Trade groups representing broker-dealers urged the Securities and Exchange Commission to approve a proposed rule change that would amend Municipal Securities Rulemaking Board Rule G-27 on dealer supervision, but also emphasized that more change is needed.
The proposed rule change, which the MSRB
The proposal would amend Rule G-27 to exclude certain public finance activities from the term "structuring of public offerings or private placements" as it is used within the rule, extend an exemption from municipal branch office designation for non-primary residences to up to 90 business days per calendar year from less than 30 business days currently and make a technical update to the rule's title.
In comment letters to the SEC this week, the Securities Industry and Financial Markets Association, the Bond Market Association and the American Securities Association each expressed support for the proposed rule change.
"SIFMA applauds the MSRB's forward-thinking efforts to modernize its rules to reduce undue compliance burdens on regulated entities while continuing to provide appropriate investor and issuer protections," said SIFMA's letter, signed by Leslie Norwood, managing director, associate general counsel and head of municipal securities at SIFMA.
To further that goal, the MSRB should work toward doing away with all location-based supervision concepts "recognizing that functional-based supervision comports with how business and supervision is conducted today and how regulators operate in the current electronic workplace," SIFMA's Aug. 25 letter said.
The Bond Market Association, formerly known as the Bond Dealers of America, "fully supports" the proposed rule change and commends "the MSRB for its leadership and innovation in addressing limited issues around Rule G-27," BMA's letter, signed by Michael Decker, senior vice president for research and public policy at BMA, said.
As BMA has told both the Financial Industry Regulatory Authority and the MSRB, "the overall location-based supervision regime represented by Rule G-27 and FINRA Rule 3110 is obsolete," the letter said.
As the industry has shown – both during the COVID-19 pandemic and in the years since – "it is possible to effectively supervise employees, including traders and bankers, remotely," Decker said in the Aug. 24 letter.
"MSRB and FINRA rules should reflect that reality by providing firms with the ability to devise tailored supervision plans that permit maximum flexibility while retaining effective oversight," BMA's letter said. "We believe the proposal represents the first steps in that direction."
In the letter, Decker said BMA supported earlier rulemaking activity by FINRA and the MSRB, "which established the concept of Residential Supervisory Location (RSL) for certain supervised employees." Under that "streamlined work-from-home approach," supervised employees with jobs that qualify are able to have their homes designated as RSLs, enabling those employees to work remotely from their homes without significant restrictions, the letter said.
While that initiative has afforded needed flexibility for certain categories of supervised individuals, "not all qualify for the RSL designation," BMA's letter said.
"In particular, the RSL designation is not available to employees engaged in 'order execution and/or market making' and 'structuring of public offerings or private placements,'" Decker said in the letter. "Order execution and market making generally refers in the fixed income context to bond traders."
Because traders' homes don't qualify for RSL treatment, some firms have taken to designating a trader's home as an office of municipal supervisory jurisdiction under MSRB Rule G-27 or office of supervisory jurisdiction under FINRA Rule 3110, according to Decker.
"That means a trader who wants to consistently work from home must have a Series 53 Municipal Securities Principal designation intended for supervisory personnel even though the remotely working trader likely does not supervise anybody," BMA's letter said. "Their home is also required to be physically inspected by a firm compliance officer annually."
Those requirements "are unnecessary impositions for simply trading from home," Decker said in the letter.
The provision in the proposed rule change to extend the current less than 30-business day non-primary residence exception to 90 business days would help address that shortcoming for traders or other supervised employees who sometimes work from a second home or other location, BMA's letter said.
"While we do not believe this represents a permanent solution for work-from-home traders— that would come with flexibility to work from a primary residence or any location and without day count restrictions—it does provide needed flexibility," the letter said.
BMA's letter urged the SEC to approve the proposed rule change, which the letter said "represents a good first step towards a comprehensive reform of obsolete supervision regimes at the MSRB and FINRA."
The American Securities Association in its Aug. 25 comment letter said it was writing to support the SEC's approval of the proposed rule change "and to note where the MSRB adopted approaches consistent with ASA's recommendations, as well as where further work remains."
Several recommendations contained in a March 16 comment letter ASA submitted in response to a Request for Comment notice the MSRB published in January weren't addressed in the proposed rule change filed with the SEC, "though the MSRB has indicated it will consider these suggestions at a later date," ASA's Aug. 25 letter, signed by Jessica Giroux, ASA's chief legal officer, said.
ASA urged the SEC, in approving the proposed rule change, to encourage the MSRB to address a number of items listed in ASA's Aug. 25 letter in future rulemaking.
The items listed were: "one-person offices, technology-enabled supervision, coordination with FINRA, trading and remote work, express confirmation that drafting presentations and materials for issuer meetings and routine data gathering and document coordination qualify as excluded public finance activities, and additional flexibility for the non-primary residence exclusion tied to supervisory risk rather than a fixed day count."
