Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change Consisting of Rule G-18, on Best Execution of Transactions in Municipal Securities, and Amendments to Rule G-48, on Transactions With Sophisticated Municipal Market Professionals (“SMMP”), and Rule D-15, on the Definition of SMMP, 73658-73665 [2014-29023]

Download as PDF 73658 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–EDGX– 2014–29, and should be submitted on or before January 2, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–29009 Filed 12–10–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73764; File No. SR–MSRB– 2014–07] 19b–4 thereunder,2 a proposed rule change consisting of Rule G–18, on best execution of transactions in municipal securities, and amendments to Rule G– 48, on transactions with SMMPs, and Rule D–15, on the definition of SMMP (the ‘‘proposed rule change’’). The proposed rule change was published for comment in the Federal Register on September 8, 2014.3 The Commission received six comment letters on the proposed rule change.4 On November 21, 2014, the MSRB submitted a response to these comments.5 This order approves the proposed rule change. II. Description of the Proposed Rule Change According to the MSRB, the establishment of a requirement that brokers, dealers and municipal securities dealers (‘‘dealers’’) seek best execution of retail customer transactions in municipal securities will have benefits for investors, promote fair competition among dealers, and improve market efficiency.6 The MSRB stated that the proposed rule change reflects the MSRB’s belief that a best execution rule should be generally harmonized with the Financial Industry Regulatory Authority’s (‘‘FINRA’’) bestexecution rule, FINRA Rule 5310 (Best Execution and Interpositioning), for purposes of regulatory efficiency but appropriately tailored to the characteristics of the municipal securities market.7 The MSRB further believes that, unlike FINRA Rule 5310, it is appropriate to provide an exception from the requirements of the best2 17 Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change Consisting of Rule G–18, on Best Execution of Transactions in Municipal Securities, and Amendments to Rule G–48, on Transactions With Sophisticated Municipal Market Professionals (‘‘SMMP’’), and Rule D–15, on the Definition of SMMP December 5, 2014. mstockstill on DSK4VPTVN1PROD with NOTICES I. Introduction On August 20, 2014, the Municipal Securities Rulemaking Board (the ‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (the ‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 16 17 1 15 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 CFR 240.19b–4. Exchange Act Release No. 72956 (September 2, 2014), 79 FR 53236 (September 8, 2014) (the ‘‘Proposing Release’’). 4 See Letters from David L. Cohen, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated September 29, 2014 (‘‘SIFMA Letter’’); Michael Nicholas, Chief Executive Officer, Bond Dealers of America (‘‘BDA’’), dated September 29, 2014 (‘‘BDA Letter No. 1’’) and October 30, 2014 (‘‘BDA Letter No. 2’’); Chris Melton, Executive Vice President, Coastal Securities (‘‘Coastal’’), dated September 29, 2014 (‘‘Coastal Letter’’); David T. Bellaire, Esq., Executive Vice President & General Counsel, Financial Services Institute (‘‘FSI’’), dated September 29, 2014 (‘‘FSI Letter’’); and Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors, LLC (‘‘Wells Fargo’’), dated September 29, 2014 (‘‘Wells Letter’’). Staff from the Office of Municipal Securities met with representatives from BDA on October 23, 2014, and had a telephonic meeting with a representative from SIFMA on December 3, 2014, to discuss the proposed rule change. 5 See Letter to Secretary, Commission, from Michael L. Post, Deputy General Counsel, MSRB, dated November 21, 2014 (‘‘MSRB Response Letter’’). 6 See supra note 3 at 2. 7 Id. at 7. 3 Securities PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 execution rule for all transactions with SMMPs.8 The MSRB represented that the proposed best-execution requirement generally would target the process by which dealers handle orders and execute transactions, and would complement and buttress the MSRB’s existing fair-pricing rules.9 1. Proposed Rule G–18 Proposed Rule G–18(a) requires that, in any transaction in a municipal security for or with a customer or a customer of another dealer, a dealer must use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.10 Paragraph (a) provides the following factors among the factors that will be considered in determining whether a dealer has used ‘‘reasonable diligence,’’ with no single factor being determinative: the character of the market for the security, the size and type of transaction, the number of markets checked, the information reviewed to determine the current market for the subject security or similar securities, the accessibility of quotations, and the terms and conditions of the customer’s inquiry or order, including any bids or offers, that result in the transaction, as communicated to the dealer.11 Proposed Rule G–18(b) prohibits a dealer from interjecting a third party between itself and the best market for the subject security in a manner inconsistent with paragraph (a).12 The MSRB stated that paragraph (b) would not prohibit the use of a broker’s broker, unless it was inconsistent with the bestexecution obligation in paragraph (a).13 Proposed Rule G–18(c) specifies that the obligations described in paragraphs (a) and (b) apply to transactions in which the dealer is acting as agent and transactions in which the dealer is acting as principal.14 Paragraph (c) expressly states that the best-execution obligations are distinct from the fairness and reasonableness of commissions, markups or markdowns, which are governed by Rule G–30.15 8 Id. 9 Id. 10 See proposed Rule G–18(a). 11 Id. 12 See proposed Rule G–18(b). supra note 3 at 10. 14 See proposed Rule G–18(c). 15 Id. 13 See E:\FR\FM\11DEN1.SGM 11DEN1 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices 2. Supplementary Material to Proposed Rule G–18 mstockstill on DSK4VPTVN1PROD with NOTICES Paragraph .01 of the Supplementary Material specifies that the principal purpose of proposed Rule G–18 is to promote, for customer transactions, dealers’ use of reasonable diligence in accordance with paragraph (a).16 Paragraph .01 also specifies that ‘‘[a] failure to have actually obtained the most favorable price possible will not necessarily mean that the dealer failed to use reasonable diligence.’’17 According to the MSRB, Paragraph .01 of the Supplementary Material indicates that Rule G–18 is not intended to be a substantive pricing standard but an order-handling standard for the execution of transactions.18 Paragraph .02 of the Supplementary Material provides that a dealer’s failure to maintain adequate resources (e.g., staff or technology) is not a justification for executing away from the best available market.19 This paragraph also states that the level of resources that a dealer maintains should take into account the nature of the dealer’s municipal securities business, including its level of sales and trading activity.20 Paragraph .03 of the Supplementary Material provides that a dealer must make every effort to execute customer transactions promptly, taking into account prevailing market conditions.21 In addition, in certain market conditions, a dealer may need more time to use reasonable diligence to ascertain the best market for the subject security.22 Paragraph .04 of the Supplementary Material defines the term ‘‘market’’ or ‘‘markets’’ for purposes of proposed Rule G–18.23 The term is to be construed broadly and includes, but is not limited to, ‘‘alternative trading systems or platforms,’’ ‘‘broker’s brokers,’’ and ‘‘other counterparties, which may include the dealer itself as principal.’’24 The MSRB represented that the purpose of this language is to tailor the definition of ‘‘market’’ to the characteristics of the municipal securities market and to provide flexibility for future developments in 16 See proposed Rule G–18 Paragraph .01 of the Supplementary Material. 17 Id. 18 See supra note 3 at 11. 19 See proposed Rule G–18 Paragraph .02 of the Supplementary Material. 20 Id. 21 See proposed Rule G–18 Paragraph .03 of the Supplementary Material. 22 Id. 23 See proposed Rule G–18 Paragraph .04 of the Supplementary Material. 24 Id. VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 both market structure and applied technology.25 Paragraph .05 of the Supplementary Material provides that a dealer’s duty to provide best execution in any transaction ‘‘for or with’’ ‘‘a customer of another dealer’’ does not apply in instances when the other dealer is simply executing a customer transaction against the dealer’s quote.26 In addition, a dealer’s duty to provide best execution to customer orders received from other dealers arises only when an order is routed from another dealer to the dealer for handling and execution.27 Paragraph .06 of the Supplementary Material addresses transactions involving securities for which there is limited pricing information or quotations.28 This paragraph requires each dealer to have written policies and procedures that address how the dealer’s best-execution determinations will be made for such securities in the absence of pricing information or multiple quotations, and to document its compliance with those policies and procedures.29 This paragraph also provides that a dealer generally should seek out other sources of pricing information and potential liquidity for such securities, including other dealers that the dealer previously has traded with in the security, and generally should, in determining whether the resultant price to the customer is as favorable as possible under prevailing market conditions, analyze other relevant data to which it reasonably has access.30 Paragraph .07 of the Supplementary Material provides that, if a dealer receives an unsolicited instruction from a customer designating a particular market for the execution of the customer’s transaction, the dealer is not required to make a best-execution determination beyond the customer’s specific instruction.31 Dealers are, however, still required to process that customer’s transaction promptly and in accordance with the terms of the customer’s bid or offer.32 Paragraph .08(a) of the Supplementary Material requires that a dealer must, at a minimum, conduct annual reviews of its policies and procedures for determining the best available market supra note 3 at 12. proposed Rule G–18 Paragraph .05 of the Supplementary Material. 27 Id. 28 See proposed Rule G–18 Paragraph .06 of the Supplementary Material. 29 Id. 30 Id. 31 See proposed Rule G–18 Paragraph .07 of the Supplementary Material. 32 Id. 73659 for the executions of its customers’ transactions.33 While no more frequent interval is specifically required, a dealer must conduct reviews at a frequency reasonably related to the nature of its municipal securities business.34 In conducting such periodic reviews, a dealer must assess whether its policies and procedures are reasonably designed to achieve best execution, taking into account the quality of the executions the dealer is obtaining under its current policies and procedures, changes in market structure, new entrants, the availability of additional pre-trade and post-trade data, and the availability of new technologies, and to make promptly any necessary modifications to such policies and procedures as may be appropriate in light of such reviews.35 Paragraph .08(b) of the Supplementary Material provides that a dealer that routes its customers’ transactions to another dealer that has agreed to handle those transactions as agent or riskless principal for the customer (e.g., a clearing firm or other executing dealer) may rely on that other dealer’s periodic reviews as long as the results and rationale of the review are fully disclosed to the dealer and the dealer periodically reviews how the other dealer’s review is conducted and the results of the review.36 Paragraph .09 of the Supplementary Material provides that the provisions of proposed Rule G–18 do not apply to transactions in municipal fund securities.37 3. Proposed Amendments to Rule G–48 The MSRB stated that the bestexecution obligations under proposed Rule G–18 do not apply to transactions with customers that are SMMPs.38 The proposed amendments to Rule G–48 add a new section (e) to provide expressly that a dealer shall not have any obligation under Rule G–18 to use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resultant price to the SMMP is as favorable as possible under prevailing market conditions.39 The MSRB noted that Rule G–48 is the new consolidated MSRB rule under which all modified 25 See 26 See PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 33 See proposed Rule G–18 Paragraph .08(a) of the Supplementary Material. 34 Id. 35 Id. 36 See proposed Rule G–18 Paragraph .08(b) of the Supplementary Material. 37 See proposed Rule G–18 Paragraph .09 of the Supplementary Material. 38 See supra note 3 at 14. 