Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 2 to Proposed Rule Change Consisting of Proposed New Rule G-42, on Duties of Non-Solicitor Municipal Advisors, and Proposed Amendments to Rule G-8, on Books and Records To Be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors, 71858-71862 [2015-29226]

Download as PDF 71858 Federal Register / Vol. 80, No. 221 / Tuesday, November 17, 2015 / Notices typically small, or even zero (e.g., if the software can be downloaded over the internet after being purchased).19 In NASDAQ’s case, it is costly to build and maintain a trading platform, but the incremental cost of trading each additional share on an existing platform, or distributing an additional instance of data, is very low. Market information and executions are each produced jointly (in the sense that the activities of trading and placing orders are the source of the information that is distributed) and are each subject to significant scale economies. In such cases, marginal cost pricing is not feasible because if all sales were priced at the margin, NASDAQ would be unable to defray its platform costs of providing the joint products. Similarly, data products cannot make use of TRF trade reports without the raw material of the trade reports themselves, and therefore necessitate the costs of operating, regulating,20 and maintaining a trade reporting system, costs that must be covered through the fees charged for use of the facility and sales of associated data. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. mstockstill on DSK4VPTVN1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Pursuant to Section 19(b)(3)(A)(ii) of the Act,21 the Exchange has designated this proposal as establishing or changing a due, fee, or other charge imposed on any person, whether or not the person is a member of the self-regulatory organization, which renders the proposed rule change effective upon filing. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings 19 See William J. Baumol and Daniel G. Swanson, ‘‘The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power,’’ Antitrust Law Journal, Vol. 70, No. 3 (2003). 20 It should be noted that the costs of operating the FINRA/NASDAQ TRF borne by NASDAQ include regulatory charges paid by NASDAQ to FINRA. 21 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 18:14 Nov 16, 2015 Jkt 238001 to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– Phlx–2015–87 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Phlx–2015–87. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 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–Phlx–2015–87 and should be submitted on or before December 8, 2015. 22 17 PO 00000 CFR 200.30–3(a)(12). Frm 00089 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–29217 Filed 11–16–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76420; File No. SR–MSRB– 2015–03] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Amendment No. 2 to Proposed Rule Change Consisting of Proposed New Rule G– 42, on Duties of Non-Solicitor Municipal Advisors, and Proposed Amendments to Rule G–8, on Books and Records To Be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors November 10, 2015. I. Introduction On April 24, 2015, the Municipal Securities Rulemaking Board (‘‘MSRB’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change consisting of proposed new Rule G–42, on duties of non-solicitor municipal advisors, and proposed amendments to Rule G–8, on books and records to be made by brokers, dealers, municipal securities dealers, and municipal advisors. The proposed rule change was published for comment in the Federal Register on May 8, 2015.3 The Commission received fifteen comment letters on the proposal.4 On June 16, 2015, the MSRB granted an extension of time for the Commission to act on the filing until August 6, 2015. On August 6, 2015, the Commission issued an order instituting proceedings (‘‘OIP’’) under Section 19(b)(2)(B) of the Act 5 to determine whether to approve or disapprove the proposed rule change.6 On August 12, 2015, the MSRB 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Exchange Act Release No. 74860 (May 4, 2015), 80 FR 26752 (‘‘Notice’’). The comment period closed on May 29, 2015. 4 Comment letters are available at www.sec.gov/ comments/sr-msrb-2015-03/msrb201503.shtml. 5 15 U.S.C. 78s(b)(2)(B). 6 See Securities Exchange Act Release No. 75628 (August 6, 2015), 80 FR 48355 (August 12, 2015). The comment period closed on September 11, 2015. 2 17 E:\FR\FM\17NON1.SGM 17NON1 Federal Register / Vol. 80, No. 221 / Tuesday, November 17, 2015 / Notices responded to the comments 7 and filed Amendment No. 1 to the proposed rule change. 8 In response to the OIP or Amendment No. 1, the Commission received 13 comment letters.9 On October 28, 2015, the MSRB granted an extension of time for the Commission to act on the filing until January 3, 2016. On November 9, 2015, the MSRB filed Amendment No. 2 to the proposed rule change.10 The text of Amendment No. 2 is available on the MSRB’s Web site. The Commission is publishing this notice to solicit comments on Amendment No. 2 to the proposed rule change from interested persons. II. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Amendment mstockstill on DSK4VPTVN1PROD with NOTICES The MSRB is proposing to add paragraphs .14 and .15 of the Supplementary Material to Proposed Rule G–42. Proposed paragraph .14 would provide a narrow exception (‘‘Exception’’) to the proposed prohibition on certain principal transactions in Proposed Rule G– 42(e)(ii) for transactions in specified types of fixed income securities. Proposed paragraph .15 would define those types of fixed income securities. Amendment No. 2 also makes five 7 See Letter from Michael L. Post, MSRB, to Secretary, SEC, dated August 12, 2015, available at https://www.sec.gov/comments/sr-msrb-2015-03/ msrb201503-19.pdf. 8 See Letter from Michael L. Post, MSRB, to Secretary, SEC, dated August 12, 2015, available at https://www.sec.gov/comments/sr-msrb-2015-03/ msrb201503-20.pdf. 9 Letters from Michael Nicholas, Chief Executive Officer, Bond Dealers of America (‘‘BDA’’), dated September 11, 2015 and November 4, 2015; John C. Melton, Sr., Executive Vice President, Coastal Securities (‘‘Coastal Securities’’), dated September 11, 2015; Jeff White, Principal, Columbia Capital Management, LLC (‘‘Columbia Capital’’), dated September 10, 2015; Joshua Cooperman, Cooperman Associates (‘‘Cooperman’’), dated September 9, 2015; David T. Bellaire, Executive Vice President & General Counsel, Financial Services Institute (‘‘FSI’’), dated September 11, 2015; Dustin McDonald, Director, Federal Liaison Center, Government Finance Officers Association (‘‘GFOA’’), dated September 14, 2015; Tamara K. Salmon, Associate General Counsel, Investment Company Institute (‘‘ICI’’), dated September 11, 2015; Lindsey K. Bell, Millar Jiles, LLP (‘‘Millar Jiles’’), dated September 11, 2015; Terri Heaton, President, National Association of Municipal Advisors (‘‘NAMA’’), dated September 11, 2015; Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated September 11, 2015; Joy A. Howard, WM Financial Strategies (‘‘WM Financial’’), dated September 11, 2015; W. David Hemingway, Executive Vice President, Zions First National Bank (‘‘Zions’’), dated September 10, 2015. 