Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Align Certain MSRB Rules to Securities Exchange Act Rule 15l-1, Regulation Best Interest, 28082-28090 [2020-10061]

Download as PDF jbell on DSKJLSW7X2PROD with NOTICES 28082 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices Person or a member of]the staff of the SEC, [except]as authorized by [with authorization of]the Operating Committee as described below, or as may be otherwise required by law. ii. The Operating Committee or a subcommittee thereof may authorize the disclosure of Confidential Information by an affirmative vote of the number of members that represent a majority of the total number of members of the Operating Committee or subcommittee. Notwithstanding the foregoing, the Operating Committee will not authorize the disclosure of Confidential Information that is generated by a Participant or Advisor and designated by that Participant or Advisor as Confidential, unless such Participant or Advisor consents to the disclosure. iii. Members of the Advisory Committee may be authorized by the Operating Committee to disclose particular Confidential Information only in furtherance of the interests of the Plan, to enable them to consult with industry representatives or technical experts, provided that the Member of the Advisory Committee takes any steps requested by the Operating Committee to prevent further dissemination of that Confidential Information, including providing the individual(s) consulted with a copy of this policy and requesting that person to maintain the confidentiality of such information in a manner consistent with this policy. iv. A Covered Person that is a representative of a Participant may be authorized by the Operating Committee to disclose particular Confidential Information [and Highly Confidential Information]to other employees or agents of the Participant or its affiliates only in furtherance of the interests of the Plan as needed for such Covered Person to perform his or her function on behalf of the Plan[Participant, as reasonably determined by the Covered Person]. A copy of this policy will be made available to recipients of such information who are employees or agents of a Participant or its affiliates that are not Covered Persons, who will be required to abide by this policy. v. A Covered Person may disclose their own individual views and statements that may otherwise be considered Confidential Information without obtaining authorization of the Operating Committee, provided that in so disclosing, the Covered Person is not disclosing the views or statements of any other Covered Person or Participant that are considered Confidential Information. vi. A person that has reason to believe that Confidential Information has been disclosed by another without the VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 authorization of the Operating Committee or otherwise in a manner inconsistent with this Policy may report such potential unauthorized disclosure to the Chair of the Operating Committee. In addition, a [A ]Covered Person that discloses Confidential Information without the authorization of the Operating Committee will report such disclosure to the Chair of the Operating Committee. Such selfreported unauthorized disclosure of Confidential Information will be recorded in the minutes of the meeting of the Operating Committee and will contain: (a) The name(s) of the person(s) who disclosed such Confidential Information, and (b) a description of the Confidential Information disclosed. The name(s) of the person(s) who disclosed such Confidential Information will also be recorded in any publicly available summaries of Operating Committee minutes. [FR Doc. 2020–10040 Filed 5–11–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88828; File No. SR–MSRB– 2020–02] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Align Certain MSRB Rules to Securities Exchange Act Rule 15l–1, Regulation Best Interest May 6, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 1, 2020, the Municipal Securities Rulemaking Board (‘‘MSRB’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the MSRB. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The MSRB filed with the Commission a proposed rule change consisting of amendments to MSRB Rule G–8, on books and records, MSRB Rule G–9, on preservation of records, MSRB Rule G– 19, on suitability of recommendations and transactions, MSRB Rule G–20, on 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00098 Fmt 4703 Sfmt 4703 gifts, gratuities, non-cash compensation and expenses of issuance, MSRB Rule G–48, on transactions with Sophisticated Municipal Market Professionals (‘‘SMMPs’’), and the deletion of an interpretation of MSRB Rule G–20 (the ‘‘proposed rule change’’). The proposed rule change would align MSRB rules to the Commission’s recently adopted Rule 15l–1 under the Exchange Act (‘‘Regulation Best Interest’’).3 The proposed rule change would result in the following changes to MSRB rules: • MSRB Rule G–19 would apply only in circumstances in which Regulation Best Interest does not apply; • MSRB Rule G–48 would make clear that the exception from the requirement to perform a customer-specific suitability analysis when making a recommendation to an SMMP, as defined in MSRB Rule D–15, is available only for recommendations that are subject to MSRB Rule G–19; • MSRB Rule G–20 would require any permissible non-cash compensation to align with the requirements of Regulation Best Interest; and • Dealers would be required to maintain books and records required by Regulation Best Interest and the related SEC Form CRS requirement. The effective date of all of the amendments to MSRB rules included in the proposed rule change will be the compliance date for Regulation Best Interest.4 Dealers would not have an obligation to comply with the proposed rule change until the effective date and the current versions of MSRB Rules G– 8, G–9, G–19, G–20, and G–48 would remain applicable in the interim period between SEC approval and the effective date. The text of the proposed rule change is available on the MSRB’s website at www.msrb.org/Rules-andInterpretations/SEC-Filings/2020Filings.aspx, at the MSRB’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB included statements concerning the purpose of and basis for the proposed rule change and discussed any 3 17 CFR 240.15l–1; see also Exchange Act Release No. 86031 (June 5, 2019), 84 FR 33318 (July 12, 2019) (File No. S7–07–18) (‘‘Regulation Best Interest Adopting Release’’). 4 See Regulation Best Interest Adopting Release, 84 FR 33400 (setting June 30, 2020 as the compliance date for Regulation Best Interest). E:\FR\FM\12MYN1.SGM 12MYN1 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background On June 5, 2019, the SEC adopted Regulation Best Interest, which establishes a new standard of conduct for broker-dealers 5 and natural persons who are associated persons of a brokerdealer (collectively, ‘‘broker-dealers’’) when they make a recommendation to a retail customer, defined generally as a natural person or the legal representative of such person, who receives and uses a recommendation from a broker-dealer primarily for personal, family, or household purposes, of any securities transaction or investment strategy involving securities. The Commission stated that Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by imposing certain new requirements on broker-dealers.6 Specifically, Regulation Best Interest imposes the following ‘‘general obligation’’: jbell on DSKJLSW7X2PROD with NOTICES A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who 5 To effect transactions in municipal securities, a dealer must be registered with the Commission as either a broker-dealer under Section 15(b)(1) or a municipal securities dealer under Section 15B(a)(2) of the Exchange Act. All dealers, other than bank dealers, are broker-dealers and therefore are subject to Regulation Best Interest. MSRB Rule D–8 defines a bank dealer as ‘‘a municipal securities dealer which is a bank or a separately identifiable department or division of a bank.’’ These dealers are registered with the Commission under Exchange Section 15B(a)(2) and thus are not subject to Regulation Best Interest. Because bank dealers can make recommendations of municipal securities transactions or investment strategies involving municipal securities to retail customers, the Board plans to issue a separate Request for Comment on whether the Board will apply the requirements of Regulation Best Interest, through further amendments to MSRB rules, to bank dealers. 6 Regulation Best Interest Adopting Release, 84 FR 33319. VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.7 Regulation Best Interest provides that this general obligation is satisfied only if a broker-dealer complies with four component obligations: (i) An obligation to make certain prescribed disclosures, before or at the time of the recommendation, about the recommendation and the relationship between the retail customer and the broker-dealer (the ‘‘Disclosure Obligation’’); 8 (ii) an obligation to exercise reasonable diligence, care, and skill in making a recommendation (the ‘‘Care Obligation’’); 9 (iii) an obligation to establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest (the ‘‘Conflict of Interest Obligation’’); 10 and (iv) an obligation to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest (the ‘‘Compliance Obligation’’).11 The MSRB has reviewed its rule book in light of the Commission’s adoption of Regulation Best Interest and the related Form CRS requirement 12 and, as further discussed below, is filing the proposed rule change to harmonize the MSRB’s rules with the Commission’s Regulation Best Interest and Form CRS and reduce the potential for conflicting or duplicative regulation in the municipal securities market.13 The MSRB has coordinated the proposed amendments with FINRA, which has proposed similar amendments to its rules,14 in order to harmonize requirements, to the extent possible, for dealers that are subject to the rules of both the MSRB and FINRA. 7 17 CFR 240.15l–1(a)(1). CFR 240.15l–1(a)(2)(i). 9 17 CFR 240.15l–1(a)(2)(ii). 10 17 CFR 240.15l–1(a)(2)(iii). 11 17 CFR 240.15l–1(a)(2)(iv). 12 When it adopted Regulation Best Interest, the Commission also adopted a requirement for registered investment advisers and registered broker-dealers to provide retail investors with a relationship summary on new Form CRS, including information about the ‘‘types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm.’’ Exchange Act Release No. 86032 (June 5, 2019), 84 FR 33492 (July 12, 2019). 13 SEC staff frequently asked questions on Regulation Best Interest are available at: https:// www.sec.gov/tm/faq-regulation-best-interest. 14 See Exchange Act Release No. 88422, File No. SR–FINRA–2020–007 (March 19, 2020), 85 FR 16974 (March 25, 2020). 8 17 PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 28083 I. Suitability A. MSRB Rule G–19 MSRB Rule G–19 provides that a dealer must have a reasonable basis to believe that a recommended transaction or investment strategy involving municipal securities is suitable for the customer, based on the information obtained through the reasonable diligence of the dealer to ascertain the customer’s investment profile.15 MSRB Rule G–19 is composed of three component obligations: • Reasonable-basis suitability, which requires a dealer to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors; 16 • Customer-specific suitability, which requires a dealer to have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile; 17 and • Quantitative suitability, which requires a dealer who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.18 MSRB Rule G–19 applies to all dealers when making a recommendation to a ‘‘customer,’’ which is defined in MSRB Rule D–9 as any person other than a dealer acting in its capacity as a dealer or an issuer in transactions involving the sale of a new issue of its securities.19 When a dealer reasonably concludes that a customer is an SMMP,20 however, the dealer is not 15 MSRB Rule G–19 defines a customer’s investment profile to include the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the dealer in connection with such recommendation. 16 MSRB Rule G–19, Supplementary Material .05(a). 17 MSRB Rule G–19, Supplementary Material .05(b). 18 MSRB Rule G–19(c). 19 MSRB Rule D–9 states that, ‘‘Except as otherwise specifically provided by rule of the Board, the term ‘customer’ shall mean any person other than a broker, dealer, or municipal securities dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new issue of its securities.’’ 20 MSRB Rule D–15 defines a customer as an SMMP according to three elements: (a) Nature of the Customer. The customer must be: (1) a bank, savings and loan association, insurance company, or registered investment company; E:\FR\FM\12MYN1.SGM Continued 12MYN1 28084 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES obligated to perform a customer-specific suitability analysis under MSRB Rule G–19.21 Conceptually similar to MSRB Rule G–19, the Care Obligation of Regulation Best Interest also requires a three-part analysis to evaluate recommendations to retail customers but employs the higher best interest standard instead of MSRB Rule G–19’s suitability standard. In addition, while Regulation Best Interest applies only to recommendations to ‘‘retail customers,’’ defined generally as a natural person or the legal representative of such person, who receives and uses a recommendation from a broker-dealer primarily for personal, family, or household purposes,22 MSRB Rule G–19 applies to ‘‘customers’’ (with an exception to the customer-specific suitability requirement for recommendations to SMMPs). The proposed rule change includes two amendments to MSRB Rule G–19 designed to harmonize MSRB requirements with Regulation Best Interest. First, to avoid unnecessary regulatory complexity, the applicability of MSRB Rule G–19 would be limited only to circumstances in which Regulation Best Interest does not apply. Second, to conform the quantitative suitability component of MSRB Rule G– 19, for circumstances in which MSRB Rule G–19 applies, to the analogous requirement in Regulation Best Interest, the proposed rule change would remove the limitation that requires a quantitative suitability determination (2) an investment adviser registered either with the Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (3) any other person or entity with total assets of at least $50 million. (b) Dealer Determination of Customer Sophistication. The dealer must have a reasonable basis to believe that the customer is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions and investment strategies in municipal securities. (c) Customer Affirmation. The customer must affirmatively indicate that it: (1) is exercising independent judgment in evaluating: (A) the recommendations of the dealer; (B) the quality of execution of the customer’s transactions by the dealer; and (C) the transaction price for non-recommended secondary market agency transactions as to which (i) the dealer’s services have been explicitly limited to providing anonymity, communication, order matching and/or clearance functions and (ii) the dealer does not exercise discretion as to how or when the transactions are executed; and (2) has timely access to material information that is available publicly through established industry sources as defined in Rule G–47(b)(i) and (ii). 21 MSRB Rule G–48(c). 