, the MSRB has not conducted a cost-benefit analysis regarding the impact of the proposed changes to Rule G–9. SIFMA requested that such cost-benefit analysis be conducted prior to implementing the proposal. In response, the MSRB stated that it does not believe that the proposal to retain certain records for an additional year will impose an undue burden on dealers or require substantial changes to their systems or procedures, since the rule would merely require that the records be retained for one additional year. Additionally, given the limited nature of the change proposed, a cost-benefit analysis is unwarranted, since the records are already being retained by dealers and any incremental storage cost and one-time transitional burden of modifying policies and systems should be relatively minimal for firms already in compliance with the existing MSRB and FINRA recordkeeping rules, with such costs clearly outweighed by the necessity to accommodate the four-year examination cycle for a significant number of FINRA members. SIFMA requested that, if the changes to Rule G–9 are approved, the effective date be at least one year from the date of the Commission’s approval, in order to provide dealers with an opportunity to modify their policies and systems to comply with the new retention schedule. The MSRB believes that an extended effective date for Rule G–9 is appropriate but does not believe that a full year is necessary to comply with a new record retention period. Amendment No. 1 would partially amend the original proposed rule change by requesting that the Commission approve the amendments to Rule G–9 with an effective date that PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 is six months from the date of the Commission’s approval order. The MSRB believes that six months is an appropriate period to permit dealers to modify their policies and systems to comply with the rule change. IV. Discussion and Commission Findings The Commission has carefully considered the proposed rule change, the comment letters received, and the MSRB’s response to the comment letters and finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to the MSRB.14 The Commission believes that the proposed rule change is consistent with the provisions of Section 15B(b)(2)(E) of the Exchange Act,15 which authorizes the MSRB to provide for the periodic examination, in accordance with Section 15B(c)(7) of the Exchange Act,16 of municipal securities brokers, municipal securities dealers, and municipal advisors to determine compliance with the applicable provisions of the Act, the rules and regulations thereunder, and the rules of the MSRB. Section 15B(b)(2)(E) of the Exchange Act 17 also provides that the rules of the Board shall specify the minimum scope and frequency of such examinations and shall be designed to avoid unnecessary regulatory duplication or undue regulatory burdens for any such municipal securities broker, municipal securities dealer, or municipal advisor. The Commission also believes that the proposed rule change is consistent with the provisions of Section 15B(b)(2)(G) of the Exchange Act 18 which authorizes the MSRB to prescribe records to be made and kept by municipal securities brokers, municipal securities dealers, and municipal advisors and the periods for which such records shall be preserved. The proposed rule change will more closely align the records required to be made and kept by municipal securities brokers, municipal securities dealers and municipal advisors pursuant to Rule G–9 with the records already required to be made and kept by FINRA, thereby reducing the administrative burden on such municipal securities 14 In approving the proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 15 15 U.S.C. 78o(b)(2)(E). 16 15 U.S.C. 78o(c)(7). 17 15 U.S.C. 78o(b)(2)(E). 18 15 U.S.C. 78o(b)(2)(G). E:\FR\FM\22DEN1.SGM 22DEN1 Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices jlentini on DSK4TPTVN1PROD with NOTICES brokers, municipal securities dealers and municipal advisors. The Commission believes that the MSRB has adequately responded to the concerns expressed in the comment letters. The Commission agrees with the MSRB that the requirement to retain certain records for an additional year will not impose an undue burden on municipal securities brokers, municipal securities dealers and municipal advisors or require substantial changes to their systems or procedures because the records are already being retained. Further, the Commission agrees with the MSRB that any incremental cost and burden of modifying policies and procedures should be minimal, with such cost and burden outweighed by the necessity to accommodate the four-year examination cycle for a significant number of FINRA members. V. Order Granting Accelerated Approval of Proposed Rule Change Pursuant to Section 19(b)(2) of the Exchange Act,19 the Commission may not approve any proposed rule change, or amendment thereto, prior to the 30th day after the date of publication of notice of the filing thereof, unless the Commission finds good cause for so doing and publishes its reasons for so finding. The Commission hereby finds good cause for approving the proposed rule change, as modified by Amendment No. 1, before the 30th day after the date of publication of notice of filing thereof in the Federal Register. Amendment No. 1 would partially amend the original proposed rule change by requesting that the Commission approve the amendments to Rule G–9 with an effective date that is six months from the date of the Commission approval order. Originally, the proposed rule change to Rule G–9 would have become effective as of the date of the Commission approval order. While the MSRB does believe it appropriate to provide dealers with time to revise their policies and procedures, systems and controls to accommodate the longer retention period, the MSRB believes that such changes can be accomplished in a shorter timeframe. The MSRB stated that the modest extension of the retention period for certain records does not warrant such a delayed effective date as requested by SIFMA. Rather, the MSRB believes that in light of the clear importance of preserving records for the entire period between FINRA examination cycles, and the modest increase in the current retention period, six months is an appropriate period to permit dealers to modify their policies 19 15 U.S.C. 78s(b)(2). VerDate Mar<15>2010 19:17 Dec 21, 2011 and systems to comply with the rule change. The Commission does not believe that Amendment No. 1 significantly alters the proposal and that the six-month extension in the effective date of the amendments to Rule G–9 is reasonable. The Commission believes that Amendment No. 1 is consistent with the proposal’s purpose and raises no new significant issues. Accordingly, pursuant to Section 19(b)(2) of the Exchange Act,20 the Commission finds good cause to approve the proposed rule change, as amended, on an accelerated basis. a.m. and 3 p.m. Copies of such 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–2011–19 and should be submitted on or before January 12, 2012. VI. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Exchange Act. Comments may be submitted by any of the following methods: It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,21 that the proposed rule change (SR– MSRB–2011–19), as modified by Amendment No. 1, be, and it hereby is, approved. The proposed amendment to Rule G–16 will become effective as of the date of this approval order and the proposed amendment to Rule G–9 will become effective six months after the date of this approval order. 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 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 20 15 Jkt 226001 79741 PO 00000 U.S.C. 78s(b)(2). Frm 00096 Fmt 4703 Sfmt 4703 VII. Conclusion For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–32754 Filed 12–21–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65988; File No. SR– NYSEARCA–2011–95] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to Listing and Trading of the PIMCO Total Return Exchange Traded Fund Under NYSE Arca Equities Rule 8.600 December 16, 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 December 13, 2011, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit 21 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 22 17 E:\FR\FM\22DEN1.SGM 22DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79738-79741]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32754]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65992, File No. SR-MSRB-2011-19]

Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by Amendment
No. 1 Thereto, Consisting of Amendments to Rule G-16, on Periodic
Compliance Examination, and Rule G-9, on Preservation of Records

December 16, 2011.

I. Introduction

On October 13, 2011, the Municipal Securities Rulemaking Board
(``MSRB'' or ``Board''), filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change consisting of amendments to Rule
G-16, on periodic compliance examination, and Rule G-9, on preservation
of records. The proposed rule change was published for comment in the
Federal Register on November 1, 2011.\3\ The Commission received two
comment letters regarding the proposed rule change and the MSRB's
response to those comment letters.\4\ On December 12, 2011, the MSRB
filed with the Commission, pursuant to Section 19(b)(1) of the Exchange
Act \5\ and Rule 19b-4 thereunder,\6\ Partial Amendment No. 1
(``Amendment No. 1'') to the proposed rule change.\7\ The Commission is
publishing this notice and order to solicit comment on Amendment No. 1
and to approve the proposed rule change, as modified by Amendment No.
1, on an accelerated basis.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 65631 (October 26,
2011), 76 FR 67503 (November 1, 2011) (the ``Commission's Notice'').
\4\ See letter from David L. Cohen, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association (``SIFMA''), dated November 21, 2011 (``SIFMA Letter'');
letter from Tamara K. Salmon, Associate General Counsel, Investment
Company Institute (``ICI''), dated November 22, 2011 (``ICI
Letter''); and letter from Lawrence P. Sandor, Senior Associate
General Counsel, Municipal Securities Rulemaking Board (``MSRB''),
dated December 12, 2011 (``MSRB Letter'').
\5\ 15 U.S.C. 78s(b)(1).
\6\ 17 CFR 240.19b-4.
\7\ Amendment No. 1 to the proposed rule change requested that
the Commission approve the amendment to Rule G-9 with an effective
date that is six months from the date of the approval order. The
text of Amendment No. 1 and the MSRB Letter are available on the
MSRB's Web site at https://www.msrb.org, at the principal office of
the MSRB, and at the Commission's Public Reference Room.
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II. Description of the Proposed Rule Change, As Modified by Amendment
No. 1 to the Proposed Rule Change