10 See Letter from Michael L. Post, MSRB, to Secretary, SEC, dated November 9, 2015, available at https://www.sec.gov/comments/sr-msrb-2015-03/ msrb201503-36.pdf. VerDate Sep<11>2014 18:14 Nov 16, 2015 Jkt 238001 minor technical changes to clarify or renumber proposed rule text.11 Proposed Rule G–42 would establish core standards of conduct and duties of non-solicitor municipal advisors when engaging in municipal advisory activities. Proposed Rule G–42(a)(ii), consistent with the Exchange Act,12 provides that a municipal advisor, in the conduct of all municipal advisory activities for a municipal entity client, is subject to a fiduciary duty that includes a duty of loyalty and a duty of care. Under proposed paragraph .02 of the Supplementary Material to Proposed Rule G–42, the duty of loyalty requires, among other things, a municipal advisor to act in the municipal entity client’s best interest without regard to the financial or other interests of the municipal advisor. In light of this fiduciary duty, and to prevent acts, practices or courses of business inconsistent with this duty, Proposed Rule G–42(e)(ii) would prohibit a municipal advisor, and any affiliate of such municipal advisor, from engaging with its municipal entity client in a principal transaction that is the same, or directly related to the, municipal securities transaction or municipal financial product as to which the municipal advisor is providing or has provided advice to the municipal entity client (‘‘principal transaction ban’’ or ‘‘ban’’). The comment letters in response to the OIP or Amendment No. 1 that addressed the principal transaction ban generally expressed concerns about the breadth of the ban and the lack of any exception. They noted that fiduciaries governed by other regulatory regimes, such as investment advisers under the Investment Advisers Act of 1940 (‘‘Advisers Act’’),13 are not flatly prohibited from engaging in principal transactions with their clients if proper disclosures are made and consent is obtained. Several commenters, including GFOA, FSI, SIFMA and BDA, generally urged the inclusion of an exception in cases, at a minimum, where the advice provided is in connection with the execution of a securities transaction by the municipal advisor on behalf of the municipal entity, the principal transaction is in a fixed income security, and the municipal entity client is involved in 11 The MSRB will address issues raised in the comment letters received in response to the OIP or Amendment No. 1 that are not addressed through this Amendment No. 2 concurrently with its response to comment letters received, if any, in response to this Amendment No. 2. 12 See Section 15B(c)(1) of the Exchange Act (15 U.S.C. 78o–4(c)(1)). 13 15 U.S.C. 80b–1 et seq. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 71859 the process for the management of the relevant conflicts of interest. GFOA expressed concerns that the ban ‘‘could force small governments to open a more expensive fee-based arrangement with an outside advisor in order to receive this very limited type of advice on investments that are not considered to be risky.’’ 14 Several other commenters, including BDA, FSI, Millar Jiles, SIFMA and Zions, commented on the importance of preserving a municipal entity’s choices and access to services and products at favorable prices, preserving choices regarding financial advisors with whom they had relationships of trust, and avoiding increased costs to municipal entities. Prior to the most recent set of comments, the MSRB consistently concluded that the principal transaction ban should be retained with the breadth as proposed. After carefully considering the additional comments, including those of GFOA, generally representative of a key class of entities that Proposed Rule G–42 is intended to protect, the MSRB has determined to incorporate the Exception into Proposed Rule G–42. The MSRB believes that the Exception will address the primary concerns expressed by commenters that, without an exception for transactions in certain fixed income securities when advice is given by the municipal advisor in connection with executing such transactions, the proposed ban would restrict the access of municipal entities to trusted financial advisors, limit their ability to obtain certain financial services and products, create undue burdens on competition, and impose unjustified costs for issuers. Significantly, the MSRB has developed Proposed Rule G–42 as a cornerstone of a regulatory framework that recognizes and is tailored to the unique characteristics of the municipal securities market, the special responsibilities of municipal entities in their financial matters and in their relationship to their constituents, and the particular role that municipal advisors play in the municipal securities market. The design of the proposed rule, as amended by Amendment No. 2, is in recognition that municipal advisors serve a diverse array of clients, and, in particular, municipal entity clients, which range from large state issuers to small school districts, special districts and other instrumentalities, public pension plans, and collective vehicles, such as local government investment pools (‘‘LGIPs’’) 14 GFOA, however, acknowledged that the ban would be appropriate in the context of a traditional financial advisor. E:\FR\FM\17NON1.SGM 17NON1 71860 Federal Register / Vol. 80, No. 221 / Tuesday, November 17, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES and college savings plans that comply with Section 529 of the Internal Revenue Code.15 The design of the proposed rule is also in recognition that municipal entity clients may have special needs of access to a range of services and particular types financial products from municipal advisors and affiliated financial intermediaries. At the same time, the MSRB believes that the proposed rule change, as amended, will further the protection of municipal entities, investors and the public interest. Description. The Exception, to be incorporated as new proposed paragraph .14 of the Supplementary Material to Proposed Rule G–42, would provide a municipal advisor two options by which it might engage in certain principal transactions with a municipal entity client, provided the municipal advisor also complies with the first three requirements set forth in paragraph .14 (organized as sections (a) through (c)). A municipal advisor would have the option to act, on a transactionby-transaction basis, in accordance with a short set of procedural requirements, some of which are drawn from and similar to the requirements set forth in Advisers Act Section 206(3).16 Alternatively, a municipal advisor that wishes to satisfy procedural requirements on other than a transaction-by-transaction basis would be subject to more and different procedural requirements, including obtaining from the municipal entity client a prospective blanket, written consent. These procedural requirements are drawn from and similar to those set forth in Advisers Act Rule 206(3)–3T.17 Importantly, the Exception would operate only to take certain conduct out of the specified prohibition on certain principal transactions in proposed Rule G–42(e)(ii). It would not provide a safe harbor from complying with any other applicable law or rules. Thus, a municipal advisor engaging in a principal transaction in compliance with the Exception would need to continue to be mindful of, and comply with, its broader and foundational obligations owed to the client as a fiduciary under the Exchange Act and Proposed Rule G–42, as well as all other applicable provisions of the federal securities laws and state law.18 15 See 26 U.S.C. 529. U.S.C. 80b–6(3). 