Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations, Proposed Revisions to MSRB Rule G-19, on Suitability of Recommendations and Transactions, Proposed MSRB Rules D-15 and G-48, on Sophisticated Municipal Market Professionals, and the Proposed Deletion of Interpretive Guidance, 62867-62881 [2013-24549]

Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations, Proposed Revisions to MSRB Rule G-19, on Suitability of Recommendations and Transactions, Proposed MSRB Rules D-15 and G-48, on Sophisticated Municipal Market Professionals, and the Proposed Deletion of Interpretive Guidance, 62867-62881 [2013-24549]

Download as PDF Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.26 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–24668 Filed 10–21–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70593; File No. SR–MSRB– 2013–07] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Proposed MSRB Rule G–47, on Time of Trade Disclosure Obligations, Proposed Revisions to MSRB Rule G–19, on Suitability of Recommendations and Transactions, Proposed MSRB Rules D–15 and G–48, on Sophisticated Municipal Market Professionals, and the Proposed Deletion of Interpretive Guidance October 1, 2013. sroberts on DSK5SPTVN1PROD with FRONT MATTER Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 17, 2013 the Municipal Securities Rulemaking Board (the ‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (the ‘‘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 Commission a proposed rule change consisting of proposed MSRB Rule G– 47, on time of trade disclosure obligations, proposed revisions to MSRB Rule G–19, on suitability of recommendations and transactions,3 proposed MSRB Rules D–15 and G–48, on sophisticated municipal market professionals, and the proposed deletion of interpretive guidance that is being superseded by these rule changes (the ‘‘proposed rule change’’). The MSRB requests an effective date for the 26 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 This also includes proposed technical revisions to MSRB Rule G–8, on books and records, to conform Rule G–8 with the proposed revisions to Rule G–19. 1 15 VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 proposed rule change of 60 days following the date of SEC approval. The text of the proposed rule change is available on the MSRB’s Web site at www.msrb.org/Rules-andInterpretations/SEC-Filings/2013Filings.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 MSRB 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 Summary of Proposed Rule Change The MSRB has examined its interpretive guidance related to time of trade disclosures, suitability, and SMMPs and is proposing to consolidate this guidance and codify it into several rules: a new time of trade disclosure rule (proposed Rule G–47), a revised suitability rule (Rule G–19), and two new SMMP rules (proposed Rules D–15 and G–48). Additionally, the proposed revisions to Rule G–19 would harmonize the MSRB’s suitability rule with Financial Industry Regulatory Authority’s (‘‘FINRA’s’’) suitability rule as recommended by the SEC in its 2012 Report on the Municipal Securities Market.4 Rule G–47 on Time of Trade Disclosures MSRB Rule G–17 provides that, in the conduct of its municipal securities or municipal advisory activities, each broker, dealer, municipal securities dealer (‘‘dealer’’), and municipal advisor must deal fairly with all persons and may not engage in any deceptive, dishonest or unfair practice. The MSRB has interpreted Rule G–17 to require a dealer, in connection with a municipal securities transaction, to disclose to its customer, at or prior to the time of trade, all material information about the transaction known by the dealer, as well 4 See https://www.sec.gov/news/studies/2012/ munireport073112.pdf. PO 00000 Frm 00285 Fmt 4703 Sfmt 4703 62867 as material information about the security that is reasonably accessible to the market.5 The MSRB has issued extensive interpretive guidance discussing this time of trade disclosure obligation in general, as well as in specific scenarios. Proposed Rule G–47 would consolidate most of this guidance 6 into rule language which the MSRB believes would ease the burden on dealers and other market participants who endeavor to understand, comply with and enforce these obligations. The proposed codification of the interpretive guidance on time of trade disclosure obligations is not intended to, and would not, substantively change the 5 See, e.g., MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure Obligations Under MSRB Rule G–17 (November 30, 2011). 6 The time of trade disclosure guidance that has been consolidated and condensed into proposed Rule G–47 was derived from the following Rule G– 17 interpretive notices: Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities (July 14, 2009), MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure Obligations Under MSRB Rule G–17 (November 30, 2011), Interpretive Notice Regarding Rule G–17, on Disclosure of Material Facts (March 18, 2002), MSRB Reminds Firms of their Sales Practice and Due Diligence Obligations When Selling Municipal Securities in the Secondary Market (September 20, 2010), Application of MSRB Rules to Transactions in Auction Rate Securities (February 19, 2008), Bond Insurance Ratings—Application of MSRB Rules (January 22, 2008), Interpretive Reminder Notice Regarding Rule G–17, on Disclosure of Material Facts—Disclosure of Original Issue Discount Bonds (January 5, 2005), Notice of Interpretation of Rule G–17 Concerning Minimum Denominations (January 30, 2002), Transactions in Municipal Securities with Non-Standard Features Affecting Price/Yield Calculations (June 12, 1995), Educational Notice on Bonds Subject to ‘‘Detachable’’ Call Features (May 13, 1993), Notice Concerning Securities that Prepay Principal (March 19, 1991), Notice Concerning Disclosure of Call Information to Customers of Municipal Securities (March 4, 1986), Application of Board Rules to Transactions in Municipal Securities Subject to Secondary Market Insurance or Other Credit Enhancement Features (March 6, 1984), and Notice Concerning the Application of Board Rules to Put Option Bonds (September 30, 1985); the following Rule G–15 interpretive notice: Notice Concerning Stripped Coupon Municipal Securities (March 13, 1989); the following Rule G–17 interpretive letters: Description provided at or prior to the time of trade (April 30, 1986), and Put option bonds: safekeeping, pricing (February 18, 1983); and the following Rule G–15 interpretive letters: Disclosure of the investment of bond proceeds (August 16, 1991), Securities description: prerefunded securities (February 17, 1998), Callable securities: pricing to mandatory sinking fund calls (April 30, 1986), and Callable securities: pricing to call and extraordinary mandatory redemption features (February 10, 1984). As discussed in more detail below, the guidance discussing time of trade disclosure obligations in connection with 529 college savings plans (‘‘529 plans’’) has not been incorporated into proposed Rule G–47. The MSRB may create a separate rule regarding time of trade disclosure obligations for 529 plans or a rule consolidating dealer obligations related to 529 plans. Until the MSRB adopts a rule specific to 529 plans, proposed Rule G–47 and all such interpretive guidance will continue to apply to 529 plans. E:\FR\FM\22OCN1.SGM 22OCN1 62868 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices current obligations. Rather, the codification is an effort to consolidate the current obligations into streamlined rule language. The structure of proposed Rule G–47 (rule language followed by supplementary material) is the same structure used by FINRA and other selfregulatory organizations (‘‘SROs’’). The MSRB intends generally to transition to this structure for all of its rules going forward in order to streamline the rules, harmonize the format with that of other SROs, and make the rules easier for dealers and municipal advisors to understand and follow. A summary of proposed Rule G–47 is as follows: sroberts on DSK5SPTVN1PROD with FRONT MATTER General Disclosure Obligation Proposed Rule G–47(a) sets forth the general time of trade disclosure obligation as currently set forth in the MSRB’s interpretive guidance. The rule states that dealers cannot sell municipal securities to a customer, or purchase municipal securities from a customer, without disclosing to the customer, at or prior to the time of trade, all material information known about the transaction and material information about the security that is reasonably accessible to the market. The rule applies regardless of whether the transaction is unsolicited or recommended, occurs in a primary offering or the secondary market, and is a principal or agency transaction. The rule provides that the disclosure can be made orally or in writing. Proposed Rule G–47(b) states that information is considered to be ‘‘material information’’ if there is a substantial likelihood that the information would be considered important or significant by a reasonable investor in making an investment decision. The rule defines ‘‘reasonably accessible to the market’’ as information that is made available publicly through ‘‘established industry sources.’’ Finally, the rule defines ‘‘established industry sources’’ as including the MSRB’s Electronic Municipal Market Access (‘‘EMMA’’®) 7 system, rating agency reports, and other sources of information generally used by dealers that effect transactions in the type of municipal securities at issue. Supplementary Material In addition to stating the general disclosure obligation, proposed Rule G– 47 includes supplementary material describing the disclosure obligation in more detail. 7 EMMA is a registered trademark of the MSRB. VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 Supplementary material .01 provides general information regarding the manner and scope of required disclosures. Specifically, the supplementary material provides that dealers have a duty to give customers a complete description of the security which includes a description of the features that would likely be considered significant by a reasonable investor, and facts that are material to assessing potential risks of the investment. This section of the supplementary material further provides that the public availability of material information through EMMA, or other established industry sources, does not relieve dealers of their disclosure obligations. Section .01 of the supplementary material also provides that dealers may not satisfy the disclosure obligation by directing customers to established industry sources or through disclosure in general advertising materials. Finally, section .01 of the supplementary material states that whether the customer is purchasing or selling the municipal securities may be a consideration in determining what information is material. Supplementary material .02 provides that dealers operating electronic trading or brokerage systems have the same time of trade disclosure obligations as other dealers. Supplementary material .03 provides a list of examples describing information that may be material in specific scenarios and require disclosures to a customer. The guidance provides that the list is not exhaustive and other information may be material to a customer in these and other scenarios. This section describes the following scenarios: variable rate demand obligations; auction rate securities; credit risks and ratings; credit or liquidity enhanced securities; insured securities; original issue discount bonds; securities sold below the minimum denomination; securities with non-standard features; bonds that prepay principal; callable securities; put option and tender option bonds; stripped coupon securities; the investment of bond proceeds; issuer’s intent to prerefund; and failure to make continuing disclosure filings. Finally, supplementary material .04 provides that dealers must implement processes and procedures reasonably designed to ensure that material information regarding municipal securities is disseminated to registered representatives who are engaged in sales to and purchases from a customer. PO 00000 Frm 00286 Fmt 4703 Sfmt 4703 Current Interpretive Guidance on Time of Trade Disclosure Obligations The MSRB has identified two interpretive notices that were previously filed with the Commission and would be superseded in their entirety by the proposed time of trade disclosure rule and the MSRB proposes deleting these two notices.8 Any statements in the remaining MSRB interpretative guidance referring to Rule G–17 for the time of trade disclosure principle should be read to refer to proposed Rule G–47. Rule G–19, on Suitability of Recommendations and Transactions The MSRB has conducted a review of Rule G–19, on suitability of recommendations and transactions, as well as the MSRB’s interpretive guidance addressing suitability. As a result of this review, the MSRB is proposing the amendments described below to more closely harmonize Rule G–19 with FINRA’s suitability rule,9 and to incorporate elements of the MSRB’s current interpretive guidance on suitability into Rule G–19.10 The 8 Interpretive Notice Regarding Rule G–17, on Disclosure of Material Facts (March 18, 2002) and Notice of Interpretation of Rule G–17 Concerning Minimum Denominations (January 30, 2002). 9 See FINRA Rule 2111. 10 The suitability guidance that has been consolidated and condensed into the proposed revisions to Rule G–19 was derived from the following Rule G–17 interpretive notices: MSRB Reminds Firms of their Sales Practice and Due Diligence Obligations When Selling Municipal Securities in the Secondary Market (September 20, 2010); Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities (July 14, 2009); Application of MSRB Rules to Transactions in Auction Rate Securities (February 19, 2008); Bond Insurance Ratings—Application of MSRB Rules (January 22, 2008); Reminder of Customer Protection Obligations in Connection with Sales of Municipal Securities (March 30, 2007); Interpretive Notice Regarding Rule G–17, on Disclosure of Material Facts (March 18, 2002); Notice Concerning Disclosure of Call Information to Customers of Municipal Securities (March 4, 1986); the following Rule G–19 interpretive notices: Notice Regarding Application of Rule G–19, on Suitability of Recommendations and Transactions, to Online Communications (September 25, 2002); Application of Suitability Requirements to Investment Seminars and Customer Inquiries Made in Response to a Dealer’s Advertisements (April 25, 1985); the following Rule G–19 interpretive letters: Recommendations (February 17, 1998); and Recommendations: advertisements (February 24, 1994); the following Rule G–15 interpretive notice: Notice Concerning Stripped Coupon Municipal Securities (March 13, 1989); the following Rule G–15 interpretive letter: Securities description: prerefunded securities (February 17, 1998); the following Rule G–21 interpretive notice: Interpretation on General Advertising Disclosures, Blind Advertisements and Annual Reports Relating to Municipal Fund Securities under Rule G–21 (June 5, 2007); the following Rule G–21 interpretive letter: Disclosure obligations (May 21, 1998); and the following Rule G–32 interpretive notices: Notice E:\FR\FM\22OCN1.SGM 22OCN1 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices proposed revisions to Rule G–19 are aligned with a recommendation of the SEC in its 2012 Report on the Municipal Securities Market that the MSRB consider ‘‘amending Rule G–19 (suitability) in a manner generally consistent with recent amendments by FINRA to its Rule 2111, including with respect to the scope of the term ‘strategy’. . . .’’ 11 Given the extensive interpretive guidance surrounding FINRA Rule 2111 and the impracticality and inefficiency of republishing each iteration of such FINRA guidance, substantively similar provisions of Rule G–19 will be interpreted in a manner consistent with FINRA’s interpretations of Rule 2111. If the MSRB believes an interpretation should not be applicable to Rule G–19, it will affirmatively state that specific provisions of FINRA’s interpretation do not apply. Additionally, the MSRB is proposing technical amendments to Rule G– 8(a)(xi)(F) to conform it to the proposed revisions to Rule G–19. A summary of the proposed revisions to Rule G–19 is as follows: Account Information Current MSRB Rule G–19(a) requires dealers to obtain certain customer information prior to completing a transaction in municipal securities for that customer account. The required customer information consists of, by cross-reference, the customer information required under MSRB Rule G–8(a)(xi), on books and records. A provision equivalent to current Rule G– 19(a) is not included in proposed Rule G–19 since MSRB Rule G–8 already independently requires dealers to make and keep a record of this information for each customer. Additionally, deleting this provision streamlines the rule and more closely aligns it with FINRA’s suitability rule, which does not have this specific requirement.12 Information Required for Suitability Determinations sroberts on DSK5SPTVN1PROD with FRONT MATTER The current MSRB suitability rule contains a list of customer information that dealers must obtain prior to recommending a transaction to a noninstitutional account.13 The proposed revisions to Rule G–19 would expand Regarding Electronic Delivery and Receipt of Information by Brokers, Dealers and Municipal Securities Dealers (November 20, 1998); and Interpretation on the Application of Rules G–32 and G–36 to New Issue Offerings Through Auction Procedures (March 26, 2001). 11 See https://www.sec.gov/news/studies/2012/ munireport073112.pdf at 141. 12 See FINRA Rule 2111. 13 See MSRB Rule G–19(b). VerDate Mar<15>2010 22:33 Oct 21, 2013 Jkt 232001 this list to include additional items from FINRA’s suitability rule 14 such as: Age, investment time horizon, liquidity needs, investment experience and risk tolerance. The proposed revision also would delete Rule G–19(b) and replace it with rule language corresponding to FINRA’s suitability rule. The MSRB believes that the items added to the rule generally are directly relevant for recommendations involving municipal securities and having such items explicitly identified will promote more consistent application of the suitability rule. The list of customer information that dealers must assess in the proposed rule also includes ‘‘any other information the customer may disclose to the broker, dealer or municipal securities dealer in connection with such recommendation’’ which is taken from the FINRA rule.15 This is similar to the requirement in current MSRB Rule G–19(c)(ii) which states that, in recommending a transaction, a dealer shall have reasonable grounds ‘‘based upon the facts disclosed by such customer or otherwise known about such customer for believing that the recommendation is suitable.’’ Therefore, the proposal would delete section (c)(ii) of Rule G–19. The current MSRB suitability rule also requires dealers to consider information available from the issuer of the security or otherwise in making suitability determinations.16 Similarly, the supplementary material to FINRA’s suitability rule establishes a reasonablebasis suitability obligation, which requires a broker-dealer to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.17 In order to perform a reasonable-basis suitability analysis, dealers must necessarily consider information available from the issuer of the security. The proposed revisions to Rule G–19 incorporate the reasonablebasis suitability terminology from FINRA Rule 2111 in supplementary material .05(a) and delete section (c)(i) of Rule G–19. Discretionary Accounts The current MSRB suitability rule includes a provision on discretionary accounts which provides that dealers cannot effect transactions in municipal securities with or for a discretionary account unless permitted by the customer’s prior written authorization 14 See FINRA Rule 2111(a). FINRA Rule 2111(b). 16 See MSRB Rule G–19(c)(i). 17 FINRA Rule 2111, Supplementary Material .05(a). 15 See PO 00000 Frm 00287 Fmt 4703 Sfmt 4703 62869 which has been accepted in writing by a municipal securities principal.18 The MSRB proposes to delete this provision because there is a substantially similar provision already included in MSRB Rule G–8(a)(xi)(I) which requires that, for customer discretionary accounts, dealers must make and keep a record of the customer’s written authorization to exercise discretionary power over the account, written approval of the municipal securities principal who supervises the account, and written approval of the municipal securities principal with respect to each transaction in the account stating the date and time of approval. The current MSRB suitability rule also includes a provision stating that a dealer cannot effect a transaction in municipal securities with or for a discretionary account unless the dealer first determines that the transaction is suitable for the customer or the transaction is specifically directed by the customer and was not recommended by the dealer.19 Similarly, the proposed suitability rule provides that a dealer must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer. The suitability obligation is the same for discretionary and nondiscretionary accounts and there is no reason to restate the obligation as it specifically relates to discretionary accounts. In addition, there is no corresponding provision in FINRA Rule 2111. For these reasons, the MSRB proposes deleting Rule G–19(d)(ii). Churning The proposed revisions to Rule G–19 retain the substance of the existing MSRB prohibition on churning,20 but recast it using the current terminology of ‘‘quantitative suitability’’ used in FINRA’s suitability rule.21 The quantitative suitability requirement is included in proposed Rule G–19, supplementary material .05(c). Investment Strategies The proposed amendments to Rule G– 19 incorporate the application of suitability to ‘‘investment strategies.’’ Specifically, proposed supplementary material .03 defines the phrase ‘‘investment strategy involving a municipal security or municipal securities’’ by stating that it is ‘‘to be interpreted broadly and would include, among other things, an explicit 18 See MSRB Rule G–19(d)(i). MSRB Rule G–19(d)(ii). 20 See MSRB Rule G–19(e). 21 See FINRA Rule 2111, Supplementary Material .05(c). 19 See E:\FR\FM\22OCN1.SGM 22OCN1 62870 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices recommendation to hold a municipal security or municipal securities.’’ This definition is consistent with the definition of ‘‘investment strategy involving a security or securities’’ in FINRA’s suitability rule.22 The proposed MSRB suitability rule, like the FINRA rule, carves out communications of certain types of educational material as long as such communications do not recommend a particular municipal security or municipal securities.23 The list of educational materials in proposed Rule G–19, supplementary material .03, differs in minor respects from the list of educational materials in FINRA’s suitability rule 24 to account for unique attributes of the municipal securities market. Institutional Accounts Provisions in guidance to MSRB Rule G–17 and proposed MSRB Rules D–15 and G–48 (discussed below) exempt dealers from the duty to perform a customer-specific suitability determination for recommendations to SMMPs.25 FINRA’s suitability rule has similar provisions with respect to institutional accounts that is included as a provision in its suitability rule.26 The MSRB SMMP exemption applies not only to Rule G–19, but also has applicability to MSRB Rules G–47, on time of trade disclosures, G–18, on transaction pricing, and G–13, on bona fide quotations. Therefore, the MSRB proposes to include the SMMP exemption in proposed Rules D–15 and G–48 instead of incorporating it into Rule G–19 and the other rules to which the SMMP exemption applies. Proposed Technical Revisions to Rule G–8, on Books and Records MSRB Rule G–8(a)(xi)(F) includes references to MSRB Rule G–19(c)(ii) and G–19(b). These referenced provisions are not codified as such in the proposed revisions to MSRB Rule G–19, but the concepts would remain in the proposed rule. Therefore, the MSRB proposes revising MSRB Rule G–8(a)(xi)(F) simply to include a reference to the entire MSRB Rule G–19. sroberts on DSK5SPTVN1PROD with FRONT MATTER 22 See FINRA Rule 2111, Supplementary Material .03. 23 Id. 24 Id. 25 See e.g., Interpretive Notice effective July 9, 2012, Restated Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals; see also MSRB Notice 2013–10, Request for Comment on Proposed Sophisticated Municipal Market Professional Rules (May 1, 2013). 26 See FINRA Rule 2111(b). VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 Current Interpretive Guidance on Suitability Over the years, the MSRB has issued guidance on suitability in connection with other issues under MSRB Rule G– 17. This guidance provides that a dealer must take into account all material information that is known to the dealer or that is available through established industry sources in meeting its suitability obligations.27 This is the same type of information that dealers are required to disclose to customers at the time of trade.28 The Rule G–17 guidance also describes material information that dealers should consider in making suitability determinations in specific scenarios such as credit or liquidity enhanced securities,29 auction rate securities,30 and insured bonds.31 Rather than listing information in the supplementary material to Rule G–19 that may be material to an investor, proposed Rule G–19, supplementary material .05(a) includes a general requirement for dealers to understand information about the municipal security or strategy and contains an explicit cross-reference to a dealer’s obligations under proposed MSRB Rule G–47, on time of trade disclosure.32 The remaining suitability obligations currently described in the Rule G–17 guidance 33 are incorporated into revised Rule G–19.34 The MSRB also has issued interpretive guidance under Rule G–19 that has been previously filed with the Commission and addresses online 27 See, e.g., Interpretive Notice dated September 20, 2010, MSRB Reminds Firms of their Sales Practice and Due Diligence Obligations when Selling Municipal Securities in the Secondary Market. 28 See, e.g., Interpretive Notice dated July 14, 2009, Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities. 29 Id. 30 Interpretive Notice dated February 19, 2008, Application of MSRB Rules to Transactions in Auction Rate Securities. 31 Interpretive Notice dated January 22, 2008, Bond Insurance Ratings—Application of MSRB Rules. 32 FINRA Rule 2111 does not include a comparable provision. 33 Interpretive Notice dated March 30, 2007, Reminder of Customer Protection Obligations in Connection with Sales of Municipal Securities; Interpretive Notice dated March 18, 2002, Interpretive Notice Regarding Rule G–17, on Disclosure of Material Facts; and Interpretive Notice dated March 4, 1986, Notice Concerning Disclosure of Call Information to Customers of Municipal Securities. 34 This does not include suitability obligations with respect to 529 plans. The MSRB may create a separate rule regarding the suitability obligations for 529 plans. Until the MSRB adopts a rule specific to 529 plans, MSRB Rule G–19 and any related interpretive guidance will continue to apply to 529 plans. PO 00000 Frm 00288 Fmt 4703 Sfmt 4703 communications, investment seminars, and customers contacting a dealer in response to an advertisement.35 This guidance would be superseded by revised Rule G–19 and the MSRB proposes deleting the guidance. The MSRB also has issued interpretations under Rules G–15,36 G–21,37 and G– 32 38 that nominally reference suitability obligations. Since these interpretations address areas other than suitability and are not inconsistent with the proposed revisions, the MSRB will leave these interpretations intact. Rules D–15 and G–48 on SMMPs Proposed Rules D–15 and G–48 on SMMPs (the ‘‘proposed SMMP rules’’) would streamline and codify the existing MSRB Rule G–17 guidance regarding the application of MSRB rules to transactions with SMMPs. The proposed SMMP rules would consist of a new definitional rule, D–15, defining an SMMP and a new general rule, G–48, on the regulatory obligations of dealers to SMMPs. On May 25, 2012, the SEC approved an interpretive notice to Rule G–17 revising prior guidance on the application of MSRB rules to transactions with SMMPs.39 The 35 Interpretive Notice dated September 25, 2002, Notice Regarding Application of Rule G–19, on Suitability of Recommendations and Transactions, to Online Communications and Interpretive Notice dated April 25, 1985, Application of Suitability Requirements to Investment Seminars and Customer Inquiries Made in Response to a Dealer’s Advertisements; see SEC Release No. 34–21990 (April 25, 1985), 50 FR 18602 (May 1, 1985) (File No. SR–MSRB–85–6). The latter notice, as currently published on the MSRB Web site, was nonsubstantially revised to reflect amendments to Rule G–19 that became effective on April 7, 1994 (File No. SR–MSRB–94–01), and those revisions were not made part of a rule filing. 36 Interpretive Notice dated March 13, 1989, Notice Concerning Stripped Coupon Municipal Securities; and Interpretive Letter dated February 17, 1998, Securities description: prerefunded securities. 37 Interpretive Notice dated June 5, 2007, Interpretation on General Advertising Disclosures, Blind Advertisements and Annual Reports Relating to Municipal Fund Securities under Rule G–21; and Interpretive Letter dated May 21, 1998, Disclosure obligations. 38 Interpretive Notice dated November 20, 1998, Notice Regarding Electronic Delivery and Receipt of Information by Brokers, Dealers and Municipal Securities Dealers; and Interpretive Notice dated March 26, 2001, Interpretation on the Application of Rules G–32 and G–36 to New Issue Offerings Through Auction Procedures. 39 Interpretive Notice effective July 9, 2012, Restated Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals (the ‘‘restated SMMP notice’’). At the time of issuance of the restated interpretive guidance, the MSRB noted that FINRA adopted Rule 2111, which included revised treatment of customer-specific suitability for institutional accounts, and that it generally considered it desirable from the standpoint of reducing the cost of dealer E:\FR\FM\22OCN1.SGM 22OCN1 sroberts on DSK5SPTVN1PROD with FRONT MATTER Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices proposed SMMP rules preserve the substance of this guidance but codify it into two proposed rules that define an SMMP and describe the application of the following obligations to SMMPs: (1) Time of trade disclosure; (2) transaction pricing; (3) suitability; and (4) bona fide quotations. The proposed SMMP rules do not change the substance of the restated SMMP notice except that the proposed definition of SMMP includes a reference to the term ‘‘investment strategies’’ to be consistent with inclusion of that term in the proposed suitability rule described above. The MSRB believes that the proposed definitional rule, together with the proposed general rule that describes the regulatory obligations of dealers working with SMMPs, will underscore the differences between dealers’ obligations to non-SMMPs and SMMPs, while highlighting the eligibility standards for being an SMMP. A summary of proposed Rules D–15 and G–48 is as follows: Proposed Rule D–15 defines the term ‘‘sophisticated municipal market professional’’ or ‘‘SMMP’’ as a customer of a dealer that is a bank, savings and loan association, insurance company, or registered investment company; or an investment adviser registered with the Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or any other entity with total assets of at least $50 million. Additionally, the dealer must have a reasonable basis to believe that the customer is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions and investment strategies in municipal securities, and affirmatively indicates that it is exercising independent judgment in evaluating the recommendations of the dealer. The supplementary material to proposed Rule D–15 addresses the reasonable basis analysis and the customer affirmation. Section .01 states that as part of the reasonable basis analysis, the dealer should consider the amount and type of municipal securities owned or under management by the customer. Section .02 states that a customer may affirm that it is exercising independent judgment either orally or in writing, and such affirmation may be given on a trade-by-trade basis, on a type-of-municipal-security basis, or on an account-wide basis. compliance to maintain consistency with FINRA rules. VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 Proposed Rule G–48 describes the application of certain obligations to SMMPs. More specifically, the proposed rule provides that a dealer’s obligations to a customer that it reasonably concludes is an SMMP are modified as follows: (1) With respect to the time of trade disclosure obligation in proposed Rule G–47, the dealer does not have any obligation to disclose material information that is reasonably accessible to the market; (2) with respect to transaction pricing obligations under Rule G–18, the dealer does not have any obligation to take action to ensure that transactions meeting certain conditions set forth in the proposed rule are effected at fair and reasonable prices; (3) with respect to the suitability obligation in Rule G–19, the proposed rule provides that the dealer does not have any obligation to perform a customerspecific suitability analysis; and (4) with respect to the obligation regarding bona fide quotations in Rule G–13, the dealer disseminating an SMMP’s quotation which is labeled as such shall apply the same standards described in Rule G– 13(b) for quotations made by another dealer. Current Interpretive Guidance on SMMPs There are two interpretive notices that were previously filed with the Commission that would be superseded in their entirety by the SMMP rule 40 and the MSRB proposes to delete these interpretive notices. 2. Statutory Basis The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2)(C) of the Act,41 which provides that the MSRB’s rules shall be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, and, in general, to protect investors, municipal entities, obligated persons, and the public interest. The proposed rule change is consistent with Section 15B(b)(2)(C) of 40 Interpretive Notice effective July 9, 2012, Restated Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals and Interpretive Notice dated April 30, 2002, Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals. 41 15 U.S.C. 78o–4(b)(2)(c). PO 00000 Frm 00289 Fmt 4703 Sfmt 4703 62871 the Act. The disclosure of material information about a transaction to investors and the performance of a meaningful suitability analysis is central to the role of a dealer in facilitating municipal securities transactions. Proposed Rule G–47, on time of trade disclosures, codifies current interpretive guidance and protects investors by requiring dealers to make disclosures to customers in connection with purchases and sales of municipal securities. These required disclosures are designed to prevent fraudulent and manipulative acts and practices by dealers, and promote just and equitable principles of trade, by requiring dealers to disclose information about a security and transaction that would be considered significant or important to a reasonable investor in making an investment decision. Similarly, the proposed revisions to Rule G–19, on suitability, furthers these purposes by requiring dealers and their associated persons to make only suitable recommendations to customers and fosters cooperation and coordination by harmonizing the rule with FINRA’s suitability rule. Finally, the proposed SMMP rules codify current interpretive guidance that was approved by the SEC in 2012 42 and these proposed rules do not change the substance of that guidance. B. Self-Regulatory Organization’s Statement on Burden on Competition The MSRB does not believe that the proposed rule change would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. As discussed above, the proposed time of trade disclosure rule and proposed SMMP rules codify current interpretive guidance, therefore, they do not add any burden on competition. The proposed revisions to the suitability rule codify current interpretive guidance and add new requirements that are largely harmonized with FINRA’s suitability rule in response to a recommendation by the Commission to harmonize MSRB Rule G–19 with FINRA Rule 2111.43 The MSRB believes that these changes will, in fact, ease burdens on dealers and promote competition by clarifying certain core dealer obligations and the relief available when transacting business with SMMPs. 