22 See 17 CFR 240.15l–1(b)(1). VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 only when a dealer has ‘‘actual or de facto control’’ over the customer’s account. These proposed amendments are discussed below. i. Eliminate Applicability of MSRB Rule G–19 to Recommendations Subject to Regulation Best Interest As noted above, Regulation Best Interest addresses generally the same conduct that is addressed by MSRB Rule G–19 but employs a best interest, rather than a suitability, standard. Absent action by the Board, a dealer would be required to reconcile compliance with both Regulation Best Interest and MSRB Rule G–19 in many circumstances. In such circumstances, the MSRB believes that compliance with Regulation Best Interest would result in compliance with MSRB Rule G–19 because a dealer who ‘‘act[s] in the best interest of the retail customer’’ 23 when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities would necessarily also meet the MSRB Rule G– 19 requirement to ‘‘have a reasonable basis to believe that [the recommendation] is suitable for the customer.’’ Accordingly, in order to reduce the potential for duplicative regulation and unnecessary complexity, the Board is proposing to limit the application of MSRB Rule G–19 to circumstances in which Regulation Best Interest does not apply. To do so, the Board would add new text to MSRB Rule G–19 that states that MSRB Rule G–19 does not apply to recommendations subject to Regulation Best Interest. MSRB Rule G–19 would thus apply only to: • Recommendations to customers that are not ‘‘retail customers,’’ as defined by Regulation Best Interest, and • Recommendations to any customers by bank dealers.24 Regulation Best Interest defines a retail customer as a natural person, or the legal representative of such natural person (regardless of net worth), who receives a recommendation from a broker-dealer and uses that recommendation primarily for personal, family, or household purposes. Accordingly, if the dealer making a recommendation is subject to Regulation Best Interest, MSRB Rule G– 19 would not apply when the dealer makes a recommendation to such persons. The Board believes this approach will provide regulatory clarity 23 17 CFR 240.15l–1(a)(1). 24 As noted above, the MSRB plans to issue a Request for Comment on whether the MSRB will apply the requirements of Regulation Best Interest to bank dealers through further amendments to MSRB rules. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 about the applicability and requirements of MSRB Rule G–19 and Regulation Best Interest to market participants in an effective and efficient manner. ii. Align MSRB Rule G–19’s Quantitative Suitability Obligation to the Requirements of Regulation Best Interest Currently, MSRB Rule G–19’s quantitative suitability obligation requires a dealer to have a reasonable basis for believing that a series of recommended transactions are not excessive and unsuitable for the customer when taken together in light of the customer’s profile, but only if the dealer has actual or de facto control over the customer’s account.25 In contrast, the quantitative care obligation of Regulation Best Interest applies regardless of whether the broker-dealer exercises actual or de facto control over the customer’s account.26 In the Regulation Best Interest Adopting Release, the Commission stated: [I]mposing the quantitative care obligation without a ‘‘control’’ element would provide consistency in the investor protections provided to retail customers by requiring a broker-dealer to always form a reasonable basis as to the recommended frequency of trading in a retail customer’s account— irrespective of whether the brokerdealer ‘‘controls’’ or exercises ‘‘de facto control’’ over the retail customer’s account. This would also be consistent with the other obligations of the Care Obligation, which apply regardless of whether a broker-dealer ‘‘controls’’ or exercises ‘‘de facto control’’ over the retail customers’ account.27 For the same reasons, the proposed rule change eliminates the control element of the quantitative suitability obligation prescribed in Supplementary Material .05(c) of MSRB Rule G–19. B. MSRB Rule G–48 As described above, MSRB Rule G– 48(c) provides that a dealer making a municipal securities recommendation to an SMMP does not have any obligation under MSRB Rule G–19 to perform a customer-specific suitability analysis. An SMMP is defined by three components: • The customer must fit within a prescribed category of institutional investor or be a natural person or entity 25 MSRB Rule G–19, Supplementary Material .05(c). 26 See 17 CFR 240.15l–1(a)(2)(ii)(C); see also Regulation Best Interest Adopting Release, 84 FR at 33327. 27 Regulation Best Interest Adopting Release, 84 FR at 33384 (citation omitted). E:\FR\FM\12MYN1.SGM 12MYN1 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices with total assets of at least $50 million; 28 • The dealer must have a reasonable basis to believe that the customer is capable of evaluating investment risks and market value independently; 29 and • The customer must make certain affirmations regarding the exercise of independent judgment and access to information.30 As a result of this definition, a dealer making a recommendation to a natural person with at least $50 million in assets and who otherwise meets the definition of SMMP, would be required by MSRB Rule G–19 to conduct reasonable basis and quantitative suitability analyses but not a customerspecific suitability analysis. In contrast, Regulation Best Interest applies when a broker-dealer makes a recommendation to a ‘‘retail customer.’’ A ‘‘retail customer’’ is a natural person or the legal representative of such natural person (regardless of net worth) who receives a recommendation from a broker-dealer and uses that recommendation primarily for personal, family, or household purposes.31 Whenever Regulation Best Interest applies, it applies in full; there is no exception from the customer-specific care obligation for high-net worth individuals. As described above, under the proposed amendments to MSRB Rule G–19, MSRB Rule G–19 would not apply to recommendations subject to Regulation Best Interest. Accordingly, the proposed rule change includes an amendment to MSRB Rule G–48(c) stating that the exception from the customer-specific suitability requirement is available only when a recommendation is subject to MSRB Rule G–19 and not Regulation Best Interest. jbell on DSKJLSW7X2PROD with NOTICES II. Non-Cash Compensation MSRB Rule G–20(g) broadly prohibits dealers and their associated persons from directly or indirectly accepting or making payments or offers of payments of any non-cash compensation in connection with the sale and distribution of a primary offering of municipal securities, subject to certain limited exceptions. Described generally, these exceptions are: • Gifts that do not exceed $100 per individual per year and are not preconditioned on achievement of a sales target; 32 28 MSRB Rule D–15(a). Rule D–15(b). 30 MSRB Rule D–15(c). 31 17 CFR 240.15l–1(b)(1). 32 MSRB Rule G–20(d)(i). 29 MSRB VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 • Occasional gifts of meals or tickets to theatrical, sporting, and other entertainments, provided that such gifts are not so frequent or so extensive as to raise any question of propriety and are not preconditioned on achievement of a sales target; 33 • Payment or reimbursement by offerors (generally, the issuer and any advisors to the issuer, the underwriters, and their affiliates) in connection with training or education meetings, subject to specified conditions, including that the payment is not conditioned on achieving a sales target; 34 • Internal non-cash compensation arrangements between the dealer and its associated persons, subject to specified conditions including that any non-cash compensation related to a sales contest must be based on the total production of all associated persons with respect to all municipal securities within respective product types distributed by the dealer and credit for those sales must be weighted equally; 35 and • Contributions by any person other than the dealer to a non-cash compensation arrangement between a dealer and its associated persons, subject to the same conditions for permissible internal non-cash compensation arrangements, described above.36 Regulation Best Interest’s Conflict of Interest Obligation requires brokerdealers to establish, maintain and enforce written policies and procedures reasonably designed to, among other things, identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.37 As described 33 MSRB Rule G–20(d)(ii). Rule G–20(d)(iii). 35 MSRB Rule G–20(d)(iv). 36 MSRB Rule G–20(d)(v). 37 17 CFR 240.15l–1(a)(2)(iii)(D). The Conflict of Interest Obligation also requires broker-dealers to (1) identify and at a minimum disclose or eliminate all conflicts of interest associated with a recommendation of any securities transaction or investment strategy involving securities to a retail customer; (2) identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker-dealer to place the interest of the broker-dealer or such natural person ahead of the interest of the retail customer; and (3) identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations and prevent such limitations and associated conflicts of interest from causing the broker-dealer, or a natural person who is an associated person of the broker-dealer, to make recommendations that place the interest of the broker-dealer or such natural person ahead of the interest of the retail customer. 17 CFR 240.15l– 1(a)(3)(A)–(C). 34 MSRB PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 28085 above, MSRB Rule G–20 permits certain sales contests in connection with primary offerings. Accordingly, the MSRB is proposing to clarify in MSRB Rule G–20(g) that any non-cash compensation permitted by MSRB Rule G–20(g), including any sales contests, must also be consistent with the applicable requirements of Regulation Best Interest. Additionally, in June 1982, the MSRB published interpretive guidance under MSRB Rule G–20 stating that sales contests offered by an underwriter to participating members of a syndicate constitute compensation for services and, therefore, must meet the requirements of the then-current version of MSRB Rule G–20.38 The MSRB proposes to delete this interpretation from 1982 because, with respect to dealers that make recommendations to retail customers, such sales contests may be inconsistent, depending on the particular facts and circumstances, with the requirements of Regulation Best Interest’s Conflict of Interest Obligation, which requires broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to ‘‘[i]dentify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.’’ 39 In adopting Regulation Best Interest, the Commission stated that ‘‘[s]ales contests, sales quotas, bonuses and noncash compensation that are based on the sales of specific securities within a limited period of time create highpressure situations for associated persons to increase the sales of specific securities or specific types of securities within a limited period of time and thus compromise the best interests of their retail customers.’’ 40 The MSRB believes the same policy concerns apply with respect to non-retail customers. Specifically, the high-pressure sales situations described above have the potential to compromise the best interests of non-retail customers as well. Accordingly, the Board is proposing to delete this interpretation. III. Books and Records A. MSRB Rule G–8 MSRB Rule G–8 directs dealers to make and keep current specified books and records to the extent they are applicable to a dealer’s business. For 38 See Rule G–20 Interpretive Guidance, ‘‘Authorization of Sales Contests’’ (June 25, 1982). 39 See 17 CFR 240.15l–1(a)(2)(iii). 40 Regulation Best Interest Adopting Release, 84 FR at 33331. E:\FR\FM\12MYN1.SGM 12MYN1 28086 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES dealers subject to Exchange Act Rule 17a–3, MSRB Rule G–8(f) provides that compliance with Exchange Act Rule 17a–3 under the Act will be deemed compliance with MSRB Rule G–8, provided that certain records required by MSRB Rule G–8 must be maintained in any event. Exchange Act Rule 17a–3 requires broker-dealers to make and keep current specified books and records and provides that for purposes of transactions in municipal securities by dealers, compliance with MSRB Rule G–8 will be deemed compliance with Exchange Act Rule 17a–3.41 When the Commission adopted Regulation Best Interest, it amended Exchange Act Rule 17a–3 to require broker-dealers to maintain a record of all information collected from and provided to a retail customer pursuant to Regulation Best Interest, along with the identity of each natural person who is an associated person, if any, responsible for the account.42 The Commission also adopted a related requirement for broker-dealers to provide retail investors with Form CRS 43 and amended Exchange Act Rule 17a–3 to require broker-dealers to maintain a record of the date each Form CRS was provided.44 Because dealers may comply with Exchange Act Rule 17a–3 for purposes of transactions in municipal securities by complying with MSRB Rule G–8, the proposed rule change includes amendments to MSRB Rule G–8 that parallel the new Exchange Act Rule 17a–3 requirements relating to Regulation Best Interest and Form CRS. These amendments are necessary to ensure that dealers subject to Regulation Best Interest and the Form CRS requirement are required to maintain the records regardless of which books and records rule they comply with. B. MSRB Rule G–9 MSRB Rule G–9 prescribes the periods of time that records must be preserved by dealers. Similar to MSRB Rule G–8, MSRB Rule G–9 provides that dealers who are subject to and comply with Exchange Act Rules 17a–3 and 17a–4 under the Act will be deemed to comply with MSRB Rule G–9, provided that certain specified records are preserved for the applicable time periods specified in Rule G–9 in any event. Exchange Act Rule 17a–4 under the Act sets forth record preservation requirements for broker-dealers and, like Exchange Act Rule 17a–3, provides CFR 240.17a–3. 42 17 CFR 240.17a–3(a)(35). 43 17 CFR 240.17a–14. 44 17 CFR 240.17a–3(a)(24). that for purposes of transactions in municipal securities by dealers, compliance with MSRB Rule G–9 will be deemed compliance with Exchange Act Rule 17a–4. The Commission amended Exchange Act Rule 17a–4 to require broker-dealers to retain the records related to Regulation Best Interest and Form CRS described above, as well as a copy of each Form CRS for six years.45 Accordingly, the proposed rule change includes amendments to MSRB Rule G– 9 that parallel these new requirements. These amendments are necessary to ensure that dealers are subject to similar requirements regardless of which record preservation rule they comply with. 2. Statutory Basis The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2) of the Act,46 which provides that: The Board shall propose and adopt rules to effect the purposes of this title with respect to transactions in municipal securities effected by brokers, dealers, and municipal securities dealers and advice provided to or on behalf of municipal entities or obligated persons by brokers, dealers, municipal securities dealers, and municipal advisors with respect to municipal financial products, the issuance of municipal securities, and solicitations of municipal entities or obligated persons undertaken by brokers, dealers, municipal securities dealers, and municipal advisors. Section 15B(b)(2)(C) of the Act 47 provides that the MSRB’s rules shall: [B]e designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, and, in general, to protect investors, municipal entities, obligated persons, and the public interest. The proposed rule change is consistent with Section 15B(b)(2)(C) of the Act because it is designed to prevent fraudulent and manipulative practices by dealers, foster cooperation and coordination among regulators, promote just and equitable principles of trade, and protect investors. I. Statutory Basis for Amendments Related to Suitability The proposed amendments to MSRB Rules G–19 and G–48 are consistent 41 17 VerDate Sep<11>2014 18:47 May 11, 2020 45 17 CFR 240.17a–4(e)(5), (e)(10). U.S.C. 78o–4(b)(2). 