17 17 CFR 275.206(3)–3T. 18 The MSRB’s approach in this regard is consistent with that of the Commission with respect to principal transactions executed by investment advisers under Advisers Act Section 206(3) (15 U.S.C. 80b–6(3)) or Advisers Act Rule 206(3)–3T (17 CFR 275.206(3)–3T). All of the requirements for the Exception take the form of various conditions and limitations. As provided in proposed section (a) of paragraph .14 of the Supplementary Material, a principal transaction could be excepted from the specified prohibition only if the municipal advisor also is a brokerdealer registered under Section 15 of the Exchange Act,19 and each account for which the municipal advisor would be relying on the Exception is a brokerage account subject to the Exchange Act,20 the rules thereunder, and the rules of the self-regulatory organization(s) of which the broker-dealer is a member. In addition, the municipal advisor could not exercise investment discretion (as defined in Section 3(a)(35) of the Exchange Act) 21 with respect to the account, unless granted by the municipal entity client on a temporary or limited basis.22 Under proposed section (b) of paragraph .14 of the Supplementary Material, neither the municipal advisor nor any affiliate of the municipal advisor may be providing, or have provided, advice to the municipal entity client as to an issue of municipal securities or a municipal financial product that is directly related to the principal transaction, except advice as to another principal transaction that also meets all the other requirements of proposed paragraph .14. For example, a municipal advisor could not use the Exception to reinvest proceeds from an issue of municipal securities where it was a municipal advisor as to such issue. A municipal advisor could use the Exception, however, for two principal transactions with the same municipal entity client where the transactions are directly related to one another, so long as all of the conditions and limitations of the Exception are met as to each transaction. Proposed section (c) of paragraph .14 of the Supplementary Material would limit a municipal advisor’s principal transactions under the Exception to sales to or purchases from a municipal entity client of any U.S. Treasury security, agency debt security or corporate debt security. In addition, the proposed Exception would not be available for transactions involving municipal escrow investments as defined in Exchange Act Rule 15Ba1– 1(h) 23 because the MSRB believes that this is an area of heightened risk where, 16 15 VerDate Sep<11>2014 18:14 Nov 16, 2015 Jkt 238001 19 15 U.S.C. 78o. U.S.C. 78a et seq. U.S.C. 78(c)(a)(35). 22 The proposed requirements are similar to those found in Advisers Act Rule 206(3)–T(a)(7) and (1), respectively. 17 CFR 275.206(3)–3T(a)(7) and (1). 23 17 CFR 240.15Ba1–1(h). 20 15 21 15 PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 historically, significant abuses have occurred. The inclusion in the Exception of transactions in this class of fixed income securities is intended to address the concerns of commenters that an absolute ban on principal transactions in fixed income securities, which are frequently sold by brokerdealers as principal or riskless principal, would be particularly problematic, and also addresses comments that an exception limited to these generally relatively liquid securities trading in relatively transparent markets would raise significantly less risk for municipal entity clients.24 The proposed class of securities may be broader than what would be permitted by relevant bond documents or a particular municipal entity’s investment policies, but, in such cases, the restrictions in the bond documents or the municipal entity’s investment policies would appropriately control. The terms ‘‘U.S. Treasury security,’’ ‘‘agency debt security’’ and ‘‘corporate debt security,’’ and related terms, ‘‘agency,’’ ‘‘government-sponsored enterprise,’’ ‘‘money market instrument’’ and ‘‘securitized product’’ would be defined for purposes of proposed paragraphs .14 and .15 of the Supplementary Material in new proposed paragraph .15 of the Supplementary Material. To comply with proposed section (d) of paragraph .14 of the Supplementary Material, a municipal advisor would have two options. These two options draw, as generally urged by commenters, upon the procedural requirements in Advisers Act Section 206(3) 25 and Advisers Act Rule 206(3)– 3T(a),26 respectively. Under the first option, which is set forth in proposed subsection (d)(1) of paragraph .14, a municipal advisor would be required, on a transaction-by-transaction basis, to disclose to the municipal entity client in writing before the completion of the principal transaction the capacity in which the municipal advisor is acting and obtain the consent of the client to such transaction. Consent would mean informed consent, and in order to make 24 For example, SIFMA noted the need for an exception to the ban was particularly acute with respect to transactions between a municipal advisor/broker-dealer and its municipal entity client in fixed income securities since ‘‘nearly all transactions in fixed-income securities are effected on a principal basis.’’ GFOA noted that municipal entities might be subject to additional costs regarding advice on ‘‘investments that are not considered to be risky,’’ and FSI specifically suggested that an exception to the ban for brokerdealers providing advice incidental to securities execution services be limited to transactions in a similar group of fixed income securities. 25 15 U.S.C. 80b–6(3). 26 See 17 CFR 275.206(3)–3T(a). E:\FR\FM\17NON1.SGM 17NON1 Federal Register / Vol. 80, No. 221 / Tuesday, November 17, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES informed consent, the municipal advisor, consistent with its fiduciary duty, would be required to disclose specified information, including the price and other terms of the transaction, as well as the capacity in which the municipal advisor would be acting. ‘‘Before completion’’ would mean either prior to execution of the transaction, or after execution but prior to the settlement of the transaction.27 Alternatively, a municipal advisor could comply with proposed subsection (d)(2) of paragraph .14 by meeting six requirements, as set forth in proposed paragraphs (d)(2)(A) through (F) of paragraph .14 and summarized below. First, under proposed paragraph (d)(2)(A), neither the municipal advisor nor any of its affiliates could be the issuer, or the underwriter (as defined in Exchange Act Rule 15c2–12(f)(8)),28 of a security that is the subject of the principal transaction. Second, under proposed paragraph (d)(2)(B), the municipal advisor would be required to obtain from the municipal entity client an executed written, revocable consent that would prospectively authorize the municipal advisor directly or indirectly to act as principal for its own account in selling a security to or purchasing a security from the municipal entity client, so long as such written consent were obtained after written disclosure to the municipal entity client explaining: (i) The circumstances under which the municipal advisor directly or indirectly may engage in principal transactions; (ii) the nature and significance of conflicts with the municipal entity client’s interests as a result of the transactions; and (iii) how the municipal advisor addresses those conflicts. Third, under proposed paragraph (d)(2)(C), the municipal advisor, prior to the execution of each principal transaction, would be required to: (i) Inform the municipal entity client, orally or in writing, of the capacity in which it may act with respect to such transaction and (ii) obtain consent from 27 These parameters are substantially similar to long-standing interpretive guidance regarding Advisers Act Section 206(3). See SEC Interpretation of Section 206(3) of the Investment Advisers Act of 1940, Rel. No. IA–1732 (July 17, 1998) (‘‘The protection provided to advisory clients by the consent requirement of Section 206(3) would be weakened, however, without sufficient disclosure of the potential conflicts of interest and the terms of a transaction. In our view, to ensure that a client’s consent to a Section 206(3) transaction is informed, Section 206(3) should be read together with Sections 206(1) and 206(2) to require the adviser to disclose facts necessary to alert the client to the adviser’s potential conflicts of interest in a principal . . . transaction.’’). 