42 See SEC Release No. 34–67064 (May 25, 2012). https://www.sec.gov/news/studies/2012/ munireport073112.pdf at 141. 43 See E:\FR\FM\22OCN1.SGM 22OCN1 62872 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Rule G–47 on Time of Trade Disclosures On February 11, 2013, the MSRB requested comment on a draft of Rule G–47, on time of trade disclosures.44 The time of trade disclosure notice generated eight comment letters.45 The comment letters are summarized by topic as follows: sroberts on DSK5SPTVN1PROD with FRONT MATTER • Support for the Proposal COMMENTS: All of the commenters generally support the MSRB’s initiative to clarify and codify the time of trade disclosure requirements. BDA states that the incorporation of interpretive notices into rules should help provide much desired clarity to market participants. Lumesis indicates that the proposed rule would provide greater clarity to market participants and support enhanced transparency and disclosure for the retail investor. Lumesis further states that the proposed rule is a significant step in clarifying the requirements for time of trade disclosures to retail investors. Schwab states that, generally speaking, it supports the MSRB’s effort to consolidate years of interpretive guidance related to time of trade disclosure obligations into a rule. SIFMA comments that it generally supports the concept behind the MSRB’s initial effort to provide clarity to regulated entities by reorganizing or eliminating certain interpretive guidance associated with MSRB Rule G– 17 into new or revised rules highlighting core principles. TMC states that it supports the MSRB’s efforts to more clearly define Rule G–17. Finally, WFA commends the MSRB’s efforts to simplify dealer compliance with time of trade disclosure guidance and to harmonize the MSRB’s rule structure with FINRA’s rule structure. MSRB RESPONSE: The MSRB believes these comments support the MSRB’s statement on the burden on competition. 44 See MSRB Notice 2013–04 (February 11, 2013) (the ‘‘time of trade disclosure notice’’). 45 Comment letters were received from: (1) Bond Dealers of America (‘‘BDA’’); (2) Charles Schwab & Co., Inc. (‘‘Schwab’’); (3) Lumesis, Inc. (‘‘Lumesis’’) (Lumesis sent two separate comment letters, one on March 11, 2013 and a second letter on July 17, 2013 after the comment period was closed); (4) R.W. Smith & Associates, Inc. (‘‘RWSA’’) (RWSA’s comment letter simply states that they contributed to and support the SIFMA comment letter and its positions in relation to codifying the time of trade disclosure obligation); (5) Securities Industry and Financial Markets Association (‘‘SIFMA’’); (6) TMC Bonds, L.L.C. (‘‘TMC’’); and (7) Wells Fargo Advisors, LLC (‘‘WFA’’). VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 • Handling of Current Notices COMMENT: SIFMA suggests that the MSRB should consolidate the existing time of trade disclosure guidance into a user friendly format similar to the format used when the MSRB reorganized guidance on Rule G–37, on political contributions and prohibitions on municipal securities business. SIFMA proposes preserving the text of the time of trade disclosure guidance, but consolidating it in one place since the guidance contains nuances that are easily lost in a short bullet point format. MSRB RESPONSE: The MSRB believes the supplementary material incorporates the necessary information from the interpretive guidance and that it is not necessary to preserve the text of the current guidance or create a set of questions and answers similar to Rule G–37 at the present time. Moreover, to codify the existing interpretative guidance into a rule but preserve the text of the guidance would not advance the MSRB’s goal to streamline its rulebook. • SMMP Guidance COMMENT: SIFMA states that, since the current SMMP guidance primarily relates to time of trade disclosures, Rule G–47 should affirm such guidance. Similarly, BDA states that the Rule G– 17 SMMP guidance should apply to Rule G–47 and a reference to the exception should be added to the proposed rule or, at a minimum, the SMMP guidance should be revised to reference Rule G–47. MSRB RESPONSE: The SMMP guidance does not primarily relate to time of trade disclosures as it addresses four separate areas: time of trade disclosures, transaction pricing, suitability, and bona fide quotations. The MSRB has proposed a draft SMMP rule that references proposed Rule G–47 and does not believe it is necessary or appropriate to reference this new SMMP rule in proposed Rule G–47 (and the other rules to which the SMMP guidance applies). Because the proposed SMMP rule references proposed Rule G– 47, the MSRB has effectively addressed the comment that the SMMP guidance should, at a minimum, reference proposed Rule G–47. • Electronic Trading Platforms COMMENT: Schwab and SIFMA are concerned about the proposed deletion of the Interpretive Notice dated March 18, 2002 entitled ‘‘Interpretive Notice Regarding Rule G–17, on Disclosure of Material Facts’’ (the ‘‘March 18, 2002 Notice’’). Specifically, Schwab and SIFMA are concerned about deleting the following sentence: PO 00000 Frm 00290 Fmt 4703 Sfmt 4703 The MSRB believes that the provision of electronic access to material information to customers who elect to transact in municipal securities on an electronic platform is generally consistent with a dealer’s obligation to disclose such information, but that whether such access is effective disclosure ultimately depends upon the particular facts and circumstances present. SIFMA 46 states that its members have relied on this language in developing policies and procedures to provide time of trade disclosures to customers using electronic trading platforms. Similarly, Schwab states that dealers providing online access to customers have relied on this language for years and the absence of specific language that recognizes a dealer’s ability to meet their time of trade disclosure obligations via electronic access could lead to confusion among dealers and disruption of disclosure processes across the industry. Additionally, BDA indicates that dealers believe access equals disclosure for online trading. MSRB RESPONSE: The sentence quoted above was intentionally excluded from the proposed rule because the ability to use electronic disclosure is now so widely accepted and the qualifying phrase ‘‘whether such access is effective disclosure ultimately depends upon the particular facts and circumstances present’’ renders the guidance less definitive. Moreover, based on the comments received, some industry members appear to have misinterpreted this sentence to mean that ‘‘access’’ equals disclosure for online trading. This apparent misunderstanding of the guidance supports deletion of the sentence and highlights the importance of clarifying the time of trade disclosure guidance by codifying it into a short and easy to understand rule. COMMENT: BDA encourages the MSRB to establish a separate section of the proposed rule addressing disclosure obligations in connection with online trading to provide more clarity. MSRB RESPONSE: The codification of interpretive guidance in this rulemaking initiative is not intended to substantively change the time of trade disclosure obligation. The MSRB can consider adding provisions addressing online trading if the Board undertakes to amend the rule substantively in the future. 46 SIFMA states that the March 18, 2002 Notice should not be deleted because it is one of the few MSRB notices discussing a dealer’s time of trade disclosure obligations that has been approved by the SEC. Proposed Rule G–47 and the related supplementary material which would supersede that Notice, however, are likewise being submitted to the SEC for approval. E:\FR\FM\22OCN1.SGM 22OCN1 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices • Electronic Trading Systems— Institutional Customers COMMENT: TMC suggests that the proposed rule exempt institutional market professionals from the disclosure requirement. MSRB RESPONSE: The proposed rule, in conjunction with the SMMP guidance and proposed SMMP rule, should address TMC’s concerns by exempting dealers from the requirement to disclose to SMMPs material information that is reasonably accessible to the market. Therefore, the MSRB is not proposing any changes to the proposed rule based on these comments. • Minimum Denominations COMMENT: SIFMA believes that the Interpretive Notice dated January 30, 2002 entitled ‘‘Notice of Interpretation of Rule G–17 Concerning Minimum Denominations’’ should not be deleted because it is the only guidance concerning the disclosure obligation for securities sold below minimum denominations. SIFMA states that its members believe the background information in this notice is important. MSRB RESPONSE: The proposed rule addresses disclosure obligations related to minimum denominations as described in the current Rule G–17 guidance. The MSRB does not believe that it is necessary to include the background information included in the guidance; however, in response to this comment, the MSRB has proposed a revision to Rule G–47, supplementary material .03(g), clarifying that the disclosure obligation relates to minimum denominations authorized by bond documents. sroberts on DSK5SPTVN1PROD with FRONT MATTER • Disclosure Obligations for Sales to Customers vs. Purchases From Customers COMMENT: SIFMA argues that the rule should make a distinction between a dealer’s disclosure obligation for sales to customers, as opposed to purchases from customers, and that the rule’s failure to do so is inconsistent with current guidance. SIFMA states that existing guidance primarily focuses on disclosure obligations when a dealer is selling a bond to a customer and very limited guidance has been issued covering situations when a dealer is purchasing. SIFMA states that this proposed extension of the disclosure obligation is not warranted, as arguably the selling customer knows the features of the security that it owns and the potentially purchasing dealer is about to assume the risks of those features. SIFMA acknowledges, however, that knowledge professionally available to VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 dealers, such as a ratings change that has not yet been noticed to EMMA, or a call at par announced minutes ago via a recognized information vendor, is material and should be disclosed. However, SIFMA argues that this new requirement could be harmful to customers and would also be unnecessarily burdensome for dealers.47 SIFMA states that the MSRB should explicitly recognize that a substantially different time of trade disclosure obligation exists in these circumstances and that the specific scenarios in the proposed rule may not be applicable when a customer is selling. Finally, SIFMA states that, if the MSRB extends an undifferentiated obligation to customer sale transactions, a thorough cost benefit analysis should be undertaken. BDA also argues that the burden of applying this rule to sales of securities by customers outweighs any tangential value to customers. BDA urges the MSRB to apply the proposed rule to sales by customers in a narrow set of instances, such as when an issuer has made a tender offer for the bonds at a price that is higher than what the dealer is offering. MSRB RESPONSE: Although recent time of trade disclosure guidance focuses on sales of municipal securities to customers, certain earlier guidance requires dealers to make disclosures in connection with both sales to and purchases from customers, and that guidance remains in effect. The MSRB believes, from a fair dealing perspective, that it is difficult to categorically exclude purchases from customers. Significantly, both SIFMA and BDA have pointed out instances where disclosure to a customer selling a bond would be appropriate. Therefore, the MSRB proposes to retain the disclosure requirement for purchases from customers. However, in response to this comment, the MSRB proposes to add the following sentence to the rule to clarify that whether the customer is purchasing or selling is a factor that can be considered in making the materiality determination: ‘‘Whether the customer is purchasing or selling the municipal securities may be a consideration in determining what information is material.’’ 47 For example, SIFMA states that a particular dealer may not have recommended or even sold the bond to the customer so researching and disclosing all material facts about the bond will delay the trade. Additionally, SIFMA states that when an estate has given a dealer instructions to liquidate an entire portfolio, the disclosure obligation could decrease liquidity while the dealer does its own diligence and increase the cost of the trade. PO 00000 Frm 00291 Fmt 4703 Sfmt 4703 62873 • Material, Non-Public Information COMMENT: SIFMA and BDA propose that the MSRB modify the definition of ‘‘material’’ to exclude material nonpublic information. MSRB RESPONSE: As discussed above, the MSRB is not proposing substantively to revise the current time of trade disclosure obligations but simply to codify them. While the MSRB understands the issue raised by the commenters, the MSRB can consider this comment if the Board undertakes to amend the rule substantively in the future. • Access Equals Delivery for Time of Trade Disclosures COMMENT: SIFMA states that the proposed rule seems to eviscerate recent MSRB access equals delivery initiatives. SIFMA states that, in connection with marketing new issues of municipal securities to customers, dealers have relied on MSRB guidance that providing a preliminary official statement (‘‘POS’’) to a customer ‘‘can serve as a primary vehicle for providing the required timeof-trade disclosures under Rule G–17, depending upon the accuracy and completeness of the POS as of the time of trade.’’ SIFMA believes that providing access to a POS, whether on EMMA or some other electronic platform, should continue to satisfy a dealer’s time of trade obligation for new issues of municipal securities. SIFMA states that proposed Rule G–47, supplementary material .01(b) and (c), seem to prohibit activity recently championed by the MSRB and that the proposed new obligation could create a risk of having dealers misinterpret or inadequately summarize information in a POS. MSRB RESPONSE: This comment does not sufficiently differentiate between Rule G–32, on disclosures in connection with primary offerings, and Rule G–17, which are two separate and distinct obligations. The guidance cited by SIFMA states that a POS can serve as a primary vehicle for providing the required time-of-trade disclosures but does not state that providing access to a POS would be sufficient. The MSRB has not stated that access to a POS, or to all material information regarding a security and transaction, is sufficient to satisfy the Rule G–17 time of trade disclosure obligation. Rather, the MSRB has explained that whether providing access to material information is effective disclosure is determined by the specific facts and circumstances. Supplementary material .01 (b) and (c) does not preclude the disclosure of material information by delivery of a E:\FR\FM\22OCN1.SGM 22OCN1 62874 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices POS to the customer, assuming the POS contains all material information and assuming the means of disclosure are effective. sroberts on DSK5SPTVN1PROD with FRONT MATTER • General Advertising Materials COMMENT: SIFMA requests further clarification of the types of ‘‘disclosure of general advertising materials’’ as referenced in proposed Rule G–47, supplementary material .01(c). MSRB RESPONSE: The MSRB does not propose to provide further clarification on general advertising materials at this time since the Rule G– 17 interpretive notices do not elaborate on this concept. The MSRB can consider providing additional guidance if the Board undertakes to amend proposed Rule G–47 substantively in the future. • Established Industry Sources COMMENT: Lumesis suggests that requiring market participants to disclose ‘‘material information about the security that is reasonably accessible to the market’’ should contemplate more than ‘‘established industry sources’’ as currently defined. Lumesis states that this would make the definition broad enough to encompass current or future technology and/or dissemination systems. Lumesis suggests that the MSRB remove the term ‘‘established industry sources’’ from the proposed rule or provide clarity to ensure that market participants focus on disclosing material information about the security that is reasonably accessible to the market. Similarly, TMC suggests that the proposed rule clarify what information is considered ‘‘reasonably accessible to the market.’’ MSRB RESPONSE: The proposed rule provides that dealers must disclose ‘‘all material information known about the transaction, as well as material information about the security that is reasonably accessible to the market.’’ The proposed rule further provides that ‘‘‘[r]easonably accessible to the market’ shall mean that the information is made available publicly through established industry sources’’ and ‘‘‘[e]stablished industry sources’ shall include [EMMA], rating agency reports, and other sources of information relating to municipal securities transactions generally used by brokers, dealers, and municipal securities dealers that effect transactions in the type of municipal securities at issue.’’ [Emphasis added] The definition of established industry sources is not limited to the particular sources listed, and the definition allows for evolving technologies and systems so long as such ‘‘other sources’’ are related and generally used as delineated by the proposed rule. VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 COMMENT: WFA states that the rule should acknowledge the role of information vendors in helping a dealer monitor established industry sources. WFA cites the Interpretive Notice dated November 30, 2011, MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure Obligations under MSRB Rule G–17, which states: [T]he MSRB has noted that information vendors and other organizations may provide industry professionals with access to information that is generally used by dealers to effect transactions in municipal securities. The MSRB expects that, as technology evolves and municipal securities information becomes more readily available, new ‘established industry sources’ are likely to emerge. More specifically, WFA requests that the final rule clarify that dealers may rely on vendors to help aggregate material information from established industry sources and monitor for ‘‘emerging’’ sources. Additionally, WFA states that the rule and guidance should recognize that established industry sources remain reliant on the quality of continuing and material event notifications provided by issuers. MSRB RESPONSE: The MSRB believes the role that information aggregators may play in assisting dealers in compliance with the rule is widely known and recognized and that specifically addressing the use of aggregators in the proposed rule may imply that use of such services is encouraged or required. • Rating Agency Reports COMMENT: SIFMA requests that the MSRB clarify ‘‘rating agency reports’’ within the definition of ‘‘established industry sources’’ in the proposed rule. SIFMA states that the use of the term ‘‘reports’’ implies that dealers must distribute credit event-driven reports and that disclosure of the rating action alone is insufficient. SIFMA requests that the MSRB clarify that firms are under no obligation to distribute such reports. Lumesis suggests that the definition of ‘‘established industry sources’’ should not include ‘‘rating agency reports.’’ Lumesis states that inclusion of the reference may be inconsistent with a focus on material information that is timely since these reports may be issued months or more before the trade triggering disclosure. Additionally, Lumesis states that the inclusion of reports may be construed as an implicit endorsement of a private, for-profit enterprise’s offering as fulfilling the requirement. Lumesis also states that the inclusion of rating agency reports seems inconsistent with the Dodd-Frank PO 00000 Frm 00292 Fmt 4703 Sfmt 4703 Act which indicates that market participants using ratings or rating reports should not rely on them alone. MSRB RESPONSE: As discussed previously, the MSRB is simply codifying the existing guidance in this rulemaking initiative. The current guidance does not address the meaning of the reference to ‘‘rating agency reports’’ for purposes of time of trade disclosure and, as discussed above, the definition of established industry sources is not limited to the particular sources listed. Therefore, the MSRB does not propose adding any additional interpretation to the meaning of ‘‘rating agency reports’’ or deleting this reference. However, the MSRB can consider revisions in this area if the Board undertakes to amend proposed Rule G–47 substantively in the future. • Unsolicited Orders COMMENT: TMC suggests that the requirement for dealers to disclose reasonably accessible information to a client placing an unsolicited order is unnecessary regulation given the ease of access to the internet. MSRB RESPONSE: Current guidance provides that the time of trade disclosure obligation is the same whether the order is unsolicited or solicited. The goal of this rulemaking initiative is to codify current guidance in the new proposed Rule G–47. • Location of Rule COMMENT: TMC suggests that it might be beneficial to codify the time of trade disclosure rule as a subsection of Rule G–17 as opposed to creating a new rule so that participants would only have to view a single rule for fair dealing, as opposed to having to crossreference similar rules and their corresponding comments. MSRB RESPONSE: The MSRB does not propose to codify the provisions as suggested because, as a result of this rulemaking initiative, there will no longer be any time of trade disclosure guidance in Rule G–17.48 • Material Event Filings COMMENT: SIFMA states that it would be helpful for the MSRB to explicitly address the concept that an event disclosed by an issuer or obligated person pursuant to an SEC Rule 15c2– 12 continuing disclosure agreement does not necessarily constitute 48 Rule G–17 will continue to include interpretive guidance related to time of trade disclosures for 529 plans. As indicated above, however, the MSRB may create a separate rule regarding time of trade disclosure obligations for 529 plans, in which case this guidance would likely be codified in a rule and deleted as part of any such rulemaking initiative. E:\FR\FM\22OCN1.SGM 22OCN1 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices sroberts on DSK5SPTVN1PROD with FRONT MATTER ‘‘material information’’ that would be required to be disclosed to investors and that, even if such information was material at the time it was disclosed, it does not remain material forever. SIFMA states that long-past credit ratings changes, or substitutions of trustees, or a continuing disclosure filing that was a few days late five years ago should not automatically be deemed material at the time of trade merely because they triggered a disclosure obligation at the time of occurrence. SIFMA suggests that a six-month look back would be a reasonable time limit for disclosing past information. MSRB RESPONSE: There is nothing in the proposed rule indicating that events disclosed by an issuer or obligated person pursuant to Rule 15c2– 12 are automatically material at the time of trade. The proposed rule states the well established definition that ‘‘[i]nformation is considered to be material if there is a substantial likelihood that the information would be considered important or significant by a reasonable investor in making an investment decision.’’ Therefore, the MSRB does not believe that any revisions are necessary or appropriate in response to this comment. In addition, there is no safe-harbor look back period under the existing guidance and thus a look back period is not included in the proposed rule, the purpose of which is only to codify existing obligations. • Disclosure Obligations in Specific Scenarios COMMENT: SIFMA states that the list of scenarios in the proposed rule that may be material under certain circumstances and require disclosure is too prescriptive for a principles-based rule and will become a de facto enforcement checklist for regulators. SIFMA also states that dealers may rely on the four corners of the notice and not consider other factors that may become material in the future. SIFMA suggests that the existing interpretive notices be reorganized by specific scenarios, as many of the listed specific scenarios are the subject of more than one interpretive notice. MSRB RESPONSE: The proposed rule provides that the examples describe information that may be material in specific scenarios and that the list is not exhaustive. The MSRB does not propose to reorganize the existing interpretive guidance by specific scenarios since the MSRB plans to delete the Rule G–17 time of trade disclosure guidance. COMMENT: Similarly, WFA states that a final rule should provide dealers with more clarity about the specific scenarios that trigger time of trade VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 disclosure obligations for the types of information identified in the supplementary material. MSRB RESPONSE: The MSRB believes that the supplementary material in the proposed rule provides dealers with sufficient clarity regarding time of trade disclosure obligations by providing a non-exhaustive list of examples describing information that may be material. • Credit Risks and Ratings COMMENT: SIFMA states that unlike many of the other specific scenarios addressed in the proposed rule, credit ratings are potentially more fluid. Therefore, SIFMA argues that it would be helpful to define a material look-back period for credit ratings changes. MSRB RESPONSE: The MSRB does not propose making these changes since they are not in the current guidance but the MSRB can consider them if the Board undertakes to amend the proposed rule substantively in the future. • Securities With Non-Standard Features COMMENT: SIFMA states that the prior uses of the term ‘‘non-standard features’’ have been related to situations where the bonds pay interest annually, rather than semi-annually, a fact that affects yield calculations. SIFMA argues that this new usage seems to have no bounds, and adds the traditional interpretation as an afterthought. SIFMA states that it would be helpful to know what the MSRB considers to be standard features. MSRB RESPONSE: The MSRB does not propose making any revisions to the proposed rule in response to this comment. The requirement in the proposed rule is drawn from current interpretive guidance on time of trade disclosure obligations, and while the discussion of non-standard features arose in the context of price/yield calculations, the basic principle, when limited by a materiality threshold, is appropriate for the proposed rule change. • Issuer’s Intent to Prerefund COMMENT: SIFMA states that, unless an issuer’s intent to prerefund has been publicly announced, it will not be known to established industry sources and would likely be material non-public information. (See the discussion above regarding the disclosure of material nonpublic information.) MSRB RESPONSE: This requirement is drawn from the current interpretive guidance and the MSRB does not PO 00000 Frm 00293 Fmt 4703 Sfmt 4703 62875 propose any changes in response to this comment. • Failure to Make Continuing Disclosure Filings COMMENT: WFA suggests that the proposed rule should provide guidance about how to interpret the potential materiality of issuer event reporting deficiencies. WFA believes that the rule should make clear that an issuer’s failure to make continuing disclosure filings is a factor but is not determinative of the materiality of the issuer’s disclosure deficiency. WFA also believes the MSRB should make clear that a dealer may consider subsequent disclosures and the curing of late filings as relevant in determining the significance of a prior or less severe disclosure deficiency. Finally, WFA believes the supplementary material should specify a window of time in which an issuer’s late continuing disclosure filing would be regarded as a clerical or ministerial issue and thus not a material deficiency. MSRB RESPONSE: Proposed Rule G– 47, supplementary material .03(o) provides that discovery that an issuer has failed to make filings required under its continuing disclosure agreements may be material in specific scenarios and require time of trade disclosures to a customer. Therefore, this does not indicate that such a failure is always material requiring disclosure. The proposed rule, as noted, states the well established definition that ‘‘[i]nformation is considered to be material if there is a substantial likelihood that the information would be considered important or significant by a reasonable investor in making an investment decision.’’ Additionally, the MSRB does not propose to add the information requested by WFA relating to curing of late filings and a time window where it would be considered clerical. As discussed previously, the MSRB is simply codifying the existing guidance in this rulemaking initiative and the existing guidance does not provide for such a bright-line look back. COMMENT: SIFMA states that the rule should make it clear that for secondary market trades the ‘‘discovery’’ by a dealer that an issuer has failed to make filings required by its continuing disclosure agreements is limited to a dealer’s review of ‘‘failure to file’’ notices on EMMA pursuant to Rule 15c2–12. MSRB RESPONSE: The interpretive guidance states that, ‘‘if a firm discovers through its Rule 15c2–12 procedures or otherwise that an issuer has failed to make filings required under its continuing disclosure agreements, the E:\FR\FM\22OCN1.SGM 22OCN1 62876 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices firm must take this information into consideration in meeting its disclosure obligations under MSRB Rule G–17 . . .’’ 49 [Emphasis added]. Therefore, this requirement is not as narrow as SIFMA appears to interpret it and the MSRB does not propose to make any changes in response to this comment. • Processes and Procedures COMMENT: SIFMA argues that proposed Rule G–47, supplementary material .04 is an expansion of current regulatory requirements, is too narrow, and omits critical guidance as set forth in the Interpretive Notice dated November 30, 2011, MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure Obligations under MSRB Rule G–17. The proposed rule states: Brokers, dealers, and municipal securities dealers must implement processes and procedures reasonably designed to ensure that material information regarding municipal securities is disseminated to registered representatives who are engaged in sales to and purchases from a customer. The proposed rule does not include the following sentence contained in the guidance: sroberts on DSK5SPTVN1PROD with FRONT MATTER It would be insufficient for a dealer to possess such material information, if there were no means by which a registered representative could access it and provide such information to customers. SIFMA argues that a dealer that provides its registered representatives access to such information satisfies current MSRB guidance under Rule G– 17 and should similarly be sufficient under the proposed rule. SIFMA also argues that incorporating this guidance into the proposed rule is an expansion of existing regulatory obligations as currently approved by the SEC and is not merely a codification of existing regulations. Therefore, SIFMA states that any enforcement against dealers for failing to disseminate or provide access to their registered representatives of material information regarding municipal securities should be applied solely prospectively. MSRB RESPONSE: SIFMA appears to interpret the sentence in the guidance to mean that merely providing access is sufficient. The sentence states that dealer possession of information is insufficient if registered representatives lack access to it. This does not mean that the converse is true—that mere access to the information is sufficient. Beyond providing access, dealers must 49 Interpretive Notice dated September 20, 2010, MSRB Reminds Firms of their Sales Practice and Due Diligence Obligations When Selling Municipal Securities in the Secondary Market. VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 implement processes and procedures reasonably designed to ensure that material information is disseminated to registered representatives. The potential for misinterpretation of this sentence supports the MSRB’s determination that it should not be included in the proposed rule. Additionally, proposed Rule G–47, supplementary material .04 is not an expansion of current regulatory requirements since this obligation is fairly and reasonably implied by current MSRB rules, as enunciated by the MSRB since November 30, 2011.50 COMMENT: WFA suggests that the proposed rule should make clear that a dealer with a reasonably designed system for the detection and disclosure of material information will be presumed to have complied with its time of trade disclosure obligations. MSRB RESPONSE: The current guidance does not provide that a dealer will be presumed to have complied with its time of trade disclosure obligations by having a reasonably designed system. To do so in the proposed rule would significantly narrow dealers’ current obligations. • Ambiguity of Rule COMMENT: BDA states that the proposed rule, like the interpretive guidance, is unnecessarily ambiguous. BDA believes that there should be at least a safe harbor or some additional clarity that allows dealers to comply with concrete rules rather than broadbased principles. MSRB RESPONSE: The MSRB believes the new rule will be clear and easier for dealers to follow. As discussed above, the MSRB is simply codifying the guidance and can consider revisions to the proposed rule in the future. • Harmonizing With FINRA Notice 10– 41 COMMENT: BDA suggests that the MSRB should reconcile how the new proposed rule will be harmonized with FINRA Regulatory Notice 10–41 and exactly how the market should read the two in conjunction with one another. MSRB RESPONSE: The MSRB’s rules and guidance should be followed for all municipal securities transactions as FINRA’s notice is simply its interpretation of MSRB rules and guidance. 