The Government Finance Officers Association supports a proposal that would raise the threshold for a municipal entity to qualify as a sophisticated municipal market professional under a Municipal Securities Rulemaking Board rule, while broker-dealer groups oppose it.
Stakeholders made their positions clear in responses to an MSRB request for comment the MSRB published Nov. 3. The MSRB sought feedback on draft amendments to MSRB Rule D-15, which defines the term sophisticated municipal market professional. The draft amendments to the rule would modify the asset threshold for a municipal entity to qualify as an SMMP and would exempt investment advisors registered with the Securities and Exchange Commission "from having to make certain affirmations" in order to qualify for SMMP status.
"Under Rule D-15(a)'s nature of the customer requirement," one way to qualify as an SMMP is to be a person or entity with total assets of at least $50 million, the RFC said. The draft amendments would maintain that threshold for non-municipal entity customers but would alter the threshold for municipal entity customers to $100 million in municipal securities investments.
"GFOA has sought changes to the SMMP defining threshold of $50 million in assets in our July 2023 letter and subsequent conversations with the MSRB," Emily Brock, director of the GFOA's Federal Liaison Center, said in a Feb. 2 comment letter. "As previously stated, many municipal entities, including small governments, may meet this requirement due to the value of their capital infrastructure, which is unrelated to government investing."
Many governments might not have dedicated investment staff and yet meet the asset threshold and are – sometimes without their knowledge – designated as SMMPs, Brock said in her letter.
"By establishing the threshold on total assets rather than an investable assets basis for our sector, the result is diluted investor protections for many municipal entities," Brock said.
Brock also cited dealer compliance with Rule D-15 as "a particular concern."
"GFOA members have noted being unaware of the designation and recalling no discussions with dealers about the designation," her letter said.
In its comment letter, however, the Bond Dealers of America opposed the MSRB's proposal to raise the threshold for municipal entity customers to qualify as SMMPs to $100 million in municipal securities investments.
"This would be an unnecessary change that would be difficult to administer and comply with and which would severely limit municipal entity choice," BDA's comment letter, signed by Michael Decker, the group's senior vice president for research and public policy, said.
Decker added that status as an SMMP investor is voluntary and investors can provide or rescind SMMP affirmations at any time.
"If any state or local government entity wants to be treated as a retail account and not a SMMP, they can simply decline to complete an SMMP affirmation or, if they have already completed one, inform their dealer that they wish to rescind it," Decker said. "SMMP status is designed as 'opt in.'"
The MSRB hasn't provided a good reason for altering the threshold solely for municipal entity customers, BDA's letter added.
"We are not aware of any specific enforcement cases, for example, where a municipal entity with a municipal securities portfolio of less than $100 million was taken advantage of in a municipal securities trade, much less market-wide issues with the definition," Decker said in the letter.
In addition, BDA agrees with the MSRB's "proposal to eliminate the requirement for SEC-registered [investment advisors] to provide an affirmation in order for a customer to be a SMMP and we believe this treatment should be applied to state-registered IAs as well," Decker's letter said.
In its letter, the Securities Industry and Financial Markets Association urged the MSRB to reject the proposed new threshold for SMMP qualification for municipal entity customers.
"Qualifying municipal entities can determine whether to certify as an SMMP to take advantage of certain broker-dealer trading services and are not required to do so," SIFMA's letter said.
The letter, signed by Leslie Norwood, managing director, associate general counsel and head of municipal securities at SIFMA, also said that it is "of utmost importance that there should be no separate category for municipal entities in Rule D-15(a)(3)."
"As the MSRB has routinely and appropriately prioritized the value of harmonization of their rule set with that of [the Financial Industry Regulatory Authority], for the benefit of increased regulatory clarity for all, SIFMA urges the MSRB to not move forward with the changes to the thresholds for municipal entity customers unless there is a clear and impactful reason for these respective rules to differ," Norwood said.
"On the contrary," her letter said, "the proposed changes to Rule D-15 would create a break with applicable FINRA rules and may negatively impact municipal entity customers."
In its letter, SIFMA also urged the MSRB to "approve the removal of the customer affirmation requirement to qualify for SMMP status" for all RIAs.
The American Securities Association believes the proposed threshold of $100 million in municipal securities investments for municipal entities "is too narrow and risks excluding entities that do have the sophistication, governance, and advisory support to function as SMMPs," its letter, signed by Jessica Giroux, ASA's chief legal officer, said.
Regardless of whether the threshold is set at $50 million or $100 million, "limiting the test to municipal securities investments for municipal entities is problematic because it is exceedingly difficult to track in practice and diverges from the general net-worth or total-assets concepts that firms already use across markets," ASA's letter said.
"This mismatch with existing MSRB and FINRA institutional standards will make compliance more complicated and costly for dealers, particularly where firms must maintain divergent customer categorizations and documentation across rule sets," Giroux said in the letter.
Also in its letter, ASA recommended that the MSRB finalize the proposed affirmation exemption for investment advisors registered with the SEC "and consider whether a subset of state-registered [advisors] should be treated similarly, subject to appropriate safeguards."