28 17 CFR 240.15c2–12(f)(8). VerDate Sep<11>2014 18:14 Nov 16, 2015 Jkt 238001 the municipal entity client, orally or in writing, to act as principal for its own account with respect to such transaction. Fourth, under proposed paragraph (d)(2)(D), a municipal advisor would be required to send a written confirmation at or before completion of each principal transaction that includes the information required by 17 CFR 240.10b–10 or MSRB Rule G–15, and a conspicuous, plain English statement informing the municipal entity client that the municipal advisor: (i) Disclosed to the client prior to the execution of the transaction that the municipal advisor may be acting in a principal capacity in connection with the transaction and the client authorized the transaction and (ii) sold the security to, or bought the security from, the client for its own account. Fifth, under proposed paragraph (d)(2)(E), a municipal advisor would be required to send its municipal entity client, no less frequently than annually, written disclosure containing a list of all transactions that were executed in the client’s account in reliance upon this Exception, and the date and price of the transactions. Sixth, under proposed paragraph (d)(2)(F), each written disclosure would be required to include a conspicuous, plain English statement regarding the ability of the municipal entity client to revoke the prospective written consent to principal transactions without penalty at any time by written notice. A municipal advisor’s use and compliance with the requirements of the Exception would not be construed as relieving it in any way from acting in the best interests of its municipal entity client nor from any obligation that may be imposed by the Exchange Act, other provisions of Proposed Rule G–42 (other than subsection (e)(ii) of the proposed rule), or other applicable provisions of the federal securities laws and state law. Other Amendments In Amendment No. 2, the MSRB makes five minor, technical amendments, which would clarify, correct cross-references in, or renumber certain provisions of Proposed Rule G– 42. First, the MSRB is making minor, technical changes to Proposed Rule G– 42(d) regarding recommendations. These amendments set forth the initial text that precedes proposed subsection (d)(i) in two sentences rather than one. The purpose of this change is to clarify the requirements that would apply when a municipal advisor makes a recommendation of a municipal securities transaction or municipal financial product and when a municipal PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 71861 advisor reviews such a recommendation of another party. These amendments also clarify in the initial text that precedes proposed subsection (d)(i), consistent with Proposed Rule G– 42(d)(ii), that a municipal advisor reviewing a recommendation of another party could determine that the recommended municipal securities transaction or municipal financial product is not suitable for the client. Second, Amendment No. 2 revises proposed Rule G–42(e)(ii) to begin with the new clause, ‘‘Except as provided in paragraph .14 of the Supplementary Material of this rule,’’ and then continue as previously proposed, except that the phrase ‘‘municipal securities transaction’’ is changed to ‘‘issue of municipal securities’’ in order to more closely track the relevant statutory language.29 Third, to alphabetize the definitions set forth in proposed section (f), the proposed definition of the term ‘‘Principal transaction’’ is renumbered from subsection (f)(i) to subsection (f)(ix). The other eight definitions, set forth as subsections (f)(ii) through (f)(ix), are renumbered, accordingly, as subsections (f)(i) through (f)(viii). Fourth, in proposed paragraphs of the Supplementary Material, references to ‘‘this paragraph’’ are amended to include the appropriate paragraph number (e.g., in proposed paragraph .01 of the Supplementary Material, ‘‘this paragraph’’ is amended to read ‘‘this paragraph .01’’). Fifth, the order of proposed paragraphs .12 and .13 of the Supplementary Material is reversed, which organizes the two paragraphs addressing principal transactions to appear consecutively and improves the readability of the rule. In addition, in proposed paragraph .13 (as renumbered), the cross-reference to the definition of the term ‘‘principal transaction’’ is corrected. The MSRB proposes to make the proposed rule change effective six months after Commission approval of all changes. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments regarding the foregoing, including whether the filing as amended by Amendment No. 2 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or 29 See, E:\FR\FM\17NON1.SGM e.g., 15 U.S.C. 78o–4(b)(2). 17NON1 71862 Federal Register / Vol. 80, No. 221 / Tuesday, November 17, 2015 / Notices • Send an email to rulecomments@sec.gov. Please include File Number SR–MSRB–2015–03 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number SR–MSRB–2015–03. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the MSRB. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MSRB– 2015–03 and should be submitted on or before December 1, 2015.30 For the Commission, pursuant to delegated authority.31 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–29226 Filed 11–16–15; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76423; File No. SR–EDGX– 2015–55] Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees November 10, 2015. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 2, 2015, EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to amend the fee schedule applicable to Members 5 and non-members of the Exchange pursuant to EDGX Rules 15.1(a) and (c) (‘‘Fee Schedule’’). The text of the proposed rule change is available at the Exchange’s Web site at www.batstrading.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the BILLING CODE 8011–01–P mstockstill on DSK4VPTVN1PROD with NOTICES 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 5 The term ‘‘Member’’ is defined as ‘‘any registered broker or dealer, or any person associated with a registered broker or dealer, that has been admitted to membership in the Exchange [sic]. A Member will have the status of a ‘‘member’’ of the Exchange as that term is defined in Section 3(a)(3) of the Act.’’ See Exchange Rule 1.5(n). 2 17 30 The Commission believes that a 14-day comment period is reasonable, given the urgency of the matter. It will provide adequate time for comment. 31 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 18:14 Nov 16, 2015 Jkt 238001 PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to increase the fee for orders yielding fee code D, which results from an order routed to the New York Stock Exchange (‘‘NYSE’’) or routed using the RDOT routing strategy. In securities priced at or above $1.00, the Exchange currently assesses a fee of $0.0027 per share for Members’ orders that yield fee code D. The Exchange proposes to amend its Fee Schedule to increase this fee to $0.00275 per share. The proposed change would enable the Exchange to pass through the rate that BATS Trading, Inc. (‘‘BATS Trading’’), the Exchange’s affiliated routing brokerdealer, is charged for routing orders to NYSE when it does not qualify for a volume tiered reduced fee. The proposed change is in response to NYSE’s November 2015 fee change where NYSE increased the fee to remove liquidity via routable order types it charges its customers, from a fee of $0.0027 per share to a fee of $0.00275 per share.6 When BATS Trading routes to NYSE, it will now be charged a standard rate of $0.00275 per share. BATS Trading will pass through this rate to the Exchange and the Exchange, in turn, will pass through of a rate of $0.00275 per share to its Members. The proposed increase to the fee under fee code D would enable the Exchange to equitably allocate its costs among all Members utilizing fee code D. The Exchange proposes to implement this amendment to its Fee Schedule immediately. In addition to the change proposed above, the Exchange proposes to change certain references on the Fee Schedule in connection with the launch of the options exchange operated by the Exchange. First, the Exchange propose [sic] to modify references in the Unicast Access section under BATS Connect fees to refer to ‘‘BZX Options’’ instead of ‘‘BATS Options’’. Second, the Exchange proposes to add reference to 6 See NYSE Trader Update, Fee Changes Effective November 2, dated October 30, 2015, available at https://www.nyse.com/publicdocs/nyse/markets/ nyse/NYSE_Client_Notice_Fee_Change_11_ 2015.pdf. E:\FR\FM\17NON1.SGM 17NON1

