The Municipal Securities Rulemaking Board has asked the Securities and Exchange Commission to approve a package of rules and proposed rule changes designed to consolidate and harmonize fair dealing requirements for muni securities dealers.
The package includes a proposed new Rule G-47 on time-of-trade disclosures that would consolidate existing requirements for dealers to disclose material information to customers in connection with purchases and sales of munis.
It also would include a proposal to consolidate dealers’ fair dealing obligations to experienced investors called sophisticated municipal market professionals with new Rules D-15 and G-48.
In addition, the MSRB is asking the SEC to approve a proposal to revise and harmonize its Rule G-19 on suitability with the Financial Industry Regulatory Authority’s suitability requirements by adding considerations for analyzing the suitability of a recommendation to a customer.
“A year ago, the MSRB promised to look for ways to make our rules easier to understand and more consistent with other regulators,” said board chairman Jay Goldstone. “We have been doing so in several areas, and the focus on these three key principals of fair dealing will help dealers more easily identify and comply with their obligations.”
Rule G-17 currently says that muni dealers and advisors must deal fairly with all persons and may not engage in any deceptive, dishonest or unfair practice.
The MSRB has interpreted G-17 to require a dealer, in connection with all muni transactions, to disclose to customers, at the time of trade, all material information known by the dealer as well as material information about the muni reasonably accessible to the market.
Proposed Rule G-47 would consolidate this guidance and apply it to transactions regardless of whether they are unsolicited or recommended, occur in the primary or secondary market, or are principal or agency transactions. The disclosures can be made orally or in writing.
The rule says information would be material if it would be considered important or significant by a reasonable investor making an investment decision. It says “reasonably accessible to the market” would mean information made available through “established industry sources,” including the MSRB’s EMMA system, rating agency reports, and other sources of information generally used by dealers trading munis.
Rule G-47 would contain supplementary material detailing the disclosure obligations.
The MSRB’s current G-19 contains a list of customer information that dealers must obtain prior to recommending a transaction to a non-institutional account. The proposed revisions would expand the list to include additional items from FINRA’s suitability rules such as age, investment time horizon, liquidity needs, investment experience, and risk tolerance.
The proposed new rule D-15 would define the term sophisticated municipal market professional as a bank, savings and loan association, insurance company, registered investment company or investment adviser registered with either the SEC under the Investment Advisers Act of 1940 or with state securities regulators. An SMMP would have to have total assets of at least $50 million and would have to be capable, in the dealer’s view, of evaluating risks and market value in connection with trades.
The new Rule G-48 would describe the application of certain dealer obligations to SMMPs.
