WASHINGTON — Responding to a move by the Financial Industry Regulatory Authority to limit the basic broker-dealer licensing exam to customer sales, the Municipal Securities Rulemaking Board is asking the Securities and Exchange Commission for permission to require market participants who engage in muni underwriting, trading, and other non-sales activities to take the board’s muni qualifications exam, according to a proposal filed with the SEC Tuesday.
The MSRB’s move, as outlined in an SEC filing Tuesday, comes a week after FINRA asked the SEC for permission to pare the muni focus on the Series 7 exam, the qualifications test for general securities representatives.
FINRA told the SEC it was proposing to “reduce” the Series 7’s emphasis on municipal securities activities to “better reflect the functions and associated tasks” performed by general securities representatives.
Specifically, the Series 7 would only focus on customer sales of municipal securities.
“It’s to get the exam focused on what the representatives are doing in their day-to-day practice,” John Kalohn, FINRA’s vice president of testing and continuing education, said in an interview.
The MSRB’s proposal asked the SEC to require individuals to pass the Series 52, the qualifications exam for municipal securities representative, if they engage in any municipal securities activities other than buying and selling for customers.
Previously, an individual could qualify to become a municipal securities representative by taking the Series 7, which is more general, or the Series 52.
In a three-page notice posted on its website Tuesday, the board said FINRA’s proposed changes to the Series 7 would be “a de-emphasis” of non-sales activities by municipal securities professionals. By focusing on “a broad range of securities, rather than specific products,” the revised Series 7 would “reduce the number of questions that test for specific knowledge of municipal securities” and MSRB rules, and the Series 7 exam “would no longer represent a useful gauge of whether a securities professional was qualified” for muni activities other than sales, the MSRB said.
The MSRB’s proposal would primarily apply to individuals who become muni securities representatives after Nov. 7. Individuals who pass the Series 7 before that date, without letting their licenses lapse, would not be required to pass the Series 52, the board’s notice said.
In addition, the board said, it would revise Rule G-3 on professional qualifications to create a “subcategory” of individuals, known as “municipal securities sales limited representatives,” who engage “exclusively” in muni-sales activities and have only passed the revised Series 7.
Under Rule G-3, the activities of a muni securities representative include: underwriting, trading, or selling municipal securities; rendering financial advisory or consultant services to issuers of municipal securities; providing muni-related research or investment advice; or communicating with customers about municipal securities.
FINRA proposed its changes to the Series 7 after a task force, including representatives from FINRA, the MSRB, and the Chicago Board Options Exchange, conducted a roughly three-year review of what an individual needed to know to perform as a registered representative, Kalohn said.
Based on that review, FINRA concluded registered representatives focus primarily on sales of municipal securities, not on more advanced topics like underwriting, Kalohn said.
Kalohn declined to provide specifics about how many municipal securities questions FINRA proposes to remove from the Series 7.
“We don’t ever talk about the test,” said Nancy Condon, a FINRA spokesperson.
Both self-regulators, FINRA and the MSRB, asked the SEC for their test proposals to become effective Nov. 7.
An industry group said the near- and medium-term impact of the board’s proposal would be muted, given the grandfather provision for individuals who hold a valid Series 7 before Nov. 7.
“[For] everybody who takes their Series 7 before Nov. 7, this has no effect,” said Michael Decker, managing director and co-head of the municipal securities division at the Securities Industry and Financial Markets Association.
Decker, who is still studying the MSRB’s proposal, added the Series 52 is more common among firms that specialize in municipal securities. For those firms, the proposal would not represent a big change, he said.
“But for the firms with a broader breadth of products, this would be a change,” Decker said.
Separately, on Monday the board asked the SEC for a two-and-a-half-month delay, until no later than Dec. 31, 2011, for implementing a project to post rating agency information on the continuing disclosure service of its EMMA website. Last year, Fitch Ratings agreed to participate in the project, the sole rating agency to date to have done so.
In a one-page notice posted on the MSRB’s website Monday, the board said it was in “ongoing discussions” with a second rating agency and needed “additional time” to “finalize an agreement,” so that it could launch the project with both rating agencies.
In a statement, a spokesperson for Moody’s Corp., the holding company for Moody’s Investors Service, confirmed the firm was speaking to the MSRB.
“Moody’s makes its credit ratings publicly available without cost via our website, and we are engaged in discussions with the MSRB and continue to evaluate their initiative,” Michael Adler, vice president for corporate communications, wrote in an e-mail.
Fitch, meanwhile, signaled its continuing endorsement of the MSRB’s project.
“Fitch Ratings fully supports the elements of the [MSRB’s] proposal to the SEC that will make municipal bond ratings free and available to the public through its electronic disclosure system, EMMA,” Daniel Champeau, group managing director, wrote in an e-mail.
David Wargin, spokesman for Standard & Poor’s, declined to comment.
An issuer said the MSRB’s request for more time made sense if two agencies shared information with EMMA rather than one.
“That’s critical information,” said Timothy Firestine, chief administrative officer of Montgomery County, Md. “If you have to wait, it’s worth the wait.”