Agencies

[Federal Register Volume 80, Number 221 (Tuesday, November 17, 2015)]
[Notices]
[Pages 71858-71862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29226]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76420; File No. SR-MSRB-2015-03]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Amendment No. 2 to Proposed Rule Change 
Consisting of Proposed New Rule G-42, on Duties of Non-Solicitor 
Municipal Advisors, and Proposed Amendments to Rule G-8, on Books and 
Records To Be Made by Brokers, Dealers, Municipal Securities Dealers, 
and Municipal Advisors

    November 10, 2015.

I. Introduction

    On April 24, 2015, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change consisting of proposed new Rule 
G-42, on duties of non-solicitor municipal advisors, and proposed 
amendments to Rule G-8, on books and records to be made by brokers, 
dealers, municipal securities dealers, and municipal advisors. The 
proposed rule change was published for comment in the Federal Register 
on May 8, 2015.\3\ The Commission received fifteen comment letters on 
the proposal.\4\ On June 16, 2015, the MSRB granted an extension of 
time for the Commission to act on the filing until August 6, 2015. On 
August 6, 2015, the Commission issued an order instituting proceedings 
(``OIP'') under Section 19(b)(2)(B) of the Act \5\ to determine whether 
to approve or disapprove the proposed rule change.\6\ On August 12, 
2015, the MSRB

[[Page 71859]]

responded to the comments \7\ and filed Amendment No. 1 to the proposed 
rule change. \8\ In response to the OIP or Amendment No. 1, the 
Commission received 13 comment letters.\9\ On October 28, 2015, the 
MSRB granted an extension of time for the Commission to act on the 
filing until January 3, 2016. On November 9, 2015, the MSRB filed 
Amendment No. 2 to the proposed rule change.\10\ The text of Amendment 
No. 2 is available on the MSRB's Web site. The Commission is publishing 
this notice to solicit comments on Amendment No. 2 to the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 74860 (May 4, 2015), 80 FR 26752 
(``Notice''). The comment period closed on May 29, 2015.
    \4\ Comment letters are available at www.sec.gov/comments/sr-msrb-2015-03/msrb201503.shtml.
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ See Securities Exchange Act Release No. 75628 (August 6, 
2015), 80 FR 48355 (August 12, 2015). The comment period closed on 
September 11, 2015.
    \7\ See Letter from Michael L. Post, MSRB, to Secretary, SEC, 
dated August 12, 2015, available at https://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-19.pdf.
    \8\ See Letter from Michael L. Post, MSRB, to Secretary, SEC, 
dated August 12, 2015, available at https://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-20.pdf.
    \9\ Letters from Michael Nicholas, Chief Executive Officer, Bond 
Dealers of America (``BDA''), dated September 11, 2015 and November 
4, 2015; John C. Melton, Sr., Executive Vice President, Coastal 
Securities (``Coastal Securities''), dated September 11, 2015; Jeff 
White, Principal, Columbia Capital Management, LLC (``Columbia 
Capital''), dated September 10, 2015; Joshua Cooperman, Cooperman 
Associates (``Cooperman''), dated September 9, 2015; David T. 
Bellaire, Executive Vice President & General Counsel, Financial 
Services Institute (``FSI''), dated September 11, 2015; Dustin 
McDonald, Director, Federal Liaison Center, Government Finance 
Officers Association (``GFOA''), dated September 14, 2015; Tamara K. 
Salmon, Associate General Counsel, Investment Company Institute 
(``ICI''), dated September 11, 2015; Lindsey K. Bell, Millar Jiles, 
LLP (``Millar Jiles''), dated September 11, 2015; Terri Heaton, 
President, National Association of Municipal Advisors (``NAMA''), 
dated September 11, 2015; Leslie M. Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated September 11, 2015; Joy A. Howard, WM 
Financial Strategies (``WM Financial''), dated September 11, 2015; 
W. David Hemingway, Executive Vice President, Zions First National 
Bank (``Zions''), dated September 10, 2015.
    \10\ See Letter from Michael L. Post, MSRB, to Secretary, SEC, 
dated November 9, 2015, available at https://www.sec.gov/comments/sr-msrb-2015-03/msrb201503-36.pdf.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Amendment