39 See proposed amendments to Rule G–48. E:\FR\FM\11DEN1.SGM 11DEN1 73660 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices obligations of dealers are addressed when dealing with SMMPs.40 4. Proposed Amendments to Rule D–15 Existing Rule D–15 contains the SMMP definition.41 The proposed amendments to Rule D–15 provide that an SMMP is defined by three essential requirements: the nature of the customer; a determination of sophistication by the dealer; and an affirmation by the customer.42 The proposed amendments to Rule D–15 do not change the nature of the customer and the determination of sophistication by the dealer, excluding minor, nonsubstantive revisions.43 The proposed amendments to Rule D–15, however, expand the existing customer affirmation 44 to require that the customer affirmatively indicate that it (1) is exercising independent judgment in evaluating: the recommendations of the dealer, the quality of execution of the customer’s transactions by the dealer, and the transaction price for certain non-recommended secondary market agency transactions; and (2) has timely access to material information that is available publicly through established industry sources.45 The MSRB stated that a dealer could not treat any customer as an SMMP after the proposed best-execution rule is implemented unless the dealer reasonably determined that the customer had given the broader affirmation required under the proposed amendments to Rule D–15.46 The MSRB believes that it is important that the definition of SMMP under the proposed 40 See supra note 3 at 14. existing Rule D–15, ‘‘SMMP’’ means a customer of a dealer that is: a bank, savings and loan association, insurance company, or registered investment company; or an investment adviser registered either with the SEC 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 (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million; and, that the dealer has a reasonable basis to believe 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 that affirmatively indicates that it is exercising independent judgment in evaluating the recommendations of the dealer. 42 See proposed amendments to Rule D–15. 43 The MSRB stated that the proposed amendments to Rule D–15 include non-substantive (e.g., technical, conforming and organizational) revisions to accommodate the substantive changes and improve the readability of the rule. See supra note 3 at 16–17 44 The SMMP customer affirmation contained in existing Rule D–15 requires that the customer affirmatively indicate that it is exercising independent judgment in evaluating the recommendations of the dealer. 45 See proposed amendments to Rule D–15. 46 See supra note 3 at 17. mstockstill on DSK4VPTVN1PROD with NOTICES 41 Under VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 amendments to Rule D–15 (as under the existing rule) is not self-executing, nor are the contingencies for its application in the unilateral control of the interfacing dealer.47 The proposed amendments to paragraph .02 of the Supplementary Material to Rule D–15 would provide that the SMMP customer affirmation may be given, in addition to the existing bases, on a type-of-transaction basis.48 5. Implementation Period The MSRB requested that the proposed rule change be approved with an implementation date one year after the Commission approval date.49 According to the MSRB, this implementation period would allow dealers sufficient time to develop or modify their policies and procedures and to acquire or adjust the level of their resources.50 The MSRB also stated that this one year implementation period would allow time for the MSRB to create educational materials and conduct outreach to the dealer community, as appropriate, regarding the proposed rule change.51 A full description of the proposed rule change is contained in the Proposing Release. III. Summary of Comments Received and the MSRB’s Response As noted previously, the Commission received six comment letters on the proposed rule change and a response letter from the MSRB.52 Commenters generally supported the proposed rule change, however, some asked for further clarification and provided suggestions to the proposed rule change.53 1. Use of Best Execution SIFMA, BDA and Wells Fargo do not support the use of the phrase ‘‘best execution’’ in the proposed rule change.54 SIFMA and BDA believe that regulatory examiners and enforcement staff will use the phrase to enforce standards that are not applicable to the municipal securities market.55 Also, Wells Fargo believes that the term best execution correlates with the equity securities market and is inconsistent with the fundamental goal expressed within proposed rule G–18.56 Similarly, 47 Id. 48 See 49 See proposed amendments to Rule D–15. supra note 3 at 8. 50 Id. 57 See 58 See supra notes 4 and 5. 54 See Fmt 4703 Sfmt 4703 Wells Letter at 4. MSRB Response Letter at 2. 61 Id. SIFMA Letter at 2, BDA Letter No. 1 at 3, and Wells Letter at 4. 55 See SIFMA Letter at 2 and BDA Letter No. 1 at 3. 56 See Wells Letter at 4. Frm 00119 BDA Letter No. 1 at 3. SIFMA Letter at 2 and BDA Letter No. 1 at 3. 60 See 53 Id. PO 00000 2. Definition of Market BDA believes proposed Rule G–18 broadens the concept of ‘‘market’’ well beyond FINRA Rule 5310.64 BDA believes there is no concept at all of limiting the market to market centers or what FINRA Rule 5310 considers venues.65 BDA believes any dealer or other counterparty in the country can potentially constitute a ‘‘market’’ that needs to be considered.66 BDA 59 See 51 Id. 52 See BDA believes using a term borrowed from standards applicable to other markets that operate very differently from the municipal securities market is inappropriate.57 SIFMA and BDA suggest removing the word ‘‘best’’ in certain instances and replacing ‘‘best execution’’ with ‘‘execution diligence’’ in others.58 Wells Fargo recommends the term ‘‘best execution’’ be removed from the proposed rule language, including the title, and be replaced with the term ‘‘reasonable diligence.’’ 59 The MSRB responded by highlighting that paragraph .01 of the Supplementary Material indicates that proposed Rule G–18 is not intended to create a substantive pricing standard, but rather an order-handling standard for the execution of transactions.60 The MSRB noted that paragraph .01 of the Supplementary Material expressly provides that a failure to have actually obtained the most favorable price possible will not necessarily mean the dealer failed to use reasonable diligence under the circumstances.61 The MSRB represented that ‘‘best execution’’ is an established term for the concept of execution quality in customer securities transactions in other contexts, and the standard in those contexts is similarly not a most-favorable-price standard.62 The MSRB believes that concerns that regulatory examiners and enforcement staff will use the phrase ‘‘best execution’’ to enforce standards that are not applicable to the municipal securities market and that are inconsistent with the MSRB’s stated intent that ‘‘the most favorable price possible’’ will not necessarily be equated with the term ‘‘best execution’’ are speculative in nature, and do not warrant changes to the proposed rule language.63 62 See MSRB Response Letter at 2–3. MSRB Response Letter at 3. 64 See BDA Letter No. 1 at 2. 65 Id. 66 Id. 63 See E:\FR\FM\11DEN1.SGM 11DEN1 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices expresses concern that the proposed definition requires dealers to use their reasonable diligence to locate the one counterparty that will pay the best price, not the best market center, and that such a duty is more expansive than the one under FINRA Rule 5310 and too burdensome to impose.67 Coastal believes the definition creates an undue burden not required by FINRA rules by defining each dealer as a market.68 Coastal recommends wording the proposed Rule G–18 language in line with existing FINRA rules.69 The MSRB responded by stating that it believes that the proposed definition of ‘‘market’’ is appropriate, even as compared to FINRA Rule 5310.70 The MSRB noted that FINRA states that its definition of ‘‘market’’ or ‘‘markets’’ in FINRA Rule 5310 also is to be construed broadly to encompass a variety of different venues, including, but not limited to, market centers.71 The MSRB further stated that FINRA Rule 5310 provides that, in the absence of quotations, ‘‘members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders,’’ and, ‘‘[i]n these instances, a member should generally seek out other sources of pricing information or potential liquidity, which may include obtaining quotations from other sources (e.g., other firms that the member previously has traded within the security).’’ 72 The MSRB does not believe the definition of ‘‘market’’ creates a duty for dealers to use reasonable diligence to locate the one counterparty that will pay the best price because, as previously noted above, proposed Rule G–18 is an order-handling and transactionexecution standard and does not contain any substantive pricing standard.73 In addition, the MSRB noted that paragraph .01 of the Supplementary Material to proposed Rule G–18 expressly provides that a failure to have actually obtained the most favorable price possible will not necessarily mean that the dealer failed to use reasonable diligence under the circumstances.74 The MSRB believes that the number of counterparties and/or other markets the dealer should consider would depend on the analysis of the factors articulated in proposed Rule G–18(a), and any other facts and circumstances that would contribute to a dealer’s identification of the best market.75 3. Number of Markets Checked SIFMA requests that ‘‘the number of markets checked’’ factor be deleted from proposed Rule G–18(a).76 SIFMA believes this factor is more applicable to the equities market structure of exchanges with a central aggregator of bids and offers as well as constant liquidity.77 SIFMA further believes that, unlike equity markets, there is no direct continuously-quoted, bid-and-ask trading market between bond dealers in the municipal markets, so the mere act of contacting other dealers for quotes on fixed income securities does not necessarily result in a more timely or beneficial execution.78 SIFMA disagrees with any suggestion that the act of contacting other dealers would be the implicit or requisite procedure to evidence best execution.79 SIFMA also believes ‘‘the number of markets checked’’ is covered by another factor— ‘‘the information reviewed to determine the current market for the subject security or similar security.’’ 80 SIFMA expresses concern that ‘‘the number of markets checked’’ factor is inconsistent with paragraph .04 of the Supplementary Material to proposed Rule G–18, which acknowledges that a dealer itself as principal may be the best market to satisfy best execution for the subject security.81 The MSRB noted that while the structure of the municipal securities market is different than the equity securities market structure of exchanges, that difference does not necessarily reduce the value of a dealer checking multiple markets, as defined by proposed Rule G–18, to ascertain the best market for executing customer transactions.82 The MSRB stated that ‘‘the number of markets checked’’ factor is only one factor in the non-exhaustive list of factors to be considered, and no single factor is determinative.83 The MSRB further stated that, depending on the particular facts and circumstances, it could be consistent with the reasonablediligence standard for a dealer not to contact other dealers, however, it would be important, given the proposed rule’s emphasis on complying with policies mstockstill on DSK4VPTVN1PROD with NOTICES 68 See and procedures, for a dealer to have written policies and procedures in place that address such circumstances.84 The MSRB believes it is important to explicitly include ‘‘the number of markets checked’’ factor to further the objective of promoting fair competition among dealers.85 The MSRB does not believe that ‘‘the number of markets checked’’ factor is inconsistent with the definition of ‘‘market’’ in paragraph .04 of the Supplementary Material.86 According to the MSRB, although paragraph .04 explicitly states that the dealer itself as principal could be the best market, it does not indicate that such a dealer would always be the best market for purposes of best execution, and, depending on the facts and circumstances, the exercise of reasonable diligence to comply with the proposed rule likely would regularly require a dealer to check other markets in addition to its own inventory.87 As such, the MSRB decided not to delete this factor from the non-exhaustive list of factors in proposed Rule G–18(a).88 4. Securities With Limited Quotations or Pricing Information Coastal believes proposed Rule G–18 erroneously presumes retail customers turn in market orders to purchase specific municipal bonds in the secondary market and, consequently, imposes unnecessary regulatory burdens on selling dealers.89 Coastal believes, on the sell side, there are no orders to speak of that would benefit from requiring a dealer to complete a process demonstrating best execution.90 Coastal questions the flexibility of the proposed best-execution standard and suggests that the requirements for securities with limited quotations or pricing information is unnecessary.91 Coastal recommends wording the proposed Rule G–18 language in line with existing FINRA rules.92 The MSRB responded by noting that the application of the proposed bestexecution standard does not hinge on whether a customer places a market order or on whether a customer has identified a particular municipal security.93 The MSRB believes that while many customer orders in the municipal securities market are placed in response to offerings made by sellers 84 Id. 67 Id. 85 Id. 75 Id. Coastal Letter at 2. 76 See 69 Id. 86 Id. SIFMA Letter at 4. 77 Id. 87 Id. 71 Id. 78 Id. 88 Id. 72 See 79 Id. 89 See 80 Id. 90 Id. 81 Id. 91 Id. 82 See 92 Id. 70 See MSRB Response Letter at 3. MSRB Response Letter at 3–4 and Paragraph .02 of the Supplementary Material to FINRA Rule 5310. 73 See MSRB Response Letter at 4. 74 Id. VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 MSRB Response Letter at 4–5. 83 Id. at 5. PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 73661 Coastal Letter at 1. at 2. MSRB Response Letter at 6. 