Pursuant to Section 15B(b)(2)(E) of the Exchange Act,\8\ MSRB rules
must provide for the periodic examination of municipal securities
brokers, municipal securities dealers, or municipal advisors
(``regulated entities'') to determine 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.
---------------------------------------------------------------------------

\8\ 15 U.S.C. 78o(b)(2)(E).
---------------------------------------------------------------------------

Section 15B(c)(7) of the Exchange Act \9\ 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.
---------------------------------------------------------------------------

\9\ 15 U.S.C. 78o(c)(7).
---------------------------------------------------------------------------

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

[[Page 79739]]

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.
The municipal securities business has also 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.\10\ 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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\10\ 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,\11\ 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.
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\11\ 15 U.S.C. 78o(b)(4).
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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 is also proposing to change MSRB Rule G-9 to
require dealers that are FINRA members to retain certain records for
four years, rather than for three years, in order to ensure that the
records are available at those firms that are examined every four
calendar years.

III. Discussion of Comments and MSRB's Response

As previously noted, the Commission received two comment letters on
the original proposed rule change.\12\ Both commenters expressed
support for the proposed amendments to Rule G-16, which would allow
FINRA and the MSRB to establish a risk-based compliance program
consistent with FINRA's requirement for cycle examinations of all other
FINRA members. One commenter, however, did not support the proposed
amendments to Rule G-9, which would extend certain recordkeeping
requirements from three to four years, stating that such change is not
warranted to support the proposed changes to the frequency of the cycle
examinations.\13\
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\12\ See supra note 4.
\13\ See SIFMA Letter.
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ICI stated that it supported the proposed revisions because they
should result in a more efficient examination process without
diminishing the effectiveness of the MSRB's oversight. ICI further
stated that changes in technology and in the municipal securities
business provide the MSRB greater access to information on registrants,
thereby reducing the need for frequent examinations of registrants.
Finally, ICI stated that in instances where there is cause for the MSRB
to conduct more frequent examinations of a particular registrant, its
ability to do so is not impeded by the revisions.
Although SIFMA believes that the current examination cycle appears
to be working adequately, SIFMA supports the proposed rule change.
SIFMA stated that the proposed rule change would facilitate the
modernization of the examination process for dealers and 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, other
market participants, and the municipal securities market. SIFMA further
stated, however, that it believes that such identified factors should
be specifically enumerated by FINRA and the MSRB after further
discussions with interested market participants. SIFMA concluded that
changes to a dealer's examination cycle frequency should not be
implemented until this process is complete. Additionally, SIFMA stated
that since the voluminous real-time transaction data received by the
MSRB on a daily basis has allowed FINRA to develop robust automated
surveillance reviews of municipal securities transactions, it is
critical that such data be leveraged to maximize the efficiency of on-
site visits.
The MSRB noted that FINRA is the designated examination and
enforcement authority for its members that are MSRB registered dealers.
The MSRB further noted that although the MSRB provides advice and
consultation on examination and enforcement matters, the authority for
such examinations rests solely with FINRA for its member firms. While
the MSRB has generally described the considerations in determining the

