MSRB proposes rule changes to line up with SEC's best interest standard

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The Municipal Securities Rulemaking Board is slimming down its suitability rules for broker-dealers to better align with the Securities and Exchange Commission’s Regulation Best Interest, which is set to go into effect June 30.

In a filing sent to the SEC Friday, the MSRB proposed amending some of its rules in light of Reg BI, which the SEC adopted in June 2019. Dealers are so far pleased by the MSRB’s proposed changes to reduce repetitiveness among the rules.

“Any reduction in rule redundancy is welcome,” said Ron Bernardi, principal and chief executive officer at Bernardi Securities. “This is certainly the case here.”

The MSRB asked for two amendments on its MSRB Rule G-19, on suitability, one being to limit it to only situations where Reg BI doesn’t apply.

SEC Chair Jay Clayton said in an April statement that a June 30, 2020 compliance date for Regulation Best Interest "remains appropriate."

Reg BI 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 interest ahead of the interest of a retail investor. It will also require broker-dealers and investment advisers to state clearly facts about their relationships with their customers, including financial incentives.

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.

Reg BI generally addresses the same conduct as MSRB Rule G-19, the MSRB said, except it employs a best interest standard rather than a suitability standard.

To reduce duplicativeness and complexity, the MSRB wants to limit the application of Rule G-19 to circumstances in which Reg BI doesn’t apply. So the MSRB wants to add text to narrow the rule to recommendations to customers that are not retail customers and recommendations to any customers by bank dealers. Bank dealers are muni securities dealers associated with banks and are not subject to Reg BI.

The MSRB plans to issue a separate request for comment on whether the board will apply Reg BI requirements through MSRB rule amendments to bank dealers.

The second change would be to remove the limitation in Rule G-19 that requires a quantitative suitability obligation. That obligation means dealers who have actual or de facto control over a customer account have to have a reasonable basis for believing that a series of recommended transactions, even if suitable viewed in isolation, are not excessive and unsuitable for the customer in light of the customer’s investment profile.

The quantitative care obligation in Reg BI applies regardless of whether the dealer exercises actual or de facto control over the customer’s account, the MSRB said in the filing.

Reg BI should transcend MSRB Rule G-19, Bernardi said.

“Circumstances where Reg BI applies such as G-19 is redundant and therefore should cease to apply,” Bernardi said. “There’s no point in it.”

The Securities Industry and Financial Markets Association likes the proposed changes.

“SIFMA appreciates the MSRB amending its rules to be consistent with the final Reg BI rule,” said Leslie Norwood, SIFMA’s managing director, associate general counsel, and head of municipals. “We have long believed there is no justification for different suitability rules for municipal securities. Harmonizing the rule set makes it easier for investors to understand, and less costly for firms to implement.”

Bond Dealers of America said at first glance the proposal “comports” MSRB rules with Reg BI.

“As we are engaging with the SEC, FINRA (Financial Industry Regulatory Authority) and MSRB on many aspects of Reg BI we will review the proposal in detail and provide comments to the MSRB very soon,” said Mike Nicholas, BDA CEO.

Among other proposed changes are amendments to Rule G-20, on gifts and gratuities, Rule G-48, on transactions with sophisticated municipal market professionals (SMMPs), and MSRB Rules G-8 and G-9, on books and records.

The SEC could decide to open up the filing for comment, approve the MSRB’s filing as is, decide not to approve the filing or ask the MSRB to amend the filing.

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