50 See Interpretive Notice dated November 30, 2011, MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure Obligations under MSRB Rule G–17; see also Interpretive Notice dated July 14, 2009, Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities. PO 00000 Frm 00294 Fmt 4703 Sfmt 4703 • Enforcement COMMENT: Lumesis comments that providing dealers that have made good faith efforts to comply with proposed Rule G–47 with ample notice and sufficient direction to take corrective actions would support the spirit and intent of the rule. MSRB RESPONSE: The MSRB appreciates this comment; however, the approach to enforcement is beyond the scope of the proposal. • Form of Disclosure COMMENT: Lumesis suggests that as the MSRB contemplates refinements and changes to the proposed rule in the future the subject of ‘‘form of disclosure’’ be more fully addressed as many market participants struggle with what actions satisfy the time of trade disclosure obligation. MSRB RESPONSE: The MSRB can consider this suggestion if the Board undertakes to revise the proposed rule in the future. Rule G–19 on Suitability of Recommendations and Transactions On March 11, 2013, the MSRB requested comment on proposed revisions to Rule G–19.51 The suitability notice generated seven comment letters.52 The comment letters are summarized by topic as follows: • Support for the Proposal COMMENTS: All of the commenters generally support the MSRB’s initiative to harmonize MSRB Rule G–19 with FINRA Rule 2111. BDA states that it is encouraged by many of the changes in proposed Rule G–19. FSI states that it supports the harmonization of MSRB 51 See MSRB Notice 2013–07 (March 11, 2013) (the ‘‘suitability notice’’). 52 Comment letters were received from: BDA; College Savings Foundation (‘‘CSF’’) (although CSF sent its own letter, the letter simply states that CSF endorses the comments made by the Investment Company Institute); College Savings Plans Network (‘‘CSPN’’) (although CSPN sent its own letter, the letter simply states that CSPN is supportive of the comments relating to 529 Plan suitability requirements submitted by the Investment Company Institute); Financial Services Institute (‘‘FSI’’); Investment Company Institute (‘‘ICI’’); SIFMA; and WFA. In addition to these seven comment letters submitted in response to the proposed revisions to Rule G–19, an additional comment letter was submitted by an investor on August 25, 2013. The substance of this letter is more germane to the MSRB’s request for comment on adopting a ‘‘best execution’’ standard and this retail investor submitted a similar letter in response to that request for comment. See, MSRB Notice 2013–16, Request for Comment on Whether to Require Dealers to Adopt a ‘‘Best Execution’’ Standard for Municipal Securities Transactions (August 6, 2013). Therefore, this letter will be discussed in detail in connection with the best execution request for comment. E:\FR\FM\22OCN1.SGM 22OCN1 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices sroberts on DSK5SPTVN1PROD with FRONT MATTER Rule G–19 with FINRA Rule 2111 and that it is a positive development that will provide significant benefits for broker-dealers and financial advisors.53 ICI states that it supports the MSRB’s proposal to harmonize its suitability rule with FINRA’s suitability rule because it is in the best interests of investors and registrants. SIFMA comments that it supports the MSRB’s efforts to harmonize MSRB Rule G–19 with FINRA Rule 2111 since such harmonization will promote more effective business practices and efficient compliance. Finally, WFA states that it applauds the MSRB’s continuing effort to promote regulatory efficiency. MSRB RESPONSE: These comments support the MSRB’s statement on burden on competition. and procedures. WFA is also concerned that the difference in rule structure will lead to regulatory confusion for clients and regulators. BDA believes that omitting any reference to the SMMP exemption in the proposed rule undermines the goal of harmonizing it with FINRA’s suitability rule. BDA is concerned that FINRA examiners will not be able to consistently apply the FINRA suitability rule as contrasted with the MSRB suitability rule, potentially causing confusion for application of the rules by FINRA examiners. BDA states that, if the MSRB includes an exemption for SMMPs in the proposed rule, the supplementary material should be updated to make certain corresponding changes. MSRB RESPONSE: The MSRB does not believe that it is appropriate or necessary to reference the SMMP exemption in Rule G–19. The SMMP exemption addresses four separate areas: time of trade disclosures, transaction pricing, suitability, and bona fide quotations and the exemption is not referenced in any of these separate rules. In connection with the proposed suitability rule, the MSRB has not proposed any revisions to the SMMP exemption and addresses WFA’s comments in this area separately in response to the request for comment on the proposed SMMP rules set out below.54 • Application to SMMPs COMMENTS: SIFMA comments that its members would prefer the MSRB to explicitly include the SMMP exemption in the proposed rule as with the institutional account exemption in FINRA Rule 2111(b) even though the MSRB is proposing separate rules codifying SMMP guidance. SIFMA states that the suitability rule should, at a minimum, cross reference the SMMP rules. Similarly, WFA requests that the MSRB reconsider its plan to handle the SMMP exemption separately from the proposed rule. WFA requests that the MSRB adopt a structure parallel to FINRA’s suitability rule to make clear that, under certain circumstances, a dealer has limited suitability obligations to institutional customers. Additionally, WFA is concerned that the SMMP exemption continues to impose additional suitability requirements on dealers transacting with institutional clients beyond those required under FINRA’s suitability rule. WFA states that dealers considering whether an institutional account is an SMMP must assess the factors required under Rule 2111(b) as well as additional criteria such as the institutional customer’s ability to independently evaluate the ‘‘market value’’ of municipal securities and the ‘‘amount and type of municipal securities owned [by] or under management’’ of the institutional customer. WFA states that since some institutional clients may satisfy FINRA’s exemptive criteria but not MSRB’s, dealers will likely need to invest in costly technology enhancements and will likely be required to maintain separate policies • Exclusions From Recommended Strategies COMMENTS: SIFMA states that the proposed rule omits important exclusions from recommended strategies that are present in FINRA’s suitability rule including with respect to: Descriptive information about an employee benefit plan; asset allocation models such as investment analysis tools; and other interactive investment materials. SIFMA states that these omissions solely with respect to municipal securities will result in confusion. SIFMA believes that materials and output of this nature provide investors with valuable information when considering investment decisions and should be recognized by the MSRB as exclusions from Rule G–19. SIFMA notes that the SEC, in its 2012 Report on the Municipal Securities Market, expressly discusses amending Rule G–19 to be consistent with FINRA’s Rule 2111 ‘‘including with respect to the scope of the term strategy.’’ 53 FSI also notes that it has concerns with FINRA’s suitability rule, but did not specify those concerns. 54 MSRB Notice 2013–10, Request for Comment on Proposed Sophisticated Municipal Market Professional Rules (May 1, 2013). VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 PO 00000 Frm 00295 Fmt 4703 Sfmt 4703 62877 SIFMA also recommends listing 529 plan education savings calculators and tools as a type of excluded ‘‘general investment information.’’ MSRB RESPONSE: The proposed rule does not include the following general financial and investment information from FINRA’s suitability rule: (1) Dollar cost averaging; (2) compounded return; (3) tax deferred investment; (4) descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan; (5) asset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor’s assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with Rule 2214 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an ‘‘investment analysis tool’’ covered by Rule 2214; and (6) interactive investment materials that incorporate the above. These items are not included in the proposed rule because the MSRB chose to include the concepts that are most pertinent to the municipal securities market. With respect to the suggestion to add 529 calculators and tools to the list, the MSRB may create a separate rule or guidance to specifically address suitability obligations for 529 plans in the future and the MSRB can consider this comment at that time. • 529 Plans COMMENTS: ICI states that it is not clear whether the proposed rule is intended to apply to MSRB registrants selling 529 plans. However, ICI states that, from talking to MSRB staff, they understand that the proposed rule is intended to apply to such registrants’ recommendations. ICI recommends that the MSRB revise the current proposal to add supplementary material to Rule G– 19 that sets forth all additional suitability obligations imposed on registrants’ recommendations of 529 plan securities. ICI also recommends that the MSRB rescind all suitability requirements and guidance that have been issued under other MSRB rules relating to recommendations involving 529 plan securities. If the MSRB follows this recommendation, ICI recommends that the MSRB publish a revised request for comment that includes any provisions designed to address 529 plans. SIFMA states that the request for comment creates confusion about the E:\FR\FM\22OCN1.SGM 22OCN1 62878 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices applicability of the proposed rule to firms selling 529 plan securities and, in lieu of a separate suitability rule for 529 plans, SIFMA suggests that the MSRB consider incorporating existing interpretive guidance related to suitability assessments for 529 plans into the proposed rule, either by adding a sentence to the proposed rule specific to assessing the suitability of a 529 plan security, or by incorporating existing interpretive guidance into the supplementary material. MSRB RESPONSE: The proposed rule is intended to apply to 529 plans. All MSRB rules and guidance apply to 529 plans unless specifically excluded, and the proposed rule does not exclude 529 plans. Additionally, the current guidance addressing suitability requirements for 529 plans continues to apply. The MSRB may decide to create a separate rule addressing 529 plans in the future; however, the proposed suitability rule and related guidance will apply to 529 plans until any such separate 529 plan rule is created. sroberts on DSK5SPTVN1PROD with FRONT MATTER • Applicability of FINRA’s Guidance COMMENT: ICI recommends that the MSRB confirm in the notice adopting the proposed revisions to Rule G–19 the MSRB’s intent to interpret its rule in a manner that is consistent with FINRA’s interpretation. MSRB RESPONSE: The MSRB will interpret proposed Rule G–19 in a manner consistent with FINRA’s interpretations of Rule 2111 except to the extent that the MSRB affirmatively states that specific provisions of FINRA’s interpretations do not apply. • Explicit vs. Passive Hold Recommendations COMMENTS: WFA comments that the MSRB should provide guidance similar to FINRA’s guidance that suitability obligations concerning hold recommendations cover only explicit hold recommendations. BDA is concerned that there is a potential for confusion with respect to explicit versus passive hold recommendations. Specifically, proposed Rule G–19, supplementary material .03, Recommended Strategies, would apply the suitability obligation to investment strategies that include an explicit recommendation to hold a municipal security or municipal securities. BDA is concerned that this might lead to unnecessary and burdensome compliance documentation in certain instances. BDA encourages the MSRB to provide further guidance as to what constitutes an explicit hold recommendation for purposes of the rule and believes that the MSRB should VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 have guidance, as FINRA does in Regulatory Notice 12–55, that ‘‘implicit’’ hold recommendations are not within the scope of the suitability rule. MSRB RESPONSE: As noted, the MSRB will interpret Rule G–19 in a manner that is consistent with FINRA’s interpretation of its suitability rule except to the extent that the MSRB affirmatively states that specific provisions of FINRA’s interpretations do not apply. • Effective Date COMMENTS: SIFMA appreciates that the MSRB intends to file the time of trade disclosure, suitability, and SMMP proposals with the SEC at the same time. SIFMA further requests that these three rules be implemented simultaneously with the same effective date. SIFMA states that FINRA Rule 2111 was the result of a multi-year process, including an implementation period of approximately 19 months and that any regulatory scheme takes time to implement properly. SIFMA further states that municipal securities dealers that are not FINRA members, as well as FINRA members that only buy and sell municipal securities, will need a reasonable time to allow for a sufficient implementation period to develop, test, and implement supervisory policies and procedures, systems and controls, as well as training. SIFMA also states that municipal securities dealers that are FINRA members will also need time, albeit less than non-FINRA members, to implement the proposed changes. SIFMA recommends an implementation period of no less than one year from approval by the SEC before the proposal becomes effective. MSRB RESPONSE: The MSRB contemplated implementing the time of trade disclosure, suitability, and SMMP rules simultaneously with the same effective date. However, the MSRB believes that an implementation period of one year is unnecessary. The time of trade disclosure and SMMP rules simply codify existing guidance and the suitability rule is largely consistent with FINRA’s suitability rule. Therefore, the MSRB proposes an effective date for the proposed rule change of 60 days following the date of SEC approval. • Changes to Supplementary Material COMMENTS: BDA suggests striking the word ‘‘retirement’’ from supplementary material .03, Recommended Strategies, item (iv). BDA suggests that the section should be rewritten to read ‘‘estimates of future PO 00000 Frm 00296 Fmt 4703 Sfmt 4703 income needs’’ as this would better align to FINRA’s ‘‘liquidity needs’’ criteria to recognize that when purchasing a position, one might be looking for a period to help bridge income needs until they reach retirement and not solely for ‘‘retirement income needs.’’ MSRB RESPONSE: The language in the proposed rule regarding estimates of future retirement income needs is identical to the parallel language in FINRA’s suitability rule relating to general financial and investment information. The MSRB does not propose to delete the word ‘‘retirement’’ since there is no unique aspect of the municipal securities market that would support adopting different language from FINRA’s rule. Moreover, the MSRB does not believe that the phrase should be aligned to the non-parallel ‘‘liquidity needs’’ criterion in FINRA’s rule relating to a customer’s investment profile. Rules D–15 and G–48 on SMMPs On May 1, 2013, the MSRB requested comment on proposed Rules D–15 and G–48 on SMMPs.55 The SMMP notice generated three comment letters.56 The comment letters are summarized by topic as follows: • Support for the Proposal COMMENTS: All of the commenters generally support the MSRB’s initiative to codify the SMMP guidance into Rules D–15 and G–48. BDA states that, while it is supportive of the proposed rules, it seeks clarity on some items. SIFMA comments that it continues to support the efforts by the MSRB to provide clarity to regulated entities by reorganizing or eliminating certain interpretive guidance associated with Rule G–17 into new or revised rules. WFA states that it supports the MSRB’s continued commitment to ‘‘streamline’’ its rules and guidance and its ongoing effort to align its rule format with that of other regulators. MSRB RESPONSE: The MSRB believes these comments support the MSRB’s statement on the burden on competition. • SMMP Definition COMMENTS: SIFMA comments that there is one group of customers that may be experienced municipal market participants yet does not fall within the current SMMP definition: Hedge funds with assets under management of less than $50 million. SIFMA states that the 55 See MSRB Notice 2013–10 (May 1, 2013) (the ‘‘SMMP notice’’). 56 Comment letters were received from: BDA; SIFMA; and WFA. E:\FR\FM\22OCN1.SGM 22OCN1 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices sroberts on DSK5SPTVN1PROD with FRONT MATTER MSRB and FINRA should consider expanding the definition of institutional account holders and SMMPs in future rulemaking to include this type of customer. Last year the MSRB harmonized (with slight distinctions) the SMMP definition and the process by which dealers confirm a customer’s SMMP status with FINRA’s suitability rule and institutional account definition. SIFMA suggests that hedge funds managing less assets than required by the MSRB and FINRA are nevertheless sophisticated and, therefore, should be covered by the MSRB and FINRA rules. By contrast, BDA indicated in its comment letter that it is comfortable with the $50 million threshold. MSRB RESPONSE: As discussed in the SMMP notice, the codification of the interpretive guidance on SMMPs that is currently in Rule G–17 is intended to preserve the substance of the guidance approved by the Board. No substantive changes are intended. It would be beyond the scope of this initiative to determine whether small hedge funds are sufficiently sophisticated to warrant the relief to dealers in proposed Rule G–48. • Cross References to SMMP Rules COMMENTS: SIFMA and WFA comment that the rules under which a dealer’s obligations to SMMPs are modified (proposed Rule G–47, and Rules G–19, G–13, and G–18) 57 should specifically include a reference to the definition of and the modified obligations to SMMPs delineated in the proposed rules. MSRB RESPONSE: One of the benefits of adopting stand-alone rules is to make them more prominent and easier for dealers and other market participants to locate. The MSRB believes that a standalone SMMP definition and a standalone rule describing the relief available to dealers who do business with SMMPs will provide ample clarity to dealers regarding their obligations. Crossreferences, therefore, are unnecessary. Moreover, if cross-references were used for rules impacting SMMPs, a consistent practice of including cross-references in other rules would tend to make the rulebook unmanageable. This comment was also made in response to the requests for comment on proposed Rule G–47 and the proposed revisions to Rule G–19. In response to the previous comments, the MSRB indicated that it does not believe it is necessary to reference the new SMMP rules in each 57 Although not listed in SIFMA’s letter, Rule G–18 obligations related to transaction pricing are also modified by proposed Rule G–48. VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 of the rules to which the SMMP guidance applies. • Effective Dates COMMENT: SIFMA requests that the proposed revisions to Rule G–19, and proposed Rules G–47, G–48, and D–15 be implemented simultaneously with the same effective date. MSRB RESPONSE: The MSRB agrees that it is appropriate to file these proposed rules simultaneously and for them to become effective together on the same date. • Customer Affirmation COMMENT: With regard to proposed Rule D–15, supplementary material .02, Customer Affirmation, BDA requests that the MSRB consider permitting alternate methods of affirming SMMP status in lieu of specifically obtaining customer affirmations under the proposed rule.58 MSRB RESPONSE: As BDA points out, the rule already provides flexibility with regard to the affirmation process, which is substantially similar to (and can be combined with) FINRA’s process. It can be done orally or in writing, on a trade by trade, type of municipal security or account-wide basis. BDA’s request to use the credit review process in lieu of an affirmation would be a substantial change in the process. The customer affirmation requirement in proposed Rule D–15, supplementary material .02 is taken directly from the 2012 SMMP Interpretation.59 The proposed SMMP rules simply codify the existing guidance and it would be beyond the scope of this rulemaking initiative to make any substantive changes to the existing guidance. • Reasonable Basis Analysis COMMENTS: BDA expresses concern regarding the more stringent requirement in proposed Rule D–15, supplementary material .01, Reasonable Basis Analysis, which goes beyond FINRA’s rules to state that a ‘‘. . . dealer should consider the amount and type of municipal securities owned or under management by the customer.’’ BDA states that FINRA does not require a consideration of the type of securities held by the customer for qualification 58 As an example, BDA states that a dealer who has a process for and conducts a regular credit review of its SMMP customers should be able to use such credit review instead of obtaining an affirmation by the SMMP as long as the dealer determines there has been no change in the status of the SMMP based on the internal review of the customer’s portfolio or other similar evaluation. 59 Restated Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals (July 9, 2012) (the ‘‘2012 SMMP Interpretation’’). PO 00000 Frm 00297 Fmt 4703 Sfmt 4703 62879 under FINRA’s institutional investor exemption. BDA also states that it is unaware of any feature unique to the municipal securities market that would justify the more burdensome requirement to consider both the amount and type of municipal securities owned or under management by the customer. BDA further states that this requirement might confuse examiners and allow for an uneven application of the proposed rule. BDA believes a determination by the dealer that the customer has total assets of at least $50 million and that the dealer has a reasonable basis to believe the customer is capable of evaluating investment risk and market value independently should be given deference. MSRB RESPONSE: The MSRB believes this additional requirement that a dealer consider the amount and type of municipal securities owned or under management by the customer is appropriate since it provides some assurance that the dealer considered the investor’s experience as a municipal securities investor in forming a reasonable basis for believing that the customer is capable of evaluating investment risks and market value independently. The MSRB believes the concern about misapplication in the regulatory examination process is misplaced, since the dealer need only evidence that it considered the municipal securities holdings of the customer in its analysis. The customer affirmation requirement in proposed Rule D–15, supplementary material .01 is taken directly from the 2012 SMMP Interpretation.60 The proposed SMMP rules simply codify the existing guidance and do not make any changes to the guidance. • Agency Transactions COMMENTS: BDA requests further clarification as to how the MSRB defines ‘‘agency transactions’’ for purposes of Rule G–48(b)(1). Additionally, BDA states that, with respect to transaction pricing, the 2012 SMMP Interpretation included guidance that was particularly relevant to dealers operating alternative trading systems. BDA requests the MSRB to consider the application of this provision in the context of alternative trading systems and whether it would be appropriate to expand this exemption for transaction pricing under the proposed rule to include an alternative trading system ‘‘which functions on a riskless principal basis disclosing all commissions in the same manner as it would if it were acting as agent.’’ 60 Id. E:\FR\FM\22OCN1.SGM 22OCN1 62880 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices sroberts on DSK5SPTVN1PROD with FRONT MATTER MSRB RESPONSE: The agency concept is taken directly from the current Rule G–17 guidance and relates to agency transactions as described in Rule G–18. The restated SMMP guidance in 2012 did not change this concept from the original notice in 2002. It has always been the case that fair pricing relief was limited to nonrecommended secondary market agency trades. BDA suggests that the MSRB expand the relief to riskless principal transactions executed by alternative trading systems. While some such systems effect trades with their institutional customers on an agency basis, the MSRB understands that some are executed on a riskless principal basis and include a markup or markdown. The MSRB views BDA’s requested change as substantive and worthy of consideration at a later date. As for the request for clarification of the definition of an agency transaction, we believe the concept is well-settled and understood by the market. Finally, the reference in the 2012 notice to commissions charged by ATSs was meant to remind dealers operating ATSs that their obligation to charge a fair and reasonable commission under Rule G–30(b) is independent of the fair and reasonable price obligation under Rule G–18 (and corresponding SMMP relief). • Bona Fide Quotations COMMENTS: BDA states that proposed Rule G–48(d), on bona fide quotations, provides that a ‘‘. . . dealer disseminating an SMMP’s ‘quotation’ as defined in Rule G–13, which is labeled as such, shall apply the same standards. . . .’’ BDA states that it is unclear whether the MSRB intends that a quotation from an SMMP needs to be labeled as an ‘‘SMMP quotation’’ or if the MSRB is simply referring to a quotation that meets the requirements set forth under MSRB Rule G–13. BDA states that under the 2012 SMMP Interpretation it was clear that, if an SMMP makes a ‘‘quotation’’ and it is labeled as such, then it is presumed not to be a quotation made by the disseminating dealer. BDA states that, if proposed Rule G–48(d) is intended to codify the language from the 2012 SMMP Interpretation, they request that the MSRB consider modifying the language in the proposed rule to clarify that the clause ‘‘which is labeled as such’’ does not require the quotation to be specifically labeled as an SMMP quotation. MSRB RESPONSE: BDA suggests that the proposed rule changes the standard for identifying quotes from SMMPs. Such is not the case. Since the original interpretation in 2002, dealers have VerDate Mar<15>2010 21:08 Oct 21, 2013 Jkt 232001 been required to identify the quote as from an SMMP to take advantage of the relief in the guidance. To read the rule any other way would not make sense. BDA suggests it would be sufficient to simply label the SMMP quote as a quote, rather than an SMMP quote. This would not alert the disseminating dealer that the quote was from an SMMP. The MSRB does not propose to make any revisions in response to this comment. The language in the proposed rule tracks the language in the current Rule G–17 guidance 61 and, therefore, the clarification requested by BDA is not necessary. • SMMP Definition vs. FINRA Institutional Investor Definition COMMENTS: WFA expresses concern that dealers considering whether an institutional account is an SMMP must assess not only the factors required under FINRA Rule 2111(b), but also additional criteria such as the institutional customer’s ability to independently evaluate the ‘‘market value’’ of municipal securities and the ‘‘amount and type of municipal securities owned [by] or under management’’ of the institutional customer. WFA states that the differences in duties owed under the SMMP rules and FINRA Rule 2111(b) may confuse clients and regulators. WFA believes that proposed Rule D–15 should not include these additional criteria. MSRB RESPONSE: The second additional criterion regarding the amount and type of municipal securities was discussed previously. As for the first additional criterion, the MSRB believes that the phrase ‘‘market value’’ should be retained, since the relief goes beyond FINRA’s suitability relief and extends to fair pricing. Although the SMMP definition does impose some obligations beyond those required by FINRA’s suitability rule, proposed Rule D–15 simply codifies the current Rule G–17 SMMP guidance. The MSRB does not propose making any substantive changes to the proposed rules in response to this comment. 61 The current Rule G–17 guidance states: ‘‘If an SMMP makes a ‘quotation’ and it is labeled as such, then it is presumed not to be a quotation made by the disseminating dealer.’’ Similarly, proposed Rule G–48(d) states ‘‘The . . . dealer disseminating an SMMP’s ‘quotation’ as defined in Rule G–13, which is labeled as such, shall apply the same standards regarding quotations described in Rule G–13(b) as if such quotations were made by another . . . dealer. . . .’’ PO 00000 Frm 00298 Fmt 4703 Sfmt 4703 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 of up to 90 days (i) as the Commission may designate 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 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–2013–07 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–2013–07. 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 10:00 a.m. and 3:00 p.m. Copies of such E:\FR\FM\22OCN1.SGM 22OCN1 Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices 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– 2013–07, and should be submitted on or before November 12, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.62 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–24549 Filed 10–21–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70599; File No. SR– NYSEMKT–2013–77] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 341A To Specify Applicable Continuing Education Requirements, Amending the NYSE Amex Options Fee Schedule To Specify Corresponding CE Fees and To Specify Fees for the Series 56 Examination sroberts on DSK5SPTVN1PROD with FRONT MATTER October 2, 2013. 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 September 19, 2013, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) 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. NYSE MKT has designated the proposed rule change as constituting a non-controversial rule change under Section 19(b)(3)(A)(iii) 4 of the Act and Rule 19b–4(f)(6) 5 thereunder, which renders the filing effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 62 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. 4 15 U.S.C. 78s(b)(3)(A)(iii). 5 17 CFR 240.19b–4(f)(6). 21:08 Oct 21, 2013 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 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. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to (i) amend Rule 341A to specify applicable CE requirements, (ii) amend the Fee Schedule to specify corresponding CE fees, and (iii) amend the Fee Schedule to specify fees for the Series 56 examination. CE Requirements Rule 341A(a) states that no member or member organization may permit any registered person to continue to, and no registered person may continue to, perform duties as a registered person unless such person has complied with the CE requirements of the rule. Rule 341A specifies the CE requirements for registered persons subsequent to their initial qualification and registration. The requirements consist of a Regulatory Element and a Firm Element.6 The Regulatory Element is a 6 Currently, the Firm Element applies to any registered person who has direct contact with customers in the conduct of the member’s or member organization’s securities sales, trading or investment banking activities, and to the immediate supervisors of such persons (collectively called 1 15 VerDate Mar<15>2010 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 341A to specify applicable continuing education (‘‘CE’’) requirements, (ii) [sic] amend the NYSE Amex Options Fee Schedule (‘‘Fee Schedule’’) to specify corresponding CE fees, and (iii) amend the Fee Schedule to specify fees for the Series 56 examination. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. Jkt 232001 PO 00000 Frm 00299 Fmt 4703 Sfmt 4703 62881 computer-based education program administered by the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), on behalf of the Securities Industry Council on Continuing Education, to help ensure that registered persons are kept up to date on regulatory, compliance, and sales practice matters in the industry. There are currently three existing Regulatory Element programs: (1) The S201 (‘‘S201 CE Program’’) for registered principals (e.g., General Securities Principals and Limited Principals) and supervisors; (2) the S106 (‘‘S106 CE Program’’) for persons registered only as Investment Company Products/Variable Contracts Limited Representatives; and (3) the S101 (‘‘S101 CE Program’’) for all other registered persons (e.g., General Securities Representatives). The Exchange proposes to enumerate these existing programs in subsection (1) of Rule 341A(a).7 The Exchange also proposes to specify the new S501 (‘‘S501 CE Program,’’ and together with the S201, S106 and S101 CE Programs, ‘‘CE Programs’’) for persons registered only as Proprietary Traders.8 This would include registered Proprietary Traders who have successfully completed the Proprietary Traders Examination (‘‘Series 56 Examination’’) 9 as well as registered Proprietary Traders who have completed the General Securities Registered Representative Examination (‘‘Series 7 Examination’’), but who have ‘‘covered registered persons’’). See Rule 341A(b)(1). The requirement stipulates that each member or member organization must maintain a continuing and current education program for its covered registered persons to enhance their securities knowledge, skills, and professionalism. Each member and member organization has the requirement to annually evaluate and prioritize its training needs and develop a written training plan. See Rule 341A(b)(2)(i). 7 Rule 341A(a)(1) currently includes existing rule text. Rule 341A(a)(1)–(3) would therefore be renumbered as Rule 341A(a)(2)–(4), respectively. 8 A Proprietary Trader is any person engaged in the purchase or sale of securities or other similar instruments for the account of a member or member organization with which he or she is associated, as an employee or otherwise, and who does not transact any business with the public. The term ‘‘Proprietary Trader’’ does not include a person who is required to be registered as a Market Maker in accordance with Rule 921NY or a Market Maker Authorized Trader in accordance with in Rule 921.1NY. See Commentary .01 to Rule 341. 9 The Exchange previously amended its rules to prescribe the Series 56 Examination as the qualifying examination for registered Proprietary Traders. See Securities Exchange Act Release No. 66453 (February 23, 2012), 77 FR 12345 (February 29, 2012) (SR–NYSEAmex–2012–11). The Exchange stated in that proposal that it intended to submit a separate filing in the future to apply CE requirements to such persons. See id. at 12346, note 11. E:\FR\FM\22OCN1.SGM 22OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62867-62881]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24549]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70593; File No. SR-MSRB-2013-07]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations, 
Proposed Revisions to MSRB Rule G-19, on Suitability of Recommendations 
and Transactions, Proposed MSRB Rules D-15 and G-48, on Sophisticated 
Municipal Market Professionals, and the Proposed Deletion of 
Interpretive Guidance

