WASHINGTON — Market participants urged the Municipal Securities Rulemaking Board to broaden the definition of “sophisticated municipal market professional,” saying it should include individuals with muni or fixed-income assets of $25 million, or $50 million in munis and other assets, not $50 million in munis, as the board had proposed.
Under the existing definition, released in 2002, only institutional customers, not individuals, can qualify as SMMPs. The board has determined 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 its November notice. Comments were due Tuesday.
The MSRB proposed revising the definition of SMMP because of advances in the quality and availability of muni market data since 2002, including information posted on its EMMA website, the board said. The MSRB also cited the need for consistency with the Financial Industry Regulatory Authority’s revised suitability standards for institutional customers, FINRA Rule 2111, slated to become effective in July 2012.
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 revised definition would include a “safe harbor” allowing a dealer to satisfy the reasonable basis requirement if an institutional customer has at least $50 million invested in munis. The customer also would need to attest, orally or in writing, that it is capable of evaluating the investment risks and market value independently, both in general and with regard to particular muni transactions.
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.
An industry group and a dealer group welcomed the proposed revisions to the SMMP definition, but asked the board to go even farther, widening it to include non-muni investors and eliminating certain other requirements, or making them consistent with the language in Rule 2111.
“Overall, we’re very pleased with the proposal,” David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said in an interview.
In its five-page comment letter, SIFMA said SMMPs should include investors with at least $25 million in munis and $25 million in other assets, including fixed-income investments or non-municipal securities.
“We feel that $25 million in munis demonstrates a high level of sophistication and knowledge about the product,” Cohen said.
In its letter, SIFMA said the board’s affirmation requirement differs from the language in FINRA Rule 2111, which would require an institutional customer to “affirm,” rather than attest, that it is exercising independent judgment in evaluating the dealer’s recommendations.
“To suggest a different affirmation by SMMPs under the MSRB rules, with differing terms and subtle distinctions, will be a costly exercise for our industry and its sophisticated buy-side clients with little incremental benefit,” SIFMA wrote.
Bond Dealers of America, by contrast, questioned the “practical utility” of the attestations, saying “they elevate form over substance.”
“If the investor with these substantial levels of assets is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities, then it seems to follow that they will do so,” wrote Michael Nicholas, BDA’s chief executive. “A more practical approach would seem to be that the dealer inform the customer that the dealer considers them to be an SMMP, capable of exercising independent judgment and evaluating market risks and market value.”
In the alternative, the dealer group said, the board should give dealers six months to obtain the required attestations.
BDA also said the board should reduce the $50 million SMMP threshold, “perhaps” to $25 million, and enlarge the definition to include fixed-income securities, not just munis.
“Any investor with at least $50 million, or $25 million, in fixed-income assets will have the capacity to evaluate investment risk and market value,” Nicholas wrote.