    The MSRB is proposing to add paragraphs .14 and .15 of the 
Supplementary Material to Proposed Rule G-42. Proposed paragraph .14 
would provide a narrow exception (``Exception'') to the proposed 
prohibition on certain principal transactions in Proposed Rule G-
42(e)(ii) for transactions in specified types of fixed income 
securities. Proposed paragraph .15 would define those types of fixed 
income securities. Amendment No. 2 also makes five minor technical 
changes to clarify or renumber proposed rule text.\11\
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    \11\ The MSRB will address issues raised in the comment letters 
received in response to the OIP or Amendment No. 1 that are not 
addressed through this Amendment No. 2 concurrently with its 
response to comment letters received, if any, in response to this 
Amendment No. 2.
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    Proposed Rule G-42 would establish core standards of conduct and 
duties of non-solicitor municipal advisors when engaging in municipal 
advisory activities. Proposed Rule G-42(a)(ii), consistent with the 
Exchange Act,\12\ provides that a municipal advisor, in the conduct of 
all municipal advisory activities for a municipal entity client, is 
subject to a fiduciary duty that includes a duty of loyalty and a duty 
of care. Under proposed paragraph .02 of the Supplementary Material to 
Proposed Rule G-42, the duty of loyalty requires, among other things, a 
municipal advisor to act in the municipal entity client's best interest 
without regard to the financial or other interests of the municipal 
advisor. In light of this fiduciary duty, and to prevent acts, 
practices or courses of business inconsistent with this duty, Proposed 
Rule G-42(e)(ii) would prohibit a municipal advisor, and any affiliate 
of such municipal advisor, from engaging with its municipal entity 
client in a principal transaction that is the same, or directly related 
to the, municipal securities transaction or municipal financial product 
as to which the municipal advisor is providing or has provided advice 
to the municipal entity client (``principal transaction ban'' or 
``ban'').
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    \12\ See Section 15B(c)(1) of the Exchange Act (15 U.S.C. 78o-
4(c)(1)).
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    The comment letters in response to the OIP or Amendment No. 1 that 
addressed the principal transaction ban generally expressed concerns 
about the breadth of the ban and the lack of any exception. They noted 
that fiduciaries governed by other regulatory regimes, such as 
investment advisers under the Investment Advisers Act of 1940 
(``Advisers Act''),\13\ are not flatly prohibited from engaging in 
principal transactions with their clients if proper disclosures are 
made and consent is obtained. Several commenters, including GFOA, FSI, 
SIFMA and BDA, generally urged the inclusion of an exception in cases, 
at a minimum, where the advice provided is in connection with the 
execution of a securities transaction by the municipal advisor on 
behalf of the municipal entity, the principal transaction is in a fixed 
income security, and the municipal entity client is involved in the 
process for the management of the relevant conflicts of interest. GFOA 
expressed concerns that the ban ``could force small governments to open 
a more expensive fee-based arrangement with an outside advisor in order 
to receive this very limited type of advice on investments that are not 
considered to be risky.'' \14\ Several other commenters, including BDA, 
FSI, Millar Jiles, SIFMA and Zions, commented on the importance of 
preserving a municipal entity's choices and access to services and 
products at favorable prices, preserving choices regarding financial 
advisors with whom they had relationships of trust, and avoiding 
increased costs to municipal entities.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 80b-1 et seq.
    \14\ GFOA, however, acknowledged that the ban would be 
appropriate in the context of a traditional financial advisor.
---------------------------------------------------------------------------

    Prior to the most recent set of comments, the MSRB consistently 
concluded that the principal transaction ban should be retained with 
the breadth as proposed. After carefully considering the additional 
comments, including those of GFOA, generally representative of a key 
class of entities that Proposed Rule G-42 is intended to protect, the 
MSRB has determined to incorporate the Exception into Proposed Rule G-
42. The MSRB believes that the Exception will address the primary 
concerns expressed by commenters that, without an exception for 
transactions in certain fixed income securities when advice is given by 
the municipal advisor in connection with executing such transactions, 
the proposed ban would restrict the access of municipal entities to 
trusted financial advisors, limit their ability to obtain certain 
financial services and products, create undue burdens on competition, 
and impose unjustified costs for issuers.
    Significantly, the MSRB has developed Proposed Rule G-42 as a 
cornerstone of a regulatory framework that recognizes and is tailored 
to the unique characteristics of the municipal securities market, the 
special responsibilities of municipal entities in their financial 
matters and in their relationship to their constituents, and the 
particular role that municipal advisors play in the municipal 
securities market. The design of the proposed rule, as amended by 
Amendment No. 2, is in recognition that municipal advisors serve a 
diverse array of clients, and, in particular, municipal entity clients, 
which range from large state issuers to small school districts, special 
districts and other instrumentalities, public pension plans, and 
collective vehicles, such as local government investment pools 
(``LGIPs'')

[[Page 71860]]

and college savings plans that comply with Section 529 of the Internal 
Revenue Code.\15\ The design of the proposed rule is also in 
recognition that municipal entity clients may have special needs of 
access to a range of services and particular types financial products 
from municipal advisors and affiliated financial intermediaries. At the 
same time, the MSRB believes that the proposed rule change, as amended, 
will further the protection of municipal entities, investors and the 
public interest.
---------------------------------------------------------------------------

    \15\ See 26 U.S.C. 529.
---------------------------------------------------------------------------

    Description. The Exception, to be incorporated as new proposed 
paragraph .14 of the Supplementary Material to Proposed Rule G-42, 
would provide a municipal advisor two options by which it might engage 
in certain principal transactions with a municipal entity client, 
provided the municipal advisor also complies with the first three 
requirements set forth in paragraph .14 (organized as sections (a) 
through (c)). A municipal advisor would have the option to act, on a 
transaction-by-transaction basis, in accordance with a short set of 
procedural requirements, some of which are drawn from and similar to 
the requirements set forth in Advisers Act Section 206(3).\16\ 
Alternatively, a municipal advisor that wishes to satisfy procedural 
requirements on other than a transaction-by-transaction basis would be 
subject to more and different procedural requirements, including 
obtaining from the municipal entity client a prospective blanket, 
written consent. These procedural requirements are drawn from and 
similar to those set forth in Advisers Act Rule 206(3)-3T.\17\
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    \16\ 15 U.S.C. 80b-6(3).
    \17\ 17 CFR 275.206(3)-3T.
---------------------------------------------------------------------------