October 1, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 17, 2013 the Municipal Securities Rulemaking Board 
(the ``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the Commission a proposed rule change 
consisting of proposed MSRB Rule G-47, on time of trade disclosure 
obligations, proposed revisions to MSRB Rule G-19, on suitability of 
recommendations and transactions,\3\ proposed MSRB Rules D-15 and G-48, 
on sophisticated municipal market professionals, and the proposed 
deletion of interpretive guidance that is being superseded by these 
rule changes (the ``proposed rule change''). The MSRB requests an 
effective date for the proposed rule change of 60 days following the 
date of SEC approval.
---------------------------------------------------------------------------

    \3\ This also includes proposed technical revisions to MSRB Rule 
G-8, on books and records, to conform Rule G-8 with the proposed 
revisions to Rule G-19.
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2013-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. 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 MSRB 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
Summary of Proposed Rule Change
    The MSRB has examined its interpretive guidance related to time of 
trade disclosures, suitability, and SMMPs and is proposing to 
consolidate this guidance and codify it into several rules: a new time 
of trade disclosure rule (proposed Rule G-47), a revised suitability 
rule (Rule G-19), and two new SMMP rules (proposed Rules D-15 and G-
48). Additionally, the proposed revisions to Rule G-19 would harmonize 
the MSRB's suitability rule with Financial Industry Regulatory 
Authority's (``FINRA's'') suitability rule as recommended by the SEC in 
its 2012 Report on the Municipal Securities Market.\4\
---------------------------------------------------------------------------

