MSRB Proposes Revision of 'SMMP' to Include Individuals

The Municipal Securities Rulemaking Board proposed a revised definition of “sophisticated municipal market professional” Tuesday that, for the first time, would include individuals with total assets of at least $50 million.

Under the existing definition, released in 2002, only institutional customers, not individuals, can qualify as SMMPs. The board has recognized SMMPs need less protection than other investors, given their access to sophisticated market data and trading platforms. The current guidance was developed largely because of electronic trading systems, though its application has not been confined to such systems, the board said in a notice that asks for public comments by Dec. 13.

The proposal comes because of advances in the quality and availability of muni market data since 2002, including information posted on the board’s EMMA website, the MSRB said.

The board also cited the need for consistency with the Financial Industry Regulatory Authority’s revised suitability rule for institutional customers, FINRA Rule 2111, slated to become effective in July 2012.

“MSRB rules need to reflect the increased transparency in the municipal market brought about by technological innovations,” Lynnette Hotchkiss, the MSRB’s executive director, said in a statement. “This proposed update also considers the compliance benefits of working with other regulators to create a consistent set of requirements for municipal market professionals.”

As proposed by the MSRB, an SMMP would be an institutional customer of a dealer that the dealer has a reasonable basis to believe is capable of evaluating investment risks and market value independently, both in general and with regard to particular muni transactions.

The customer would also need to attest that is exercising independent judgment in evaluating the dealer’s recommendations.

The revised definition would include a “safe harbor” allowing a dealer to satisfy the reasonable basis requirement if an institutional customer has total assets of at least $50 million invested in munis. The customer also would need to attest that it is capable of evaluating the investment risks and market value independently, both in general and with regard to particular muni transactions.

In its notice, the board said the reasonable basis requirement is “key” to the revised definition.

“When the MSRB created the existing definition of SMMP, electronic trading systems for municipal securities were new, and access to material facts about municipal securities was in large part limited to very large institutional investors,” the board said.

Ten years ago, the board added, it felt the need for a “high threshold” for determining whether an investor qualified as an institutional one.

Under the existing guidance, an institutional customer is an entity, other than a person, with total assets of at least $100 million invested in munis in its portfolio or under management.

That approach was necessary “to make sure that only the most sophisticated institutions and dealers” were likely to use an ETS, the board said.

Now, though, given the widespread availability of muni information, the amount of an investor’s assets and their nature is less important, the board noted.

Under the board’s revisions, an “institutional” account would include: a bank, savings and loan, insurance company, registered investment company, investment advisor, or “any other entity,” including a person, with total assets of at least $50 million.

An industry group hailed the board’s proposal, saying the old SMMP definition was unduly narrow.

“We think it’s high time that this notice be revisited,” said Leslie Norwood, managing director and co-head of the muni division of the Securities Industry and Financial Markets Association.

Under FINRA Rule 2111, a dealer’s suitability obligation to an institutional customer is satisfied if the dealer has a reasonable basis to believe the customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security, the MSRB said.

The customer must also say it is exercising independent judgment in evaluating the dealer’s recommendations.

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Washington
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