47 15 U.S.C. 78o–4(b)(2)(C). 46 15 Jkt 250001 PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 with Section 15B(b)(2) of the Act because the amendments will foster cooperation and coordination with regulators, facilitate transactions in municipal securities and municipal financial products, remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, and protect investors, as described below. A. Eliminating the Applicability of MSRB Rule G–19 to Recommendations Subject to Regulation Best Interest The proposed amendments to MSRB Rule G–19 eliminating the applicability of MSRB Rule G–19’s suitability requirements to recommendations subject to Regulation Best Interest will foster cooperation and coordination with regulators by harmonizing MSRB rules with the Commission’s Regulation Best Interest. Consequently, these amendments will also facilitate transactions in municipal securities and municipal financial products and remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products by eliminating potential regulatory duplication and complexity, which will ease potential regulatory burdens on dealers associated with complying with two regulatory schemes. Dealers will be able to more efficiently analyze and operationalize compliance with Regulation Best Interest and MSRB Rule G–19. For example, dealers can proceed in conforming their municipal securities activities to Regulation Best Interest without engaging in a more extensive analysis of how the obligations of Regulation Best Interest may overlap, exceed, or differ from those of MSRB Rule G–19. Consequently, dealers will be able to more efficiently execute transactions in the municipal securities market with greater regulatory certainty under the proposed amendments. These proposed amendments to MSRB Rule G–19 will also protect investors by ensuring dealers comply with the heightened regulatory requirements of the Commission’s Regulation Best Interest, while maintaining the existing regulatory scheme under MSRB Rule G–19 for transactions not subject to Regulation Best Interest. As stated by the Commission in its adopting of Regulation Best Interest: The enhancements contained in Regulation Best Interest are designed to improve investor protection by enhancing the quality of broker-dealer recommendations to retail customers and reducing the potential harm to E:\FR\FM\12MYN1.SGM 12MYN1 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices retail customers that may be caused by conflicts of interest.48 For the same reasons, the MSRB believes that these amendments in the proposed rule change are consistent with the investor protection requirements of Section 15B(b)(2)(C) of the Act.49 B. Aligning MSRB Rule G–19’s Quantitative Suitability Obligation to the Requirements of Regulation Best Interest The proposed amendments to MSRB Rule G–19 aligning MSRB Rule G–19’s quantitative suitability obligation to the requirements of Regulation Best Interest will foster cooperation and coordination with regulators by harmonizing MSRB rules with the Commission’s Regulation Best Interest. Consequently, these amendments will also facilitate transactions in municipal securities and municipal financial products and remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products by eliminating potential regulatory duplication and complexity, which will ease potential regulatory burdens on dealers associated with complying with two regulatory schemes. Conforming the quantitative suitability requirement of MSRB Rule G–19 with Regulation Best Interest’s Care Obligation will allow dealers to more efficiently operationalize compliance with their obligations under both requirements, and to more efficiently execute transactions in the municipal securities market with greater regulatory certainty. The proposed amendment to the quantitative suitability obligation of MSRB Rule G–19 will also protect investors by heightening the requirements of MSRB Rule G–19 for recommendations not subject to Regulation Best Interest.50 Accordingly, the MSRB believes that these amendments are consistent with the investor protection requirements of Section 15B(b)(2)(C) of the Act.51 jbell on DSKJLSW7X2PROD with NOTICES C. Amending MSRB Rule G–48(c) To State That the Exception From the Customer-Specific Suitability Requirement Is Available Only When a Recommendation Is Subject to MSRB Rule G–19 The proposed amendments to MSRB Rule G–48(c) to state that the exception 48 Regulation Best Interest Adopting Release, 83 FR at 33321. 49 15 U.S.C. 78o–4(b)(2)(C). 50 See, e.g., Regulation Best Interest Adopting Release, 83 FR at 33321. 51 15 U.S.C. 78o–4(b)(2)(C). VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 from the customer-specific suitability requirement is available only when a recommendation is subject to MSRB Rule G–19 will foster cooperation and coordination with regulators by harmonizing MSRB rules with Regulation Best Interest. Consequently, these amendments will also facilitate transactions in municipal securities and municipal financial products and remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products by eliminating potential regulatory duplication and, thereby, ease potential regulatory burdens on dealers associated with complying with two regulatory schemes. More specifically, dealers will not have to analyze whether aspects of complying with MSRB Rule G–19’s suitability obligations in some circumstances could fail to satisfy the requirements of Regulation Best Interest. Consequently, dealers will be able to more efficiently execute transactions in the municipal securities market with greater regulatory certainty under the proposed amendments. II. Statutory Basis for Amendments Related to Non-Cash Compensation The proposed amendments to MSRB Rule G–20 related to non-cash compensation are consistent with Section 15B(b)(2) of the Act because the amendments will foster cooperation and coordination with regulators by harmonizing MSRB rules. Consequently, these amendments will also facilitate transactions in municipal securities and municipal financial products and remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products by eliminating potential regulatory duplication and, thereby, ease potential regulatory burdens on dealers associated with complying with two regulatory schemes. Consequently, dealers will be able to more efficiently execute transactions in the municipal securities market with greater regulatory certainty under the proposed amendments. III. Statutory Basis for Amendments Related to Books and Records The proposed amendments to MSRB Rules G–8 and G–9 are consistent with Section 15B(b)(2) of the Act because the amendments will foster cooperation and coordination with regulators, facilitate transactions in municipal securities and municipal financial products, remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 28087 financial products, and protect investors. A. Amending MSRB Rule G–8 to Align With Exchange Act Rule 17a–3 Because dealers may comply with Exchange Act Rule 17a–3 for purposes of transactions in municipal securities by complying with MSRB Rule G–8, the proposed rule change includes amendments to MSRB Rule G–8 that parallel the new Exchange Act Rule 17a–3 requirements relating to Regulation Best Interest and Form CRS. These amendments will foster cooperation and coordination with regulators by harmonizing MSRB rules with the Commission’s record-keeping requirements under Exchange Rule Act Rule 17a–3, as amended by Regulation Best Interest. Consequently, these amendments will also facilitate transactions in municipal securities and municipal financial products and remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products by providing greater regulatory certainty to dealers in the application of record-keeping requirements associated with municipal securities transactions. In this way, the proposed rule change will ease certain regulatory burdens on dealers when attempting to comply with the recordkeeping requirements under MSRB Rule G–8 and Exchange Act Rule 17a–3. The proposed amendments to MSRB Rule G–8 will also protect investors by requiring dealers to create and maintain books and records, as applicable, to demonstrate compliance with Regulation Best Interest and the SEC’s Form CRS requirements.52 These proposed amendments are coordinated with SEC books and records requirements to ensure that dealers are subject to similar requirements, whether under MSRB rules or the rules of the SEC. B. Amending MSRB Rule G–9 To Align With Exchange Act Rule 17a–4 In its adoption of Regulation Best Interest, the Commission amended Exchange Act Rule 17a–4 to require dealers to retain the records related to Regulation Best Interest and Form CRS described above, as well as a copy of 52 See Regulation Best Interest Adopting Release, 83 FR at 33398 (‘‘The Commission notes that the proposed new requirements of Rule 17a–3 are not designed to create additional, standalone burdens for broker-dealers but instead to provide a means by which they can demonstrate, and Commission examiners can confirm, their compliance with the new substantive requirements of Regulation Best Interest.’’). E:\FR\FM\12MYN1.SGM 12MYN1 28088 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices each Form CRS for six years.53 Accordingly, the proposed rule change includes amendments to MSRB Rule G– 9 that parallel these new requirements. These amendments will foster cooperation and coordination with regulators by harmonizing MSRB rules with the Commission’s record-keeping requirements under Exchange Rule Act Rule 17a–4, as amended by Regulation Best Interest. These amendments will also facilitate transactions in municipal securities and municipal financial products and remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products by providing greater regulatory certainty to dealers in the application of recordkeeping requirements associated with municipal securities transactions. In this way, the proposed rule change will ease regulatory burdens on dealers when complying with the recordkeeping requirements under MSRB Rule G–9 and Exchange Act Rule 17a–4. The proposed amendments to MSRB Rule G–9 will protect investors by requiring dealers to create and maintain books and records, as applicable, to demonstrate compliance with Regulation Best Interest and the SEC’s Form CRS requirements.54 These proposed amendments are coordinated with SEC books and records requirements to ensure that dealers are subject to similar requirements, whether under MSRB rules or the rules of the SEC. B. Self-Regulatory Organization’s Statement on Burden on Competition jbell on DSKJLSW7X2PROD with NOTICES Section 15B(b)(2)(C) of the Exchange Act requires that MSRB rules not be designed to impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.55 As discussed below, the proposed rule change would align MSRB rules with, or otherwise clarify the applicability of 53 17 CFR 240.17a–4(e)(5), (e)(10). As described above, registered broker-dealers and investment advisers are required to provide retail investors with a relationship summary on new Form CRS. Pursuant to this requirement, ‘‘[r]etail investors will receive a relationship summary at the beginning of a relationship with a firm, communications of updated information following a material change to the relationship summary, and an updated relationship summary upon certain events.’’ Exchange Act Release No. 86032 (June 5, 2019), 84 FR 33492 (July 12, 2019). 54 See Regulation Best Interest Adopting Release, 83 FR at 33400 (‘‘. . . the Commission believes it is important, including for examination purposes, that broker-dealers separately retain records that specifically demonstrate compliance with Regulation Best Interest and new paragraph (a)(35) of Rule 17a–3 . . .’’). 55 15 U.S.C. 78o–4(b)(2)(C). VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 MSRB rules in relation to, the requirements of Regulation Best Interest. For those dealers that are already subject to Regulation Best Interest, the MSRB does not believe that the proposed rule change would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act because the proposed rule change would apply equally to all these dealers.56 1. Need for Proposed Rule Change The adoption of Regulation Best Interest necessitates the proposed rule change consisting of amendments to MSRB Rules G–8, G–9, G–19, G–20 and G–48 described above. The proposed rule change is needed to harmonize Regulation Best Interest and relevant MSRB rules, to clarify and enhance dealers’ regulatory obligations under MSRB rules when making recommendations involving municipal securities to retail investors, and thus to enhance investor protection. In addition, the proposed rule change is designed to better harmonize MSRB requirements with relevant FINRA rules. Specifically, the proposed rule change would eliminate the applicability of Rule G–19 with regard to recommendations subject to Regulation Best Interest, align Rule G–19’s quantitative suitability obligation with the requirements of Regulation Best Interest, amend Rule G–48 to make clear that the exception from the requirement to conduct a customer-specific suitability obligation when making a recommendation to an SMMP does not apply to recommendations that are subject to Regulation Best Interest, and align Rule G–20’s permissible non-cash compensation to the requirements of Regulation Best Interest. In addition, the proposed rule change includes amendments to MSRB Rule G–8 and Rule G–9 on books and records that parallel the new Exchange Act Rule 17a–3 and 17a–4 requirements related to Regulation Best Interest and Form CRS under the Exchange Act. 56 For bank dealers that are not subject to Regulation Best Interest, to the extent these bank dealers are currently making recommendations of municipal securities to retail customers, the MSRB believes that a potential regulatory imbalance between bank dealers and dealers other than bank dealers likely will exist as of the compliance date of Regulation Best Interest. However, the MSRB plans to issue a Request for Comment on whether it will apply the requirements of Regulation Best Interest to bank dealers through further amendments to MSRB rules. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 2. Baseline for Evaluation In order to evaluate the potential economic impact of any proposed rule change, a baseline must be established as a point of reference. This baseline enables a comparison to the expected state with the proposed rule change in effect. The economic impact of the proposed change is therefore viewed as the difference between the baseline state and the expected state. Typically, the baseline is defined as the present state before any proposed rule change is approved and implemented. For dealers subject to Regulation Best Interest, however, the future state after the Regulation Best Interest compliance date is a more appropriate baseline, as the MSRB’s proposed rule change is in response to and closely tied to the future implementation of Regulation Best Interest. 