    \4\ See https://www.sec.gov/news/studies/2012/munireport073112.pdf.
---------------------------------------------------------------------------

Rule G-47 on Time of Trade Disclosures
    MSRB Rule G-17 provides that, in the conduct of its municipal 
securities or municipal advisory activities, each broker, dealer, 
municipal securities dealer (``dealer''), and municipal advisor must 
deal fairly with all persons and may not engage in any deceptive, 
dishonest or unfair practice. The MSRB has interpreted Rule G-17 to 
require a dealer, in connection with a municipal securities 
transaction, to disclose to its customer, at or prior to the time of 
trade, all material information about the transaction known by the 
dealer, as well as material information about the security that is 
reasonably accessible to the market.\5\ The MSRB has issued extensive 
interpretive guidance discussing this time of trade disclosure 
obligation in general, as well as in specific scenarios. Proposed Rule 
G-47 would consolidate most of this guidance \6\ into rule language 
which the MSRB believes would ease the burden on dealers and other 
market participants who endeavor to understand, comply with and enforce 
these obligations. The proposed codification of the interpretive 
guidance on time of trade disclosure obligations is not intended to, 
and would not, substantively change the

[[Page 62868]]

current obligations. Rather, the codification is an effort to 
consolidate the current obligations into streamlined rule language.
---------------------------------------------------------------------------

    \5\ See, e.g., MSRB Answers Frequently Asked Questions Regarding 
Dealer Disclosure Obligations Under MSRB Rule G-17 (November 30, 
2011).
    \6\ The time of trade disclosure guidance that has been 
consolidated and condensed into proposed Rule G-47 was derived from 
the following Rule G-17 interpretive notices: Guidance on Disclosure 
and Other Sales Practice Obligations to Individual and Other Retail 
Investors in Municipal Securities (July 14, 2009), MSRB Answers 
Frequently Asked Questions Regarding Dealer Disclosure Obligations 
Under MSRB Rule G-17 (November 30, 2011), Interpretive Notice 
Regarding Rule G-17, on Disclosure of Material Facts (March 18, 
2002), MSRB Reminds Firms of their Sales Practice and Due Diligence 
Obligations When Selling Municipal Securities in the Secondary 
Market (September 20, 2010), Application of MSRB Rules to 
Transactions in Auction Rate Securities (February 19, 2008), Bond 
Insurance Ratings--Application of MSRB Rules (January 22, 2008), 
Interpretive Reminder Notice Regarding Rule G-17, on Disclosure of 
Material Facts--Disclosure of Original Issue Discount Bonds (January 
5, 2005), Notice of Interpretation of Rule G-17 Concerning Minimum 
Denominations (January 30, 2002), Transactions in Municipal 
Securities with Non-Standard Features Affecting Price/Yield 
Calculations (June 12, 1995), Educational Notice on Bonds Subject to 
``Detachable'' Call Features (May 13, 1993), Notice Concerning 
Securities that Prepay Principal (March 19, 1991), Notice Concerning 
Disclosure of Call Information to Customers of Municipal Securities 
(March 4, 1986), Application of Board Rules to Transactions in 
Municipal Securities Subject to Secondary Market Insurance or Other 
Credit Enhancement Features (March 6, 1984), and Notice Concerning 
the Application of Board Rules to Put Option Bonds (September 30, 
1985); the following Rule G-15 interpretive notice: Notice 
Concerning Stripped Coupon Municipal Securities (March 13, 1989); 
the following Rule G-17 interpretive letters: Description provided 
at or prior to the time of trade (April 30, 1986), and Put option 
bonds: safekeeping, pricing (February 18, 1983); and the following 
Rule G-15 interpretive letters: Disclosure of the investment of bond 
proceeds (August 16, 1991), Securities description: prerefunded 
securities (February 17, 1998), Callable securities: pricing to 
mandatory sinking fund calls (April 30, 1986), and Callable 
securities: pricing to call and extraordinary mandatory redemption 
features (February 10, 1984). As discussed in more detail below, the 
guidance discussing time of trade disclosure obligations in 
connection with 529 college savings plans (``529 plans'') has not 
been incorporated into proposed Rule G-47. The MSRB may create a 
separate rule regarding time of trade disclosure obligations for 529 
plans or a rule consolidating dealer obligations related to 529 
plans. Until the MSRB adopts a rule specific to 529 plans, proposed 
Rule G-47 and all such interpretive guidance will continue to apply 
to 529 plans.
---------------------------------------------------------------------------

    The structure of proposed Rule G-47 (rule language followed by 
supplementary material) is the same structure used by FINRA and other 
self-regulatory organizations (``SROs''). The MSRB intends generally to 
transition to this structure for all of its rules going forward in 
order to streamline the rules, harmonize the format with that of other 
SROs, and make the rules easier for dealers and municipal advisors to 
understand and follow.
    A summary of proposed Rule G-47 is as follows:
General Disclosure Obligation
    Proposed Rule G-47(a) sets forth the general time of trade 
disclosure obligation as currently set forth in the MSRB's interpretive 
guidance. The rule states that dealers cannot sell municipal securities 
to a customer, or purchase municipal securities from a customer, 
without disclosing to the customer, at or prior to the time of trade, 
all material information known about the transaction and material 
information about the security that is reasonably accessible to the 
market. The rule applies regardless of whether the transaction is 
unsolicited or recommended, occurs in a primary offering or the 
secondary market, and is a principal or agency transaction. The rule 
provides that the disclosure can be made orally or in writing.
    Proposed Rule G-47(b) states that information is considered to be 
``material information'' if there is a substantial likelihood that the 
information would be considered important or significant by a 
reasonable investor in making an investment decision. The rule defines 
``reasonably accessible to the market'' as information that is made 
available publicly through ``established industry sources.'' Finally, 
the rule defines ``established industry sources'' as including the 
MSRB's Electronic Municipal Market Access (``EMMA''[supreg]) \7\ 
system, rating agency reports, and other sources of information 
generally used by dealers that effect transactions in the type of 
municipal securities at issue.
---------------------------------------------------------------------------

    \7\ EMMA is a registered trademark of the MSRB.
---------------------------------------------------------------------------

Supplementary Material
    In addition to stating the general disclosure obligation, proposed 
Rule G-47 includes supplementary material describing the disclosure 
obligation in more detail.
    Supplementary material .01 provides general information regarding 
the manner and scope of required disclosures. Specifically, the 
supplementary material provides that dealers have a duty to give 
customers a complete description of the security which includes a 
description of the features that would likely be considered significant 
by a reasonable investor, and facts that are material to assessing 
potential risks of the investment. This section of the supplementary 
material further provides that the public availability of material 
information through EMMA, or other established industry sources, does 
not relieve dealers of their disclosure obligations. Section .01 of the 
supplementary material also provides that dealers may not satisfy the 
disclosure obligation by directing customers to established industry 
sources or through disclosure in general advertising materials. 
Finally, section .01 of the supplementary material states that whether 
the customer is purchasing or selling the municipal securities may be a 
consideration in determining what information is material.
    Supplementary material .02 provides that dealers operating 
electronic trading or brokerage systems have the same time of trade 
disclosure obligations as other dealers.
    Supplementary material .03 provides a list of examples describing 
information that may be material in specific scenarios and require 
disclosures to a customer. The guidance provides that the list is not 
exhaustive and other information may be material to a customer in these 
and other scenarios. This section describes the following scenarios: 
variable rate demand obligations; auction rate securities; credit risks 
and ratings; credit or liquidity enhanced securities; insured 
securities; original issue discount bonds; securities sold below the 
minimum denomination; securities with non-standard features; bonds that 
prepay principal; callable securities; put option and tender option 
bonds; stripped coupon securities; the investment of bond proceeds; 
issuer's intent to prerefund; and failure to make continuing disclosure 
filings.
    Finally, supplementary material .04 provides that dealers must 
implement processes and procedures reasonably designed to ensure that 
material information regarding municipal securities is disseminated to 
registered representatives who are engaged in sales to and purchases 
from a customer.
Current Interpretive Guidance on Time of Trade Disclosure Obligations
    The MSRB has identified two interpretive notices that were 
previously filed with the Commission and would be superseded in their 
entirety by the proposed time of trade disclosure rule and the MSRB 
proposes deleting these two notices.\8\ Any statements in the remaining 
MSRB interpretative guidance referring to Rule G-17 for the time of 
trade disclosure principle should be read to refer to proposed Rule G-
47.
---------------------------------------------------------------------------

    \8\ Interpretive Notice Regarding Rule G-17, on Disclosure of 
Material Facts (March 18, 2002) and Notice of Interpretation of Rule 
G-17 Concerning Minimum Denominations (January 30, 2002).
---------------------------------------------------------------------------

Rule G-19, on Suitability of Recommendations and Transactions
    The MSRB has conducted a review of Rule G-19, on suitability of 
recommendations and transactions, as well as the MSRB's interpretive 
guidance addressing suitability. As a result of this review, the MSRB 
is proposing the amendments described below to more closely harmonize 
Rule G-19 with FINRA's suitability rule,\9\ and to incorporate elements 
of the MSRB's current interpretive guidance on suitability into Rule G-
19.\10\ The

[[Page 62869]]

proposed revisions to Rule G-19 are aligned with a recommendation of 
the SEC in its 2012 Report on the Municipal Securities Market that the 
MSRB consider ``amending Rule G-19 (suitability) in a manner generally 
consistent with recent amendments by FINRA to its Rule 2111, including 
with respect to the scope of the term `strategy'. . . .'' \11\ Given 
the extensive interpretive guidance surrounding FINRA Rule 2111 and the 
impracticality and inefficiency of republishing each iteration of such 
FINRA guidance, substantively similar provisions of Rule G-19 will be 
interpreted in a manner consistent with FINRA's interpretations of Rule 
2111. If the MSRB believes an interpretation should not be applicable 
to Rule G-19, it will affirmatively state that specific provisions of 
FINRA's interpretation do not apply. Additionally, the MSRB is 
proposing technical amendments to Rule G-8(a)(xi)(F) to conform it to 
the proposed revisions to Rule G-19.
---------------------------------------------------------------------------

    \9\ See FINRA Rule 2111.
    \10\ The suitability guidance that has been consolidated and 
condensed into the proposed revisions to Rule G-19 was derived from 
the following Rule G-17 interpretive notices: MSRB Reminds Firms of 
their Sales Practice and Due Diligence Obligations When Selling 
Municipal Securities in the Secondary Market (September 20, 2010); 
Guidance on Disclosure and Other Sales Practice Obligations to 
Individual and Other Retail Investors in Municipal Securities (July 
14, 2009); Application of MSRB Rules to Transactions in Auction Rate 
Securities (February 19, 2008); Bond Insurance Ratings--Application 
of MSRB Rules (January 22, 2008); Reminder of Customer Protection 
Obligations in Connection with Sales of Municipal Securities (March 
30, 2007); Interpretive Notice Regarding Rule G-17, on Disclosure of 
Material Facts (March 18, 2002); Notice Concerning Disclosure of 
Call Information to Customers of Municipal Securities (March 4, 
1986); the following Rule G-19 interpretive notices: Notice 
Regarding Application of Rule G-19, on Suitability of 
Recommendations and Transactions, to Online Communications 
(September 25, 2002); Application of Suitability Requirements to 
Investment Seminars and Customer Inquiries Made in Response to a 
Dealer's Advertisements (April 25, 1985); the following Rule G-19 
interpretive letters: Recommendations (February 17, 1998); and 
Recommendations: advertisements (February 24, 1994); the following 
Rule G-15 interpretive notice: Notice Concerning Stripped Coupon 
Municipal Securities (March 13, 1989); the following Rule G-15 
interpretive letter: Securities description: prerefunded securities 
(February 17, 1998); the following Rule G-21 interpretive notice: 
Interpretation on General Advertising Disclosures, Blind 
Advertisements and Annual Reports Relating to Municipal Fund 
Securities under Rule G-21 (June 5, 2007); the following Rule G-21 
interpretive letter: Disclosure obligations (May 21, 1998); and the 
following Rule G-32 interpretive notices: Notice Regarding 
Electronic Delivery and Receipt of Information by Brokers, Dealers 
and Municipal Securities Dealers (November 20, 1998); and 
Interpretation on the Application of Rules G-32 and G-36 to New 
Issue Offerings Through Auction Procedures (March 26, 2001).
    \11\ See https://www.sec.gov/news/studies/2012/munireport073112.pdf at 141.
---------------------------------------------------------------------------

    A summary of the proposed revisions to Rule G-19 is as follows:
Account Information
    Current MSRB Rule G-19(a) requires dealers to obtain certain 
customer information prior to completing a transaction in municipal 
securities for that customer account. The required customer information 
consists of, by cross-reference, the customer information required 
under MSRB Rule G-8(a)(xi), on books and records. A provision 
equivalent to current Rule G-19(a) is not included in proposed Rule G-
19 since MSRB Rule G-8 already independently requires dealers to make 
and keep a record of this information for each customer. Additionally, 
deleting this provision streamlines the rule and more closely aligns it 
with FINRA's suitability rule, which does not have this specific 
requirement.\12\
---------------------------------------------------------------------------

    \12\ See FINRA Rule 2111.
---------------------------------------------------------------------------

Information Required for Suitability Determinations
    The current MSRB suitability rule contains a list of customer 
information that dealers must obtain prior to recommending a 
transaction to a non-institutional account.\13\ The proposed revisions 
to Rule G-19 would expand this list to include additional items from 
FINRA's suitability rule \14\ such as: Age, investment time horizon, 
liquidity needs, investment experience and risk tolerance. The proposed 
revision also would delete Rule G-19(b) and replace it with rule 
language corresponding to FINRA's suitability rule. The MSRB believes 
that the items added to the rule generally are directly relevant for 
recommendations involving municipal securities and having such items 
explicitly identified will promote more consistent application of the 
suitability rule. The list of customer information that dealers must 
assess in the proposed rule also includes ``any other information the 
customer may disclose to the broker, dealer or municipal securities 
dealer in connection with such recommendation'' which is taken from the 
FINRA rule.\15\ This is similar to the requirement in current MSRB Rule 
G-19(c)(ii) which states that, in recommending a transaction, a dealer 
shall have reasonable grounds ``based upon the facts disclosed by such 
customer or otherwise known about such customer for believing that the 
recommendation is suitable.'' Therefore, the proposal would delete 
section (c)(ii) of Rule G-19.
---------------------------------------------------------------------------

    \13\ See MSRB Rule G-19(b).
    \14\ See FINRA Rule 2111(a).
    \15\ See FINRA Rule 2111(b).
---------------------------------------------------------------------------

    The current MSRB suitability rule also requires dealers to consider 
information available from the issuer of the security or otherwise in 
making suitability determinations.\16\ Similarly, the supplementary 
material to FINRA's suitability rule establishes a reasonable-basis 
suitability obligation, which requires a broker-dealer to have a 
reasonable basis to believe, based on reasonable diligence, that the 
recommendation is suitable for at least some investors.\17\ In order to 
perform a reasonable-basis suitability analysis, dealers must 
necessarily consider information available from the issuer of the 
security. The proposed revisions to Rule G-19 incorporate the 
reasonable-basis suitability terminology from FINRA Rule 2111 in 
supplementary material .05(a) and delete section (c)(i) of Rule G-19.
---------------------------------------------------------------------------

    \16\ See MSRB Rule G-19(c)(i).
    \17\ FINRA Rule 2111, Supplementary Material .05(a).
---------------------------------------------------------------------------

Discretionary Accounts
    The current MSRB suitability rule includes a provision on 
discretionary accounts which provides that dealers cannot effect 
transactions in municipal securities with or for a discretionary 
account unless permitted by the customer's prior written authorization 
which has been accepted in writing by a municipal securities 
principal.\18\ The MSRB proposes to delete this provision because there 
is a substantially similar provision already included in MSRB Rule G-
8(a)(xi)(I) which requires that, for customer discretionary accounts, 
dealers must make and keep a record of the customer's written 
authorization to exercise discretionary power over the account, written 
approval of the municipal securities principal who supervises the 
account, and written approval of the municipal securities principal 
with respect to each transaction in the account stating the date and 
time of approval.
---------------------------------------------------------------------------

    \18\ See MSRB Rule G-19(d)(i).
---------------------------------------------------------------------------

    The current MSRB suitability rule also includes a provision stating 
that a dealer cannot effect a transaction in municipal securities with 
or for a discretionary account unless the dealer first determines that 
the transaction is suitable for the customer or the transaction is 
specifically directed by the customer and was not recommended by the 
dealer.\19\ Similarly, the proposed suitability rule provides that a 
dealer must have a reasonable basis to believe that a recommended 
transaction or investment strategy is suitable for the customer. The 
suitability obligation is the same for discretionary and non-
discretionary accounts and there is no reason to restate the obligation 
as it specifically relates to discretionary accounts. In addition, 
there is no corresponding provision in FINRA Rule 2111. For these 
reasons, the MSRB proposes deleting Rule G-19(d)(ii).
---------------------------------------------------------------------------

    \19\ See MSRB Rule G-19(d)(ii).
---------------------------------------------------------------------------

Churning
    The proposed revisions to Rule G-19 retain the substance of the 
existing MSRB prohibition on churning,\20\ but recast it using the 
current terminology of ``quantitative suitability'' used in FINRA's 
suitability rule.\21\ The quantitative suitability requirement is 
included in proposed Rule G-19, supplementary material .05(c).
---------------------------------------------------------------------------

    \20\ See MSRB Rule G-19(e).
    \21\ See FINRA Rule 2111, Supplementary Material .05(c).
---------------------------------------------------------------------------

Investment Strategies
    The proposed amendments to Rule G-19 incorporate the application of 
suitability to ``investment strategies.'' Specifically, proposed 
supplementary material .03 defines the phrase ``investment strategy 
involving a municipal security or municipal securities'' by stating 
that it is ``to be interpreted broadly and would include, among other 
things, an explicit

[[Page 62870]]

recommendation to hold a municipal security or municipal securities.'' 
This definition is consistent with the definition of ``investment 
strategy involving a security or securities'' in FINRA's suitability 
rule.\22\ The proposed MSRB suitability rule, like the FINRA rule, 
carves out communications of certain types of educational material as 
long as such communications do not recommend a particular municipal 
security or municipal securities.\23\ The list of educational materials 
in proposed Rule G-19, supplementary material .03, differs in minor 
respects from the list of educational materials in FINRA's suitability 
rule \24\ to account for unique attributes of the municipal securities 
market.
---------------------------------------------------------------------------

    \22\ See FINRA Rule 2111, Supplementary Material .03.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

Institutional Accounts
    Provisions in guidance to MSRB Rule G-17 and proposed MSRB Rules D-
15 and G-48 (discussed below) exempt dealers from the duty to perform a 
customer-specific suitability determination for recommendations to 
SMMPs.\25\ FINRA's suitability rule has similar provisions with respect 
to institutional accounts that is included as a provision in its 
suitability rule.\26\ The MSRB SMMP exemption applies not only to Rule 
G-19, but also has applicability to MSRB Rules G-47, on time of trade 
disclosures, G-18, on transaction pricing, and G-13, on bona fide 
quotations. Therefore, the MSRB proposes to include the SMMP exemption 
in proposed Rules D-15 and G-48 instead of incorporating it into Rule 
G-19 and the other rules to which the SMMP exemption applies.
---------------------------------------------------------------------------

    \25\ See e.g., Interpretive Notice effective July 9, 2012, 
Restated Interpretive Notice Regarding the Application of MSRB Rules 
to Transactions with Sophisticated Municipal Market Professionals; 
see also MSRB Notice 2013-10, Request for Comment on Proposed 
Sophisticated Municipal Market Professional Rules (May 1, 2013).
    \26\ See FINRA Rule 2111(b).
---------------------------------------------------------------------------

Proposed Technical Revisions to Rule G-8, on Books and Records
    MSRB Rule G-8(a)(xi)(F) includes references to MSRB Rule G-
19(c)(ii) and G-19(b). These referenced provisions are not codified as 
such in the proposed revisions to MSRB Rule G-19, but the concepts 
would remain in the proposed rule. Therefore, the MSRB proposes 
revising MSRB Rule G-8(a)(xi)(F) simply to include a reference to the 
entire MSRB Rule G-19.
Current Interpretive Guidance on Suitability
    Over the years, the MSRB has issued guidance on suitability in 
connection with other issues under MSRB Rule G-17. This guidance 
provides that a dealer must take into account all material information 
that is known to the dealer or that is available through established 
industry sources in meeting its suitability obligations.\27\ This is 
the same type of information that dealers are required to disclose to 
customers at the time of trade.\28\ The Rule G-17 guidance also 
describes material information that dealers should consider in making 
suitability determinations in specific scenarios such as credit or 
liquidity enhanced securities,\29\ auction rate securities,\30\ and 
insured bonds.\31\ Rather than listing information in the supplementary 
material to Rule G-19 that may be material to an investor, proposed 
Rule G-19, supplementary material .05(a) includes a general requirement 
for dealers to understand information about the municipal security or 
strategy and contains an explicit cross-reference to a dealer's 
obligations under proposed MSRB Rule G-47, on time of trade 
disclosure.\32\ The remaining suitability obligations currently 
described in the Rule G-17 guidance \33\ are incorporated into revised 
Rule G-19.\34\
---------------------------------------------------------------------------