93 See E:\FR\FM\11DEN1.SGM 11DEN1 73662 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices out of their own inventories, there are customer-initiated orders in the market as well.94 The MSRB believes that a significant benefit of the flexible bestexecution standard embodied in proposed Rule G–18 is the ability to apply to an evolving market over time.95 The MSRB also believes that paragraph .06 of the Supplementary Material of proposed Rule G–18, which requires written policies and procedures that address how a dealer would make its best-execution determinations in cases of limited quotations or pricing information, is consistent with FINRA Rule 5310.96 The MSRB stated that the FINRA rule, with which the MSRB has generally harmonized, does not contain further prescriptions than proposed Rule G–18 in this area.97 The MSRB believes that including additional language would not materially add to proposed Rule G–18, which already contains the core requirement that dealers use reasonable diligence and is tailored to the characteristics of the municipal securities market.98 5. Enforcement Concerns SIFMA and Wells Fargo express concerns with how proposed rule G–18 would be enforced.99 SIFMA believes that the non-exhaustive list of factors to be considered by dealers creates a de facto enforcement checklist for FINRA.100 SIFMA questions how compliance with ‘‘the number of markets checked’’ factor can be proved.101 SIFMA members are concerned that enforcement regulators will challenge a dealer’s trade price because the regulators will have the benefit of hindsight and may be able to show other trades for the same CUSIP at marginally better prices and will assert that the dealer therefore did not provide best execution.102 SIFMA suggests codifying the MSRB’s view that proposed Rule G–18 is not intended to create a trade-through rule by adding the following to paragraph .01 of the Supplementary Material: ‘‘[a] failure to consider a superior price available on another market would not necessarily constitute a violation of the rule.’’ 103 The MSRB responded by stating that the mandatory factors in proposed Rule G–18(a) would be considered in any 94 Id. mstockstill on DSK4VPTVN1PROD with NOTICES 95 Id. 96 Id. examination and/or enforcement activities by regulators, but no single factor would be determinative, and other facts and circumstances could be considered as well in determining whether a dealer has used reasonable diligence.104 The MSRB noted that it would be important, given proposed rule G–18’s emphasis on complying with sound policies and procedures, for a dealer to have written policies and procedures in place that articulate how the dealer would exercise reasonable diligence, which should, at a minimum, include consideration of the number of markets checked factor, as well as the others listed in the proposed rule.105 Also, according to the MSRB, under the broad standard in proposed Rule G–18, the subsequent discovery of a market that had better prices than the market in which a dealer executed a customer transaction would inform a dealer’s development of its policies and procedures and periodic review of them under Paragraph .08 of the Supplementary Material.106 The MSRB noted, however, a failure to consider such a market would not necessarily constitute a violation of the proposed rule, and, as provided in proposed Supplementary Material .01, a failure to have actually obtained the most favorable price possible would not necessarily mean that the dealer failed to use reasonable diligence.107 As such, the MSRB does not believe revision of the proposed rule language is necessary at this time.108 Wells Fargo believes that the proposed rule language regarding a dealer’s failure to maintain adequate resources (set forth in paragraph .02 of the Supplementary Material of proposed Rule G–18) may create confusion over enforcement as proposed rule G–18 could be applied inconsistently and arbitrarily based on the activity level and number of ATSs to which a particular dealer subscribes.109 The MSRB responded by stating that proposed Rule G–18 establishes only one best execution standard for all dealers in the municipal securities market.110 According to the MSRB, paragraph .02 of the Supplementary Material, similar to FINRA Rule 5310(c), addresses the need for dealers to devote adequate resources towards meeting their best-execution obligations, while 97 Id. 104 See 98 Id. 99 See SIFMA Letter at 2, 4–5 and Wells Letter at 3. 100 See SIFMA Letter at 4. 101 Id. 102 Id. 103 Id. at 4–5. at 5. VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 MSRB Response Letter at 6. at 6–7. 106 Id. at 7. 107 Id. 108 Id. 109 See Wells Letter at 3. 110 See MSRB Response Letter at 7. 105 Id. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 acknowledging that a ‘‘one-size-fits-all’’ approach to staffing is not required.111 6. Request for Clarification/Guidance BDA, FSI and Wells Fargo request guidance and/or clarification on how to comply with the proposed rule change generally, as well as in more particular circumstances, and how to evidence compliance to regulators.112 The MSRB responded by stating, at this time, it is not revising proposed Rule G–18 to include any more prescriptive provisions because doing so could negate the benefits of a principlesbased rulemaking approach.113 The MSRB stated that while it understands the desire on the part of dealers for concrete steps to follow for their particular business models, such a prescriptive rule might undermine the flexibility the rule is designed to provide.114 The MSRB represented that, if the proposed rule change is approved, the MSRB plans to provide practical guidance on complying with the bestexecution standard prior to implementation of the proposed rule change, in coordination with FINRA.115 7. Proposed Amendments to Rules G–48 and D–15 (a) Public Comment SIFMA and Wells Fargo express concerns that the MSRB did not request public comment on the proposed amendments to Rule D–15 prior to filing the proposed rule change with the SEC.116 Additionally, SIFMA and Wells Fargo believe the SEC should have provided a lengthier comment period.117 Wells Fargo believes this aspect of the proposed rule change should be withdrawn until additional time is provided.118 The MSRB responded by noting that the SEC determines the length of the public comment period and it provided 21 days for comment on the proposed rule change, specifically soliciting comment on the proposed amendments to Rules G–48 and D–15.119 The MSRB stated that any additional solicitation of comments, prior to the SEC’s publication of a proposed rule change, by a self-regulatory organization, such 111 Id. 112 See BDA Letter No. 1 at 3–4, BDA Letter No. 2 at 1, FSI Letter 2–3, and Wells Letter 2–3 and 5. 113 See MSRB Response Letter at 7. 114 Id. at 7–8. 115 Id. at 8. 116 See SIFMA Letter at 2 and 6 and Wells Letter at 2. 117 See SIFMA Letter at 9–10 and Wells Letter at 4. 118 See Wells Letter at 4. 119 See MSRB Response Letter at 8. E:\FR\FM\11DEN1.SGM 11DEN1 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices as the MSRB, is not required.120 The MSRB also noted that it provided two rounds of public comment, focusing first on the concept of applying a best execution standard to customer transactions in municipal securities and, second, evaluating specific rule language articulating such standard.121 According to the MSRB, the issues related to the proposed amendments to Rules G–48 and D–15 are derivative of changes in response to comments and are consistent with well-established requirements applicable to qualification as an SMMP.122 As such, the MSRB does not believe the proposed amendments to Rules G–48 and D–15 warrant another round of comment in this rulemaking matter.123 (b) Economic Analysis SIFMA believes the MSRB did not discuss any economic analysis as it relates to the proposed amendments to Rule D–15.124 SIFMA expresses concern that the proposed amendments to Rule D–15 fundamentally alter how a dealer determines if a customer qualifies as an SMMP.125 SIFMA suggests that the MSRB should have conducted an economic analysis consistent with its Policy for Integrating Economic Analysis in MSRB Rulemaking (‘‘Policy’’) in proposing the amendments to Rule D–15.126 FSI believes that, prior to approving the proposed rule change, the MSRB should publish a cost-benefit analysis to determine whether the proposed rule change would have consequences for liquidity in the municipal securities market which would impact retail investors.127 The MSRB responded by clarifying that the Policy does not apply to rulemaking initiatives, like this one, that were initially presented to the MSRB Board of Directors before September 26, 2013.128 The MSRB represented that it had been particularly mindful of potential costs and burdens of the proposed rule change, and that the proposed exemption for transactions for or with SMMPs is one such example.129 The MSRB noted that although no economic analysis of the proposed amendments to Rule D–15 is required pursuant to the Policy, the MSRB, as appropriate, has provided additional analysis in the MSRB Response Letter in response to the commenters’ concerns.130 The MSRB, however, does not believe that the proposed amendments fundamentally alter the conclusions of its preliminary economic analysis.131 The MSRB further stated that some of the costs associated with compliance with proposed Rule G–18 would be reduced in the aggregate due to the exemption for transactions with SMMPs, as compared to an alternative approach in which there was no such exemption.132 The MSRB believes the costs associated with the amendments to Rule D–15 must be evaluated in light of the overall cost mitigation that flows from the existence of the SMMP exemption.133 (c) SMMP Customer Affirmation SIFMA and Wells Fargo express concerns regarding the invalidation of existing SMMP customer affirmations after the effective date of the proposed rule change.134 BDA states that its members believe that some if not many institutional investors will be unwilling to provide an affirmation that has the effect of excluding them from the application of a best execution rule on the dealer.135 BDA recommends that the SMMP customer affirmation should be bifurcated into two affirmations: (1) The existing SMMP customer affirmation and, if an institutional investor provides such affirmation, the investor should be treated as an SMMP for all purposes other than for the application of the best execution rule; and (2) an affirmation tailored just to the best execution rule.136 Wells Fargo believes there is no benefit to invalidating existing SMMP customer affirmations and BDA does not see the value in expanding the existing SMMP customer affirmations.137 According to the MSRB, it is important for the SMMP customer affirmation to be unified and speak to all of the modified dealer obligations.138 The MSRB believes that unnecessary inefficiencies and additional burdens on dealers would result from a piecemeal approach, under which dealers would potentially have different customers that are SMMPs only with respect to several different permutations of modified dealer obligations.139 The MSRB 130 Id. 73663 believes this belief is supported by SIFMA’s statement that, if the SEC approves the proposed amendments to Rule D–15 as is, or even if the affirmation did not need to be unified, some of SIFMA’s members would prefer a unified affirmation, as it would be much easier to implement and administer.140 Further, the MSRB believes the unified approach to the SMMP customer affirmation provides greater protection to investors, as it would help ensure that dealer obligations would be modified only for transactions with customers that are knowingly willing to have their dealer subject to the several reduced obligations provided in Rule G–48.141 The MSRB believes that this added investor protection, as well as the mitigated costs of compliance with the best execution obligation provided by the SMMP exemption, would justify the costs of requiring dealers to obtain new affirmations from all SMMP customers, including existing SMMPs.142 SIFMA, BDA and Wells Fargo express concerns regarding the operational impact of deharmonizing the SMMP qualification process from the FINRA Rule 2111 process and precluding dealers from satisfying the SMMP affirmation requirement by receiving a FINRA Rule 2111 affirmation.143 Wells Fargo believes this aspect of the proposed rule change contradicts the MSRB’s previously stated goal to seek harmony with FINRA rules.144 SIFMA believes an SMMP customer affirmation that mirrors FINRA’s affirmation process as closely as possible makes the most economic sense, encourages crossover investors, and eases dealer compliance regimes.145 SIFMA believes the costs of maintaining separate affirmation systems for institutional accounts across product lines will be unduly burdensome.146 SIFMA proposes an alternative revision to Rule D–15 which would require dealers to have a reasonable basis to believe that an SMMP would like to avail itself to the conveniences of SMMP status.147 As an alternative approach, SIFMA suggests a negative consent letter sent to institutional customers.148 BDA and Wells Fargo also favor a negative 131 Id. mstockstill on DSK4VPTVN1PROD with NOTICES 120 Id. 132 Id. 140 Id. 121 Id. 133 Id. 141 Id. 134 See 142 Id. at 8–9. 122 Id. at 9. 123 Id. 124 See SIFMA Letter at 8. 125 Id. 126 Id. at 8–9. 127 See FSI Letter at 3. 128 See MSRB Response Letter at 9. 129 Id. VerDate Sep<11>2014 19:07 Dec 10, 2014 SIFMA Letter at 2, 6 and 9 and Wells Letter at 4. 135 See BDA Letter No. 2 at 1. 136 Id. 137 See Wells Letter at 4 and BDA Letter No. 1 at 3. 138 See MSRB Response Letter at 10. 139 Id. Jkt 235001 PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 143 See SIFMA Letter at 2, 6–7, and 9, BDA Letter No. 1 at 3–4 and Wells Letter at 2 and 4–5. 144 See Wells Letter at 4. 145 See SIFMA Letter at 7. 146 Id. at 6. 147 Id. at 7. 