3. Alternative Approaches The MSRB identified and reviewed two options as alternatives to the changes outlined previously. In one alternative approach, the MSRB would eliminate MSRB Rule G–19 on suitability. However, Regulation Best Interest is only applicable to recommendations made to retail customers and is not applicable to recommendations made to other customers, such as institutions. If Rule G–19 were eliminated, no suitability rule would apply when dealers make recommendations regarding municipal securities that are not covered by Regulation Best Interest. In addition, Regulation Best Interest does not apply to bank dealers, while MSRB Rule G–19 applies to all dealers, including bank dealers. Consequently, this alternative would likely reduce protection to investors and thus be inferior to the proposed rule change. The second alternative is to require bank dealers to also comply with Regulation Best Interest, in addition to the proposed changes described above. As noted above, the MSRB plans to issue a Request for Comment on applying the requirements of Regulation Best Interest to bank dealers through further amendments to MSRB rules to further inform its consideration of this approach. 4. Benefits, Costs and Effect on Competition Pursuant to the MSRB’s policy on economic analysis in rulemaking, economic analysis should address the likely costs and benefits of the draft amendments. The economic analysis assesses the draft amendments as if they were fully implemented against the E:\FR\FM\12MYN1.SGM 12MYN1 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES context of the economic baselines discussed above. In considering these costs, benefits, and impacts, the Board addresses reasonable alternatives, where applicable. The SEC estimated in its filing that there was a total of 2,766 broker-dealers who had retail customers at the end of 2018. By comparison, the MSRB’s RealTime Transaction Reporting System (‘‘RTRS’’) trading records indicate that there are 768 dealers that are subject to Regulation Best Interest and had at least one municipal security trade with customers in 2019 with a trade size of $100,000 par amount or lower, a proxy for retail-sized trades.57 Since all dealers other than bank dealers are required to be in full compliance with Regulation Best Interest, the cost and benefit assessment focuses on the incremental impact of the proposed MSRB rule changes, beyond the costs and benefits of compliance with Regulation Best Interest. A. Benefits The MSRB believes that the proposed rule change would benefit dealers by clarifying and harmonizing their regulatory obligations under MSRB rules considering the upcoming implementation of Regulation Best Interest. Dealer compliance with the proposed rule change would provide greater certainty to dealers about when Regulation Best Interest applies rather than MSRB Rule G–19. This would in turn enhance investor protection as a result of dealers being clearer about when Regulation Best Interest applies. The proposed rule change would also foster cooperation and coordination by harmonizing MSRB rules with Regulation Best Interest and related FINRA rules. The MSRB generally considers it desirable and efficient to improve the clarity and consistency of MSRB rules in relation to the rules of other regulators, particularly to the extent such changes may eliminate inconsistencies between rules of different regulators, ease the burdens of dealer compliance and lessen instances of confusion among dealers without reducing investor protections. Specifically, the proposed rule change will allow dealers to conform their policies and procedures and related business practices to Regulation Best Interest, MSRB Rule G–19 and FINRA’s suitability rule without engaging in a more extensive analysis of how the obligations of each rule may overlap, exceed, or differ from each other. 57 While not a perfect proxy for a retail trade, the MSRB believes that the relatively low par amount is more indicative of a trade with a retail customer than an institutional investor. VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 B. Costs For dealers, the MSRB believes the costs of complying with the proposed rule change that are incremental to the already allotted and absorbed costs of complying with Regulation Best Interest will be minor, given that dealers other than bank dealers are assumed to be in full compliance with Regulation Best Interest already when the proposed MSRB rule changes become effective. Bank dealers would not incur costs in complying with Regulation Best Interest and would continue to comply with MSRB Rule G–19, as amended to remove the control element from the quantitative suitability obligation. The proposed rule change would trigger one-time policy and procedure revisions by all dealers (including bank dealers) in relation to the changes to MSRB Rule G–19’s quantitative suitability requirement. Therefore, there would be upfront costs associated with revising the policies and procedures to comply with the new requirements. It is possible that the one-time revision cost may be proportionately higher for smaller-size dealers than larger-size dealers as a smaller firm may have to rely on outside legal counsel and technology support to review changes on policies and procedures. The MSRB, however, believes the revisions of policies and procedures by dealers would not be overly burdensome or expensive, and on balance, the aggregate benefits expected to accumulate to dealers and retail investors associated with the proposed rule change should outweigh the one-time policy and procedure revision costs over time.58 58 The proposed amendments to MSRB Rules G– 8 and G–9 would not impose costs on dealers because these amendments impose no new requirements on dealers beyond those already imposed by Rules 17a–3 and 17a–4, as amended in light of Regulation Best Interest and the Form CRS requirement. Dealers not subject to Regulation Best Interest or the Form CRS requirement would not be required to maintain these records under MSRB Rules G–8 and G–9, as amended by the proposed rule change. Similarly, the proposed amendment to MSRB Rule G–20 would not impose costs on dealers because it imposes no new requirements on dealers beyond those already imposed by Regulation Best Interest. The proposed deletion of the interpretation of MSRB Rule G–20 would similarly impose no costs because it does not impose requirements on dealers beyond those of MSRB Rule G–20. Finally, the proposed amendment to MSRB Rule G–48 states that the existing exception to the MSRB Rule G–19 customer specific suitability obligation is only available in circumstances when MSRB Rule G–19, rather than Regulation Best Interest, applies and imposes no new obligations on dealers. Accordingly, this proposed amendment should not impose costs on dealers. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 28089 C. Effect on Competition, Efficiency and Capital Formation The MSRB believes the proposed rule change may improve dealers’ regulatory certainty by promoting clarity and consistency on issues related to suitability and permissible non-cash compensation. The MSRB also believes the proposed rule change would not result in undue burden on competition for dealers subject to Regulation Best Interest, as the proposed rule change would have a relatively mild impact on dealers who are in full compliance with Regulation Best Interest. For these dealers, the incremental impact of the proposed rule change should be limited to the need to update their policies and procedures to reflect the removal of the control element from the quantitative suitability obligation of MSRB Rule G– 19, as noted above. Since this proposed amendment to Rule G–19 conforms with the care obligation of Regulation Best Interest, dealers likely have already implemented necessary changes to policies and procedures to comply with the obligation in the context of Regulation Best Interest. For bank dealers that are not subject to Regulation Best Interest, to the extent these bank dealers are currently offering recommendations of municipal securities to retail customers, the MSRB believes that they could gain an advantage over dealers (other than bank dealers) by incurring less compliance costs, unless MSRB rules apply Regulation Best Interest to bank dealers. While this cohort of bank dealers makes up a relatively small percentage of all dealers that transact in municipal securities,59 the MSRB plans to issue a Request for Comment on whether it will apply Regulation Best Interest to bank dealers through further amendments to MSRB rules to address this regulatory imbalance. The MSRB believes the proposed rule change would not impose barriers on capital formation, as the intention is to harmonize MSRB rules with Regulation Best Interest and related FINRA rules. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Board did not solicit comment on the proposed rule change. Therefore, 59 See, e.g., Broker-Dealers and Bank Dealers Registered with the MSRB, available at https:// www.msrb.org/BDRegistrants.aspx. Using retailsized dealer-to-customer trades (par value at $100,000 or less in this case) from MSRB’s RTRS database as a proxy for the degree of interaction with retail customers, the MSRB found that only 17 bank dealers conducted at least one retail-sized trade in 2019. E:\FR\FM\12MYN1.SGM 12MYN1 28090 Federal Register / Vol. 85, No. 92 / Tuesday, May 12, 2020 / Notices there are no comments on the proposed rule change received from members, participants, or others. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period of up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: jbell on DSKJLSW7X2PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MSRB–2020–02 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–2020–02. 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 website (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 website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official VerDate Sep<11>2014 18:47 May 11, 2020 Jkt 250001 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MSRB–2020–02 and should be submitted on or before June 2, 2020. For the Commission, pursuant to delegated authority.60 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–10061 Filed 5–11–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88825; File No. SR–CTA/ CQ–2019–04] Consolidated Tape Association; Order Approving the Thirty-Third Substantive Amendment to the Second Restatement of the CTA Plan and Twenty-Fourth Substantive Amendment to the Restated CQ Plan, as Modified by the Commission, Concerning a Confidentiality Policy May 6, 2020. I. Introduction On November 25, 2019,1 the Consolidated Tape Association Plan (‘‘CTA Plan’’) participants (‘‘Participants’’) 2 filed with the 60 17 CFR 200.30–3(a)(12). 1 See Letter from Robert Books, Chairman, Operating Committee, CTA/CQ Plans, to Vanessa Countryman, Secretary, Commission, dated November 19, 2019 (‘‘Transmittal Letter’’). 2 The Participants are the national securities association and national securities exchanges that submit trades and quotes to the Plans and include: Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., Financial Industry Regulatory Authority, Inc., The Investors Exchange LLC, Long-Term Stock Exchange, Inc., Nasdaq BX, Inc., Nasdaq ISE, LLC, Nasdaq PHLX, Inc., The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. (each a ‘‘Participant’’ and collectively, the ‘‘Participants’’). Participants also are members of the Plans’ Operating Committees. Other parties include the ‘‘Processor,’’ who is charged with collecting, processing and preparing for distribution or publication all Plan information. The ‘‘Administrator’’ is charged with administering the Plan to include data feed approval, customer communications, contract management, and related functions. The ‘‘Advisory Committee members’’ are individuals who represent particular types of financial services firms or actors in the securities PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) pursuant to Section 11A of the Securities Exchange Act of 1934 (‘‘Act’’) 3 and Rule 608 of Regulation National Market System (‘‘NMS’’) thereunder,4 a proposal to amend the Second Restatement of the CTA Plan and the Restated Consolidated Quotation Plan (‘‘CQ Plan’’) (each a ‘‘Plan’’ and together with the CTA Plan, the ‘‘Plans’’).5 These amendments represent the Thirty-Third Substantive Amendment to the CTA Plan and Twenty-Fourth Substantive Amendment to the CQ Plan (‘‘Amendments’’). As described in the Amendments, the Participants proposed to adopt a confidentiality policy to provide guidelines for the Operating Committee and the Advisory Committee of the Plans, and all subcommittees thereof, regarding the confidentiality of any data or information generated, accessed, or transmitted to the Operating Committee, as well as discussions occurring at a meeting of the Operating Committee or any subcommittee. The Amendments were published for comment in the Federal Register on January 14, 2020.6 In the Commission’s view, the Amendments must balance protection against the potential misuse of confidential information with the strong interest in public transparency about the operations of the Plans in light of the important function the Plans serve in the national market system. This order approves the Amendments to the Plans, as modified by the Commission, to better strike that balance. A copy of the Amendments, as modified by the Commission, is attached as Exhibit A hereto. The Commission concludes that market, and who were selected by Plan participants to be on the Advisory Committee. A list of the Processor, Administrator, and Advisory Committee members is available at https://www.ctaplan.com/ governance. 3 15 U.S.C. 78k–1(a)(3). 4 17 CFR 242.608. 5 See Securities Exchange Act Release Nos. 10787 (May 10, 1974), 39 FR 17799 (May 20, 1974) (declaring the CTA Plan effective); 15009 (July 28, 1978), 43 FR 34851 (August 7, 1978) (temporarily authorizing the CQ Plan); and 16518 (January 22, 1980), 45 FR 6521 (January 28, 1980) (permanently authorizing the CQ Plan). The most recent restatement of both Plans was in 1995. The CTA Plan, pursuant to which markets collect and disseminate last sale price information for nonNASDAQ listed securities, is a ‘‘transaction reporting plan’’ under Rule 601 under the Act, 17 CFR 242.601, and a ‘‘national market system plan’’ under Rule 608 under the Act, 17 CFR 242.608. The CQ Plan, pursuant to which markets collect and disseminate bid/ask quotation information for listed securities, is a ‘‘national market system plan’’ under Rule 608 under the Act, 17 CFR 242.608. 6 See Securities Exchange Act Release No. 87909 (January 8, 2020), 85 FR 2207 (January 14, 2020) (‘‘Notice’’). Comments received in response to the Notice are available at https://www.sec.gov/ comments/sr-ctacq-2019-04/srctacq201904.htm. E:\FR\FM\12MYN1.SGM 12MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 92 (Tuesday, May 12, 2020)]
[Notices]
[Pages 28082-28090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10061]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88828; File No. SR-MSRB-2020-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change To Align Certain MSRB 
Rules to Securities Exchange Act Rule 15l-1, Regulation Best Interest