[[Page 79740]]

frequency of a dealer's examinations, such as the size and scope of its
business, the MSRB believes it important to maintain confidentiality of
the specific risk factors and not make them a matter of negotiation.
Moreover, the MSRB stated that the risk factors are dynamic, and
additional risk factors may be utilized as new risks emerge and
existing risks are mitigated by market conditions or business
practices. The MSRB believes that it would not be in the public
interest to refrain from changing a dealer's examination cycle until
there is disclosure and consultation with market participants. The MSRB
stated that it agrees that transaction reporting by dealers provides an
important source of information regarding dealer activity in the
municipal securities market, and that the information is, and will
continue to be, of value in surveillance and examinations of dealers.
With respect to the proposed changes to MSRB Rule G-9, SIFMA stated
that the current three year/six year/and lifetime record-keeping
categories as set forth in Rule G-9 are sufficient and have long been
an industry standard. SIFMA believes that the proposed four-year
record-keeping requirement is unnecessarily burdensome for member
firms, and that the MSRB's only stated reasoning for increasing the
retention period for certain records is to mirror the proposed four-
year examination cycle. SIFMA further stated that, in order to function
efficiently, dealers should be subject to consistent record-keeping
requirements across product lines. SIFMA also stated that satisfying
these regulations requires dealers to implement procedures, technology
and training and that a well-established standard such as the current
one should not be changed without a more comprehensive discussion of
all related issues, including cost estimates compared to anticipated
benefits.
In addition, SIFMA stated that real-time transaction data is
available for review on a daily basis. SIFMA noted that when a periodic
examination is conducted, FINRA reviews a sampling of transactions
occurring during the period of review. SIFMA stated that the
substantial costs of requiring additional record-keeping for all
dealers (especially those dealers that are examined on an annual or
semi-annual basis) so that certain records would be available to review
at those dealers that are examined in year four of the proposed four-
year review cycle (i.e., dealers with the smallest footprint or risk
profile) should be weighed against the nominal benefit of allowing
FINRA to review a few records from ``year one'' for that subset of
dealers.
The MSRB stated that the proposed rule change is not a significant
departure from current record-keeping standards and will not impose an
unnecessary burden on dealers that are already subject to a variety of
different record retention requirements. Rule G-9 provides that, for
dealers that are FINRA members, certain records must be retained for
three years, while other records must be retained for six years or for
the life of the enterprise. The proposal would extend the record
retention obligation for certain records by one year. The MSRB stated
that the retention of these records for one additional year is
necessary to accommodate the four-year examination cycle for certain
FINRA-member dealers and serves a clear regulatory purpose.
SIFMA also noted that, to their knowledge, the MSRB has not
conducted a cost-benefit analysis regarding the impact of the proposed
changes to Rule G-9. SIFMA requested that such cost-benefit analysis be
conducted prior to implementing the proposal. In response, the MSRB
stated that it does not believe that the proposal to retain certain
records for an additional year will impose an undue burden on dealers
or require substantial changes to their systems or procedures, since
the rule would merely require that the records be retained for one
additional year. Additionally, given the limited nature of the change
proposed, a cost-benefit analysis is unwarranted, since the records are
already being retained by dealers and any incremental storage cost and
one-time transitional burden of modifying policies and systems should
be relatively minimal for firms already in compliance with the existing
MSRB and FINRA record-keeping rules, with such costs clearly outweighed
by the necessity to accommodate the four-year examination cycle for a
significant number of FINRA members.
SIFMA requested that, if the changes to Rule G-9 are approved, the
effective date be at least one year from the date of the Commission's
approval, in order to provide dealers with an opportunity to modify
their policies and systems to comply with the new retention schedule.
The MSRB believes that an extended effective date for Rule G-9 is
appropriate but does not believe that a full year is necessary to
comply with a new record retention period. Amendment No. 1 would
partially amend the original proposed rule change by requesting that
the Commission approve the amendments to Rule G-9 with an effective
date that is six months from the date of the Commission's approval
order. The MSRB believes that six months is an appropriate period to
permit dealers to modify their policies and systems to comply with the
rule change.

