WASHINGTON — The Municipal Securities Rulemaking Board is requesting comments on a proposal to consolidate current fair dealing rule guidance into two stand-alone rules defining sophisticated municipal market professionals and laying out dealer obligations to SMMPs.

The two new rules, D-15 defining sophisticated municipal market professionals, and G-48 on the regulatory obligations of brokers, dealers and municipal securities dealers to such SMMPs, would replace current interpretive notices attached to the MSRB’s rule G-17 on fair dealing.

The move would “not change the substance of the restated SMMP notice,” originally issued in July 2012, the MSRB said, but is part of an effort to trim down the more than thirty pages of interpretive rules that accompany G-17.

This change, if adopted along with a new rule on trade disclosures and changes to the suitability rule, would allow the MSRB to delete four current interpretive notices from the lengthy fair dealing document.

The board hopes this will create greater clarity, according to MSRB executive director Lynnette Kelly.

“Consolidating the MSRB’s SMMP-related guidance into two stand-alone rules is another step in the MSRB’s effort to streamline the many interpretations attached to Rule G-17,” she said. “We aim to help dealers more easily identify and comply with their obligations to all customers, including the more sophisticated professionals in the market.”

The definitional rule would define an SMMP as a customer of a broker, dealer, or municipal securities dealer that is a financial institution such as a bank, a registered investment advisor, or an investor with assets of at least $50 million. If a customer satisfies any of those requirements and the dealer has a “reasonable basis” to believe the customer is capable of weighing the investment risks appropriately, that investor would be an SMMP under D-15. An investor could affirm, either orally or in writing, that he or she is exercising that judgement.

The stand-alone definition could provide dealer groups another opportunity to weigh in on the subject, as some have suggested that the MSRB definition of SMMP is a bit too broad.

In a December 2011 comment letter to the MSRB on the SMMP interpretive notice, Bond Dealers of America chief executive officer Mike Nicholas urged the board to consider scaling back the criteria on total assets.

“We believe that the amount could be lower than $50 million and still reflect that the investor is able to make independent judgments,” Nicholas wrote. “We note that the requirement for Accredited Investors requires a net worth as low as $2 million, and the SEC [Securities and Exchange Commission] has determined that those investors are sophisticated enough to purchase a variety of unregistered securities, including stock.”

BDA suggested cutting the amount to $25 million, and specifying that those holdings be fixed-income securities.

The proposed rule G-48 would spell out the dealer’s reduced obligations to such investors.

When dealing with an SMMP, the proposed rule makes clear, the dealer has no requirement under rule G-47 on time of trade disclosure to ensure dissemination of material information that is readily available. The dealer would also have no obligation under rule G-18 on transaction pricing to ensure that certain transactions were effected at fair and reasonable prices. There would also be no obligation for the dealer to perform a suitability analysis under rule G-19.

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said SIFMA has supported the MSRB’s previous guidance on SMMPs but needs additional time to discuss the stand-alone rule with member institutions. Cohen applauded the board for taking a comprehensive approach to clarifying the existing G-17 interpretations.

“We appreciate the MSRB recognizing that because SMMP, suitability and time of trade disclosures are so interconnected that the effective date to any changes to all three will be the same,” Cohen said. “We believe harmonization of these effective dates is critically important.”

The MSRB has said it hopes to submit the comprehensive package streamlining G-17 for SEC approval sometime later this year.

The board wants to know whether the proposed changes would help identify SMMPs more effectively, and whether they would benefit or create a burden to dealers. Comments are due by June 12.

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