148 Id. at 8. E:\FR\FM\11DEN1.SGM 11DEN1 73664 Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES consent approach for SMMPs effectively to opt out of SMMP status.149 The MSRB does not believe the proposed amendments to Rule D–15 would inappropriately deharmonize the rule from FINRA’s affirmation or contradict the MSRB’s established position on SMMP customer affirmations.150 Previously, the MSRB stated that it ‘‘considers it desirable from the standpoint of reducing the cost of dealer compliance to maintain consistency with FINRA rules, absent clear reasons for treating transactions in municipal securities differently.’’ 151 According to the MSRB, consistent with this goal, the proposed amendments to Rule D–15 are aligned to harmonize with FINRA Rule 2111 but with adjustments associated with the SMMP exemption from the best-execution obligation, as well as the other modified dealer obligations currently covered by Rule G–48.152 The MSRB noted that FINRA Rule 2111(b) and paragraph .07 of the Supplementary Material thereto provide an institutional investor exemption to the suitability obligation under that rule, which is similar to the existing exemption dealers have from the suitability requirement of MSRB Rule G–19 under Rule G–48(c), however, neither FINRA Rule 2111 nor any other FINRA rule provides a similar exemption from best execution or any other obligations for its member firms comparable to those included in Rule G–48.153 The MSRB further noted that no commenter expressed an objection to the proposed exemption from best execution under Rule G–48, and BDA and SIFMA have explicitly endorsed the exemption in comment letters relating to the proposed rule change.154 The MSRB believes clear reasons exist for the proposed amendments to Rule D–15 to vary from FINRA’s affirmation under FINRA Rule 2111, as the amendments would facilitate the exemption supported by commenters and mitigate the burden of compliance with proposed Rule G–18 by reducing the number of customers to which the obligation would apply.155 The MSRB believes that the proposed amendments to Rule D–15 would enhance protections to customers by addressing the full scope of modified obligations that dealers would be 149 See BDA Letter No. 1 at 4 and Wells Letter at relieved of performing, providing clear disclosure to SMMPs regarding the modified dealer obligations and obtaining affirmative statements that SMMPs can, for example, exercise independent judgment in performing the evaluations related to best execution, suitability and the other modified dealer obligations.156 The MSRB also believes that any changes to dealer affirmation systems made in an effort to comply with the proposed amendments to Rule D–15 would be justified by the need to tailor the rule to the particular interests and characteristics of the municipal securities market, which are not reflected in FINRA rules.157 Additionally, according to the MSRB, a negative consent letter to institutional customers would not be an appropriate alternative, as it would be important for customers to take affirmative action to be treated as an SMMP.158 8. Implementation Period SIFMA supports the one-year implementation period for proposed Rule G–18 and the proposed amendments to Rule G–48.159 If the SEC approves the proposed amendments to Rule D–15, however, SIFMA requests an additional six-month implementation period.160 The MSRB believes a one-year implementation period would be sufficient for dealers to comply with the proposed rule change, including amendments to Rule D–15.161 According to the MSRB, one year would be adequate for dealers to develop systems, establish policies and procedures, conduct training and obtain the expanded SMMP customer affirmations.162 IV. Discussion and Commission Findings The Commission has carefully considered the proposed rule change, the comments received, and the MSRB’s response to the comments, and finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the MSRB. In particular, the Commission finds that the proposed rule change is consistent with Section 15B(b)(2)(C) of the Act,163 which requires, among other things, that the rules of the MSRB be designed to 4. 150 See 156 Id. 151 See 157 Id. MSRB Response Letter at 11. MSRB Response Letter at 11 (quoting from Securities Exchange Act Release No. 66772 (April 9, 2012)). 152 See MSRB Response Letter at 11. 153 Id. 154 Id. 155 Id. VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 158 Id. 159 See SIFMA Letter at 9. 160 Id. 161 See MSRB Response Letter at 12. 162 Id. 163 15 PO 00000 U.S.C. 78o-4(b)(2)(C). Frm 00123 Fmt 4703 Sfmt 4703 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 Commission notes that its Report on the Municipal Securities Market, issued July 31, 2012, recommended that the MSRB consider a rule that would require municipal bond dealers to seek ‘‘best execution’’ of customer orders for municipal securities. The Commission believes that the establishment of a requirement that dealers seek best execution of customer transactions in municipal securities, as required by the proposed rule change, will have benefits for investors, improve market efficiency and promote fair competition among dealers. The Commission believes that the new order-handling obligations of dealers will complement the MSRB’s existing substantive pricing standards, helping to ensure that investors receive a price that is as favorable as possible under prevailing market conditions. The proposed rule change is appropriately designed to buttress existing dealer pricing obligations and promote better execution quality for investors in municipal securities. Moreover, the Commission believes that the proposed amendments to Rule G–48 and Rule D–15 to effectuate the exemption for transactions with SMMPs will facilitate transactions in municipal securities and help perfect the mechanism of a free and open market in municipal securities by avoiding the imposition of regulatory burdens if they are not needed. In addition, the Commission believes that the proposed rule change will protect investors by helping to ensure that the exemption for dealers from the best-execution obligation for transactions with SMMPs (as well as the reduced dealer obligations related to time-of-trade disclosure and pricing) will apply only to transactions with SMMPs. The Commission believes it is important that the definition of SMMP is not selfexecuting nor in the unilateral control of the interfacing dealer. The Commission also believes that the proposed rule change is beneficial to the municipal securities market and that the changes E:\FR\FM\11DEN1.SGM 11DEN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 238 / Thursday, December 11, 2014 / Notices will enhance investor confidence and protection. In approving the proposed rule change, the Commission has considered the proposed rule change’s impact on efficiency, competition, and capital formation.164 The Commission believes that the proposed rule change includes accommodations that help promote efficiency because the proposed rule change is designed to allow flexibility for each dealer to adapt its policies and procedures to be reasonably related to the nature of its business, including its level of sales and trading activity and the type of customer transactions at issue. The Commission also believes that the reasonable diligence standard and the SMMP customer affirmation are sufficiently flexible to be met by a diverse population of dealers and allows a dealer to evidence compliance in a manner that may be different from that used by another dealer. The Commission does not believe that the proposed rule change would impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act since it would apply to all dealers who engage in municipal securities transactions. The Commission also believes that the proposed rule change takes into account competitive concerns that could arise from the diversity of dealer characteristics because proposed Rule G–18 embodies a broad and flexible principles-based standard. The Commission has reviewed the record for the proposed rule change and notes that the record does not contain any information to indicate that the proposed rule change would have a negative effect on capital formation. As noted above, the Commission received six comment letters on the filing. The Commission believes that the MSRB considered carefully and responded adequately to comments and concerns regarding the proposed rule change. While commenters suggested changes to the filing or opposed certain aspects of the proposed rule change, the Commission notes that no commenters argued that the proposed rule change was inconsistent with the applicable provisions of the Act. For the reasons noted above, including those discussed in the MSRB Response Letter, the Commission believes that the proposed rule change is consistent with the Act. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,165 that the 164 See 165 15 15 U.S.C. 78c(f). U.S.C. 78s(b)(2). VerDate Sep<11>2014 19:07 Dec 10, 2014 Jkt 235001 proposed rule change (SR–MSRB–2014– 07) be, and hereby is, approved. For the Commission, pursuant to delegated authority.166 Brent J. Fields, Secretary. [FR Doc. 2014–29023 Filed 12–10–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73755; File Nos. SR–FICC– 2014–810; SR–NSCC–2014–811; SR–DTC– 2014–812] Self-Regulatory Organizations; Fixed Income Clearing Corporation; National Securities Clearing Corporation; The Depository Trust Company; Notice of Filing of Advance Notices, as Amended, To Amend and Restate the Third Amended and Restated Shareholders Agreement, Dated as of December 7, 2005 December 5, 2014. Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 1 (‘‘Clearing Supervision Act’’) and Rule 19b–4(n)(1)(i) 2 under the Securities Exchange Act of 1934, notice is hereby given that on November 5, 2014, Fixed Income Clearing Corporation (‘‘FICC’’), National Securities Clearing Corporation (‘‘NSCC’’), and The Depository Trust Company (‘‘DTC,’’ together with FICC and NSCC, ‘‘Operating Subsidiaries’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the advance notices SR–FICC–2014–810, SR–NSCC–2014–811 and SR–DTC– 2014–812 (‘‘Advance Notices’’), respectively, as described in Items I and II below, which Items have been prepared primarily by the Operating Subsidiaries. On November 17, 2014, the Operating Subsidiaries each filed Amendments No. 1 to the Advance Notices.3 On November 17, 2014 FICC withdrew Amendment No. 1 and filed Amendment No. 2 to advance notice SR–FICC–2014–810.4 The Commission 166 17 CFR 200.30–3(a)(12). U.S.C. 5465(e)(1). 2 17 CFR 240.19b–4(n)(1)(i). 3 NSCC and DTC filed Amendment Nos. 1 to provide additional description of the changes proposed in advance notices SR–NSCC–2014–811 and SR–DTC–2014–812, respectively. 4 FICC withdrew Amendment No. 1 to advance notice SR–FICC–2014–810 due to an error in filing the amendment. FICC filed Amendment No. 2 to advance notice SR–FICC–2014–810 in order to provide additional description of the changes proposed in the advance notice. 1 12 PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 73665 is publishing this notice to solicit comments on the Advance Notices, as amended, from interested persons. I. Clearing Agencies’ Statement of the Terms of Substance of the Advance Notices The Advance Notices, as amended, were filed by the Operating Subsidiaries in connection with the amendment and restatement of the Third Amended and Restated Shareholders Agreement, dated as of December 7, 2005 (‘‘Existing Shareholders Agreement’’), by and among The Depository Trust & Clearing Corporation (‘‘DTCC’’), Operating Subsidiaries, and the other parties thereto (such Existing Shareholders Agreement as so proposed to be amended and restated, ‘‘Revised Shareholders Agreement’’), as more fully described below. II. Clearing Agencies’ Statement of the Purpose of, and Statutory Basis for, the Advance Notices In their filings with the Commission, the Operating Subsidiaries included statements concerning the purpose of and basis for the Advance Notices, as amended, and discussed any comments received on the Advance Notices, as amended. The text of these statements may be examined at the places specified in Item IV below. The Operating Subsidiaries have prepared summaries, set forth in sections (A) and (B) below, of the most significant aspects of these statements. (A) Clearing Agencies’ Statement on Comments on the Advance Notices Received From Members, Participants, or Others Beginning in June 2014, DTCC has conducted outreach to users of the services and facilities of the Operating Subsidiaries in order to provide them with advance notice of the proposed changes and the impact on a firm-byfirm basis. The outreach efforts have included providing individual shareholder firms with statements of their projected potential impact. As of the date of this filing, no written comments relating to the proposed changes have been received in response to this outreach. The Commission will be notified of any written comments received. (B) Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing and Settlement Supervision Act Description of Change The Existing Shareholders Agreement is proposed to be amended to: (1) Update and simplify the formulas used to allocate shares of the common stock E:\FR\FM\11DEN1.SGM 11DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 238 (Thursday, December 11, 2014)]
[Notices]
[Pages 73658-73665]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73764; File No. SR-MSRB-2014-07]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change Consisting of 
Rule G-18, on Best Execution of Transactions in Municipal Securities, 
and Amendments to Rule G-48, on Transactions With Sophisticated 
Municipal Market Professionals (``SMMP''), and Rule D-15, on the 
Definition of SMMP