IV. Discussion and Commission Findings

The Commission has carefully considered the proposed rule change,
the comment letters received, and the MSRB's response to the comment
letters and finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with the requirements of the Exchange
Act and the rules and regulations thereunder applicable to the
MSRB.\14\ The Commission believes that the proposed rule change is
consistent with the provisions of Section 15B(b)(2)(E) of the Exchange
Act,\15\ which authorizes the MSRB to provide for the periodic
examination, in accordance with Section 15B(c)(7) of the Exchange
Act,\16\ of municipal securities brokers, municipal securities dealers,
and municipal advisors to determine compliance with the applicable
provisions of the Act, the rules and regulations thereunder, and the
rules of the MSRB. Section 15B(b)(2)(E) of the Exchange Act \17\ also
provides that the rules of the Board shall specify the minimum scope
and frequency of such examinations and shall be designed to avoid
unnecessary regulatory duplication or undue regulatory burdens for any
such municipal securities broker, municipal securities dealer, or
municipal advisor.
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\14\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition and capital formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78o(b)(2)(E).
\16\ 15 U.S.C. 78o(c)(7).
\17\ 15 U.S.C. 78o(b)(2)(E).
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The Commission also believes that the proposed rule change is
consistent with the provisions of Section 15B(b)(2)(G) of the Exchange
Act \18\ which authorizes the MSRB to prescribe records to be made and
kept by municipal securities brokers, municipal securities dealers, and
municipal advisors and the periods for which such records shall be
preserved.
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\18\ 15 U.S.C. 78o(b)(2)(G).
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The proposed rule change will more closely align the records
required to be made and kept by municipal securities brokers, municipal
securities dealers and municipal advisors pursuant to Rule G-9 with the
records already required to be made and kept by FINRA, thereby reducing
the administrative burden on such municipal securities

[[Page 79741]]

brokers, municipal securities dealers and municipal advisors.
The Commission believes that the MSRB has adequately responded to
the concerns expressed in the comment letters. The Commission agrees
with the MSRB that the requirement to retain certain records for an
additional year will not impose an undue burden on municipal securities
brokers, municipal securities dealers and municipal advisors or require
substantial changes to their systems or procedures because the records
are already being retained. Further, the Commission agrees with the
MSRB that any incremental cost and burden of modifying policies and
procedures should be minimal, with such cost and burden outweighed by
the necessity to accommodate the four-year examination cycle for a
significant number of FINRA members.

V. Order Granting Accelerated Approval of Proposed Rule Change

Pursuant to Section 19(b)(2) of the Exchange Act,\19\ the
Commission may not approve any proposed rule change, or amendment
thereto, prior to the 30th day after the date of publication of notice
of the filing thereof, unless the Commission finds good cause for so
doing and publishes its reasons for so finding. The Commission hereby
finds good cause for approving the proposed rule change, as modified by
Amendment No. 1, before the 30th day after the date of publication of
notice of filing thereof in the Federal Register. Amendment No. 1 would
partially amend the original proposed rule change by requesting that
the Commission approve the amendments to Rule G-9 with an effective
date that is six months from the date of the Commission approval order.
Originally, the proposed rule change to Rule G-9 would have become
effective as of the date of the Commission approval order. While the
MSRB does believe it appropriate to provide dealers with time to revise
their policies and procedures, systems and controls to accommodate the
longer retention period, the MSRB believes that such changes can be
accomplished in a shorter timeframe. The MSRB stated that the modest
extension of the retention period for certain records does not warrant
such a delayed effective date as requested by SIFMA. Rather, the MSRB
believes that in light of the clear importance of preserving records
for the entire period between FINRA examination cycles, and the modest
increase in the current retention period, six months is an appropriate
period to permit dealers to modify their policies and systems to comply
with the rule change. The Commission does not believe that Amendment
No. 1 significantly alters the proposal and that the six-month
extension in the effective date of the amendments to Rule G-9 is
reasonable. The Commission believes that Amendment No. 1 is consistent
with the proposal's purpose and raises no new significant issues.
Accordingly, pursuant to Section 19(b)(2) of the Exchange Act,\20\ the
Commission finds good cause to approve the proposed rule change, as
amended, on an accelerated basis.
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\19\ 15 U.S.C. 78s(b)(2).
\20\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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 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 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-2011-19 and should be
submitted on or before January 12, 2012.

VII. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\21\ that the proposed rule change (SR-MSRB-2011-19), as
modified by Amendment No. 1, be, and it hereby is, approved. The
proposed amendment to Rule G-16 will become effective as of the date of
this approval order and the proposed amendment to Rule G-9 will become
effective six months after the date of this approval order.
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\21\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32754 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P

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