    Importantly, the Exception would operate only to take certain 
conduct out of the specified prohibition on certain principal 
transactions in proposed Rule G-42(e)(ii). It would not provide a safe 
harbor from complying with any other applicable law or rules. Thus, a 
municipal advisor engaging in a principal transaction in compliance 
with the Exception would need to continue to be mindful of, and comply 
with, its broader and foundational obligations owed to the client as a 
fiduciary under the Exchange Act and Proposed Rule G-42, as well as all 
other applicable provisions of the federal securities laws and state 
law.\18\
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    \18\ The MSRB's approach in this regard is consistent with that 
of the Commission with respect to principal transactions executed by 
investment advisers under Advisers Act Section 206(3) (15 U.S.C. 
80b-6(3)) or Advisers Act Rule 206(3)-3T (17 CFR 275.206(3)-3T).
---------------------------------------------------------------------------

    All of the requirements for the Exception take the form of various 
conditions and limitations. As provided in proposed section (a) of 
paragraph .14 of the Supplementary Material, a principal transaction 
could be excepted from the specified prohibition only if the municipal 
advisor also is a broker-dealer registered under Section 15 of the 
Exchange Act,\19\ and each account for which the municipal advisor 
would be relying on the Exception is a brokerage account subject to the 
Exchange Act,\20\ the rules thereunder, and the rules of the self-
regulatory organization(s) of which the broker-dealer is a member. In 
addition, the municipal advisor could not exercise investment 
discretion (as defined in Section 3(a)(35) of the Exchange Act) \21\ 
with respect to the account, unless granted by the municipal entity 
client on a temporary or limited basis.\22\
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    \19\ 15 U.S.C. 78o.
    \20\ 15 U.S.C. 78a et seq.
    \21\ 15 U.S.C. 78(c)(a)(35).
    \22\ The proposed requirements are similar to those found in 
Advisers Act Rule 206(3)-T(a)(7) and (1), respectively. 17 CFR 
275.206(3)-3T(a)(7) and (1).
---------------------------------------------------------------------------

    Under proposed section (b) of paragraph .14 of the Supplementary 
Material, neither the municipal advisor nor any affiliate of the 
municipal advisor may be providing, or have provided, advice to the 
municipal entity client as to an issue of municipal securities or a 
municipal financial product that is directly related to the principal 
transaction, except advice as to another principal transaction that 
also meets all the other requirements of proposed paragraph .14. For 
example, a municipal advisor could not use the Exception to reinvest 
proceeds from an issue of municipal securities where it was a municipal 
advisor as to such issue. A municipal advisor could use the Exception, 
however, for two principal transactions with the same municipal entity 
client where the transactions are directly related to one another, so 
long as all of the conditions and limitations of the Exception are met 
as to each transaction.
    Proposed section (c) of paragraph .14 of the Supplementary Material 
would limit a municipal advisor's principal transactions under the 
Exception to sales to or purchases from a municipal entity client of 
any U.S. Treasury security, agency debt security or corporate debt 
security. In addition, the proposed Exception would not be available 
for transactions involving municipal escrow investments as defined in 
Exchange Act Rule 15Ba1-1(h) \23\ because the MSRB believes that this 
is an area of heightened risk where, historically, significant abuses 
have occurred. The inclusion in the Exception of transactions in this 
class of fixed income securities is intended to address the concerns of 
commenters that an absolute ban on principal transactions in fixed 
income securities, which are frequently sold by broker-dealers as 
principal or riskless principal, would be particularly problematic, and 
also addresses comments that an exception limited to these generally 
relatively liquid securities trading in relatively transparent markets 
would raise significantly less risk for municipal entity clients.\24\ 
The proposed class of securities may be broader than what would be 
permitted by relevant bond documents or a particular municipal entity's 
investment policies, but, in such cases, the restrictions in the bond 
documents or the municipal entity's investment policies would 
appropriately control. The terms ``U.S. Treasury security,'' ``agency 
debt security'' and ``corporate debt security,'' and related terms, 
``agency,'' ``government-sponsored enterprise,'' ``money market 
instrument'' and ``securitized product'' would be defined for purposes 
of proposed paragraphs .14 and .15 of the Supplementary Material in new 
proposed paragraph .15 of the Supplementary Material.
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    \23\ 17 CFR 240.15Ba1-1(h).
    \24\ For example, SIFMA noted the need for an exception to the 
ban was particularly acute with respect to transactions between a 
municipal advisor/broker-dealer and its municipal entity client in 
fixed income securities since ``nearly all transactions in fixed-
income securities are effected on a principal basis.'' GFOA noted 
that municipal entities might be subject to additional costs 
regarding advice on ``investments that are not considered to be 
risky,'' and FSI specifically suggested that an exception to the ban 
for broker-dealers providing advice incidental to securities 
execution services be limited to transactions in a similar group of 
fixed income securities.
---------------------------------------------------------------------------

    To comply with proposed section (d) of paragraph .14 of the 
Supplementary Material, a municipal advisor would have two options. 
These two options draw, as generally urged by commenters, upon the 
procedural requirements in Advisers Act Section 206(3) \25\ and 
Advisers Act Rule 206(3)-3T(a),\26\ respectively. Under the first 
option, which is set forth in proposed subsection (d)(1) of paragraph 
.14, a municipal advisor would be required, on a transaction-by-
transaction basis, to disclose to the municipal entity client in 
writing before the completion of the principal transaction the capacity 
in which the municipal advisor is acting and obtain the consent of the 
client to such transaction. Consent would mean informed consent, and in 
order to make

[[Page 71861]]

informed consent, the municipal advisor, consistent with its fiduciary 
duty, would be required to disclose specified information, including 
the price and other terms of the transaction, as well as the capacity 
in which the municipal advisor would be acting. ``Before completion'' 
would mean either prior to execution of the transaction, or after 
execution but prior to the settlement of the transaction.\27\
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    \25\ 15 U.S.C. 80b-6(3).
    \26\ See 17 CFR 275.206(3)-3T(a).
    \27\ These parameters are substantially similar to long-standing 
interpretive guidance regarding Advisers Act Section 206(3). See SEC 
Interpretation of Section 206(3) of the Investment Advisers Act of 
1940, Rel. No. IA-1732 (July 17, 1998) (``The protection provided to 
advisory clients by the consent requirement of Section 206(3) would 
be weakened, however, without sufficient disclosure of the potential 
conflicts of interest and the terms of a transaction. In our view, 
to ensure that a client's consent to a Section 206(3) transaction is 
informed, Section 206(3) should be read together with Sections 
206(1) and 206(2) to require the adviser to disclose facts necessary 
to alert the client to the adviser's potential conflicts of interest 
in a principal . . . transaction.'').
---------------------------------------------------------------------------