    \27\ See, e.g., Interpretive Notice dated September 20, 2010, 
MSRB Reminds Firms of their Sales Practice and Due Diligence 
Obligations when Selling Municipal Securities in the Secondary 
Market.
    \28\ See, e.g., Interpretive Notice dated July 14, 2009, 
Guidance on Disclosure and Other Sales Practice Obligations to 
Individual and Other Retail Investors in Municipal Securities.
    \29\ Id.
    \30\ Interpretive Notice dated February 19, 2008, Application of 
MSRB Rules to Transactions in Auction Rate Securities.
    \31\ Interpretive Notice dated January 22, 2008, Bond Insurance 
Ratings--Application of MSRB Rules.
    \32\ FINRA Rule 2111 does not include a comparable provision.
    \33\ Interpretive Notice dated March 30, 2007, Reminder of 
Customer Protection Obligations in Connection with Sales of 
Municipal Securities; Interpretive Notice dated March 18, 2002, 
Interpretive Notice Regarding Rule G-17, on Disclosure of Material 
Facts; and Interpretive Notice dated March 4, 1986, Notice 
Concerning Disclosure of Call Information to Customers of Municipal 
Securities.
    \34\ This does not include suitability obligations with respect 
to 529 plans. The MSRB may create a separate rule regarding the 
suitability obligations for 529 plans. Until the MSRB adopts a rule 
specific to 529 plans, MSRB Rule G-19 and any related interpretive 
guidance will continue to apply to 529 plans.
---------------------------------------------------------------------------

    The MSRB also has issued interpretive guidance under Rule G-19 that 
has been previously filed with the Commission and addresses online 
communications, investment seminars, and customers contacting a dealer 
in response to an advertisement.\35\ This guidance would be superseded 
by revised Rule G-19 and the MSRB proposes deleting the guidance. The 
MSRB also has issued interpretations under Rules G-15,\36\ G-21,\37\ 
and G-32 \38\ that nominally reference suitability obligations. Since 
these interpretations address areas other than suitability and are not 
inconsistent with the proposed revisions, the MSRB will leave these 
interpretations intact.
---------------------------------------------------------------------------

    \35\ Interpretive Notice dated September 25, 2002, Notice 
Regarding Application of Rule G-19, on Suitability of 
Recommendations and Transactions, to Online Communications and 
Interpretive Notice dated April 25, 1985, Application of Suitability 
Requirements to Investment Seminars and Customer Inquiries Made in 
Response to a Dealer's Advertisements; see SEC Release No. 34-21990 
(April 25, 1985), 50 FR 18602 (May 1, 1985) (File No. SR-MSRB-85-6). 
The latter notice, as currently published on the MSRB Web site, was 
non-substantially revised to reflect amendments to Rule G-19 that 
became effective on April 7, 1994 (File No. SR-MSRB-94-01), and 
those revisions were not made part of a rule filing.
    \36\ Interpretive Notice dated March 13, 1989, Notice Concerning 
Stripped Coupon Municipal Securities; and Interpretive Letter dated 
February 17, 1998, Securities description: prerefunded securities.
    \37\ Interpretive Notice dated June 5, 2007, Interpretation on 
General Advertising Disclosures, Blind Advertisements and Annual 
Reports Relating to Municipal Fund Securities under Rule G-21; and 
Interpretive Letter dated May 21, 1998, Disclosure obligations.
    \38\ Interpretive Notice dated November 20, 1998, Notice 
Regarding Electronic Delivery and Receipt of Information by Brokers, 
Dealers and Municipal Securities Dealers; and Interpretive Notice 
dated March 26, 2001, Interpretation on the Application of Rules G-
32 and G-36 to New Issue Offerings Through Auction Procedures.
---------------------------------------------------------------------------

Rules D-15 and G-48 on SMMPs
    Proposed Rules D-15 and G-48 on SMMPs (the ``proposed SMMP rules'') 
would streamline and codify the existing MSRB Rule G-17 guidance 
regarding the application of MSRB rules to transactions with SMMPs. The 
proposed SMMP rules would consist of a new definitional rule, D-15, 
defining an SMMP and a new general rule, G-48, on the regulatory 
obligations of dealers to SMMPs.
    On May 25, 2012, the SEC approved an interpretive notice to Rule G-
17 revising prior guidance on the application of MSRB rules to 
transactions with SMMPs.\39\ The

[[Page 62871]]

proposed SMMP rules preserve the substance of this guidance but codify 
it into two proposed rules that define an SMMP and describe the 
application of the following obligations to SMMPs: (1) Time of trade 
disclosure; (2) transaction pricing; (3) suitability; and (4) bona fide 
quotations. The proposed SMMP rules do not change the substance of the 
restated SMMP notice except that the proposed definition of SMMP 
includes a reference to the term ``investment strategies'' to be 
consistent with inclusion of that term in the proposed suitability rule 
described above. The MSRB believes that the proposed definitional rule, 
together with the proposed general rule that describes the regulatory 
obligations of dealers working with SMMPs, will underscore the 
differences between dealers' obligations to non-SMMPs and SMMPs, while 
highlighting the eligibility standards for being an SMMP.
---------------------------------------------------------------------------

    \39\ Interpretive Notice effective July 9, 2012, Restated 
Interpretive Notice Regarding the Application of MSRB Rules to 
Transactions with Sophisticated Municipal Market Professionals (the 
``restated SMMP notice''). At the time of issuance of the restated 
interpretive guidance, the MSRB noted that FINRA adopted Rule 2111, 
which included revised treatment of customer-specific suitability 
for institutional accounts, and that it generally considered it 
desirable from the standpoint of reducing the cost of dealer 
compliance to maintain consistency with FINRA rules.
---------------------------------------------------------------------------

    A summary of proposed Rules D-15 and G-48 is as follows:
    Proposed Rule D-15 defines the term ``sophisticated municipal 
market professional'' or ``SMMP'' as a customer of a dealer that is a 
bank, savings and loan association, insurance company, or registered 
investment company; or an investment adviser registered with the 
Commission under Section 203 of the Investment Advisers Act of 1940 or 
with a state securities commission (or any agency or office performing 
like functions); or any other entity with total assets of at least $50 
million. Additionally, the dealer must have a reasonable basis to 
believe that the customer is capable of evaluating investment risks and 
market value independently, both in general and with regard to 
particular transactions and investment strategies in municipal 
securities, and affirmatively indicates that it is exercising 
independent judgment in evaluating the recommendations of the dealer.
    The supplementary material to proposed Rule D-15 addresses the 
reasonable basis analysis and the customer affirmation. Section .01 
states that as part of the reasonable basis analysis, the dealer should 
consider the amount and type of municipal securities owned or under 
management by the customer. Section .02 states that a customer may 
affirm that it is exercising independent judgment either orally or in 
writing, and such affirmation may be given on a trade-by-trade basis, 
on a type-of-municipal-security basis, or on an account-wide basis.
    Proposed Rule G-48 describes the application of certain obligations 
to SMMPs. More specifically, the proposed rule provides that a dealer's 
obligations to a customer that it reasonably concludes is an SMMP are 
modified as follows: (1) With respect to the time of trade disclosure 
obligation in proposed Rule G-47, the dealer does not have any 
obligation to disclose material information that is reasonably 
accessible to the market; (2) with respect to transaction pricing 
obligations under Rule G-18, the dealer does not have any obligation to 
take action to ensure that transactions meeting certain conditions set 
forth in the proposed rule are effected at fair and reasonable prices; 
(3) with respect to the suitability obligation in Rule G-19, the 
proposed rule provides that the dealer does not have any obligation to 
perform a customer-specific suitability analysis; and (4) with respect 
to the obligation regarding bona fide quotations in Rule G-13, the 
dealer disseminating an SMMP's quotation which is labeled as such shall 
apply the same standards described in Rule G-13(b) for quotations made 
by another dealer.
Current Interpretive Guidance on SMMPs
    There are two interpretive notices that were previously filed with 
the Commission that would be superseded in their entirety by the SMMP 
rule \40\ and the MSRB proposes to delete these interpretive notices.
---------------------------------------------------------------------------

    \40\ Interpretive Notice effective July 9, 2012, Restated 
Interpretive Notice Regarding the Application of MSRB Rules to 
Transactions with Sophisticated Municipal Market Professionals and 
Interpretive Notice dated April 30, 2002, Interpretive Notice 
Regarding the Application of MSRB Rules to Transactions with 
Sophisticated Municipal Market Professionals.
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act,\41\ which provides that the MSRB's 
rules shall
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78o-4(b)(2)(c).

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities and 
municipal financial products, to remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
---------------------------------------------------------------------------
municipal entities, obligated persons, and the public interest.

    The proposed rule change is consistent with Section 15B(b)(2)(C) of 
the Act. The disclosure of material information about a transaction to 
investors and the performance of a meaningful suitability analysis is 
central to the role of a dealer in facilitating municipal securities 
transactions. Proposed Rule G-47, on time of trade disclosures, 
codifies current interpretive guidance and protects investors by 
requiring dealers to make disclosures to customers in connection with 
purchases and sales of municipal securities. These required disclosures 
are designed to prevent fraudulent and manipulative acts and practices 
by dealers, and promote just and equitable principles of trade, by 
requiring dealers to disclose information about a security and 
transaction that would be considered significant or important to a 
reasonable investor in making an investment decision. Similarly, the 
proposed revisions to Rule G-19, on suitability, furthers these 
purposes by requiring dealers and their associated persons to make only 
suitable recommendations to customers and fosters cooperation and 
coordination by harmonizing the rule with FINRA's suitability rule. 
Finally, the proposed SMMP rules codify current interpretive guidance 
that was approved by the SEC in 2012 \42\ and these proposed rules do 
not change the substance of that guidance.
---------------------------------------------------------------------------

    \42\ See SEC Release No. 34-67064 (May 25, 2012).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change would 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As discussed 
above, the proposed time of trade disclosure rule and proposed SMMP 
rules codify current interpretive guidance, therefore, they do not add 
any burden on competition. The proposed revisions to the suitability 
rule codify current interpretive guidance and add new requirements that 
are largely harmonized with FINRA's suitability rule in response to a 
recommendation by the Commission to harmonize MSRB Rule G-19 with FINRA 
Rule 2111.\43\ The MSRB believes that these changes will, in fact, ease 
burdens on dealers and promote competition by clarifying certain core 
dealer obligations and the relief available when transacting business 
with SMMPs.
---------------------------------------------------------------------------

    \43\ See https://www.sec.gov/news/studies/2012/munireport073112.pdf at 141.

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

[[Page 62872]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

Rule G-47 on Time of Trade Disclosures
    On February 11, 2013, the MSRB requested comment on a draft of Rule 
G-47, on time of trade disclosures.\44\ The time of trade disclosure 
notice generated eight comment letters.\45\
---------------------------------------------------------------------------

    \44\ See MSRB Notice 2013-04 (February 11, 2013) (the ``time of 
trade disclosure notice'').
    \45\ Comment letters were received from: (1) Bond Dealers of 
America (``BDA''); (2) Charles Schwab & Co., Inc. (``Schwab''); (3) 
Lumesis, Inc. (``Lumesis'') (Lumesis sent two separate comment 
letters, one on March 11, 2013 and a second letter on July 17, 2013 
after the comment period was closed); (4) R.W. Smith & Associates, 
Inc. (``RWSA'') (RWSA's comment letter simply states that they 
contributed to and support the SIFMA comment letter and its 
positions in relation to codifying the time of trade disclosure 
obligation); (5) Securities Industry and Financial Markets 
Association (``SIFMA''); (6) TMC Bonds, L.L.C. (``TMC''); and (7) 
Wells Fargo Advisors, LLC (``WFA'').
---------------------------------------------------------------------------

    The comment letters are summarized by topic as follows:
 Support for the Proposal
    COMMENTS: All of the commenters generally support the MSRB's 
initiative to clarify and codify the time of trade disclosure 
requirements. BDA states that the incorporation of interpretive notices 
into rules should help provide much desired clarity to market 
participants. Lumesis indicates that the proposed rule would provide 
greater clarity to market participants and support enhanced 
transparency and disclosure for the retail investor. Lumesis further 
states that the proposed rule is a significant step in clarifying the 
requirements for time of trade disclosures to retail investors. Schwab 
states that, generally speaking, it supports the MSRB's effort to 
consolidate years of interpretive guidance related to time of trade 
disclosure obligations into a rule. SIFMA comments that it generally 
supports the concept behind the MSRB's initial effort to provide 
clarity to regulated entities by reorganizing or eliminating certain 
interpretive guidance associated with MSRB Rule G-17 into new or 
revised rules highlighting core principles. TMC states that it supports 
the MSRB's efforts to more clearly define Rule G-17. Finally, WFA 
commends the MSRB's efforts to simplify dealer compliance with time of 
trade disclosure guidance and to harmonize the MSRB's rule structure 
with FINRA's rule structure.
    MSRB RESPONSE: The MSRB believes these comments support the MSRB's 
statement on the burden on competition.
 Handling of Current Notices
    COMMENT: SIFMA suggests that the MSRB should consolidate the 
existing time of trade disclosure guidance into a user friendly format 
similar to the format used when the MSRB reorganized guidance on Rule 
G-37, on political contributions and prohibitions on municipal 
securities business. SIFMA proposes preserving the text of the time of 
trade disclosure guidance, but consolidating it in one place since the 
guidance contains nuances that are easily lost in a short bullet point 
format.
    MSRB RESPONSE: The MSRB believes the supplementary material 
incorporates the necessary information from the interpretive guidance 
and that it is not necessary to preserve the text of the current 
guidance or create a set of questions and answers similar to Rule G-37 
at the present time. Moreover, to codify the existing interpretative 
guidance into a rule but preserve the text of the guidance would not 
advance the MSRB's goal to streamline its rulebook.
 SMMP Guidance
    COMMENT: SIFMA states that, since the current SMMP guidance 
primarily relates to time of trade disclosures, Rule G-47 should affirm 
such guidance. Similarly, BDA states that the Rule G-17 SMMP guidance 
should apply to Rule G-47 and a reference to the exception should be 
added to the proposed rule or, at a minimum, the SMMP guidance should 
be revised to reference Rule G-47.
    MSRB RESPONSE: The SMMP guidance does not primarily relate to time 
of trade disclosures as it addresses four separate areas: time of trade 
disclosures, transaction pricing, suitability, and bona fide 
quotations. The MSRB has proposed a draft SMMP rule that references 
proposed Rule G-47 and does not believe it is necessary or appropriate 
to reference this new SMMP rule in proposed Rule G-47 (and the other 
rules to which the SMMP guidance applies). Because the proposed SMMP 
rule references proposed Rule G-47, the MSRB has effectively addressed 
the comment that the SMMP guidance should, at a minimum, reference 
proposed Rule G-47.
 Electronic Trading Platforms
    COMMENT: Schwab and SIFMA are concerned about the proposed deletion 
of the Interpretive Notice dated March 18, 2002 entitled ``Interpretive 
Notice Regarding Rule G-17, on Disclosure of Material Facts'' (the 
``March 18, 2002 Notice''). Specifically, Schwab and SIFMA are 
concerned about deleting the following sentence:

    The MSRB believes that the provision of electronic access to 
material information to customers who elect to transact in municipal 
securities on an electronic platform is generally consistent with a 
dealer's obligation to disclose such information, but that whether 
such access is effective disclosure ultimately depends upon the 
particular facts and circumstances present.

SIFMA \46\ states that its members have relied on this language in 
developing policies and procedures to provide time of trade disclosures 
to customers using electronic trading platforms. Similarly, Schwab 
states that dealers providing online access to customers have relied on 
this language for years and the absence of specific language that 
recognizes a dealer's ability to meet their time of trade disclosure 
obligations via electronic access could lead to confusion among dealers 
and disruption of disclosure processes across the industry. 
Additionally, BDA indicates that dealers believe access equals 
disclosure for online trading.
---------------------------------------------------------------------------

    \46\ SIFMA states that the March 18, 2002 Notice should not be 
deleted because it is one of the few MSRB notices discussing a 
dealer's time of trade disclosure obligations that has been approved 
by the SEC. Proposed Rule G-47 and the related supplementary 
material which would supersede that Notice, however, are likewise 
being submitted to the SEC for approval.
---------------------------------------------------------------------------

    MSRB RESPONSE: The sentence quoted above was intentionally excluded 
from the proposed rule because the ability to use electronic disclosure 
is now so widely accepted and the qualifying phrase ``whether such 
access is effective disclosure ultimately depends upon the particular 
facts and circumstances present'' renders the guidance less definitive. 
Moreover, based on the comments received, some industry members appear 
to have misinterpreted this sentence to mean that ``access'' equals 
disclosure for online trading. This apparent misunderstanding of the 
guidance supports deletion of the sentence and highlights the 
importance of clarifying the time of trade disclosure guidance by 
codifying it into a short and easy to understand rule.
    COMMENT: BDA encourages the MSRB to establish a separate section of 
the proposed rule addressing disclosure obligations in connection with 
online trading to provide more clarity.
    MSRB RESPONSE: The codification of interpretive guidance in this 
rulemaking initiative is not intended to substantively change the time 
of trade disclosure obligation. The MSRB can consider adding provisions 
addressing online trading if the Board undertakes to amend the rule 
substantively in the future.

[[Page 62873]]

 Electronic Trading Systems--Institutional Customers
    COMMENT: TMC suggests that the proposed rule exempt institutional 
market professionals from the disclosure requirement.
    MSRB RESPONSE: The proposed rule, in conjunction with the SMMP 
guidance and proposed SMMP rule, should address TMC's concerns by 
exempting dealers from the requirement to disclose to SMMPs material 
information that is reasonably accessible to the market. Therefore, the 
MSRB is not proposing any changes to the proposed rule based on these 
comments.
 Minimum Denominations
    COMMENT: SIFMA believes that the Interpretive Notice dated January 
30, 2002 entitled ``Notice of Interpretation of Rule G-17 Concerning 
Minimum Denominations'' should not be deleted because it is the only 
guidance concerning the disclosure obligation for securities sold below 
minimum denominations. SIFMA states that its members believe the 
background information in this notice is important.
    MSRB RESPONSE: The proposed rule addresses disclosure obligations 
related to minimum denominations as described in the current Rule G-17 
guidance. The MSRB does not believe that it is necessary to include the 
background information included in the guidance; however, in response 
to this comment, the MSRB has proposed a revision to Rule G-47, 
supplementary material .03(g), clarifying that the disclosure 
obligation relates to minimum denominations authorized by bond 
documents.
 Disclosure Obligations for Sales to Customers vs. Purchases 
From Customers
    COMMENT: SIFMA argues that the rule should make a distinction 
between a dealer's disclosure obligation for sales to customers, as 
opposed to purchases from customers, and that the rule's failure to do 
so is inconsistent with current guidance. SIFMA states that existing 
guidance primarily focuses on disclosure obligations when a dealer is 
selling a bond to a customer and very limited guidance has been issued 
covering situations when a dealer is purchasing. SIFMA states that this 
proposed extension of the disclosure obligation is not warranted, as 
arguably the selling customer knows the features of the security that 
it owns and the potentially purchasing dealer is about to assume the 
risks of those features. SIFMA acknowledges, however, that knowledge 
professionally available to dealers, such as a ratings change that has 
not yet been noticed to EMMA, or a call at par announced minutes ago 
via a recognized information vendor, is material and should be 
disclosed. However, SIFMA argues that this new requirement could be 
harmful to customers and would also be unnecessarily burdensome for 
dealers.\47\ SIFMA states that the MSRB should explicitly recognize 
that a substantially different time of trade disclosure obligation 
exists in these circumstances and that the specific scenarios in the 
proposed rule may not be applicable when a customer is selling. 
Finally, SIFMA states that, if the MSRB extends an undifferentiated 
obligation to customer sale transactions, a thorough cost benefit 
analysis should be undertaken. BDA also argues that the burden of 
applying this rule to sales of securities by customers outweighs any 
tangential value to customers. BDA urges the MSRB to apply the proposed 
rule to sales by customers in a narrow set of instances, such as when 
an issuer has made a tender offer for the bonds at a price that is 
higher than what the dealer is offering.
---------------------------------------------------------------------------

    \47\ For example, SIFMA states that a particular dealer may not 
have recommended or even sold the bond to the customer so 
researching and disclosing all material facts about the bond will 
delay the trade. Additionally, SIFMA states that when an estate has 
given a dealer instructions to liquidate an entire portfolio, the 
disclosure obligation could decrease liquidity while the dealer does 
its own diligence and increase the cost of the trade.
---------------------------------------------------------------------------