December 5, 2014.

I. Introduction

    On August 20, 2014, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change consisting of Rule G-18, on 
best execution of transactions in municipal securities, and amendments 
to Rule G-48, on transactions with SMMPs, and Rule D-15, on the 
definition of SMMP (the ``proposed rule change''). The proposed rule 
change was published for comment in the Federal Register on September 
8, 2014.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 72956 (September 2, 
2014), 79 FR 53236 (September 8, 2014) (the ``Proposing Release'').
---------------------------------------------------------------------------

    The Commission received six comment letters on the proposed rule 
change.\4\ On November 21, 2014, the MSRB submitted a response to these 
comments.\5\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \4\ See Letters from David L. Cohen, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated September 29, 2014 (``SIFMA 
Letter''); Michael Nicholas, Chief Executive Officer, Bond Dealers 
of America (``BDA''), dated September 29, 2014 (``BDA Letter No. 
1'') and October 30, 2014 (``BDA Letter No. 2''); Chris Melton, 
Executive Vice President, Coastal Securities (``Coastal''), dated 
September 29, 2014 (``Coastal Letter''); David T. Bellaire, Esq., 
Executive Vice President & General Counsel, Financial Services 
Institute (``FSI''), dated September 29, 2014 (``FSI Letter''); and 
Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo 
Advisors, LLC (``Wells Fargo''), dated September 29, 2014 (``Wells 
Letter''). Staff from the Office of Municipal Securities met with 
representatives from BDA on October 23, 2014, and had a telephonic 
meeting with a representative from SIFMA on December 3, 2014, to 
discuss the proposed rule change.
    \5\ See Letter to Secretary, Commission, from Michael L. Post, 
Deputy General
    Counsel, MSRB, dated November 21, 2014 (``MSRB Response 
Letter'').
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II. Description of the Proposed Rule Change

    According to the MSRB, the establishment of a requirement that 
brokers, dealers and municipal securities dealers (``dealers'') seek 
best execution of retail customer transactions in municipal securities 
will have benefits for investors, promote fair competition among 
dealers, and improve market efficiency.\6\ The MSRB stated that the 
proposed rule change reflects the MSRB's belief that a best execution 
rule should be generally harmonized with the Financial Industry 
Regulatory Authority's (``FINRA'') best-execution rule, FINRA Rule 5310 
(Best Execution and Interpositioning), for purposes of regulatory 
efficiency but appropriately tailored to the characteristics of the 
municipal securities market.\7\ The MSRB further believes that, unlike 
FINRA Rule 5310, it is appropriate to provide an exception from the 
requirements of the best-execution rule for all transactions with 
SMMPs.\8\ The MSRB represented that the proposed best-execution 
requirement generally would target the process by which dealers handle 
orders and execute transactions, and would complement and buttress the 
MSRB's existing fair-pricing rules.\9\
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    \6\ See supra note 3 at 2.
    \7\ Id. at 7.
    \8\ Id.
    \9\ Id.
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1. Proposed Rule G-18

    Proposed Rule G-18(a) requires that, in any transaction in a 
municipal security for or with a customer or a customer of another 
dealer, a dealer must use reasonable diligence to ascertain the best 
market for the subject security and buy or sell in that market so that 
the resultant price to the customer is as favorable as possible under 
prevailing market conditions.\10\ Paragraph (a) provides the following 
factors among the factors that will be considered in determining 
whether a dealer has used ``reasonable diligence,'' with no single 
factor being determinative: the character of the market for the 
security, the size and type of transaction, the number of markets 
checked, the information reviewed to determine the current market for 
the subject security or similar securities, the accessibility of 
quotations, and the terms and conditions of the customer's inquiry or 
order, including any bids or offers, that result in the transaction, as 
communicated to the dealer.\11\
---------------------------------------------------------------------------

    \10\ See proposed Rule G-18(a).
    \11\ Id.
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    Proposed Rule G-18(b) prohibits a dealer from interjecting a third 
party between itself and the best market for the subject security in a 
manner inconsistent with paragraph (a).\12\ The MSRB stated that 
paragraph (b) would not prohibit the use of a broker's broker, unless 
it was inconsistent with the best-execution obligation in paragraph 
(a).\13\
---------------------------------------------------------------------------

    \12\ See proposed Rule G-18(b).
    \13\ See supra note 3 at 10.
---------------------------------------------------------------------------

    Proposed Rule G-18(c) specifies that the obligations described in 
paragraphs (a) and (b) apply to transactions in which the dealer is 
acting as agent and transactions in which the dealer is acting as 
principal.\14\ Paragraph (c) expressly states that the best-execution 
obligations are distinct from the fairness and reasonableness of 
commissions, markups or markdowns, which are governed by Rule G-30.\15\
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    \14\ See proposed Rule G-18(c).
    \15\ Id.

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[[Page 73659]]

2. Supplementary Material to Proposed Rule G-18

    Paragraph .01 of the Supplementary Material specifies that the 
principal purpose of proposed Rule G-18 is to promote, for customer 
transactions, dealers' use of reasonable diligence in accordance with 
paragraph (a).\16\ Paragraph .01 also specifies that ``[a] failure to 
have actually obtained the most favorable price possible will not 
necessarily mean that the dealer failed to use reasonable 
diligence.''\17\ According to the MSRB, Paragraph .01 of the 
Supplementary Material indicates that Rule G-18 is not intended to be a 
substantive pricing standard but an order-handling standard for the 
execution of transactions.\18\
---------------------------------------------------------------------------

    \16\ See proposed Rule G-18 Paragraph .01 of the Supplementary 
Material.
    \17\ Id.
    \18\ See supra note 3 at 11.
---------------------------------------------------------------------------

    Paragraph .02 of the Supplementary Material provides that a 
dealer's failure to maintain adequate resources (e.g., staff or 
technology) is not a justification for executing away from the best 
available market.\19\ This paragraph also states that the level of 
resources that a dealer maintains should take into account the nature 
of the dealer's municipal securities business, including its level of 
sales and trading activity.\20\
---------------------------------------------------------------------------

    \19\ See proposed Rule G-18 Paragraph .02 of the Supplementary 
Material.
    \20\ Id.
---------------------------------------------------------------------------

    Paragraph .03 of the Supplementary Material provides that a dealer 
must make every effort to execute customer transactions promptly, 
taking into account prevailing market conditions.\21\ In addition, in 
certain market conditions, a dealer may need more time to use 
reasonable diligence to ascertain the best market for the subject 
security.\22\
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    \21\ See proposed Rule G-18 Paragraph .03 of the Supplementary 
Material.
    \22\ Id.
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    Paragraph .04 of the Supplementary Material defines the term 
``market'' or ``markets'' for purposes of proposed Rule G-18.\23\ The 
term is to be construed broadly and includes, but is not limited to, 
``alternative trading systems or platforms,'' ``broker's brokers,'' and 
``other counterparties, which may include the dealer itself as 
principal.''\24\ The MSRB represented that the purpose of this language 
is to tailor the definition of ``market'' to the characteristics of the 
municipal securities market and to provide flexibility for future 
developments in both market structure and applied technology.\25\
---------------------------------------------------------------------------

    \23\ See proposed Rule G-18 Paragraph .04 of the Supplementary 
Material.
    \24\ Id.
    \25\ See supra note 3 at 12.
---------------------------------------------------------------------------

    Paragraph .05 of the Supplementary Material provides that a 
dealer's duty to provide best execution in any transaction ``for or 
with'' ``a customer of another dealer'' does not apply in instances 
when the other dealer is simply executing a customer transaction 
against the dealer's quote.\26\ In addition, a dealer's duty to provide 
best execution to customer orders received from other dealers arises 
only when an order is routed from another dealer to the dealer for 
handling and execution.\27\
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    \26\ See proposed Rule G-18 Paragraph .05 of the Supplementary 
Material.
    \27\ Id.
---------------------------------------------------------------------------

    Paragraph .06 of the Supplementary Material addresses transactions 
involving securities for which there is limited pricing information or 
quotations.\28\ This paragraph requires each dealer to have written 
policies and procedures that address how the dealer's best-execution 
determinations will be made for such securities in the absence of 
pricing information or multiple quotations, and to document its 
compliance with those policies and procedures.\29\ This paragraph also 
provides that a dealer generally should seek out other sources of 
pricing information and potential liquidity for such securities, 
including other dealers that the dealer previously has traded with in 
the security, and generally should, in determining whether the 
resultant price to the customer is as favorable as possible under 
prevailing market conditions, analyze other relevant data to which it 
reasonably has access.\30\
---------------------------------------------------------------------------

    \28\ See proposed Rule G-18 Paragraph .06 of the Supplementary 
Material.
    \29\ Id.
    \30\ Id.
---------------------------------------------------------------------------

    Paragraph .07 of the Supplementary Material provides that, if a 
dealer receives an unsolicited instruction from a customer designating 
a particular market for the execution of the customer's transaction, 
the dealer is not required to make a best-execution determination 
beyond the customer's specific instruction.\31\ Dealers are, however, 
still required to process that customer's transaction promptly and in 
accordance with the terms of the customer's bid or offer.\32\
---------------------------------------------------------------------------

    \31\ See proposed Rule G-18 Paragraph .07 of the Supplementary 
Material.
    \32\ Id.
---------------------------------------------------------------------------

    Paragraph .08(a) of the Supplementary Material requires that a 
dealer must, at a minimum, conduct annual reviews of its policies and 
procedures for determining the best available market for the executions 
of its customers' transactions.\33\ While no more frequent interval is 
specifically required, a dealer must conduct reviews at a frequency 
reasonably related to the nature of its municipal securities 
business.\34\ In conducting such periodic reviews, a dealer must assess 
whether its policies and procedures are reasonably designed to achieve 
best execution, taking into account the quality of the executions the 
dealer is obtaining under its current policies and procedures, changes 
in market structure, new entrants, the availability of additional pre-
trade and post-trade data, and the availability of new technologies, 
and to make promptly any necessary modifications to such policies and 
procedures as may be appropriate in light of such reviews.\35\
---------------------------------------------------------------------------

    \33\ See proposed Rule G-18 Paragraph .08(a) of the 
Supplementary Material.
    \34\ Id.
    \35\ Id.
---------------------------------------------------------------------------

    Paragraph .08(b) of the Supplementary Material provides that a 
dealer that routes its customers' transactions to another dealer that 
has agreed to handle those transactions as agent or riskless principal 
for the customer (e.g., a clearing firm or other executing dealer) may 
rely on that other dealer's periodic reviews as long as the results and 
rationale of the review are fully disclosed to the dealer and the 
dealer periodically reviews how the other dealer's review is conducted 
and the results of the review.\36\
---------------------------------------------------------------------------

    \36\ See proposed Rule G-18 Paragraph .08(b) of the 
Supplementary Material.
---------------------------------------------------------------------------

    Paragraph .09 of the Supplementary Material provides that the 
provisions of proposed Rule G-18 do not apply to transactions in 
municipal fund securities.\37\
---------------------------------------------------------------------------

    \37\ See proposed Rule G-18 Paragraph .09 of the Supplementary 
Material.
---------------------------------------------------------------------------

3. Proposed Amendments to Rule G-48

    The MSRB stated that the best-execution obligations under proposed 
Rule G-18 do not apply to transactions with customers that are 
SMMPs.\38\ The proposed amendments to Rule G-48 add a new section (e) 
to provide expressly that a dealer shall not have any obligation under 
Rule G-18 to use reasonable diligence to ascertain the best market for 
the subject security and buy or sell in that market so that the 
resultant price to the SMMP is as favorable as possible under 
prevailing market conditions.\39\ The MSRB noted that Rule G-48 is the 
new consolidated MSRB rule under which all modified

[[Page 73660]]

obligations of dealers are addressed when dealing with SMMPs.\40\
---------------------------------------------------------------------------

    \38\ See supra note 3 at 14.
    \39\ See proposed amendments to Rule G-48.
    \40\ See supra note 3 at 14.
---------------------------------------------------------------------------