May 6, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on May 1, 2020, the Municipal Securities 
Rulemaking Board (``MSRB'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the MSRB. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change 
consisting of amendments to MSRB Rule G-8, on books and records, MSRB 
Rule G-9, on preservation of records, MSRB Rule G-19, on suitability of 
recommendations and transactions, MSRB Rule G-20, on gifts, gratuities, 
non-cash compensation and expenses of issuance, MSRB Rule G-48, on 
transactions with Sophisticated Municipal Market Professionals 
(``SMMPs''), and the deletion of an interpretation of MSRB Rule G-20 
(the ``proposed rule change''). The proposed rule change would align 
MSRB rules to the Commission's recently adopted Rule 15l-1 under the 
Exchange Act (``Regulation Best Interest'').\3\
---------------------------------------------------------------------------

    \3\ 17 CFR 240.15l-1; see also Exchange Act Release No. 86031 
(June 5, 2019), 84 FR 33318 (July 12, 2019) (File No. S7-07-18) 
(``Regulation Best Interest Adopting Release'').
---------------------------------------------------------------------------

    The proposed rule change would result in the following changes to 
MSRB rules:
     MSRB Rule G-19 would apply only in circumstances in which 
Regulation Best Interest does not apply;
     MSRB Rule G-48 would make clear that the exception from 
the requirement to perform a customer-specific suitability analysis 
when making a recommendation to an SMMP, as defined in MSRB Rule D-15, 
is available only for recommendations that are subject to MSRB Rule G-
19;
     MSRB Rule G-20 would require any permissible non-cash 
compensation to align with the requirements of Regulation Best 
Interest; and
     Dealers would be required to maintain books and records 
required by Regulation Best Interest and the related SEC Form CRS 
requirement.
    The effective date of all of the amendments to MSRB rules included 
in the proposed rule change will be the compliance date for Regulation 
Best Interest.\4\ Dealers would not have an obligation to comply with 
the proposed rule change until the effective date and the current 
versions of MSRB Rules G-8, G-9, G-19, G-20, and G-48 would remain 
applicable in the interim period between SEC approval and the effective 
date.
---------------------------------------------------------------------------

    \4\ See Regulation Best Interest Adopting Release, 84 FR 33400 
(setting June 30, 2020 as the compliance date for Regulation Best 
Interest).
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    The text of the proposed rule change is available on the MSRB's 
website at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2020-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any

[[Page 28083]]

comments it received on the proposed rule change. The text of these 
statements may be examined at the places specified in Item IV below. 
The MSRB has prepared summaries, set forth in Sections A, B, and C 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On June 5, 2019, the SEC adopted Regulation Best Interest, which 
establishes a new standard of conduct for broker-dealers \5\ and 
natural persons who are associated persons of a broker-dealer 
(collectively, ``broker-dealers'') when they make a recommendation to a 
retail customer, defined generally as a natural person or the legal 
representative of such person, who receives and uses a recommendation 
from a broker-dealer primarily for personal, family, or household 
purposes, of any securities transaction or investment strategy 
involving securities. The Commission stated that Regulation Best 
Interest enhances the broker-dealer standard of conduct beyond existing 
suitability obligations, and aligns the standard of conduct with retail 
customers' reasonable expectations by imposing certain new requirements 
on broker-dealers.\6\ Specifically, Regulation Best Interest imposes 
the following ``general obligation'':
---------------------------------------------------------------------------

    \5\ To effect transactions in municipal securities, a dealer 
must be registered with the Commission as either a broker-dealer 
under Section 15(b)(1) or a municipal securities dealer under 
Section 15B(a)(2) of the Exchange Act. All dealers, other than bank 
dealers, are broker-dealers and therefore are subject to Regulation 
Best Interest. MSRB Rule D-8 defines a bank dealer as ``a municipal 
securities dealer which is a bank or a separately identifiable 
department or division of a bank.'' These dealers are registered 
with the Commission under Exchange Section 15B(a)(2) and thus are 
not subject to Regulation Best Interest. Because bank dealers can 
make recommendations of municipal securities transactions or 
investment strategies involving municipal securities to retail 
customers, the Board plans to issue a separate Request for Comment 
on whether the Board will apply the requirements of Regulation Best 
Interest, through further amendments to MSRB rules, to bank dealers.
    \6\ Regulation Best Interest Adopting Release, 84 FR 33319.

A broker, dealer, or a natural person who is an associated person of 
a broker or dealer, when making a recommendation of any securities 
transaction or investment strategy involving securities (including 
account recommendations) to a retail customer, shall act in the best 
interest of the retail customer at the time the recommendation is 
made, without placing the financial or other interest of the broker, 
dealer, or natural person who is an associated person of a broker or 
dealer making the recommendation ahead of the interest of the retail 
customer.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.15l-1(a)(1).

    Regulation Best Interest provides that this general obligation is 
satisfied only if a broker-dealer complies with four component 
obligations: (i) An obligation to make certain prescribed disclosures, 
before or at the time of the recommendation, about the recommendation 
and the relationship between the retail customer and the broker-dealer 
(the ``Disclosure Obligation''); \8\ (ii) an obligation to exercise 
reasonable diligence, care, and skill in making a recommendation (the 
``Care Obligation''); \9\ (iii) an obligation to establish, maintain, 
and enforce written policies and procedures reasonably designed to 
address conflicts of interest (the ``Conflict of Interest 
Obligation''); \10\ and (iv) an obligation to establish, maintain, and 
enforce written policies and procedures reasonably designed to achieve 
compliance with Regulation Best Interest (the ``Compliance 
Obligation'').\11\
---------------------------------------------------------------------------

    \8\ 17 CFR 240.15l-1(a)(2)(i).
    \9\ 17 CFR 240.15l-1(a)(2)(ii).
    \10\ 17 CFR 240.15l-1(a)(2)(iii).
    \11\ 17 CFR 240.15l-1(a)(2)(iv).
---------------------------------------------------------------------------

    The MSRB has reviewed its rule book in light of the Commission's 
adoption of Regulation Best Interest and the related Form CRS 
requirement \12\ and, as further discussed below, is filing the 
proposed rule change to harmonize the MSRB's rules with the 
Commission's Regulation Best Interest and Form CRS and reduce the 
potential for conflicting or duplicative regulation in the municipal 
securities market.\13\ The MSRB has coordinated the proposed amendments 
with FINRA, which has proposed similar amendments to its rules,\14\ in 
order to harmonize requirements, to the extent possible, for dealers 
that are subject to the rules of both the MSRB and FINRA.
---------------------------------------------------------------------------

    \12\ When it adopted Regulation Best Interest, the Commission 
also adopted a requirement for registered investment advisers and 
registered broker-dealers to provide retail investors with a 
relationship summary on new Form CRS, including information about 
the ``types of client and customer relationships and services the 
firm offers; the fees, costs, conflicts of interest, and required 
standard of conduct associated with those relationships and 
services; whether the firm and its financial professionals currently 
have reportable legal or disciplinary history; and how to obtain 
additional information about the firm.'' Exchange Act Release No. 
86032 (June 5, 2019), 84 FR 33492 (July 12, 2019).
    \13\ SEC staff frequently asked questions on Regulation Best 
Interest are available at: https://www.sec.gov/tm/faq-regulation-best-interest.
    \14\ See Exchange Act Release No. 88422, File No. SR-FINRA-2020-
007 (March 19, 2020), 85 FR 16974 (March 25, 2020).
---------------------------------------------------------------------------

I. Suitability

A. MSRB Rule G-19

    MSRB Rule G-19 provides that a dealer must have a reasonable basis 
to believe that a recommended transaction or investment strategy 
involving municipal securities is suitable for the customer, based on 
the information obtained through the reasonable diligence of the dealer 
to ascertain the customer's investment profile.\15\ MSRB Rule G-19 is 
composed of three component obligations:
---------------------------------------------------------------------------

    \15\ MSRB Rule G-19 defines a customer's investment profile to 
include the customer's age, other investments, financial situation 
and needs, tax status, investment objectives, investment experience, 
investment time horizon, liquidity needs, risk tolerance, and any 
other information the customer may disclose to the dealer in 
connection with such recommendation.
---------------------------------------------------------------------------

     Reasonable-basis suitability, which requires a dealer to 
have a reasonable basis to believe, based on reasonable diligence, that 
the recommendation is suitable for at least some investors; \16\
---------------------------------------------------------------------------

    \16\ MSRB Rule G-19, Supplementary Material .05(a).
---------------------------------------------------------------------------

     Customer-specific suitability, which requires a dealer to 
have a reasonable basis to believe that the recommendation is suitable 
for a particular customer based on that customer's investment profile; 
\17\ and
---------------------------------------------------------------------------

    \17\ MSRB Rule G-19, Supplementary Material .05(b).
---------------------------------------------------------------------------

     Quantitative suitability, which requires a dealer who has 
actual or de facto control over a customer account to have a reasonable 
basis for believing that a series of recommended transactions, even if 
suitable when viewed in isolation, are not excessive and unsuitable for 
the customer when taken together in light of the customer's investment 
profile.\18\
---------------------------------------------------------------------------

    \18\ MSRB Rule G-19(c).
---------------------------------------------------------------------------

    MSRB Rule G-19 applies to all dealers when making a recommendation 
to a ``customer,'' which is defined in MSRB Rule D-9 as any person 
other than a dealer acting in its capacity as a dealer or an issuer in 
transactions involving the sale of a new issue of its securities.\19\ 
When a dealer reasonably concludes that a customer is an SMMP,\20\ 
however, the dealer is not

[[Page 28084]]

obligated to perform a customer-specific suitability analysis under 
MSRB Rule G-19.\21\
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    \19\ MSRB Rule D-9 states that, ``Except as otherwise 
specifically provided by rule of the Board, the term `customer' 
shall mean any person other than a broker, dealer, or municipal 
securities dealer acting in its capacity as such or an issuer in 
transactions involving the sale by the issuer of a new issue of its 
securities.''
    \20\ MSRB Rule D-15 defines a customer as an SMMP according to 
three elements:
    (a) Nature of the Customer. The customer must be:
    (1) a bank, savings and loan association, insurance company, or 
registered investment company;
    (2) an investment adviser registered either with the Commission 
under Section 203 of the Investment Advisers Act of 1940 or with a 
state securities commission (or any agency or office performing like 
functions); or
    (3) any other person or entity with total assets of at least $50 
million.
    (b) Dealer Determination of Customer Sophistication. The dealer 
must have a reasonable basis to believe that the customer is capable 
of evaluating investment risks and market value independently, both 
in general and with regard to particular transactions and investment 
strategies in municipal securities.
    (c) Customer Affirmation. The customer must affirmatively 
indicate that it:
    (1) is exercising independent judgment in evaluating:
    (A) the recommendations of the dealer;
    (B) the quality of execution of the customer's transactions by 
the dealer; and
    (C) the transaction price for non-recommended secondary market 
agency transactions as to which (i) the dealer's services have been 
explicitly limited to providing anonymity, communication, order 
matching and/or clearance functions and (ii) the dealer does not 
exercise discretion as to how or when the transactions are executed; 
and
    (2) has timely access to material information that is available 
publicly through established industry sources as defined in Rule G-
47(b)(i) and (ii).
    \21\ MSRB Rule G-48(c).
---------------------------------------------------------------------------

    Conceptually similar to MSRB Rule G-19, the Care Obligation of 
Regulation Best Interest also requires a three-part analysis to 
evaluate recommendations to retail customers but employs the higher 
best interest standard instead of MSRB Rule G-19's suitability 
standard. In addition, while Regulation Best Interest applies only to 
recommendations to ``retail customers,'' defined generally as a natural 
person or the legal representative of such person, who receives and 
uses a recommendation from a broker-dealer primarily for personal, 
family, or household purposes,\22\ MSRB Rule G-19 applies to 
``customers'' (with an exception to the customer-specific suitability 
requirement for recommendations to SMMPs).
---------------------------------------------------------------------------

    \22\ See 17 CFR 240.15l-1(b)(1).
---------------------------------------------------------------------------