    MSRB RESPONSE: Although recent time of trade disclosure guidance 
focuses on sales of municipal securities to customers, certain earlier 
guidance requires dealers to make disclosures in connection with both 
sales to and purchases from customers, and that guidance remains in 
effect. The MSRB believes, from a fair dealing perspective, that it is 
difficult to categorically exclude purchases from customers. 
Significantly, both SIFMA and BDA have pointed out instances where 
disclosure to a customer selling a bond would be appropriate. 
Therefore, the MSRB proposes to retain the disclosure requirement for 
purchases from customers. However, in response to this comment, the 
MSRB proposes to add the following sentence to the rule to clarify that 
whether the customer is purchasing or selling is a factor that can be 
considered in making the materiality determination: ``Whether the 
customer is purchasing or selling the municipal securities may be a 
consideration in determining what information is material.''
 Material, Non-Public Information
    COMMENT: SIFMA and BDA propose that the MSRB modify the definition 
of ``material'' to exclude material non-public information.
    MSRB RESPONSE: As discussed above, the MSRB is not proposing 
substantively to revise the current time of trade disclosure 
obligations but simply to codify them. While the MSRB understands the 
issue raised by the commenters, the MSRB can consider this comment if 
the Board undertakes to amend the rule substantively in the future.
 Access Equals Delivery for Time of Trade Disclosures
    COMMENT: SIFMA states that the proposed rule seems to eviscerate 
recent MSRB access equals delivery initiatives. SIFMA states that, in 
connection with marketing new issues of municipal securities to 
customers, dealers have relied on MSRB guidance that providing a 
preliminary official statement (``POS'') to a customer ``can serve as a 
primary vehicle for providing the required time-of-trade disclosures 
under Rule G-17, depending upon the accuracy and completeness of the 
POS as of the time of trade.'' SIFMA believes that providing access to 
a POS, whether on EMMA or some other electronic platform, should 
continue to satisfy a dealer's time of trade obligation for new issues 
of municipal securities. SIFMA states that proposed Rule G-47, 
supplementary material .01(b) and (c), seem to prohibit activity 
recently championed by the MSRB and that the proposed new obligation 
could create a risk of having dealers misinterpret or inadequately 
summarize information in a POS.
    MSRB RESPONSE: This comment does not sufficiently differentiate 
between Rule G-32, on disclosures in connection with primary offerings, 
and Rule G-17, which are two separate and distinct obligations. The 
guidance cited by SIFMA states that a POS can serve as a primary 
vehicle for providing the required time-of-trade disclosures but does 
not state that providing access to a POS would be sufficient. The MSRB 
has not stated that access to a POS, or to all material information 
regarding a security and transaction, is sufficient to satisfy the Rule 
G-17 time of trade disclosure obligation. Rather, the MSRB has 
explained that whether providing access to material information is 
effective disclosure is determined by the specific facts and 
circumstances. Supplementary material .01 (b) and (c) does not preclude 
the disclosure of material information by delivery of a

[[Page 62874]]