4. Proposed Amendments to Rule D-15

    Existing Rule D-15 contains the SMMP definition.\41\ The proposed 
amendments to Rule D-15 provide that an SMMP is defined by three 
essential requirements: the nature of the customer; a determination of 
sophistication by the dealer; and an affirmation by the customer.\42\ 
The proposed amendments to Rule D-15 do not change the nature of the 
customer and the determination of sophistication by the dealer, 
excluding minor, non-substantive revisions.\43\ The proposed amendments 
to Rule D-15, however, expand the existing customer affirmation \44\ to 
require that the customer affirmatively indicate that it (1) is 
exercising independent judgment in evaluating: the recommendations of 
the dealer, the quality of execution of the customer's transactions by 
the dealer, and the transaction price for certain non-recommended 
secondary market agency transactions; and (2) has timely access to 
material information that is available publicly through established 
industry sources.\45\ The MSRB stated that a dealer could not treat any 
customer as an SMMP after the proposed best-execution rule is 
implemented unless the dealer reasonably determined that the customer 
had given the broader affirmation required under the proposed 
amendments to Rule D-15.\46\ The MSRB believes that it is important 
that the definition of SMMP under the proposed amendments to Rule D-15 
(as under the existing rule) is not self-executing, nor are the 
contingencies for its application in the unilateral control of the 
interfacing dealer.\47\
---------------------------------------------------------------------------

    \41\ Under existing Rule D-15, ``SMMP'' means a customer of a 
dealer that is: a bank, savings and loan association, insurance 
company, or registered investment company; or an investment adviser 
registered either with the SEC 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 
(whether a natural person, corporation, partnership, trust, or 
otherwise) with total assets of at least $50 million; and, that the 
dealer has a reasonable basis to believe 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 that affirmatively indicates that it is 
exercising independent judgment in evaluating the recommendations of 
the dealer.
    \42\ See proposed amendments to Rule D-15.
    \43\ The MSRB stated that the proposed amendments to Rule D-15 
include non-substantive (e.g., technical, conforming and 
organizational) revisions to accommodate the substantive changes and 
improve the readability of the rule. See supra note 3 at 16-17
    \44\ The SMMP customer affirmation contained in existing Rule D-
15 requires that the customer affirmatively indicate that it is 
exercising independent judgment in evaluating the recommendations of 
the dealer.
    \45\ See proposed amendments to Rule D-15.
    \46\ See supra note 3 at 17.
    \47\ Id.
---------------------------------------------------------------------------

    The proposed amendments to paragraph .02 of the Supplementary 
Material to Rule D-15 would provide that the SMMP customer affirmation 
may be given, in addition to the existing bases, on a type-of-
transaction basis.\48\
---------------------------------------------------------------------------

    \48\ See proposed amendments to Rule D-15.
---------------------------------------------------------------------------

5. Implementation Period

    The MSRB requested that the proposed rule change be approved with 
an implementation date one year after the Commission approval date.\49\ 
According to the MSRB, this implementation period would allow dealers 
sufficient time to develop or modify their policies and procedures and 
to acquire or adjust the level of their resources.\50\ The MSRB also 
stated that this one year implementation period would allow time for 
the MSRB to create educational materials and conduct outreach to the 
dealer community, as appropriate, regarding the proposed rule 
change.\51\
---------------------------------------------------------------------------

    \49\ See supra note 3 at 8.
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

    A full description of the proposed rule change is contained in the 
Proposing Release.

III. Summary of Comments Received and the MSRB's Response

    As noted previously, the Commission received six comment letters on 
the proposed rule change and a response letter from the MSRB.\52\ 
Commenters generally supported the proposed rule change, however, some 
asked for further clarification and provided suggestions to the 
proposed rule change.\53\
---------------------------------------------------------------------------

    \52\ See supra notes 4 and 5.
    \53\ Id.
---------------------------------------------------------------------------

1. Use of Best Execution

    SIFMA, BDA and Wells Fargo do not support the use of the phrase 
``best execution'' in the proposed rule change.\54\ SIFMA and BDA 
believe that regulatory examiners and enforcement staff will use the 
phrase to enforce standards that are not applicable to the municipal 
securities market.\55\ Also, Wells Fargo believes that the term best 
execution correlates with the equity securities market and is 
inconsistent with the fundamental goal expressed within proposed rule 
G-18.\56\ Similarly, BDA believes using a term borrowed from standards 
applicable to other markets that operate very differently from the 
municipal securities market is inappropriate.\57\ SIFMA and BDA suggest 
removing the word ``best'' in certain instances and replacing ``best 
execution'' with ``execution diligence'' in others.\58\ Wells Fargo 
recommends the term ``best execution'' be removed from the proposed 
rule language, including the title, and be replaced with the term 
``reasonable diligence.'' \59\
---------------------------------------------------------------------------

    \54\ See SIFMA Letter at 2, BDA Letter No. 1 at 3, and Wells 
Letter at 4.
    \55\ See SIFMA Letter at 2 and BDA Letter No. 1 at 3.
    \56\ See Wells Letter at 4.
    \57\ See BDA Letter No. 1 at 3.
    \58\ See SIFMA Letter at 2 and BDA Letter No. 1 at 3.
    \59\ See Wells Letter at 4.
---------------------------------------------------------------------------

    The MSRB responded by highlighting that paragraph .01 of the 
Supplementary Material indicates that proposed Rule G-18 is not 
intended to create a substantive pricing standard, but rather an order-
handling standard for the execution of transactions.\60\ The MSRB noted 
that paragraph .01 of the Supplementary Material expressly provides 
that a failure to have actually obtained the most favorable price 
possible will not necessarily mean the dealer failed to use reasonable 
diligence under the circumstances.\61\ The MSRB represented that ``best 
execution'' is an established term for the concept of execution quality 
in customer securities transactions in other contexts, and the standard 
in those contexts is similarly not a most-favorable-price standard.\62\ 
The MSRB believes that concerns that regulatory examiners and 
enforcement staff will use the phrase ``best execution'' to enforce 
standards that are not applicable to the municipal securities market 
and that are inconsistent with the MSRB's stated intent that ``the most 
favorable price possible'' will not necessarily be equated with the 
term ``best execution'' are speculative in nature, and do not warrant 
changes to the proposed rule language.\63\
---------------------------------------------------------------------------

    \60\ See MSRB Response Letter at 2.
    \61\ Id.
    \62\ See MSRB Response Letter at 2-3.
    \63\ See MSRB Response Letter at 3.
---------------------------------------------------------------------------

2. Definition of Market

    BDA believes proposed Rule G-18 broadens the concept of ``market'' 
well beyond FINRA Rule 5310.\64\ BDA believes there is no concept at 
all of limiting the market to market centers or what FINRA Rule 5310 
considers venues.\65\ BDA believes any dealer or other counterparty in 
the country can potentially constitute a ``market'' that needs to be 
considered.\66\ BDA

[[Page 73661]]

expresses concern that the proposed definition requires dealers to use 
their reasonable diligence to locate the one counterparty that will pay 
the best price, not the best market center, and that such a duty is 
more expansive than the one under FINRA Rule 5310 and too burdensome to 
impose.\67\ Coastal believes the definition creates an undue burden not 
required by FINRA rules by defining each dealer as a market.\68\ 
Coastal recommends wording the proposed Rule G-18 language in line with 
existing FINRA rules.\69\
---------------------------------------------------------------------------

    \64\ See BDA Letter No. 1 at 2.
    \65\ Id.
    \66\ Id.
    \67\ Id.
    \68\ See Coastal Letter at 2.
    \69\ Id.
---------------------------------------------------------------------------

    The MSRB responded by stating that it believes that the proposed 
definition of ``market'' is appropriate, even as compared to FINRA Rule 
5310.\70\ The MSRB noted that FINRA states that its definition of 
``market'' or ``markets'' in FINRA Rule 5310 also is to be construed 
broadly to encompass a variety of different venues, including, but not 
limited to, market centers.\71\ The MSRB further stated that FINRA Rule 
5310 provides that, in the absence of quotations, ``members are not 
relieved from taking reasonable steps and employing their market 
expertise in achieving the best execution of customer orders,'' and, 
``[i]n these instances, a member should generally seek out other 
sources of pricing information or potential liquidity, which may 
include obtaining quotations from other sources (e.g., other firms that 
the member previously has traded within the security).'' \72\
---------------------------------------------------------------------------

    \70\ See MSRB Response Letter at 3.
    \71\ Id.
    \72\ See MSRB Response Letter at 3-4 and Paragraph .02 of the 
Supplementary Material to FINRA Rule 5310.
---------------------------------------------------------------------------

    The MSRB does not believe the definition of ``market'' creates a 
duty for dealers to use reasonable diligence to locate the one 
counterparty that will pay the best price because, as previously noted 
above, proposed Rule G-18 is an order-handling and transaction-
execution standard and does not contain any substantive pricing 
standard.\73\ In addition, the MSRB noted that paragraph .01 of the 
Supplementary Material to proposed Rule G-18 expressly provides that a 
failure to have actually obtained the most favorable price possible 
will not necessarily mean that the dealer failed to use reasonable 
diligence under the circumstances.\74\ The MSRB believes that the 
number of counterparties and/or other markets the dealer should 
consider would depend on the analysis of the factors articulated in 
proposed Rule G-18(a), and any other facts and circumstances that would 
contribute to a dealer's identification of the best market.\75\
---------------------------------------------------------------------------

    \73\ See MSRB Response Letter at 4.
    \74\ Id.
    \75\ Id.
---------------------------------------------------------------------------

3. Number of Markets Checked

    SIFMA requests that ``the number of markets checked'' factor be 
deleted from proposed Rule G-18(a).\76\ SIFMA believes this factor is 
more applicable to the equities market structure of exchanges with a 
central aggregator of bids and offers as well as constant 
liquidity.\77\ SIFMA further believes that, unlike equity markets, 
there is no direct continuously-quoted, bid-and-ask trading market 
between bond dealers in the municipal markets, so the mere act of 
contacting other dealers for quotes on fixed income securities does not 
necessarily result in a more timely or beneficial execution.\78\ SIFMA 
disagrees with any suggestion that the act of contacting other dealers 
would be the implicit or requisite procedure to evidence best 
execution.\79\ SIFMA also believes ``the number of markets checked'' is 
covered by another factor--``the information reviewed to determine the 
current market for the subject security or similar security.'' \80\ 
SIFMA expresses concern that ``the number of markets checked'' factor 
is inconsistent with paragraph .04 of the Supplementary Material to 
proposed Rule G-18, which acknowledges that a dealer itself as 
principal may be the best market to satisfy best execution for the 
subject security.\81\
---------------------------------------------------------------------------

    \76\ See SIFMA Letter at 4.
    \77\ Id.
    \78\ Id.
    \79\ Id.
    \80\ Id.
    \81\ Id.
---------------------------------------------------------------------------

    The MSRB noted that while the structure of the municipal securities 
market is different than the equity securities market structure of 
exchanges, that difference does not necessarily reduce the value of a 
dealer checking multiple markets, as defined by proposed Rule G-18, to 
ascertain the best market for executing customer transactions.\82\ The 
MSRB stated that ``the number of markets checked'' factor is only one 
factor in the non-exhaustive list of factors to be considered, and no 
single factor is determinative.\83\ The MSRB further stated that, 
depending on the particular facts and circumstances, it could be 
consistent with the reasonable-diligence standard for a dealer not to 
contact other dealers, however, it would be important, given the 
proposed rule's emphasis on complying with policies and procedures, for 
a dealer to have written policies and procedures in place that address 
such circumstances.\84\
---------------------------------------------------------------------------

    \82\ See MSRB Response Letter at 4-5.
    \83\ Id. at 5.
    \84\ Id.
---------------------------------------------------------------------------

