MSRB gears up to review rules under SEC's best interest standard

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The Municipal Securities Rulemaking Board is planning a "deep dive" to explore how a recently approved Securities and Exchange Commission rule for broker-dealers will change its rulebook.

MSRB Chair Gary Hall discussed the board's plans in a recorded interview hosted by the Securities Industry and Financial Markets Association and conducted by SIFMA President and CEO Ken Bentsen. Bentsen asked Hall his plans regarding Regulation Best Interest’s impact on the municipal market.

“In all candor, we are starting to really gear up and understand sort of the implications of those regulations to our rulebook,” Hall said. “We also have to work in concert with FINRA (Financial Industry Regulatory Authority) and trying to see where they might be on that. What we don’t want to do is have sort of disparate solutions and cause more confusion in the marketplace.”

MSRB President and CEO Lynnette Kelly, who also participated in the interview, emphasized working closely with FINRA and said the MSRB was thinking about corresponding requests for comment or press releases.

Bentsen said SIFMA was requesting questions from its members regarding Reg BI.

MSRB’s overall approach during its retrospective rule review of the past two years has been to amend, consolidate and streamline existing rules. An MSRB spokesperson said the board is in an early stage of their review of existing rules when it comes to Reg BI.

The SEC approved RegBI in June. The rule would strengthen the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail investor. It will also require broker-dealers and investment advisers to state clearly key facts about their relationships with their customers, including financial incentives.

Specifically, Hall said he is looking to see how Reg BI would impact 529 college savings plans and ABLE account rules. ABLE creates tax-advantaged savings accounts for individuals with disabilities and their families. Both are considered types of municipal fund securities.

Both Hall and Kelly are departing the MSRB when its fiscal year ends Sept. 30. Hall's term is up and Kelly is stepping down after 12 years leading the self-regulator.

SIFMA wants harmonization between the MSRB and FINRA rules on suitability regarding Reg BI, Leslie Norwood, a managing director, associate general counsel and head of municipals at SIFMA told The Bond Buyer.

“We see no reason for there to be different suitability rules for municipal securities,” Norwood said. “Harmonizing the rule set makes it easier for investors to understand, and less costly for firms to implement.”

The MSRB already has rules imposing on municipal securities dealers responsibilities to determine that a recommendation or transaction is suitable for a customer and to attempt to execute transactions at prices as favorable to the customer as possible under prevailing market conditions.

Duplication of rules among regulatory groups is confusing, said Ronald Bernardi, principal and CEO at Bernardi Securities. FINRA and the MSRB are going to have to work through rule overlaps, he said.

“It would seem to me that this would be a wonderful opportunity for the MSRB to remove a lot of rules, refine certain rules because the suitability rule, at this point with Regulation Best Interest, is redundant,” Bernardi said.

Registered broker-dealers must comply with the over 700-page rule by June 30, 2020.

Bernardi said his firm has an advisory committee that meets once a week to prepare for the new rule.

“There is going to be a lot of work for the MSRB and FINRA,” Bernardi said. “There’s a lot of rule overlap. Not only is it going to be a big workload on market participants, broker-dealers and investment advisors, the regulators are going to have to look at their rulebook and see if the rules remain relevant and are duplicative.”

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SEC regulations SEC enforcement MSRB rules Broker dealers Lynnette Kelly Ken Bentsen SEC MSRB SIFMA