    The proposed rule change includes two amendments to MSRB Rule G-19 
designed to harmonize MSRB requirements with Regulation Best Interest. 
First, to avoid unnecessary regulatory complexity, the applicability of 
MSRB Rule G-19 would be limited only to circumstances in which 
Regulation Best Interest does not apply. Second, to conform the 
quantitative suitability component of MSRB Rule G-19, for circumstances 
in which MSRB Rule G-19 applies, to the analogous requirement in 
Regulation Best Interest, the proposed rule change would remove the 
limitation that requires a quantitative suitability determination only 
when a dealer has ``actual or de facto control'' over the customer's 
account. These proposed amendments are discussed below.
i. Eliminate Applicability of MSRB Rule G-19 to Recommendations Subject 
to Regulation Best Interest
    As noted above, Regulation Best Interest addresses generally the 
same conduct that is addressed by MSRB Rule G-19 but employs a best 
interest, rather than a suitability, standard. Absent action by the 
Board, a dealer would be required to reconcile compliance with both 
Regulation Best Interest and MSRB Rule G-19 in many circumstances. In 
such circumstances, the MSRB believes that compliance with Regulation 
Best Interest would result in compliance with MSRB Rule G-19 because a 
dealer who ``act[s] in the best interest of the retail customer'' \23\ 
when making a recommendation to a retail customer of any securities 
transaction or investment strategy involving securities would 
necessarily also meet the MSRB Rule G-19 requirement to ``have a 
reasonable basis to believe that [the recommendation] is suitable for 
the customer.'' Accordingly, in order to reduce the potential for 
duplicative regulation and unnecessary complexity, the Board is 
proposing to limit the application of MSRB Rule G-19 to circumstances 
in which Regulation Best Interest does not apply. To do so, the Board 
would add new text to MSRB Rule G-19 that states that MSRB Rule G-19 
does not apply to recommendations subject to Regulation Best Interest. 
MSRB Rule G-19 would thus apply only to:
---------------------------------------------------------------------------

    \23\ 17 CFR 240.15l-1(a)(1).
---------------------------------------------------------------------------

     Recommendations to customers that are not ``retail 
customers,'' as defined by Regulation Best Interest, and
     Recommendations to any customers by bank dealers.\24\
---------------------------------------------------------------------------

    \24\ As noted above, the MSRB plans to issue a Request for 
Comment on whether the MSRB will apply the requirements of 
Regulation Best Interest to bank dealers through further amendments 
to MSRB rules.
---------------------------------------------------------------------------

    Regulation Best Interest defines a retail customer as a natural 
person, or the legal representative of such natural person (regardless 
of net worth), who receives a recommendation from a broker-dealer and 
uses that recommendation primarily for personal, family, or household 
purposes. Accordingly, if the dealer making a recommendation is subject 
to Regulation Best Interest, MSRB Rule G-19 would not apply when the 
dealer makes a recommendation to such persons. The Board believes this 
approach will provide regulatory clarity about the applicability and 
requirements of MSRB Rule G-19 and Regulation Best Interest to market 
participants in an effective and efficient manner.
ii. Align MSRB Rule G-19's Quantitative Suitability Obligation to the 
Requirements of Regulation Best Interest
    Currently, MSRB Rule G-19's quantitative suitability obligation 
requires a dealer to have a reasonable basis for believing that a 
series of recommended transactions are not excessive and unsuitable for 
the customer when taken together in light of the customer's profile, 
but only if the dealer has actual or de facto control over the 
customer's account.\25\ In contrast, the quantitative care obligation 
of Regulation Best Interest applies regardless of whether the broker-
dealer exercises actual or de facto control over the customer's 
account.\26\ In the Regulation Best Interest Adopting Release, the 
Commission stated:
---------------------------------------------------------------------------

    \25\ MSRB Rule G-19, Supplementary Material .05(c).
    \26\ See 17 CFR 240.15l-1(a)(2)(ii)(C); see also Regulation Best 
Interest Adopting Release, 84 FR at 33327.
---------------------------------------------------------------------------

    [I]mposing the quantitative care obligation without a ``control'' 
element would provide consistency in the investor protections provided 
to retail customers by requiring a broker-dealer to always form a 
reasonable basis as to the recommended frequency of trading in a retail 
customer's account--irrespective of whether the broker-dealer 
``controls'' or exercises ``de facto control'' over the retail 
customer's account. This would also be consistent with the other 
obligations of the Care Obligation, which apply regardless of whether a 
broker-dealer ``controls'' or exercises ``de facto control'' over the 
retail customers' account.\27\
---------------------------------------------------------------------------

    \27\ Regulation Best Interest Adopting Release, 84 FR at 33384 
(citation omitted).
---------------------------------------------------------------------------

    For the same reasons, the proposed rule change eliminates the 
control element of the quantitative suitability obligation prescribed 
in Supplementary Material .05(c) of MSRB Rule G-19.

B. MSRB Rule G-48

    As described above, MSRB Rule G-48(c) provides that a dealer making 
a municipal securities recommendation to an SMMP does not have any 
obligation under MSRB Rule G-19 to perform a customer-specific 
suitability analysis. An SMMP is defined by three components:
     The customer must fit within a prescribed category of 
institutional investor or be a natural person or entity

[[Page 28085]]

with total assets of at least $50 million; \28\
---------------------------------------------------------------------------

    \28\ MSRB Rule D-15(a).
---------------------------------------------------------------------------

     The dealer must have a reasonable basis to believe that 
the customer is capable of evaluating investment risks and market value 
independently; \29\ and
---------------------------------------------------------------------------

    \29\ MSRB Rule D-15(b).
---------------------------------------------------------------------------

     The customer must make certain affirmations regarding the 
exercise of independent judgment and access to information.\30\
---------------------------------------------------------------------------

    \30\ MSRB Rule D-15(c).
---------------------------------------------------------------------------

    As a result of this definition, a dealer making a recommendation to 
a natural person with at least $50 million in assets and who otherwise 
meets the definition of SMMP, would be required by MSRB Rule G-19 to 
conduct reasonable basis and quantitative suitability analyses but not 
a customer-specific suitability analysis.
    In contrast, Regulation Best Interest applies when a broker-dealer 
makes a recommendation to a ``retail customer.'' A ``retail customer'' 
is a natural person or the legal representative of such natural person 
(regardless of net worth) who receives a recommendation from a broker-
dealer and uses that recommendation primarily for personal, family, or 
household purposes.\31\ Whenever Regulation Best Interest applies, it 
applies in full; there is no exception from the customer-specific care 
obligation for high-net worth individuals.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.15l-1(b)(1).
---------------------------------------------------------------------------

    As described above, under the proposed amendments to MSRB Rule G-
19, MSRB Rule G-19 would not apply to recommendations subject to 
Regulation Best Interest. Accordingly, the proposed rule change 
includes an amendment to MSRB Rule G-48(c) stating that the exception 
from the customer-specific suitability requirement is available only 
when a recommendation is subject to MSRB Rule G-19 and not Regulation 
Best Interest.

II. Non-Cash Compensation

    MSRB Rule G-20(g) broadly prohibits dealers and their associated 
persons from directly or indirectly accepting or making payments or 
offers of payments of any non-cash compensation in connection with the 
sale and distribution of a primary offering of municipal securities, 
subject to certain limited exceptions. Described generally, these 
exceptions are:
     Gifts that do not exceed $100 per individual per year and 
are not preconditioned on achievement of a sales target; \32\
---------------------------------------------------------------------------

    \32\ MSRB Rule G-20(d)(i).
---------------------------------------------------------------------------

     Occasional gifts of meals or tickets to theatrical, 
sporting, and other entertainments, provided that such gifts are not so 
frequent or so extensive as to raise any question of propriety and are 
not preconditioned on achievement of a sales target; \33\
---------------------------------------------------------------------------

    \33\ MSRB Rule G-20(d)(ii).
---------------------------------------------------------------------------

     Payment or reimbursement by offerors (generally, the 
issuer and any advisors to the issuer, the underwriters, and their 
affiliates) in connection with training or education meetings, subject 
to specified conditions, including that the payment is not conditioned 
on achieving a sales target; \34\
---------------------------------------------------------------------------

    \34\ MSRB Rule G-20(d)(iii).
---------------------------------------------------------------------------

     Internal non-cash compensation arrangements between the 
dealer and its associated persons, subject to specified conditions 
including that any non-cash compensation related to a sales contest 
must be based on the total production of all associated persons with 
respect to all municipal securities within respective product types 
distributed by the dealer and credit for those sales must be weighted 
equally; \35\ and
---------------------------------------------------------------------------

    \35\ MSRB Rule G-20(d)(iv).
---------------------------------------------------------------------------

     Contributions by any person other than the dealer to a 
non-cash compensation arrangement between a dealer and its associated 
persons, subject to the same conditions for permissible internal non-
cash compensation arrangements, described above.\36\
---------------------------------------------------------------------------

    \36\ MSRB Rule G-20(d)(v).
---------------------------------------------------------------------------

    Regulation Best Interest's Conflict of Interest Obligation requires 
broker-dealers to establish, maintain and enforce written policies and 
procedures reasonably designed to, among other things, identify and 
eliminate sales contests, sales quotas, bonuses, and non-cash 
compensation that are based on the sale of specific securities or 
specific types of securities within a limited period of time.\37\ As 
described above, MSRB Rule G-20 permits certain sales contests in 
connection with primary offerings. Accordingly, the MSRB is proposing 
to clarify in MSRB Rule G-20(g) that any non-cash compensation 
permitted by MSRB Rule G-20(g), including any sales contests, must also 
be consistent with the applicable requirements of Regulation Best 
Interest.
---------------------------------------------------------------------------

    \37\ 17 CFR 240.15l-1(a)(2)(iii)(D). The Conflict of Interest 
Obligation also requires broker-dealers to (1) identify and at a 
minimum disclose or eliminate all conflicts of interest associated 
with a recommendation of any securities transaction or investment 
strategy involving securities to a retail customer; (2) identify and 
mitigate any conflicts of interest associated with such 
recommendations that create an incentive for a natural person who is 
an associated person of a broker-dealer to place the interest of the 
broker-dealer or such natural person ahead of the interest of the 
retail customer; and (3) identify and disclose any material 
limitations placed on the securities or investment strategies 
involving securities that may be recommended to a retail customer 
and any conflicts of interest associated with such limitations and 
prevent such limitations and associated conflicts of interest from 
causing the broker-dealer, or a natural person who is an associated 
person of the broker-dealer, to make recommendations that place the 
interest of the broker-dealer or such natural person ahead of the 
interest of the retail customer. 17 CFR 240.15l-1(a)(3)(A)-(C).
---------------------------------------------------------------------------

    Additionally, in June 1982, the MSRB published interpretive 
guidance under MSRB Rule G-20 stating that sales contests offered by an 
underwriter to participating members of a syndicate constitute 
compensation for services and, therefore, must meet the requirements of 
the then-current version of MSRB Rule G-20.\38\ The MSRB proposes to 
delete this interpretation from 1982 because, with respect to dealers 
that make recommendations to retail customers, such sales contests may 
be inconsistent, depending on the particular facts and circumstances, 
with the requirements of Regulation Best Interest's Conflict of 
Interest Obligation, which requires broker-dealers to establish, 
maintain and enforce written policies and procedures reasonably 
designed to ``[i]dentify and eliminate any sales contests, sales 
quotas, bonuses, and non-cash compensation that are based on the sales 
of specific securities or specific types of securities within a limited 
period of time.'' \39\ In adopting Regulation Best Interest, the 
Commission stated that ``[s]ales contests, sales quotas, bonuses and 
non-cash compensation that are based on the sales of specific 
securities within a limited period of time create high-pressure 
situations for associated persons to increase the sales of specific 
securities or specific types of securities within a limited period of 
time and thus compromise the best interests of their retail 
customers.'' \40\ The MSRB believes the same policy concerns apply with 
respect to non-retail customers. Specifically, the high-pressure sales 
situations described above have the potential to compromise the best 
interests of non-retail customers as well. Accordingly, the Board is 
proposing to delete this interpretation.
---------------------------------------------------------------------------

    \38\ See Rule G-20 Interpretive Guidance, ``Authorization of 
Sales Contests'' (June 25, 1982).
    \39\ See 17 CFR 240.15l-1(a)(2)(iii).
    \40\ Regulation Best Interest Adopting Release, 84 FR at 33331.
---------------------------------------------------------------------------

III. Books and Records

A. MSRB Rule G-8

    MSRB Rule G-8 directs dealers to make and keep current specified 
books and records to the extent they are applicable to a dealer's 
business. For

[[Page 28086]]

dealers subject to Exchange Act Rule 17a-3, MSRB Rule G-8(f) provides 
that compliance with Exchange Act Rule 17a-3 under the Act will be 
deemed compliance with MSRB Rule G-8, provided that certain records 
required by MSRB Rule G-8 must be maintained in any event. Exchange Act 
Rule 17a-3 requires broker-dealers to make and keep current specified 
books and records and provides that for purposes of transactions in 
municipal securities by dealers, compliance with MSRB Rule G-8 will be 
deemed compliance with Exchange Act Rule 17a-3.\41\
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17a-3.
---------------------------------------------------------------------------

    When the Commission adopted Regulation Best Interest, it amended 
Exchange Act Rule 17a-3 to require broker-dealers to maintain a record 
of all information collected from and provided to a retail customer 
pursuant to Regulation Best Interest, along with the identity of each 
natural person who is an associated person, if any, responsible for the 
account.\42\ The Commission also adopted a related requirement for 
broker-dealers to provide retail investors with Form CRS \43\ and 
amended Exchange Act Rule 17a-3 to require broker-dealers to maintain a 
record of the date each Form CRS was provided.\44\
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17a-3(a)(35).
    \43\ 17 CFR 240.17a-14.
    \44\ 17 CFR 240.17a-3(a)(24).
---------------------------------------------------------------------------

    Because dealers may comply with Exchange Act Rule 17a-3 for 
purposes of transactions in municipal securities by complying with MSRB 
Rule G-8, the proposed rule change includes amendments to MSRB Rule G-8 
that parallel the new Exchange Act Rule 17a-3 requirements relating to 
Regulation Best Interest and Form CRS. These amendments are necessary 
to ensure that dealers subject to Regulation Best Interest and the Form 
CRS requirement are required to maintain the records regardless of 
which books and records rule they comply with.

