The Municipal Securities Rulemaking Board on Monday asked the Securities and Exchange Commission to approve proposed rule changes that would allow individual investors to qualify as “sophisticated municipal market professionals,” for whom broker-dealers would be exempt from having to meet certain requirements.
The proposal was made in response to the improved availability of online municipal market data, and is designed to bring the MSRB’s rule in line with new rules from the Financial Industry Regulatory Authority defining broker-dealers’ suitability obligations for institutional clients, the board said in a release.
The MSRB asked the SEC to make the changes effective July 9, the same day that FINRA’s new Rule 2111 on suitability takes effect.
SMMPs are municipal bond customers that are considered to be more sophisticated than other types of investors, and who therefore do not require the same protections as other investors, according to the MSRB.
Dealers conducting trades for SMMPs are exempt from some disclosure requirements and other MSRB rules.
Under the current MSRB guidance that was issued in 2002, an individual may not be an SMMP.
The designation is limited to institutional customers, which are defined as entities such as corporations or partnerships that have total assets of at least $100 million invested in municipal securities or under management.
The dealer had to have reasonable grounds for concluding that an SMMP customer had timely access to publicly available material facts about a muni transaction, was capable of independently evaluating investment risk and the market value of the munis, and was making independent investment decisions and its muni investments.
The MSRB is proposing to change the definition to include individuals with total assets of at least $50 million.
The proposal also would remove the current $100 million threshold for institutional investors.
The proposal also would eliminate many of the other criteria that currently define an SMMP.
Under its proposal, an SMMP would be an institutional customer 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 transactions in municipal securities.”
In addition, an SMMP would need to “affirmatively” indicate to a dealer that it is exercising independent judgement in evaluating the dealer’s recommendations, the proposal said.
The MSRB said the new definition comes as the public information about muni bonds has increased substantially, primarily because of EMMA and other information vendors.
“The quality and availability of information concerning municipal securities has improved substantially in recent years and sophisticated municipal market professionals have a great ability to make investment decision on their own,” said MSRB executive director Lynnette Kelly in the release.
“Our proposed revision to the definition of SMMP also will provide important regulatory consistency with the revised FINRA rule.”
Kelly said the new definition reflects the MSRB’s commitment to ensuring muni rules reflect current market conditions. She said the board carefully monitors its rules, and makes changes when necessary.
“It’s not just about putting out the rule, it’s [about] the care and feeding of the rule after it’s put out,” she said.
The Securities Industry and Financial Markets Association applauded the proposal.
David Cohen, SIFMA’s managing director and associate general counsel, said the proposal incorporates a number of SIFMA recommendations, including the requirement that dealers receive an “affirmation” from sophisticated municipal market professionals.
“We think [the proposal] expands the universe of investors capable [of] evaluating investment risks,” according to Cohen. “Most important to our members is that the MSRB clarified its proposal to harmonize SMMP compliance with FINRA’s new suitability rule for institutional customers.”