    Alternatively, a municipal advisor could comply with proposed 
subsection (d)(2) of paragraph .14 by meeting six requirements, as set 
forth in proposed paragraphs (d)(2)(A) through (F) of paragraph .14 and 
summarized below. First, under proposed paragraph (d)(2)(A), neither 
the municipal advisor nor any of its affiliates could be the issuer, or 
the underwriter (as defined in Exchange Act Rule 15c2-12(f)(8)),\28\ of 
a security that is the subject of the principal transaction.
---------------------------------------------------------------------------

    \28\ 17 CFR 240.15c2-12(f)(8).
---------------------------------------------------------------------------

    Second, under proposed paragraph (d)(2)(B), the municipal advisor 
would be required to obtain from the municipal entity client an 
executed written, revocable consent that would prospectively authorize 
the municipal advisor directly or indirectly to act as principal for 
its own account in selling a security to or purchasing a security from 
the municipal entity client, so long as such written consent were 
obtained after written disclosure to the municipal entity client 
explaining: (i) The circumstances under which the municipal advisor 
directly or indirectly may engage in principal transactions; (ii) the 
nature and significance of conflicts with the municipal entity client's 
interests as a result of the transactions; and (iii) how the municipal 
advisor addresses those conflicts.
    Third, under proposed paragraph (d)(2)(C), the municipal advisor, 
prior to the execution of each principal transaction, would be required 
to: (i) Inform the municipal entity client, orally or in writing, of 
the capacity in which it may act with respect to such transaction and 
(ii) obtain consent from the municipal entity client, orally or in 
writing, to act as principal for its own account with respect to such 
transaction.
    Fourth, under proposed paragraph (d)(2)(D), a municipal advisor 
would be required to send a written confirmation at or before 
completion of each principal transaction that includes the information 
required by 17 CFR 240.10b-10 or MSRB Rule G-15, and a conspicuous, 
plain English statement informing the municipal entity client that the 
municipal advisor: (i) Disclosed to the client prior to the execution 
of the transaction that the municipal advisor may be acting in a 
principal capacity in connection with the transaction and the client 
authorized the transaction and (ii) sold the security to, or bought the 
security from, the client for its own account.
    Fifth, under proposed paragraph (d)(2)(E), a municipal advisor 
would be required to send its municipal entity client, no less 
frequently than annually, written disclosure containing a list of all 
transactions that were executed in the client's account in reliance 
upon this Exception, and the date and price of the transactions.
    Sixth, under proposed paragraph (d)(2)(F), each written disclosure 
would be required to include a conspicuous, plain English statement 
regarding the ability of the municipal entity client to revoke the 
prospective written consent to principal transactions without penalty 
at any time by written notice.
    A municipal advisor's use and compliance with the requirements of 
the Exception would not be construed as relieving it in any way from 
acting in the best interests of its municipal entity client nor from 
any obligation that may be imposed by the Exchange Act, other 
provisions of Proposed Rule G-42 (other than subsection (e)(ii) of the 
proposed rule), or other applicable provisions of the federal 
securities laws and state law.

Other Amendments

    In Amendment No. 2, the MSRB makes five minor, technical 
amendments, which would clarify, correct cross-references in, or 
renumber certain provisions of Proposed Rule G-42. First, the MSRB is 
making minor, technical changes to Proposed Rule G-42(d) regarding 
recommendations. These amendments set forth the initial text that 
precedes proposed subsection (d)(i) in two sentences rather than one. 
The purpose of this change is to clarify the requirements that would 
apply when a municipal advisor makes a recommendation of a municipal 
securities transaction or municipal financial product and when a 
municipal advisor reviews such a recommendation of another party. These 
amendments also clarify in the initial text that precedes proposed 
subsection (d)(i), consistent with Proposed Rule G-42(d)(ii), that a 
municipal advisor reviewing a recommendation of another party could 
determine that the recommended municipal securities transaction or 
municipal financial product is not suitable for the client.
    Second, Amendment No. 2 revises proposed Rule G-42(e)(ii) to begin 
with the new clause, ``Except as provided in paragraph .14 of the 
Supplementary Material of this rule,'' and then continue as previously 
proposed, except that the phrase ``municipal securities transaction'' 
is changed to ``issue of municipal securities'' in order to more 
closely track the relevant statutory language.\29\ Third, to 
alphabetize the definitions set forth in proposed section (f), the 
proposed definition of the term ``Principal transaction'' is renumbered 
from subsection (f)(i) to subsection (f)(ix). The other eight 
definitions, set forth as subsections (f)(ii) through (f)(ix), are 
renumbered, accordingly, as subsections (f)(i) through (f)(viii). 
Fourth, in proposed paragraphs of the Supplementary Material, 
references to ``this paragraph'' are amended to include the appropriate 
paragraph number (e.g., in proposed paragraph .01 of the Supplementary 
Material, ``this paragraph'' is amended to read ``this paragraph 
.01''). Fifth, the order of proposed paragraphs .12 and .13 of the 
Supplementary Material is reversed, which organizes the two paragraphs 
addressing principal transactions to appear consecutively and improves 
the readability of the rule. In addition, in proposed paragraph .13 (as 
renumbered), the cross-reference to the definition of the term 
``principal transaction'' is corrected.
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    \29\ See, e.g., 15 U.S.C. 78o-4(b)(2).
---------------------------------------------------------------------------

    The MSRB proposes to make the proposed rule change effective six 
months after Commission approval of all changes.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments regarding the foregoing, including whether the filing as 
amended by Amendment No. 2 is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or

[[Page 71862]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2015-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2015-03. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the MSRB. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MSRB-2015-03 and should be 
submitted on or before December 1, 2015.\30\
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    \30\ The Commission believes that a 14-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment.

    For the Commission, pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29226 Filed 11-16-15; 8:45 am]
 BILLING CODE 8011-01-P
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