B. MSRB Rule G-9

    MSRB Rule G-9 prescribes the periods of time that records must be 
preserved by dealers. Similar to MSRB Rule G-8, MSRB Rule G-9 provides 
that dealers who are subject to and comply with Exchange Act Rules 17a-
3 and 17a-4 under the Act will be deemed to comply with MSRB Rule G-9, 
provided that certain specified records are preserved for the 
applicable time periods specified in Rule G-9 in any event. Exchange 
Act Rule 17a-4 under the Act sets forth record preservation 
requirements for broker-dealers and, like Exchange Act Rule 17a-3, 
provides that for purposes of transactions in municipal securities by 
dealers, compliance with MSRB Rule G-9 will be deemed compliance with 
Exchange Act Rule 17a-4.
    The Commission amended Exchange Act Rule 17a-4 to require broker-
dealers to retain the records related to Regulation Best Interest and 
Form CRS described above, as well as a copy of each Form CRS for six 
years.\45\ Accordingly, the proposed rule change includes amendments to 
MSRB Rule G-9 that parallel these new requirements. These amendments 
are necessary to ensure that dealers are subject to similar 
requirements regardless of which record preservation rule they comply 
with.
---------------------------------------------------------------------------

    \45\ 17 CFR 240.17a-4(e)(5), (e)(10).
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2) of the Act,\46\ which provides that:
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78o-4(b)(2).

    The Board shall propose and adopt rules to effect the purposes 
of this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
---------------------------------------------------------------------------
municipal securities dealers, and municipal advisors.

    Section 15B(b)(2)(C) of the Act \47\ provides that the MSRB's rules 
shall:
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78o-4(b)(2)(C).

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

    The proposed rule change is consistent with Section 15B(b)(2)(C) of 
the Act because it is designed to prevent fraudulent and manipulative 
practices by dealers, foster cooperation and coordination among 
regulators, promote just and equitable principles of trade, and protect 
investors.

I. Statutory Basis for Amendments Related to Suitability

    The proposed amendments to MSRB Rules G-19 and G-48 are consistent 
with Section 15B(b)(2) of the Act because the amendments will foster 
cooperation and coordination with regulators, facilitate transactions 
in municipal securities and municipal financial products, remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities and municipal financial products, and protect 
investors, as described below.

A. Eliminating the Applicability of MSRB Rule G-19 to Recommendations 
Subject to Regulation Best Interest

    The proposed amendments to MSRB Rule G-19 eliminating the 
applicability of MSRB Rule G-19's suitability requirements to 
recommendations subject to Regulation Best Interest will foster 
cooperation and coordination with regulators by harmonizing MSRB rules 
with the Commission's Regulation Best Interest. Consequently, these 
amendments will also facilitate transactions in municipal securities 
and municipal financial products and remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products by eliminating potential regulatory 
duplication and complexity, which will ease potential regulatory 
burdens on dealers associated with complying with two regulatory 
schemes. Dealers will be able to more efficiently analyze and 
operationalize compliance with Regulation Best Interest and MSRB Rule 
G-19. For example, dealers can proceed in conforming their municipal 
securities activities to Regulation Best Interest without engaging in a 
more extensive analysis of how the obligations of Regulation Best 
Interest may overlap, exceed, or differ from those of MSRB Rule G-19. 
Consequently, dealers will be able to more efficiently execute 
transactions in the municipal securities market with greater regulatory 
certainty under the proposed amendments.
    These proposed amendments to MSRB Rule G-19 will also protect 
investors by ensuring dealers comply with the heightened regulatory 
requirements of the Commission's Regulation Best Interest, while 
maintaining the existing regulatory scheme under MSRB Rule G-19 for 
transactions not subject to Regulation Best Interest. As stated by the 
Commission in its adopting of Regulation Best Interest:

    The enhancements contained in Regulation Best Interest are 
designed to improve investor protection by enhancing the quality of 
broker-dealer recommendations to retail customers and reducing the 
potential harm to

[[Page 28087]]

retail customers that may be caused by conflicts of interest.\48\
---------------------------------------------------------------------------

    \48\ Regulation Best Interest Adopting Release, 83 FR at 33321.

    For the same reasons, the MSRB believes that these amendments in 
the proposed rule change are consistent with the investor protection 
requirements of Section 15B(b)(2)(C) of the Act.\49\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

B. Aligning MSRB Rule G-19's Quantitative Suitability Obligation to the 
Requirements of Regulation Best Interest

    The proposed amendments to MSRB Rule G-19 aligning MSRB Rule G-19's 
quantitative suitability obligation to the requirements of Regulation 
Best Interest will foster cooperation and coordination with regulators 
by harmonizing MSRB rules with the Commission's Regulation Best 
Interest. Consequently, these amendments will also facilitate 
transactions in municipal securities and municipal financial products 
and remove impediments to and perfect the mechanism of a free and open 
market in municipal securities and municipal financial products by 
eliminating potential regulatory duplication and complexity, which will 
ease potential regulatory burdens on dealers associated with complying 
with two regulatory schemes. Conforming the quantitative suitability 
requirement of MSRB Rule G-19 with Regulation Best Interest's Care 
Obligation will allow dealers to more efficiently operationalize 
compliance with their obligations under both requirements, and to more 
efficiently execute transactions in the municipal securities market 
with greater regulatory certainty.
    The proposed amendment to the quantitative suitability obligation 
of MSRB Rule G-19 will also protect investors by heightening the 
requirements of MSRB Rule G-19 for recommendations not subject to 
Regulation Best Interest.\50\ Accordingly, the MSRB believes that these 
amendments are consistent with the investor protection requirements of 
Section 15B(b)(2)(C) of the Act.\51\
---------------------------------------------------------------------------

    \50\ See, e.g., Regulation Best Interest Adopting Release, 83 FR 
at 33321.
    \51\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

C. Amending MSRB Rule G-48(c) To State That the Exception From the 
Customer-Specific Suitability Requirement Is Available Only When a 
Recommendation Is Subject to MSRB Rule G-19

    The proposed amendments to MSRB Rule G-48(c) to state that the 
exception from the customer-specific suitability requirement is 
available only when a recommendation is subject to MSRB Rule G-19 will 
foster cooperation and coordination with regulators by harmonizing MSRB 
rules with Regulation Best Interest. Consequently, these amendments 
will also facilitate transactions in municipal securities and municipal 
financial products and remove impediments to and perfect the mechanism 
of a free and open market in municipal securities and municipal 
financial products by eliminating potential regulatory duplication and, 
thereby, ease potential regulatory burdens on dealers associated with 
complying with two regulatory schemes. More specifically, dealers will 
not have to analyze whether aspects of complying with MSRB Rule G-19's 
suitability obligations in some circumstances could fail to satisfy the 
requirements of Regulation Best Interest. Consequently, dealers will be 
able to more efficiently execute transactions in the municipal 
securities market with greater regulatory certainty under the proposed 
amendments.

II. Statutory Basis for Amendments Related to Non-Cash Compensation

    The proposed amendments to MSRB Rule G-20 related to non-cash 
compensation are consistent with Section 15B(b)(2) of the Act because 
the amendments will foster cooperation and coordination with regulators 
by harmonizing MSRB rules. Consequently, these amendments will also 
facilitate transactions in municipal securities and municipal financial 
products and remove impediments to and perfect the mechanism of a free 
and open market in municipal securities and municipal financial 
products by eliminating potential regulatory duplication and, thereby, 
ease potential regulatory burdens on dealers associated with complying 
with two regulatory schemes. Consequently, dealers will be able to more 
efficiently execute transactions in the municipal securities market 
with greater regulatory certainty under the proposed amendments.

III. Statutory Basis for Amendments Related to Books and Records

    The proposed amendments to MSRB Rules G-8 and G-9 are consistent 
with Section 15B(b)(2) of the Act because the amendments will foster 
cooperation and coordination with regulators, facilitate transactions 
in municipal securities and municipal financial products, remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities and municipal financial products, and protect 
investors.

A. Amending MSRB Rule G-8 to Align With Exchange Act Rule 17a-3

    Because dealers may comply with Exchange Act Rule 17a-3 for 
purposes of transactions in municipal securities by complying with MSRB 
Rule G-8, the proposed rule change includes amendments to MSRB Rule G-8 
that parallel the new Exchange Act Rule 17a-3 requirements relating to 
Regulation Best Interest and Form CRS. These amendments will foster 
cooperation and coordination with regulators by harmonizing MSRB rules 
with the Commission's record-keeping requirements under Exchange Rule 
Act Rule 17a-3, as amended by Regulation Best Interest. Consequently, 
these amendments will also facilitate transactions in municipal 
securities and municipal financial products and remove impediments to 
and perfect the mechanism of a free and open market in municipal 
securities and municipal financial products by providing greater 
regulatory certainty to dealers in the application of record-keeping 
requirements associated with municipal securities transactions. In this 
way, the proposed rule change will ease certain regulatory burdens on 
dealers when attempting to comply with the record-keeping requirements 
under MSRB Rule G-8 and Exchange Act Rule 17a-3.
    The proposed amendments to MSRB Rule G-8 will also protect 
investors by requiring dealers to create and maintain books and 
records, as applicable, to demonstrate compliance with Regulation Best 
Interest and the SEC's Form CRS requirements.\52\ These proposed 
amendments are coordinated with SEC books and records requirements to 
ensure that dealers are subject to similar requirements, whether under 
MSRB rules or the rules of the SEC.
---------------------------------------------------------------------------

    \52\ See Regulation Best Interest Adopting Release, 83 FR at 
33398 (``The Commission notes that the proposed new requirements of 
Rule 17a-3 are not designed to create additional, standalone burdens 
for broker-dealers but instead to provide a means by which they can 
demonstrate, and Commission examiners can confirm, their compliance 
with the new substantive requirements of Regulation Best 
Interest.'').
---------------------------------------------------------------------------

B. Amending MSRB Rule G-9 To Align With Exchange Act Rule 17a-4

    In its adoption of Regulation Best Interest, the Commission amended 
Exchange Act Rule 17a-4 to require dealers to retain the records 
related to Regulation Best Interest and Form CRS described above, as 
well as a copy of

[[Page 28088]]

each Form CRS for six years.\53\ Accordingly, the proposed rule change 
includes amendments to MSRB Rule G-9 that parallel these new 
requirements. These amendments will foster cooperation and coordination 
with regulators by harmonizing MSRB rules with the Commission's record-
keeping requirements under Exchange Rule Act Rule 17a-4, as amended by 
Regulation Best Interest. These amendments will also facilitate 
transactions in municipal securities and municipal financial products 
and remove impediments to and perfect the mechanism of a free and open 
market in municipal securities and municipal financial products by 
providing greater regulatory certainty to dealers in the application of 
record-keeping requirements associated with municipal securities 
transactions. In this way, the proposed rule change will ease 
regulatory burdens on dealers when complying with the record-keeping 
requirements under MSRB Rule G-9 and Exchange Act Rule 17a-4.
---------------------------------------------------------------------------