    The MSRB believes it is important to explicitly include ``the 
number of markets checked'' factor to further the objective of 
promoting fair competition among dealers.\85\ The MSRB does not believe 
that ``the number of markets checked'' factor is inconsistent with the 
definition of ``market'' in paragraph .04 of the Supplementary 
Material.\86\ According to the MSRB, although paragraph .04 explicitly 
states that the dealer itself as principal could be the best market, it 
does not indicate that such a dealer would always be the best market 
for purposes of best execution, and, depending on the facts and 
circumstances, the exercise of reasonable diligence to comply with the 
proposed rule likely would regularly require a dealer to check other 
markets in addition to its own inventory.\87\ As such, the MSRB decided 
not to delete this factor from the non-exhaustive list of factors in 
proposed Rule G-18(a).\88\
---------------------------------------------------------------------------

    \85\ Id.
    \86\ Id.
    \87\ Id.
    \88\ Id.
---------------------------------------------------------------------------

4. Securities With Limited Quotations or Pricing Information

    Coastal believes proposed Rule G-18 erroneously presumes retail 
customers turn in market orders to purchase specific municipal bonds in 
the secondary market and, consequently, imposes unnecessary regulatory 
burdens on selling dealers.\89\ Coastal believes, on the sell side, 
there are no orders to speak of that would benefit from requiring a 
dealer to complete a process demonstrating best execution.\90\ Coastal 
questions the flexibility of the proposed best-execution standard and 
suggests that the requirements for securities with limited quotations 
or pricing information is unnecessary.\91\ Coastal recommends wording 
the proposed Rule G-18 language in line with existing FINRA rules.\92\
---------------------------------------------------------------------------

    \89\ See Coastal Letter at 1.
    \90\ Id.
    \91\ Id.
    \92\ Id. at 2.
---------------------------------------------------------------------------

    The MSRB responded by noting that the application of the proposed 
best-execution standard does not hinge on whether a customer places a 
market order or on whether a customer has identified a particular 
municipal security.\93\ The MSRB believes that while many customer 
orders in the municipal securities market are placed in response to 
offerings made by sellers

[[Page 73662]]

out of their own inventories, there are customer-initiated orders in 
the market as well.\94\ The MSRB believes that a significant benefit of 
the flexible best-execution standard embodied in proposed Rule G-18 is 
the ability to apply to an evolving market over time.\95\
---------------------------------------------------------------------------

    \93\ See MSRB Response Letter at 6.
    \94\ Id.
    \95\ Id.
---------------------------------------------------------------------------

    The MSRB also believes that paragraph .06 of the Supplementary 
Material of proposed Rule G-18, which requires written policies and 
procedures that address how a dealer would make its best-execution 
determinations in cases of limited quotations or pricing information, 
is consistent with FINRA Rule 5310.\96\ The MSRB stated that the FINRA 
rule, with which the MSRB has generally harmonized, does not contain 
further prescriptions than proposed Rule G-18 in this area.\97\ The 
MSRB believes that including additional language would not materially 
add to proposed Rule G-18, which already contains the core requirement 
that dealers use reasonable diligence and is tailored to the 
characteristics of the municipal securities market.\98\
---------------------------------------------------------------------------

    \96\ Id.
    \97\ Id.
    \98\ Id.
---------------------------------------------------------------------------

5. Enforcement Concerns

    SIFMA and Wells Fargo express concerns with how proposed rule G-18 
would be enforced.\99\ SIFMA believes that the non-exhaustive list of 
factors to be considered by dealers creates a de facto enforcement 
checklist for FINRA.\100\ SIFMA questions how compliance with ``the 
number of markets checked'' factor can be proved.\101\ SIFMA members 
are concerned that enforcement regulators will challenge a dealer's 
trade price because the regulators will have the benefit of hindsight 
and may be able to show other trades for the same CUSIP at marginally 
better prices and will assert that the dealer therefore did not provide 
best execution.\102\ SIFMA suggests codifying the MSRB's view that 
proposed Rule G-18 is not intended to create a trade-through rule by 
adding the following to paragraph .01 of the Supplementary Material: 
``[a] failure to consider a superior price available on another market 
would not necessarily constitute a violation of the rule.'' \103\
---------------------------------------------------------------------------

    \99\ See SIFMA Letter at 2, 4-5 and Wells Letter at 3.
    \100\ See SIFMA Letter at 4.
    \101\ Id.
    \102\ Id. at 4-5.
    \103\ Id. at 5.
---------------------------------------------------------------------------

    The MSRB responded by stating that the mandatory factors in 
proposed Rule G-18(a) would be considered in any examination and/or 
enforcement activities by regulators, but no single factor would be 
determinative, and other facts and circumstances could be considered as 
well in determining whether a dealer has used reasonable 
diligence.\104\ The MSRB noted that it would be important, given 
proposed rule G-18's emphasis on complying with sound policies and 
procedures, for a dealer to have written policies and procedures in 
place that articulate how the dealer would exercise reasonable 
diligence, which should, at a minimum, include consideration of the 
number of markets checked factor, as well as the others listed in the 
proposed rule.\105\ Also, according to the MSRB, under the broad 
standard in proposed Rule G-18, the subsequent discovery of a market 
that had better prices than the market in which a dealer executed a 
customer transaction would inform a dealer's development of its 
policies and procedures and periodic review of them under Paragraph .08 
of the Supplementary Material.\106\ The MSRB noted, however, a failure 
to consider such a market would not necessarily constitute a violation 
of the proposed rule, and, as provided in proposed Supplementary 
Material .01, a failure to have actually obtained the most favorable 
price possible would not necessarily mean that the dealer failed to use 
reasonable diligence.\107\ As such, the MSRB does not believe revision 
of the proposed rule language is necessary at this time.\108\
---------------------------------------------------------------------------

    \104\ See MSRB Response Letter at 6.
    \105\ Id. at 6-7.
    \106\ Id. at 7.
    \107\ Id.
    \108\ Id.
---------------------------------------------------------------------------

    Wells Fargo believes that the proposed rule language regarding a 
dealer's failure to maintain adequate resources (set forth in paragraph 
.02 of the Supplementary Material of proposed Rule G-18) may create 
confusion over enforcement as proposed rule G-18 could be applied 
inconsistently and arbitrarily based on the activity level and number 
of ATSs to which a particular dealer subscribes.\109\
---------------------------------------------------------------------------

    \109\ See Wells Letter at 3.
---------------------------------------------------------------------------

    The MSRB responded by stating that proposed Rule G-18 establishes 
only one best execution standard for all dealers in the municipal 
securities market.\110\ According to the MSRB, paragraph .02 of the 
Supplementary Material, similar to FINRA Rule 5310(c), addresses the 
need for dealers to devote adequate resources towards meeting their 
best-execution obligations, while acknowledging that a ``one-size-fits-
all'' approach to staffing is not required.\111\
---------------------------------------------------------------------------

    \110\ See MSRB Response Letter at 7.
    \111\ Id.
---------------------------------------------------------------------------

6. Request for Clarification/Guidance

    BDA, FSI and Wells Fargo request guidance and/or clarification on 
how to comply with the proposed rule change generally, as well as in 
more particular circumstances, and how to evidence compliance to 
regulators.\112\
---------------------------------------------------------------------------

    \112\ See BDA Letter No. 1 at 3-4, BDA Letter No. 2 at 1, FSI 
Letter 2-3, and Wells Letter 2-3 and 5.
---------------------------------------------------------------------------

    The MSRB responded by stating, at this time, it is not revising 
proposed Rule G-18 to include any more prescriptive provisions because 
doing so could negate the benefits of a principles-based rulemaking 
approach.\113\ The MSRB stated that while it understands the desire on 
the part of dealers for concrete steps to follow for their particular 
business models, such a prescriptive rule might undermine the 
flexibility the rule is designed to provide.\114\ The MSRB represented 
that, if the proposed rule change is approved, the MSRB plans to 
provide practical guidance on complying with the best-execution 
standard prior to implementation of the proposed rule change, in 
coordination with FINRA.\115\
---------------------------------------------------------------------------

    \113\ See MSRB Response Letter at 7.
    \114\ Id. at 7-8.
    \115\ Id. at 8.
---------------------------------------------------------------------------

7. Proposed Amendments to Rules G-48 and D-15

(a) Public Comment
    SIFMA and Wells Fargo express concerns that the MSRB did not 
request public comment on the proposed amendments to Rule D-15 prior to 
filing the proposed rule change with the SEC.\116\ Additionally, SIFMA 
and Wells Fargo believe the SEC should have provided a lengthier 
comment period.\117\ Wells Fargo believes this aspect of the proposed 
rule change should be withdrawn until additional time is provided.\118\
---------------------------------------------------------------------------

    \116\ See SIFMA Letter at 2 and 6 and Wells Letter at 2.
    \117\ See SIFMA Letter at 9-10 and Wells Letter at 4.
    \118\ See Wells Letter at 4.
---------------------------------------------------------------------------

    The MSRB responded by noting that the SEC determines the length of 
the public comment period and it provided 21 days for comment on the 
proposed rule change, specifically soliciting comment on the proposed 
amendments to Rules G-48 and D-15.\119\ The MSRB stated that any 
additional solicitation of comments, prior to the SEC's publication of 
a proposed rule change, by a self-regulatory organization, such

[[Page 73663]]

as the MSRB, is not required.\120\ The MSRB also noted that it provided 
two rounds of public comment, focusing first on the concept of applying 
a best execution standard to customer transactions in municipal 
securities and, second, evaluating specific rule language articulating 
such standard.\121\ According to the MSRB, the issues related to the 
proposed amendments to Rules G-48 and D-15 are derivative of changes in 
response to comments and are consistent with well-established 
requirements applicable to qualification as an SMMP.\122\ As such, the 
MSRB does not believe the proposed amendments to Rules G-48 and D-15 
warrant another round of comment in this rulemaking matter.\123\
---------------------------------------------------------------------------

    \119\ See MSRB Response Letter at 8.
    \120\ Id.
    \121\ Id. at 8-9.
    \122\ Id. at 9.
    \123\ Id.
---------------------------------------------------------------------------

(b) Economic Analysis
    SIFMA believes the MSRB did not discuss any economic analysis as it 
relates to the proposed amendments to Rule D-15.\124\ SIFMA expresses 
concern that the proposed amendments to Rule D-15 fundamentally alter 
how a dealer determines if a customer qualifies as an SMMP.\125\ SIFMA 
suggests that the MSRB should have conducted an economic analysis 
consistent with its Policy for Integrating Economic Analysis in MSRB 
Rulemaking (``Policy'') in proposing the amendments to Rule D-15.\126\ 
FSI believes that, prior to approving the proposed rule change, the 
MSRB should publish a cost-benefit analysis to determine whether the 
proposed rule change would have consequences for liquidity in the 
municipal securities market which would impact retail investors.\127\
---------------------------------------------------------------------------

    \124\ See SIFMA Letter at 8.
    \125\ Id.
    \126\ Id. at 8-9.
    \127\ See FSI Letter at 3.
---------------------------------------------------------------------------

    The MSRB responded by clarifying that the Policy does not apply to 
rulemaking initiatives, like this one, that were initially presented to 
the MSRB Board of Directors before September 26, 2013.\128\ The MSRB 
represented that it had been particularly mindful of potential costs 
and burdens of the proposed rule change, and that the proposed 
exemption for transactions for or with SMMPs is one such example.\129\ 
The MSRB noted that although no economic analysis of the proposed 
amendments to Rule D-15 is required pursuant to the Policy, the MSRB, 
as appropriate, has provided additional analysis in the MSRB Response 
Letter in response to the commenters' concerns.\130\ The MSRB, however, 
does not believe that the proposed amendments fundamentally alter the 
conclusions of its preliminary economic analysis.\131\ The MSRB further 
stated that some of the costs associated with compliance with proposed 
Rule G-18 would be reduced in the aggregate due to the exemption for 
transactions with SMMPs, as compared to an alternative approach in 
which there was no such exemption.\132\ The MSRB believes the costs 
associated with the amendments to Rule D-15 must be evaluated in light 
of the overall cost mitigation that flows from the existence of the 
SMMP exemption.\133\
---------------------------------------------------------------------------

