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SEC Approves Changes to Broker-Dealer Compliance Rules

The Securities and Exchange Commission has approved Municipal Securities Rulemaking Board changes to Rule G-16 that would require muni broker-dealers that pose more risks to undergo compliance examinations more frequently, possibly as often as every year.

The SEC approved the rule changes on Friday and the new examination requirements took effect that same day.

However, related changes to Rule G-9 on recordkeeping, which would require dealers to retain certain records for four, rather than three, years would not take effect until June 16, 2012.

The MSRB said the extended effective date would “provide dealers with sufficient time to modify their policies and systems to comply with the new record-retention period.”

The commission’s approval came after the MSRB had provided responses to industry comments and recommended the rule be kept as proposed, with the exception of the longer effective date for recordkeeping.

Until now, the Financial Industry Regulatory Authority was required to conduct an exam of every muni broker-dealer at least once every two years.

Under the new rule changes, FINRA would examine firms that pose high risks more frequently and firms with low volumes of muni business less frequently than two years, but at least once every four years.

The Securities Industry and Financial Markets Association had asked the MSRB and FINRA to detail the factors they would use to determine which muni broker-dealers pose more risk and to refrain from changing the exam cycles until it had made the disclosures and consulted with the industry.

But in its response to the comments, sent to the SEC on Dec. 12, the MSRB said that while FINRA is responsible for the examinations, the board “believes it important to maintain the confidentiality of the specific risk factors and not make them a matter of negotiation.”

“Moreover, the risk factors are dynamic and additional risk factors may be utilized as new risks emerge, and existing risks are mitigated by market conditions or business practices,” the MSRB told the commission. “It would therefore not be in the public interest to refrain from changing a dealer’s examination cycle until there is disclosure and consultation with market participants.”

The board said it should be clear from the rule changes that the largest, most active firms will be examined more frequently and the less active firms will be examined less often.

SIFMA also had opposed the proposed changes to G-9, saying the current recordkeeping requirements have long been an industry standard and that a four-year requirement to retain certain records would be unnecessarily burdensome and would require new procedures, technology and training.

But the MSRB said it “believes the proposed rule change is not a significant departure from current recordkeeping standards and will not impose an unnecessary burden on dealers that are already subject to a variety of different record-retention requirements.”

“Rule G-9 provides that, for dealers that are FINRA members, certain records must be maintained for three years, while other records must be maintained for six years or the life of the enterprise,” the board said.

The rule changes “would extend the record retention obligation for certain records for four years, six years, or the life of the enterprise.”

The MSRB said that “given the limited nature of the change proposed” on recordkeeping, “a cost-benefit analysis is unwarranted.”

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