    \53\ 17 CFR 240.17a-4(e)(5), (e)(10). As described above, 
registered broker-dealers and investment advisers are required to 
provide retail investors with a relationship summary on new Form 
CRS. Pursuant to this requirement, ``[r]etail investors will receive 
a relationship summary at the beginning of a relationship with a 
firm, communications of updated information following a material 
change to the relationship summary, and an updated relationship 
summary upon certain events.'' Exchange Act Release No. 86032 (June 
5, 2019), 84 FR 33492 (July 12, 2019).
---------------------------------------------------------------------------

    The proposed amendments to MSRB Rule G-9 will protect investors by 
requiring dealers to create and maintain books and records, as 
applicable, to demonstrate compliance with Regulation Best Interest and 
the SEC's Form CRS requirements.\54\ These proposed amendments are 
coordinated with SEC books and records requirements to ensure that 
dealers are subject to similar requirements, whether under MSRB rules 
or the rules of the SEC.
---------------------------------------------------------------------------

    \54\ See Regulation Best Interest Adopting Release, 83 FR at 
33400 (``. . . the Commission believes it is important, including 
for examination purposes, that broker-dealers separately retain 
records that specifically demonstrate compliance with Regulation 
Best Interest and new paragraph (a)(35) of Rule 17a-3 . . .'').
---------------------------------------------------------------------------

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

    Section 15B(b)(2)(C) of the Exchange Act requires that MSRB rules 
not be designed to impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.\55\ As 
discussed below, the proposed rule change would align MSRB rules with, 
or otherwise clarify the applicability of MSRB rules in relation to, 
the requirements of Regulation Best Interest. For those dealers that 
are already subject to Regulation Best Interest, the MSRB does not 
believe that the proposed rule change would result in any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Exchange Act because the proposed rule change would 
apply equally to all these dealers.\56\
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78o-4(b)(2)(C).
    \56\ For bank dealers that are not subject to Regulation Best 
Interest, to the extent these bank dealers are currently making 
recommendations of municipal securities to retail customers, the 
MSRB believes that a potential regulatory imbalance between bank 
dealers and dealers other than bank dealers likely will exist as of 
the compliance date of Regulation Best Interest. However, the MSRB 
plans to issue a Request for Comment on whether it will apply the 
requirements of Regulation Best Interest to bank dealers through 
further amendments to MSRB rules.
---------------------------------------------------------------------------

1. Need for Proposed Rule Change
    The adoption of Regulation Best Interest necessitates the proposed 
rule change consisting of amendments to MSRB Rules G-8, G-9, G-19, G-20 
and G-48 described above. The proposed rule change is needed to 
harmonize Regulation Best Interest and relevant MSRB rules, to clarify 
and enhance dealers' regulatory obligations under MSRB rules when 
making recommendations involving municipal securities to retail 
investors, and thus to enhance investor protection. In addition, the 
proposed rule change is designed to better harmonize MSRB requirements 
with relevant FINRA rules.
    Specifically, the proposed rule change would eliminate the 
applicability of Rule G-19 with regard to recommendations subject to 
Regulation Best Interest, align Rule G-19's quantitative suitability 
obligation with the requirements of Regulation Best Interest, amend 
Rule G-48 to make clear that the exception from the requirement to 
conduct a customer-specific suitability obligation when making a 
recommendation to an SMMP does not apply to recommendations that are 
subject to Regulation Best Interest, and align Rule G-20's permissible 
non-cash compensation to the requirements of Regulation Best Interest. 
In addition, the proposed rule change includes amendments to MSRB Rule 
G-8 and Rule G-9 on books and records that parallel the new Exchange 
Act Rule 17a-3 and 17a-4 requirements related to Regulation Best 
Interest and Form CRS under the Exchange Act.
2. Baseline for Evaluation
    In order to evaluate the potential economic impact of any proposed 
rule change, a baseline must be established as a point of reference. 
This baseline enables a comparison to the expected state with the 
proposed rule change in effect. The economic impact of the proposed 
change is therefore viewed as the difference between the baseline state 
and the expected state. Typically, the baseline is defined as the 
present state before any proposed rule change is approved and 
implemented. For dealers subject to Regulation Best Interest, however, 
the future state after the Regulation Best Interest compliance date is 
a more appropriate baseline, as the MSRB's proposed rule change is in 
response to and closely tied to the future implementation of Regulation 
Best Interest.
3. Alternative Approaches
    The MSRB identified and reviewed two options as alternatives to the 
changes outlined previously. In one alternative approach, the MSRB 
would eliminate MSRB Rule G-19 on suitability. However, Regulation Best 
Interest is only applicable to recommendations made to retail customers 
and is not applicable to recommendations made to other customers, such 
as institutions. If Rule G-19 were eliminated, no suitability rule 
would apply when dealers make recommendations regarding municipal 
securities that are not covered by Regulation Best Interest. In 
addition, Regulation Best Interest does not apply to bank dealers, 
while MSRB Rule G-19 applies to all dealers, including bank dealers. 
Consequently, this alternative would likely reduce protection to 
investors and thus be inferior to the proposed rule change. The second 
alternative is to require bank dealers to also comply with Regulation 
Best Interest, in addition to the proposed changes described above. As 
noted above, the MSRB plans to issue a Request for Comment on applying 
the requirements of Regulation Best Interest to bank dealers through 
further amendments to MSRB rules to further inform its consideration of 
this approach.
4. Benefits, Costs and Effect on Competition
    Pursuant to the MSRB's policy on economic analysis in rulemaking, 
economic analysis should address the likely costs and benefits of the 
draft amendments. The economic analysis assesses the draft amendments 
as if they were fully implemented against the

[[Page 28089]]

context of the economic baselines discussed above. In considering these 
costs, benefits, and impacts, the Board addresses reasonable 
alternatives, where applicable.
    The SEC estimated in its filing that there was a total of 2,766 
broker-dealers who had retail customers at the end of 2018. By 
comparison, the MSRB's Real-Time Transaction Reporting System 
(``RTRS'') trading records indicate that there are 768 dealers that are 
subject to Regulation Best Interest and had at least one municipal 
security trade with customers in 2019 with a trade size of $100,000 par 
amount or lower, a proxy for retail-sized trades.\57\
---------------------------------------------------------------------------

    \57\ While not a perfect proxy for a retail trade, the MSRB 
believes that the relatively low par amount is more indicative of a 
trade with a retail customer than an institutional investor.
---------------------------------------------------------------------------

    Since all dealers other than bank dealers are required to be in 
full compliance with Regulation Best Interest, the cost and benefit 
assessment focuses on the incremental impact of the proposed MSRB rule 
changes, beyond the costs and benefits of compliance with Regulation 
Best Interest.

A. Benefits

    The MSRB believes that the proposed rule change would benefit 
dealers by clarifying and harmonizing their regulatory obligations 
under MSRB rules considering the upcoming implementation of Regulation 
Best Interest. Dealer compliance with the proposed rule change would 
provide greater certainty to dealers about when Regulation Best 
Interest applies rather than MSRB Rule G-19. This would in turn enhance 
investor protection as a result of dealers being clearer about when 
Regulation Best Interest applies.
    The proposed rule change would also foster cooperation and 
coordination by harmonizing MSRB rules with Regulation Best Interest 
and related FINRA rules. The MSRB generally considers it desirable and 
efficient to improve the clarity and consistency of MSRB rules in 
relation to the rules of other regulators, particularly to the extent 
such changes may eliminate inconsistencies between rules of different 
regulators, ease the burdens of dealer compliance and lessen instances 
of confusion among dealers without reducing investor protections. 
Specifically, the proposed rule change will allow dealers to conform 
their policies and procedures and related business practices to 
Regulation Best Interest, MSRB Rule G-19 and FINRA's suitability rule 
without engaging in a more extensive analysis of how the obligations of 
each rule may overlap, exceed, or differ from each other.

B. Costs

    For dealers, the MSRB believes the costs of complying with the 
proposed rule change that are incremental to the already allotted and 
absorbed costs of complying with Regulation Best Interest will be 
minor, given that dealers other than bank dealers are assumed to be in 
full compliance with Regulation Best Interest already when the proposed 
MSRB rule changes become effective. Bank dealers would not incur costs 
in complying with Regulation Best Interest and would continue to comply 
with MSRB Rule G-19, as amended to remove the control element from the 
quantitative suitability obligation.
    The proposed rule change would trigger one-time policy and 
procedure revisions by all dealers (including bank dealers) in relation 
to the changes to MSRB Rule G-19's quantitative suitability 
requirement. Therefore, there would be upfront costs associated with 
revising the policies and procedures to comply with the new 
requirements. It is possible that the one-time revision cost may be 
proportionately higher for smaller-size dealers than larger-size 
dealers as a smaller firm may have to rely on outside legal counsel and 
technology support to review changes on policies and procedures. The 
MSRB, however, believes the revisions of policies and procedures by 
dealers would not be overly burdensome or expensive, and on balance, 
the aggregate benefits expected to accumulate to dealers and retail 
investors associated with the proposed rule change should outweigh the 
one-time policy and procedure revision costs over time.\58\
---------------------------------------------------------------------------

    \58\ The proposed amendments to MSRB Rules G-8 and G-9 would not 
impose costs on dealers because these amendments impose no new 
requirements on dealers beyond those already imposed by Rules 17a-3 
and 17a-4, as amended in light of Regulation Best Interest and the 
Form CRS requirement. Dealers not subject to Regulation Best 
Interest or the Form CRS requirement would not be required to 
maintain these records under MSRB Rules G-8 and G-9, as amended by 
the proposed rule change. Similarly, the proposed amendment to MSRB 
Rule G-20 would not impose costs on dealers because it imposes no 
new requirements on dealers beyond those already imposed by 
Regulation Best Interest. The proposed deletion of the 
interpretation of MSRB Rule G-20 would similarly impose no costs 
because it does not impose requirements on dealers beyond those of 
MSRB Rule G-20. Finally, the proposed amendment to MSRB Rule G-48 
states that the existing exception to the MSRB Rule G-19 customer 
specific suitability obligation is only available in circumstances 
when MSRB Rule G-19, rather than Regulation Best Interest, applies 
and imposes no new obligations on dealers. Accordingly, this 
proposed amendment should not impose costs on dealers.
---------------------------------------------------------------------------

C. Effect on Competition, Efficiency and Capital Formation

    The MSRB believes the proposed rule change may improve dealers' 
regulatory certainty by promoting clarity and consistency on issues 
related to suitability and permissible non-cash compensation. The MSRB 
also believes the proposed rule change would not result in undue burden 
on competition for dealers subject to Regulation Best Interest, as the 
proposed rule change would have a relatively mild impact on dealers who 
are in full compliance with Regulation Best Interest. For these 
dealers, the incremental impact of the proposed rule change should be 
limited to the need to update their policies and procedures to reflect 
the removal of the control element from the quantitative suitability 
obligation of MSRB Rule G-19, as noted above. Since this proposed 
amendment to Rule G-19 conforms with the care obligation of Regulation 
Best Interest, dealers likely have already implemented necessary 
changes to policies and procedures to comply with the obligation in the 
context of Regulation Best Interest.
    For bank dealers that are not subject to Regulation Best Interest, 
to the extent these bank dealers are currently offering recommendations 
of municipal securities to retail customers, the MSRB believes that 
they could gain an advantage over dealers (other than bank dealers) by 
incurring less compliance costs, unless MSRB rules apply Regulation 
Best Interest to bank dealers. While this cohort of bank dealers makes 
up a relatively small percentage of all dealers that transact in 
municipal securities,\59\ the MSRB plans to issue a Request for Comment 
on whether it will apply Regulation Best Interest to bank dealers 
through further amendments to MSRB rules to address this regulatory 
imbalance.
---------------------------------------------------------------------------

    \59\ See, e.g., Broker-Dealers and Bank Dealers Registered with 
the MSRB, available at https://www.msrb.org/BDRegistrants.aspx. Using 
retail-sized dealer-to-customer trades (par value at $100,000 or 
less in this case) from MSRB's RTRS database as a proxy for the 
degree of interaction with retail customers, the MSRB found that 
only 17 bank dealers conducted at least one retail-sized trade in 
2019.
---------------------------------------------------------------------------

    The MSRB believes the proposed rule change would not impose 
barriers on capital formation, as the intention is to harmonize MSRB 
rules with Regulation Best Interest and related FINRA rules.

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

    The Board did not solicit comment on the proposed rule change. 
Therefore,

[[Page 28090]]

there are no comments on the proposed rule change received from 
members, participants, or others.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period of up to 90 days (i) as 
the Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MSRB-2020-02 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-2020-02. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2020-02 and should be submitted on 
or before June 2, 2020.

    For the Commission, pursuant to delegated authority.\60\
---------------------------------------------------------------------------

    \60\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10061 Filed 5-11-20; 8:45 am]
BILLING CODE 8011-01-P

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