POS to the customer, assuming the POS contains all material information 
and assuming the means of disclosure are effective.
 General Advertising Materials
    COMMENT: SIFMA requests further clarification of the types of 
``disclosure of general advertising materials'' as referenced in 
proposed Rule G-47, supplementary material .01(c).
    MSRB RESPONSE: The MSRB does not propose to provide further 
clarification on general advertising materials at this time since the 
Rule G-17 interpretive notices do not elaborate on this concept. The 
MSRB can consider providing additional guidance if the Board undertakes 
to amend proposed Rule G-47 substantively in the future.
 Established Industry Sources
    COMMENT: Lumesis suggests that requiring market participants to 
disclose ``material information about the security that is reasonably 
accessible to the market'' should contemplate more than ``established 
industry sources'' as currently defined. Lumesis states that this would 
make the definition broad enough to encompass current or future 
technology and/or dissemination systems. Lumesis suggests that the MSRB 
remove the term ``established industry sources'' from the proposed rule 
or provide clarity to ensure that market participants focus on 
disclosing material information about the security that is reasonably 
accessible to the market. Similarly, TMC suggests that the proposed 
rule clarify what information is considered ``reasonably accessible to 
the market.''
    MSRB RESPONSE: The proposed rule provides that dealers must 
disclose ``all material information known about the transaction, as 
well as material information about the security that is reasonably 
accessible to the market.'' The proposed rule further provides that 
```[r]easonably accessible to the market' shall mean that the 
information is made available publicly through established industry 
sources'' and ```[e]stablished industry sources' shall include [EMMA], 
rating agency reports, and other sources of information relating to 
municipal securities transactions generally used by brokers, dealers, 
and municipal securities dealers that effect transactions in the type 
of municipal securities at issue.'' [Emphasis added] The definition of 
established industry sources is not limited to the particular sources 
listed, and the definition allows for evolving technologies and systems 
so long as such ``other sources'' are related and generally used as 
delineated by the proposed rule.
    COMMENT: WFA states that the rule should acknowledge the role of 
information vendors in helping a dealer monitor established industry 
sources. WFA cites the Interpretive Notice dated November 30, 2011, 
MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure 
Obligations under MSRB Rule G-17, which states:

    [T]he MSRB has noted that information vendors and other 
organizations may provide industry professionals with access to 
information that is generally used by dealers to effect transactions 
in municipal securities. The MSRB expects that, as technology 
evolves and municipal securities information becomes more readily 
available, new `established industry sources' are likely to emerge.

    More specifically, WFA requests that the final rule clarify that 
dealers may rely on vendors to help aggregate material information from 
established industry sources and monitor for ``emerging'' sources. 
Additionally, WFA states that the rule and guidance should recognize 
that established industry sources remain reliant on the quality of 
continuing and material event notifications provided by issuers.
    MSRB RESPONSE: The MSRB believes the role that information 
aggregators may play in assisting dealers in compliance with the rule 
is widely known and recognized and that specifically addressing the use 
of aggregators in the proposed rule may imply that use of such services 
is encouraged or required.
 Rating Agency Reports
    COMMENT: SIFMA requests that the MSRB clarify ``rating agency 
reports'' within the definition of ``established industry sources'' in 
the proposed rule. SIFMA states that the use of the term ``reports'' 
implies that dealers must distribute credit event-driven reports and 
that disclosure of the rating action alone is insufficient. SIFMA 
requests that the MSRB clarify that firms are under no obligation to 
distribute such reports.
    Lumesis suggests that the definition of ``established industry 
sources'' should not include ``rating agency reports.'' Lumesis states 
that inclusion of the reference may be inconsistent with a focus on 
material information that is timely since these reports may be issued 
months or more before the trade triggering disclosure. Additionally, 
Lumesis states that the inclusion of reports may be construed as an 
implicit endorsement of a private, for-profit enterprise's offering as 
fulfilling the requirement. Lumesis also states that the inclusion of 
rating agency reports seems inconsistent with the Dodd-Frank Act which 
indicates that market participants using ratings or rating reports 
should not rely on them alone.
    MSRB RESPONSE: As discussed previously, the MSRB is simply 
codifying the existing guidance in this rulemaking initiative. The 
current guidance does not address the meaning of the reference to 
``rating agency reports'' for purposes of time of trade disclosure and, 
as discussed above, the definition of established industry sources is 
not limited to the particular sources listed. Therefore, the MSRB does 
not propose adding any additional interpretation to the meaning of 
``rating agency reports'' or deleting this reference. However, the MSRB 
can consider revisions in this area if the Board undertakes to amend 
proposed Rule G-47 substantively in the future.
 Unsolicited Orders
    COMMENT: TMC suggests that the requirement for dealers to disclose 
reasonably accessible information to a client placing an unsolicited 
order is unnecessary regulation given the ease of access to the 
internet.
    MSRB RESPONSE: Current guidance provides that the time of trade 
disclosure obligation is the same whether the order is unsolicited or 
solicited. The goal of this rulemaking initiative is to codify current 
guidance in the new proposed Rule G-47.
 Location of Rule
    COMMENT: TMC suggests that it might be beneficial to codify the 
time of trade disclosure rule as a subsection of Rule G-17 as opposed 
to creating a new rule so that participants would only have to view a 
single rule for fair dealing, as opposed to having to cross-reference 
similar rules and their corresponding comments.
    MSRB RESPONSE: The MSRB does not propose to codify the provisions 
as suggested because, as a result of this rulemaking initiative, there 
will no longer be any time of trade disclosure guidance in Rule G-
17.\48\
---------------------------------------------------------------------------

    \48\ Rule G-17 will continue to include interpretive guidance 
related to time of trade disclosures for 529 plans. As indicated 
above, however, the MSRB may create a separate rule regarding time 
of trade disclosure obligations for 529 plans, in which case this 
guidance would likely be codified in a rule and deleted as part of 
any such rulemaking initiative.
---------------------------------------------------------------------------

 Material Event Filings
    COMMENT: SIFMA states that it would be helpful for the MSRB to 
explicitly address the concept that an event disclosed by an issuer or 
obligated person pursuant to an SEC Rule 15c2-12 continuing disclosure 
agreement does not necessarily constitute

[[Page 62875]]

``material information'' that would be required to be disclosed to 
investors and that, even if such information was material at the time 
it was disclosed, it does not remain material forever. SIFMA states 
that long-past credit ratings changes, or substitutions of trustees, or 
a continuing disclosure filing that was a few days late five years ago 
should not automatically be deemed material at the time of trade merely 
because they triggered a disclosure obligation at the time of 
occurrence. SIFMA suggests that a six-month look back would be a 
reasonable time limit for disclosing past information.
    MSRB RESPONSE: There is nothing in the proposed rule indicating 
that events disclosed by an issuer or obligated person pursuant to Rule 
15c2-12 are automatically material at the time of trade. The proposed 
rule states the well established definition that ``[i]nformation is 
considered to be material if there is a substantial likelihood that the 
information would be considered important or significant by a 
reasonable investor in making an investment decision.'' Therefore, the 
MSRB does not believe that any revisions are necessary or appropriate 
in response to this comment. In addition, there is no safe-harbor look 
back period under the existing guidance and thus a look back period is 
not included in the proposed rule, the purpose of which is only to 
codify existing obligations.
 Disclosure Obligations in Specific Scenarios
    COMMENT: SIFMA states that the list of scenarios in the proposed 
rule that may be material under certain circumstances and require 
disclosure is too prescriptive for a principles-based rule and will 
become a de facto enforcement checklist for regulators. SIFMA also 
states that dealers may rely on the four corners of the notice and not 
consider other factors that may become material in the future. SIFMA 
suggests that the existing interpretive notices be reorganized by 
specific scenarios, as many of the listed specific scenarios are the 
subject of more than one interpretive notice.
    MSRB RESPONSE: The proposed rule provides that the examples 
describe information that may be material in specific scenarios and 
that the list is not exhaustive. The MSRB does not propose to 
reorganize the existing interpretive guidance by specific scenarios 
since the MSRB plans to delete the Rule G-17 time of trade disclosure 
guidance.
    COMMENT: Similarly, WFA states that a final rule should provide 
dealers with more clarity about the specific scenarios that trigger 
time of trade disclosure obligations for the types of information 
identified in the supplementary material.
    MSRB RESPONSE: The MSRB believes that the supplementary material in 
the proposed rule provides dealers with sufficient clarity regarding 
time of trade disclosure obligations by providing a non-exhaustive list 
of examples describing information that may be material.
 Credit Risks and Ratings
    COMMENT: SIFMA states that unlike many of the other specific 
scenarios addressed in the proposed rule, credit ratings are 
potentially more fluid. Therefore, SIFMA argues that it would be 
helpful to define a material look-back period for credit ratings 
changes.
    MSRB RESPONSE: The MSRB does not propose making these changes since 
they are not in the current guidance but the MSRB can consider them if 
the Board undertakes to amend the proposed rule substantively in the 
future.
 Securities With Non-Standard Features
    COMMENT: SIFMA states that the prior uses of the term ``non-
standard features'' have been related to situations where the bonds pay 
interest annually, rather than semi-annually, a fact that affects yield 
calculations. SIFMA argues that this new usage seems to have no bounds, 
and adds the traditional interpretation as an afterthought. SIFMA 
states that it would be helpful to know what the MSRB considers to be 
standard features.
    MSRB RESPONSE: The MSRB does not propose making any revisions to 
the proposed rule in response to this comment. The requirement in the 
proposed rule is drawn from current interpretive guidance on time of 
trade disclosure obligations, and while the discussion of non-standard 
features arose in the context of price/yield calculations, the basic 
principle, when limited by a materiality threshold, is appropriate for 
the proposed rule change.
 Issuer's Intent to Prerefund
    COMMENT: SIFMA states that, unless an issuer's intent to prerefund 
has been publicly announced, it will not be known to established 
industry sources and would likely be material non-public information. 
(See the discussion above regarding the disclosure of material non-
public information.)
    MSRB RESPONSE: This requirement is drawn from the current 
interpretive guidance and the MSRB does not propose any changes in 
response to this comment.
 Failure to Make Continuing Disclosure Filings
    COMMENT: WFA suggests that the proposed rule should provide 
guidance about how to interpret the potential materiality of issuer 
event reporting deficiencies. WFA believes that the rule should make 
clear that an issuer's failure to make continuing disclosure filings is 
a factor but is not determinative of the materiality of the issuer's 
disclosure deficiency. WFA also believes the MSRB should make clear 
that a dealer may consider subsequent disclosures and the curing of 
late filings as relevant in determining the significance of a prior or 
less severe disclosure deficiency. Finally, WFA believes the 
supplementary material should specify a window of time in which an 
issuer's late continuing disclosure filing would be regarded as a 
clerical or ministerial issue and thus not a material deficiency.
    MSRB RESPONSE: Proposed Rule G-47, supplementary material .03(o) 
provides that discovery that an issuer has failed to make filings 
required under its continuing disclosure agreements may be material in 
specific scenarios and require time of trade disclosures to a customer. 
Therefore, this does not indicate that such a failure is always 
material requiring disclosure. The proposed rule, as noted, states the 
well established definition that ``[i]nformation is considered to be 
material if there is a substantial likelihood that the information 
would be considered important or significant by a reasonable investor 
in making an investment decision.'' Additionally, the MSRB does not 
propose to add the information requested by WFA relating to curing of 
late filings and a time window where it would be considered clerical. 
As discussed previously, the MSRB is simply codifying the existing 
guidance in this rulemaking initiative and the existing guidance does 
not provide for such a bright-line look back.
    COMMENT: SIFMA states that the rule should make it clear that for 
secondary market trades the ``discovery'' by a dealer that an issuer 
has failed to make filings required by its continuing disclosure 
agreements is limited to a dealer's review of ``failure to file'' 
notices on EMMA pursuant to Rule 15c2-12.
    MSRB RESPONSE: The interpretive guidance states that, ``if a firm 
discovers through its Rule 15c2-12 procedures or otherwise that an 
issuer has failed to make filings required under its continuing 
disclosure agreements, the

[[Page 62876]]

firm must take this information into consideration in meeting its 
disclosure obligations under MSRB Rule G-17 . . .'' \49\ [Emphasis 
added]. Therefore, this requirement is not as narrow as SIFMA appears 
to interpret it and the MSRB does not propose to make any changes in 
response to this comment.
---------------------------------------------------------------------------

    \49\ Interpretive Notice dated September 20, 2010, MSRB Reminds 
Firms of their Sales Practice and Due Diligence Obligations When 
Selling Municipal Securities in the Secondary Market.
---------------------------------------------------------------------------

 Processes and Procedures
    COMMENT: SIFMA argues that proposed Rule G-47, supplementary 
material .04 is an expansion of current regulatory requirements, is too 
narrow, and omits critical guidance as set forth in the Interpretive 
Notice dated November 30, 2011, MSRB Answers Frequently Asked Questions 
Regarding Dealer Disclosure Obligations under MSRB Rule G-17. The 
proposed rule states:

    Brokers, dealers, and municipal securities dealers must 
implement processes and procedures reasonably designed to ensure 
that material information regarding municipal securities is 
disseminated to registered representatives who are engaged in sales 
to and purchases from a customer.

    The proposed rule does not include the following sentence contained 
in the guidance:

    It would be insufficient for a dealer to possess such material 
information, if there were no means by which a registered 
representative could access it and provide such information to 
customers.

    SIFMA argues that a dealer that provides its registered 
representatives access to such information satisfies current MSRB 
guidance under Rule G-17 and should similarly be sufficient under the 
proposed rule. SIFMA also argues that incorporating this guidance into 
the proposed rule is an expansion of existing regulatory obligations as 
currently approved by the SEC and is not merely a codification of 
existing regulations. Therefore, SIFMA states that any enforcement 
against dealers for failing to disseminate or provide access to their 
registered representatives of material information regarding municipal 
securities should be applied solely prospectively.
    MSRB RESPONSE: SIFMA appears to interpret the sentence in the 
guidance to mean that merely providing access is sufficient. The 
sentence states that dealer possession of information is insufficient 
if registered representatives lack access to it. This does not mean 
that the converse is true--that mere access to the information is 
sufficient. Beyond providing access, dealers must implement processes 
and procedures reasonably designed to ensure that material information 
is disseminated to registered representatives. The potential for 
misinterpretation of this sentence supports the MSRB's determination 
that it should not be included in the proposed rule. Additionally, 
proposed Rule G-47, supplementary material .04 is not an expansion of 
current regulatory requirements since this obligation is fairly and 
reasonably implied by current MSRB rules, as enunciated by the MSRB 
since November 30, 2011.\50\
---------------------------------------------------------------------------

    \50\ See Interpretive Notice dated November 30, 2011, MSRB 
Answers Frequently Asked Questions Regarding Dealer Disclosure 
Obligations under MSRB Rule G-17; see also Interpretive Notice dated 
July 14, 2009, Guidance on Disclosure and Other Sales Practice 
Obligations to Individual and Other Retail Investors in Municipal 
Securities.
---------------------------------------------------------------------------

    COMMENT: WFA suggests that the proposed rule should make clear that 
a dealer with a reasonably designed system for the detection and 
disclosure of material information will be presumed to have complied 
with its time of trade disclosure obligations.
    MSRB RESPONSE: The current guidance does not provide that a dealer 
will be presumed to have complied with its time of trade disclosure 
obligations by having a reasonably designed system. To do so in the 
proposed rule would significantly narrow dealers' current obligations.
 Ambiguity of Rule
    COMMENT: BDA states that the proposed rule, like the interpretive 
guidance, is unnecessarily ambiguous. BDA believes that there should be 
at least a safe harbor or some additional clarity that allows dealers 
to comply with concrete rules rather than broad-based principles.
    MSRB RESPONSE: The MSRB believes the new rule will be clear and 
easier for dealers to follow. As discussed above, the MSRB is simply 
codifying the guidance and can consider revisions to the proposed rule 
in the future.
 Harmonizing With FINRA Notice 10-41
    COMMENT: BDA suggests that the MSRB should reconcile how the new 
proposed rule will be harmonized with FINRA Regulatory Notice 10-41 and 
exactly how the market should read the two in conjunction with one 
another.
    MSRB RESPONSE: The MSRB's rules and guidance should be followed for 
all municipal securities transactions as FINRA's notice is simply its 
interpretation of MSRB rules and guidance.
 Enforcement
    COMMENT: Lumesis comments that providing dealers that have made 
good faith efforts to comply with proposed Rule G-47 with ample notice 
and sufficient direction to take corrective actions would support the 
spirit and intent of the rule.
    MSRB RESPONSE: The MSRB appreciates this comment; however, the 
approach to enforcement is beyond the scope of the proposal.
 Form of Disclosure
    COMMENT: Lumesis suggests that as the MSRB contemplates refinements 
and changes to the proposed rule in the future the subject of ``form of 
disclosure'' be more fully addressed as many market participants 
struggle with what actions satisfy the time of trade disclosure 
obligation.
    MSRB RESPONSE: The MSRB can consider this suggestion if the Board 
undertakes to revise the proposed rule in the future.
Rule G-19 on Suitability of Recommendations and Transactions
    On March 11, 2013, the MSRB requested comment on proposed revisions 
to Rule G-19.\51\ The suitability notice generated seven comment 
letters.\52\
---------------------------------------------------------------------------

    \51\ See MSRB Notice 2013-07 (March 11, 2013) (the ``suitability 
notice'').
    \52\ Comment letters were received from: BDA; College Savings 
Foundation (``CSF'') (although CSF sent its own letter, the letter 
simply states that CSF endorses the comments made by the Investment 
Company Institute); College Savings Plans Network (``CSPN'') 
(although CSPN sent its own letter, the letter simply states that 
CSPN is supportive of the comments relating to 529 Plan suitability 
requirements submitted by the Investment Company Institute); 
Financial Services Institute (``FSI''); Investment Company Institute 
(``ICI''); SIFMA; and WFA. In addition to these seven comment 
letters submitted in response to the proposed revisions to Rule G-
19, an additional comment letter was submitted by an investor on 
August 25, 2013. The substance of this letter is more germane to the 
MSRB's request for comment on adopting a ``best execution'' standard 
and this retail investor submitted a similar letter in response to 
that request for comment. See, MSRB Notice 2013-16, Request for 
Comment on Whether to Require Dealers to Adopt a ``Best Execution'' 
Standard for Municipal Securities Transactions (August 6, 2013). 
Therefore, this letter will be discussed in detail in connection 
with the best execution request for comment.
---------------------------------------------------------------------------

    The comment letters are summarized by topic as follows:
 Support for the Proposal
    COMMENTS: All of the commenters generally support the MSRB's 
initiative to harmonize MSRB Rule G-19 with FINRA Rule 2111. BDA states 
that it is encouraged by many of the changes in proposed Rule G-19. FSI 
states that it supports the harmonization of MSRB

[[Page 62877]]

Rule G-19 with FINRA Rule 2111 and that it is a positive development 
that will provide significant benefits for broker-dealers and financial 
advisors.\53\ ICI states that it supports the MSRB's proposal to 
harmonize its suitability rule with FINRA's suitability rule because it 
is in the best interests of investors and registrants. SIFMA comments 
that it supports the MSRB's efforts to harmonize MSRB Rule G-19 with 
FINRA Rule 2111 since such harmonization will promote more effective 
business practices and efficient compliance. Finally, WFA states that 
it applauds the MSRB's continuing effort to promote regulatory 
efficiency.
---------------------------------------------------------------------------

    \53\ FSI also notes that it has concerns with FINRA's 
suitability rule, but did not specify those concerns.
---------------------------------------------------------------------------

    MSRB RESPONSE: These comments support the MSRB's statement on 
burden on competition.
 Application to SMMPs
    COMMENTS: SIFMA comments that its members would prefer the MSRB to 
explicitly include the SMMP exemption in the proposed rule as with the 
institutional account exemption in FINRA Rule 2111(b) even though the 
MSRB is proposing separate rules codifying SMMP guidance. SIFMA states 
that the suitability rule should, at a minimum, cross reference the 
SMMP rules.
    Similarly, WFA requests that the MSRB reconsider its plan to handle 
the SMMP exemption separately from the proposed rule. WFA requests that 
the MSRB adopt a structure parallel to FINRA's suitability rule to make 
clear that, under certain circumstances, a dealer has limited 
suitability obligations to institutional customers.
    Additionally, WFA is concerned that the SMMP exemption continues to 
impose additional suitability requirements on dealers transacting with 
institutional clients beyond those required under FINRA's suitability 
rule. WFA states that dealers considering whether an institutional 
account is an SMMP must assess the factors required under Rule 2111(b) 
as well as additional criteria such as the institutional customer's 
ability to independently evaluate the ``market value'' of municipal 
securities and the ``amount and type of municipal securities owned [by] 
or under management'' of the institutional customer. WFA states that 
since some institutional clients may satisfy FINRA's exemptive criteria 
but not MSRB's, dealers will likely need to invest in costly technology 
enhancements and will likely be required to maintain separate policies 
and procedures. WFA is also concerned that the difference in rule 
structure will lead to regulatory confusion for clients and regulators.
    BDA believes that omitting any reference to the SMMP exemption in 
the proposed rule undermines the goal of harmonizing it with FINRA's 
suitability rule. BDA is concerned that FINRA examiners will not be 
able to consistently apply the FINRA suitability rule as contrasted 
with the MSRB suitability rule, potentially causing confusion for 
application of the rules by FINRA examiners.
    BDA states that, if the MSRB includes an exemption for SMMPs in the 
proposed rule, the supplementary material should be updated to make 
certain corresponding changes.
    MSRB RESPONSE: The MSRB does not believe that it is appropriate or 
necessary to reference the SMMP exemption in Rule G-19. The SMMP 
exemption addresses four separate areas: time of trade disclosures, 
transaction pricing, suitability, and bona fide quotations and the 
exemption is not referenced in any of these separate rules. In 
connection with the proposed suitability rule, the MSRB has not 
proposed any revisions to the SMMP exemption and addresses WFA's 
comments in this area separately in response to the request for comment 
on the proposed SMMP rules set out below.\54\
---------------------------------------------------------------------------

    \54\ MSRB Notice 2013-10, Request for Comment on Proposed 
Sophisticated Municipal Market Professional Rules (May 1, 2013).
---------------------------------------------------------------------------

 Exclusions From Recommended Strategies
    COMMENTS: SIFMA states that the proposed rule omits important 
exclusions from recommended strategies that are present in FINRA's 
suitability rule including with respect to: Descriptive information 
about an employee benefit plan; asset allocation models such as 
investment analysis tools; and other interactive investment materials. 
SIFMA states that these omissions solely with respect to municipal 
securities will result in confusion. SIFMA believes that materials and 
output of this nature provide investors with valuable information when 
considering investment decisions and should be recognized by the MSRB 
as exclusions from Rule G-19. SIFMA notes that the SEC, in its 2012 
Report on the Municipal Securities Market, expressly discusses amending 
Rule G-19 to be consistent with FINRA's Rule 2111 ``including with 
respect to the scope of the term strategy.''
    SIFMA also recommends listing 529 plan education savings 
calculators and tools as a type of excluded ``general investment 
information.''
    MSRB RESPONSE: The proposed rule does not include the following 
general financial and investment information from FINRA's suitability 
rule: (1) Dollar cost averaging; (2) compounded return; (3) tax 
deferred investment; (4) descriptive information about an employer-
sponsored retirement or benefit plan, participation in the plan, the 
benefits of plan participation, and the investment options available 
under the plan; (5) asset allocation models that are (i) based on 
generally accepted investment theory, (ii) accompanied by disclosures 
of all material facts and assumptions that may affect a reasonable 
investor's assessment of the asset allocation model or any report 
generated by such model, and (iii) in compliance with Rule 2214 
(Requirements for the Use of Investment Analysis Tools) if the asset 
allocation model is an ``investment analysis tool'' covered by Rule 
2214; and (6) interactive investment materials that incorporate the 
above. These items are not included in the proposed rule because the 
MSRB chose to include the concepts that are most pertinent to the 
municipal securities market. With respect to the suggestion to add 529 
calculators and tools to the list, the MSRB may create a separate rule 
or guidance to specifically address suitability obligations for 529 
plans in the future and the MSRB can consider this comment at that 
time.
 529 Plans
    COMMENTS: ICI states that it is not clear whether the proposed rule 
is intended to apply to MSRB registrants selling 529 plans. However, 
ICI states that, from talking to MSRB staff, they understand that the 
proposed rule is intended to apply to such registrants' 
recommendations. ICI recommends that the MSRB revise the current 
proposal to add supplementary material to Rule G-19 that sets forth all 
additional suitability obligations imposed on registrants' 
recommendations of 529 plan securities. ICI also recommends that the 
MSRB rescind all suitability requirements and guidance that have been 
issued under other MSRB rules relating to recommendations involving 529 
plan securities. If the MSRB follows this recommendation, ICI 
recommends that the MSRB publish a revised request for comment that 
includes any provisions designed to address 529 plans.
    SIFMA states that the request for comment creates confusion about 
the

[[Page 62878]]

applicability of the proposed rule to firms selling 529 plan securities 
and, in lieu of a separate suitability rule for 529 plans, SIFMA 
suggests that the MSRB consider incorporating existing interpretive 
guidance related to suitability assessments for 529 plans into the 
proposed rule, either by adding a sentence to the proposed rule 
specific to assessing the suitability of a 529 plan security, or by 
incorporating existing interpretive guidance into the supplementary 
material.
    MSRB RESPONSE: The proposed rule is intended to apply to 529 plans. 
All MSRB rules and guidance apply to 529 plans unless specifically 
excluded, and the proposed rule does not exclude 529 plans. 
Additionally, the current guidance addressing suitability requirements 
for 529 plans continues to apply. The MSRB may decide to create a 
separate rule addressing 529 plans in the future; however, the proposed 
suitability rule and related guidance will apply to 529 plans until any 
such separate 529 plan rule is created.
 Applicability of FINRA's Guidance
    COMMENT: ICI recommends that the MSRB confirm in the notice 
adopting the proposed revisions to Rule G-19 the MSRB's intent to 
interpret its rule in a manner that is consistent with FINRA's 
interpretation.
    MSRB RESPONSE: The MSRB will interpret proposed Rule G-19 in a 
manner consistent with FINRA's interpretations of Rule 2111 except to 
the extent that the MSRB affirmatively states that specific provisions 
of FINRA's interpretations do not apply.
 Explicit vs. Passive Hold Recommendations
    COMMENTS: WFA comments that the MSRB should provide guidance 
similar to FINRA's guidance that suitability obligations concerning 
hold recommendations cover only explicit hold recommendations.
    BDA is concerned that there is a potential for confusion with 
respect to explicit versus passive hold recommendations. Specifically, 
proposed Rule G-19, supplementary material .03, Recommended Strategies, 
would apply the suitability obligation to investment strategies that 
include an explicit recommendation to hold a municipal security or 
municipal securities. BDA is concerned that this might lead to 
unnecessary and burdensome compliance documentation in certain 
instances. BDA encourages the MSRB to provide further guidance as to 
what constitutes an explicit hold recommendation for purposes of the 
rule and believes that the MSRB should have guidance, as FINRA does in 
Regulatory Notice 12-55, that ``implicit'' hold recommendations are not 
within the scope of the suitability rule.
    MSRB RESPONSE: As noted, the MSRB will interpret Rule G-19 in a 
manner that is consistent with FINRA's interpretation of its 
suitability rule except to the extent that the MSRB affirmatively 
states that specific provisions of FINRA's interpretations do not 
apply.
 Effective Date
    COMMENTS: SIFMA appreciates that the MSRB intends to file the time 
of trade disclosure, suitability, and SMMP proposals with the SEC at 
the same time.
    SIFMA further requests that these three rules be implemented 
simultaneously with the same effective date.
    SIFMA states that FINRA Rule 2111 was the result of a multi-year 
process, including an implementation period of approximately 19 months 
and that any regulatory scheme takes time to implement properly. SIFMA 
further states that municipal securities dealers that are not FINRA 
members, as well as FINRA members that only buy and sell municipal 
securities, will need a reasonable time to allow for a sufficient 
implementation period to develop, test, and implement supervisory 
policies and procedures, systems and controls, as well as training.
    SIFMA also states that municipal securities dealers that are FINRA 
members will also need time, albeit less than non-FINRA members, to 
implement the proposed changes. SIFMA recommends an implementation 
period of no less than one year from approval by the SEC before the 
proposal becomes effective.
    MSRB RESPONSE: The MSRB contemplated implementing the time of trade 
disclosure, suitability, and SMMP rules simultaneously with the same 
effective date. However, the MSRB believes that an implementation 
period of one year is unnecessary. The time of trade disclosure and 
SMMP rules simply codify existing guidance and the suitability rule is 
largely consistent with FINRA's suitability rule. Therefore, the MSRB 
proposes an effective date for the proposed rule change of 60 days 
following the date of SEC approval.
 Changes to Supplementary Material
    COMMENTS: BDA suggests striking the word ``retirement'' from 
supplementary material .03, Recommended Strategies, item (iv). BDA 
suggests that the section should be rewritten to read ``estimates of 
future income needs'' as this would better align to FINRA's ``liquidity 
needs'' criteria to recognize that when purchasing a position, one 
might be looking for a period to help bridge income needs until they 
reach retirement and not solely for ``retirement income needs.''
    MSRB RESPONSE: The language in the proposed rule regarding 
estimates of future retirement income needs is identical to the 
parallel language in FINRA's suitability rule relating to general 
financial and investment information. The MSRB does not propose to 
delete the word ``retirement'' since there is no unique aspect of the 
municipal securities market that would support adopting different 
language from FINRA's rule. Moreover, the MSRB does not believe that 
the phrase should be aligned to the non-parallel ``liquidity needs'' 
criterion in FINRA's rule relating to a customer's investment profile.
Rules D-15 and G-48 on SMMPs
    On May 1, 2013, the MSRB requested comment on proposed Rules D-15 
and G-48 on SMMPs.\55\ The SMMP notice generated three comment 
letters.\56\
---------------------------------------------------------------------------

    \55\ See MSRB Notice 2013-10 (May 1, 2013) (the ``SMMP 
notice'').
    \56\ Comment letters were received from: BDA; SIFMA; and WFA.
---------------------------------------------------------------------------

    The comment letters are summarized by topic as follows:
 Support for the Proposal
    COMMENTS: All of the commenters generally support the MSRB's 
initiative to codify the SMMP guidance into Rules D-15 and G-48. BDA 
states that, while it is supportive of the proposed rules, it seeks 
clarity on some items. SIFMA comments that it continues to support the 
efforts by the MSRB to provide clarity to regulated entities by 
reorganizing or eliminating certain interpretive guidance associated 
with Rule G-17 into new or revised rules. WFA states that it supports 
the MSRB's continued commitment to ``streamline'' its rules and 
guidance and its ongoing effort to align its rule format with that of 
other regulators.
    MSRB RESPONSE: The MSRB believes these comments support the MSRB's 
statement on the burden on competition.
 SMMP Definition
    COMMENTS: SIFMA comments that there is one group of customers that 
may be experienced municipal market participants yet does not fall 
within the current SMMP definition: Hedge funds with assets under 
management of less than $50 million. SIFMA states that the

[[Page 62879]]

MSRB and FINRA should consider expanding the definition of 
institutional account holders and SMMPs in future rulemaking to include 
this type of customer.
    Last year the MSRB harmonized (with slight distinctions) the SMMP 
definition and the process by which dealers confirm a customer's SMMP 
status with FINRA's suitability rule and institutional account 
definition. SIFMA suggests that hedge funds managing less assets than 
required by the MSRB and FINRA are nevertheless sophisticated and, 
therefore, should be covered by the MSRB and FINRA rules. By contrast, 
BDA indicated in its comment letter that it is comfortable with the $50 
million threshold.
    MSRB RESPONSE: As discussed in the SMMP notice, the codification of 
the interpretive guidance on SMMPs that is currently in Rule G-17 is 
intended to preserve the substance of the guidance approved by the 
Board. No substantive changes are intended. It would be beyond the 
scope of this initiative to determine whether small hedge funds are 
sufficiently sophisticated to warrant the relief to dealers in proposed 
Rule G-48.
 Cross References to SMMP Rules
    COMMENTS: SIFMA and WFA comment that the rules under which a 
dealer's obligations to SMMPs are modified (proposed Rule G-47, and 
Rules G-19, G-13, and G-18) \57\ should specifically include a 
reference to the definition of and the modified obligations to SMMPs 
delineated in the proposed rules.
---------------------------------------------------------------------------

    \57\ Although not listed in SIFMA's letter, Rule G-18 
obligations related to transaction pricing are also modified by 
proposed Rule G-48.
---------------------------------------------------------------------------

    MSRB RESPONSE: One of the benefits of adopting stand-alone rules is 
to make them more prominent and easier for dealers and other market 
participants to locate. The MSRB believes that a stand-alone SMMP 
definition and a stand-alone rule describing the relief available to 
dealers who do business with SMMPs will provide ample clarity to 
dealers regarding their obligations. Cross-references, therefore, are 
unnecessary. Moreover, if cross-references were used for rules 
impacting SMMPs, a consistent practice of including cross-references in 
other rules would tend to make the rulebook unmanageable. This comment 
was also made in response to the requests for comment on proposed Rule 
G-47 and the proposed revisions to Rule G-19. In response to the 
previous comments, the MSRB indicated that it does not believe it is 
necessary to reference the new SMMP rules in each of the rules to which 
the SMMP guidance applies.
 Effective Dates
    COMMENT: SIFMA requests that the proposed revisions to Rule G-19, 
and proposed Rules G-47, G-48, and D-15 be implemented simultaneously 
with the same effective date.
    MSRB RESPONSE: The MSRB agrees that it is appropriate to file these 
proposed rules simultaneously and for them to become effective together 
on the same date.
 Customer Affirmation
    COMMENT: With regard to proposed Rule D-15, supplementary material 
.02, Customer Affirmation, BDA requests that the MSRB consider 
permitting alternate methods of affirming SMMP status in lieu of 
specifically obtaining customer affirmations under the proposed 
rule.\58\
---------------------------------------------------------------------------

    \58\ As an example, BDA states that a dealer who has a process 
for and conducts a regular credit review of its SMMP customers 
should be able to use such credit review instead of obtaining an 
affirmation by the SMMP as long as the dealer determines there has 
been no change in the status of the SMMP based on the internal 
review of the customer's portfolio or other similar evaluation.
---------------------------------------------------------------------------

    MSRB RESPONSE: As BDA points out, the rule already provides 
flexibility with regard to the affirmation process, which is 
substantially similar to (and can be combined with) FINRA's process. It 
can be done orally or in writing, on a trade by trade, type of 
municipal security or account-wide basis. BDA's request to use the 
credit review process in lieu of an affirmation would be a substantial 
change in the process. The customer affirmation requirement in proposed 
Rule D-15, supplementary material .02 is taken directly from the 2012 
SMMP Interpretation.\59\ The proposed SMMP rules simply codify the 
existing guidance and it would be beyond the scope of this rulemaking 
initiative to make any substantive changes to the existing guidance.
---------------------------------------------------------------------------

    \59\ Restated Interpretive Notice Regarding the Application of 
MSRB Rules to Transactions with Sophisticated Municipal Market 
Professionals  (July 9, 2012) (the ``2012 SMMP Interpretation'').
---------------------------------------------------------------------------

 Reasonable Basis Analysis
    COMMENTS: BDA expresses concern regarding the more stringent 
requirement in proposed Rule D-15, supplementary material .01, 
Reasonable Basis Analysis, which goes beyond FINRA's rules to state 
that a ``. . . dealer should consider the amount and type of municipal 
securities owned or under management by the customer.'' BDA states that 
FINRA does not require a consideration of the type of securities held 
by the customer for qualification under FINRA's institutional investor 
exemption. BDA also states that it is unaware of any feature unique to 
the municipal securities market that would justify the more burdensome 
requirement to consider both the amount and type of municipal 
securities owned or under management by the customer. BDA further 
states that this requirement might confuse examiners and allow for an 
uneven application of the proposed rule. BDA believes a determination 
by the dealer that the customer has total assets of at least $50 
million and that the dealer has a reasonable basis to believe the 
customer is capable of evaluating investment risk and market value 
independently should be given deference.
    MSRB RESPONSE: The MSRB believes this additional requirement that a 
dealer consider the amount and type of municipal securities owned or 
under management by the customer is appropriate since it provides some 
assurance that the dealer considered the investor's experience as a 
municipal securities investor in forming a reasonable basis for 
believing that the customer is capable of evaluating investment risks 
and market value independently. The MSRB believes the concern about 
misapplication in the regulatory examination process is misplaced, 
since the dealer need only evidence that it considered the municipal 
securities holdings of the customer in its analysis. The customer 
affirmation requirement in proposed Rule D-15, supplementary material 
.01 is taken directly from the 2012 SMMP Interpretation.\60\ The 
proposed SMMP rules simply codify the existing guidance and do not make 
any changes to the guidance.
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

 Agency Transactions
    COMMENTS: BDA requests further clarification as to how the MSRB 
defines ``agency transactions'' for purposes of Rule G-48(b)(1). 
Additionally, BDA states that, with respect to transaction pricing, the 
2012 SMMP Interpretation included guidance that was particularly 
relevant to dealers operating alternative trading systems. BDA requests 
the MSRB to consider the application of this provision in the context 
of alternative trading systems and whether it would be appropriate to 
expand this exemption for transaction pricing under the proposed rule 
to include an alternative trading system ``which functions on a 
riskless principal basis disclosing all commissions in the same manner 
as it would if it were acting as agent.''

[[Page 62880]]

    MSRB RESPONSE: The agency concept is taken directly from the 
current Rule G-17 guidance and relates to agency transactions as 
described in Rule G-18. The restated SMMP guidance in 2012 did not 
change this concept from the original notice in 2002. It has always 
been the case that fair pricing relief was limited to non-recommended 
secondary market agency trades. BDA suggests that the MSRB expand the 
relief to riskless principal transactions executed by alternative 
trading systems. While some such systems effect trades with their 
institutional customers on an agency basis, the MSRB understands that 
some are executed on a riskless principal basis and include a markup or 
markdown. The MSRB views BDA's requested change as substantive and 
worthy of consideration at a later date. As for the request for 
clarification of the definition of an agency transaction, we believe 
the concept is well-settled and understood by the market. Finally, the 
reference in the 2012 notice to commissions charged by ATSs was meant 
to remind dealers operating ATSs that their obligation to charge a fair 
and reasonable commission under Rule G-30(b) is independent of the fair 
and reasonable price obligation under Rule G-18 (and corresponding SMMP 
relief).
 Bona Fide Quotations
    COMMENTS: BDA states that proposed Rule G-48(d), on bona fide 
quotations, provides that a ``. . . dealer disseminating an SMMP's 
`quotation' as defined in Rule G-13, which is labeled as such, shall 
apply the same standards. . . .'' BDA states that it is unclear whether 
the MSRB intends that a quotation from an SMMP needs to be labeled as 
an ``SMMP quotation'' or if the MSRB is simply referring to a quotation 
that meets the requirements set forth under MSRB Rule G-13. BDA states 
that under the 2012 SMMP Interpretation it was clear that, if an SMMP 
makes a ``quotation'' and it is labeled as such, then it is presumed 
not to be a quotation made by the disseminating dealer. BDA states 
that, if proposed Rule G-48(d) is intended to codify the language from 
the 2012 SMMP Interpretation, they request that the MSRB consider 
modifying the language in the proposed rule to clarify that the clause 
``which is labeled as such'' does not require the quotation to be 
specifically labeled as an SMMP quotation.
    MSRB RESPONSE: BDA suggests that the proposed rule changes the 
standard for identifying quotes from SMMPs. Such is not the case. Since 
the original interpretation in 2002, dealers have been required to 
identify the quote as from an SMMP to take advantage of the relief in 
the guidance. To read the rule any other way would not make sense. BDA 
suggests it would be sufficient to simply label the SMMP quote as a 
quote, rather than an SMMP quote. This would not alert the 
disseminating dealer that the quote was from an SMMP. The MSRB does not 
propose to make any revisions in response to this comment. The language 
in the proposed rule tracks the language in the current Rule G-17 
guidance \61\ and, therefore, the clarification requested by BDA is not 
necessary.
---------------------------------------------------------------------------

    \61\ The current Rule G-17 guidance states: ``If an SMMP makes a 
`quotation' and it is labeled as such, then it is presumed not to be 
a quotation made by the disseminating dealer.'' Similarly, proposed 
Rule G-48(d) states ``The . . . dealer disseminating an SMMP's 
`quotation' as defined in Rule G-13, which is labeled as such, shall 
apply the same standards regarding quotations described in Rule G-
13(b) as if such quotations were made by another . . . dealer. . . 
.''
---------------------------------------------------------------------------

 SMMP Definition vs. FINRA Institutional Investor Definition
    COMMENTS: WFA expresses concern that dealers considering whether an 
institutional account is an SMMP must assess not only the factors 
required under FINRA Rule 2111(b), but also additional criteria such as 
the institutional customer's ability to independently evaluate the 
``market value'' of municipal securities and the ``amount and type of 
municipal securities owned [by] or under management'' of the 
institutional customer. WFA states that the differences in duties owed 
under the SMMP rules and FINRA Rule 2111(b) may confuse clients and 
regulators. WFA believes that proposed Rule D-15 should not include 
these additional criteria.
    MSRB RESPONSE: The second additional criterion regarding the amount 
and type of municipal securities was discussed previously. As for the 
first additional criterion, the MSRB believes that the phrase ``market 
value'' should be retained, since the relief goes beyond FINRA's 
suitability relief and extends to fair pricing. Although the SMMP 
definition does impose some obligations beyond those required by 
FINRA's suitability rule, proposed Rule D-15 simply codifies the 
current Rule G-17 SMMP guidance. The MSRB does not propose making any 
substantive changes to the proposed rules in response to this comment.

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 of up to 90 days (i) as 
the Commission may designate 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 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-2013-07 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-2013-07. 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 
10:00 a.m. and 3:00 p.m. Copies of such

[[Page 62881]]

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-2013-07, and should be submitted on or before 
November 12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
---------------------------------------------------------------------------

    \62\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24549 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.