    \128\ See MSRB Response Letter at 9.
    \129\ Id.
    \130\ Id.
    \131\ Id.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

(c) SMMP Customer Affirmation
    SIFMA and Wells Fargo express concerns regarding the invalidation 
of existing SMMP customer affirmations after the effective date of the 
proposed rule change.\134\ BDA states that its members believe that 
some if not many institutional investors will be unwilling to provide 
an affirmation that has the effect of excluding them from the 
application of a best execution rule on the dealer.\135\ BDA recommends 
that the SMMP customer affirmation should be bifurcated into two 
affirmations: (1) The existing SMMP customer affirmation and, if an 
institutional investor provides such affirmation, the investor should 
be treated as an SMMP for all purposes other than for the application 
of the best execution rule; and (2) an affirmation tailored just to the 
best execution rule.\136\ Wells Fargo believes there is no benefit to 
invalidating existing SMMP customer affirmations and BDA does not see 
the value in expanding the existing SMMP customer affirmations.\137\
---------------------------------------------------------------------------

    \134\ See SIFMA Letter at 2, 6 and 9 and Wells Letter at 4.
    \135\ See BDA Letter No. 2 at 1.
    \136\ Id.
    \137\ See Wells Letter at 4 and BDA Letter No. 1 at 3.
---------------------------------------------------------------------------

    According to the MSRB, it is important for the SMMP customer 
affirmation to be unified and speak to all of the modified dealer 
obligations.\138\ The MSRB believes that unnecessary inefficiencies and 
additional burdens on dealers would result from a piecemeal approach, 
under which dealers would potentially have different customers that are 
SMMPs only with respect to several different permutations of modified 
dealer obligations.\139\ The MSRB believes this belief is supported by 
SIFMA's statement that, if the SEC approves the proposed amendments to 
Rule D-15 as is, or even if the affirmation did not need to be unified, 
some of SIFMA's members would prefer a unified affirmation, as it would 
be much easier to implement and administer.\140\ Further, the MSRB 
believes the unified approach to the SMMP customer affirmation provides 
greater protection to investors, as it would help ensure that dealer 
obligations would be modified only for transactions with customers that 
are knowingly willing to have their dealer subject to the several 
reduced obligations provided in Rule G-48.\141\ The MSRB believes that 
this added investor protection, as well as the mitigated costs of 
compliance with the best execution obligation provided by the SMMP 
exemption, would justify the costs of requiring dealers to obtain new 
affirmations from all SMMP customers, including existing SMMPs.\142\
---------------------------------------------------------------------------

    \138\ See MSRB Response Letter at 10.
    \139\ Id.
    \140\ Id.
    \141\ Id.
    \142\ Id.
---------------------------------------------------------------------------

    SIFMA, BDA and Wells Fargo express concerns regarding the 
operational impact of deharmonizing the SMMP qualification process from 
the FINRA Rule 2111 process and precluding dealers from satisfying the 
SMMP affirmation requirement by receiving a FINRA Rule 2111 
affirmation.\143\ Wells Fargo believes this aspect of the proposed rule 
change contradicts the MSRB's previously stated goal to seek harmony 
with FINRA rules.\144\ SIFMA believes an SMMP customer affirmation that 
mirrors FINRA's affirmation process as closely as possible makes the 
most economic sense, encourages cross-over investors, and eases dealer 
compliance regimes.\145\ SIFMA believes the costs of maintaining 
separate affirmation systems for institutional accounts across product 
lines will be unduly burdensome.\146\ SIFMA proposes an alternative 
revision to Rule D-15 which would require dealers to have a reasonable 
basis to believe that an SMMP would like to avail itself to the 
conveniences of SMMP status.\147\ As an alternative approach, SIFMA 
suggests a negative consent letter sent to institutional 
customers.\148\ BDA and Wells Fargo also favor a negative

[[Page 73664]]

consent approach for SMMPs effectively to opt out of SMMP status.\149\
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    \143\ See SIFMA Letter at 2, 6-7, and 9, BDA Letter No. 1 at 3-4 
and Wells Letter at 2 and 4-5.
    \144\ See Wells Letter at 4.
    \145\ See SIFMA Letter at 7.
    \146\ Id. at 6.
    \147\ Id. at 7.
    \148\ Id. at 8.
    \149\ See BDA Letter No. 1 at 4 and Wells Letter at 4.
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    The MSRB does not believe the proposed amendments to Rule D-15 
would inappropriately deharmonize the rule from FINRA's affirmation or 
contradict the MSRB's established position on SMMP customer 
affirmations.\150\ Previously, the MSRB stated that it ``considers it 
desirable from the standpoint of reducing the cost of dealer compliance 
to maintain consistency with FINRA rules, absent clear reasons for 
treating transactions in municipal securities differently.'' \151\ 
According to the MSRB, consistent with this goal, the proposed 
amendments to Rule D-15 are aligned to harmonize with FINRA Rule 2111 
but with adjustments associated with the SMMP exemption from the best-
execution obligation, as well as the other modified dealer obligations 
currently covered by Rule G-48.\152\ The MSRB noted that FINRA Rule 
2111(b) and paragraph .07 of the Supplementary Material thereto provide 
an institutional investor exemption to the suitability obligation under 
that rule, which is similar to the existing exemption dealers have from 
the suitability requirement of MSRB Rule G-19 under Rule G-48(c), 
however, neither FINRA Rule 2111 nor any other FINRA rule provides a 
similar exemption from best execution or any other obligations for its 
member firms comparable to those included in Rule G-48.\153\ The MSRB 
further noted that no commenter expressed an objection to the proposed 
exemption from best execution under Rule G-48, and BDA and SIFMA have 
explicitly endorsed the exemption in comment letters relating to the 
proposed rule change.\154\ The MSRB believes clear reasons exist for 
the proposed amendments to Rule D-15 to vary from FINRA's affirmation 
under FINRA Rule 2111, as the amendments would facilitate the exemption 
supported by commenters and mitigate the burden of compliance with 
proposed Rule G-18 by reducing the number of customers to which the 
obligation would apply.\155\
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    \150\ See MSRB Response Letter at 11.
    \151\ See MSRB Response Letter at 11 (quoting from Securities 
Exchange Act Release No. 66772 (April 9, 2012)).
    \152\ See MSRB Response Letter at 11.
    \153\ Id.
    \154\ Id.
    \155\ Id.
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    The MSRB believes that the proposed amendments to Rule D-15 would 
enhance protections to customers by addressing the full scope of 
modified obligations that dealers would be relieved of performing, 
providing clear disclosure to SMMPs regarding the modified dealer 
obligations and obtaining affirmative statements that SMMPs can, for 
example, exercise independent judgment in performing the evaluations 
related to best execution, suitability and the other modified dealer 
obligations.\156\ The MSRB also believes that any changes to dealer 
affirmation systems made in an effort to comply with the proposed 
amendments to Rule D-15 would be justified by the need to tailor the 
rule to the particular interests and characteristics of the municipal 
securities market, which are not reflected in FINRA rules.\157\ 
Additionally, according to the MSRB, a negative consent letter to 
institutional customers would not be an appropriate alternative, as it 
would be important for customers to take affirmative action to be 
treated as an SMMP.\158\
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    \156\ Id.
    \157\ Id.
    \158\ Id.
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8. Implementation Period

    SIFMA supports the one-year implementation period for proposed Rule 
G-18 and the proposed amendments to Rule G-48.\159\ If the SEC approves 
the proposed amendments to Rule D-15, however, SIFMA requests an 
additional six-month implementation period.\160\
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    \159\ See SIFMA Letter at 9.
    \160\ Id.
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    The MSRB believes a one-year implementation period would be 
sufficient for dealers to comply with the proposed rule change, 
including amendments to Rule D-15.\161\ According to the MSRB, one year 
would be adequate for dealers to develop systems, establish policies 
and procedures, conduct training and obtain the expanded SMMP customer 
affirmations.\162\
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    \161\ See MSRB Response Letter at 12.
    \162\ Id.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comments received, and the MSRB's response to the comments, and 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to the 
MSRB. In particular, the Commission finds that the proposed rule change 
is consistent with Section 15B(b)(2)(C) of the Act,\163\ which 
requires, among other things, that the rules of the MSRB 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.
---------------------------------------------------------------------------

    \163\ 15 U.S.C. 78o-4(b)(2)(C).
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    The Commission notes that its Report on the Municipal Securities 
Market, issued July 31, 2012, recommended that the MSRB consider a rule 
that would require municipal bond dealers to seek ``best execution'' of 
customer orders for municipal securities. The Commission believes that 
the establishment of a requirement that dealers seek best execution of 
customer transactions in municipal securities, as required by the 
proposed rule change, will have benefits for investors, improve market 
efficiency and promote fair competition among dealers. The Commission 
believes that the new order-handling obligations of dealers will 
complement the MSRB's existing substantive pricing standards, helping 
to ensure that investors receive a price that is as favorable as 
possible under prevailing market conditions. The proposed rule change 
is appropriately designed to buttress existing dealer pricing 
obligations and promote better execution quality for investors in 
municipal securities.
    Moreover, the Commission believes that the proposed amendments to 
Rule G-48 and Rule D-15 to effectuate the exemption for transactions 
with SMMPs will facilitate transactions in municipal securities and 
help perfect the mechanism of a free and open market in municipal 
securities by avoiding the imposition of regulatory burdens if they are 
not needed. In addition, the Commission believes that the proposed rule 
change will protect investors by helping to ensure that the exemption 
for dealers from the best-execution obligation for transactions with 
SMMPs (as well as the reduced dealer obligations related to time-of-
trade disclosure and pricing) will apply only to transactions with 
SMMPs. The Commission believes it is important that the definition of 
SMMP is not self-executing nor in the unilateral control of the 
interfacing dealer. The Commission also believes that the proposed rule 
change is beneficial to the municipal securities market and that the 
changes

[[Page 73665]]

will enhance investor confidence and protection.
    In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation.\164\ The Commission believes that 
the proposed rule change includes accommodations that help promote 
efficiency because the proposed rule change is designed to allow 
flexibility for each dealer to adapt its policies and procedures to be 
reasonably related to the nature of its business, including its level 
of sales and trading activity and the type of customer transactions at 
issue. The Commission also believes that the reasonable diligence 
standard and the SMMP customer affirmation are sufficiently flexible to 
be met by a diverse population of dealers and allows a dealer to 
evidence compliance in a manner that may be different from that used by 
another dealer. The Commission does not believe that the proposed rule 
change would impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act since it would 
apply to all dealers who engage in municipal securities transactions. 
The Commission also believes that the proposed rule change takes into 
account competitive concerns that could arise from the diversity of 
dealer characteristics because proposed Rule G-18 embodies a broad and 
flexible principles-based standard. The Commission has reviewed the 
record for the proposed rule change and notes that the record does not 
contain any information to indicate that the proposed rule change would 
have a negative effect on capital formation.
---------------------------------------------------------------------------

    \164\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As noted above, the Commission received six comment letters on the 
filing. The Commission believes that the MSRB considered carefully and 
responded adequately to comments and concerns regarding the proposed 
rule change. While commenters suggested changes to the filing or 
opposed certain aspects of the proposed rule change, the Commission 
notes that no commenters argued that the proposed rule change was 
inconsistent with the applicable provisions of the Act.
    For the reasons noted above, including those discussed in the MSRB 
Response Letter, the Commission believes that the proposed rule change 
is consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\165\ that the proposed rule change (SR-MSRB-2014-07) be, and 
hereby is, approved.
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    \165\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\166\
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    \166\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-29023 Filed 12-10-14; 8:45 am]
BILLING CODE 8011-01-P

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