The Securities and Exchange Commission approved the slimming down of some municipal securities rules to align with its Regulation Best Interest set to go into effect in just a few days.
Per an SEC order released late Thursday, a handful of Municipal Securities Rulemaking Board Rules will be tightened to align its suitability rules with Reg BI. Two amendments were made to MSRB Rule G-19 on suitability to reduce redundancy.
The implementation date for the Reg BI is June 30, which has been a challenge for some broker-dealer firms during the coronavirus pandemic, groups say.
“Our members have been preparing for Reg BI,” said Mike Nicholas, CEO at Bond Dealers of America. “We’re disappointed that Reg BI hasn’t been delayed especially due to the economic shutdown due to the global health crisis. In our view, the SEC should have considered that and delayed the implementation of Reg BI to ensure that the firms get it right.”
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.
Broker-dealers have not been fully staffed in their offices due to social distancing, as true for vendors dealers use such as those to help with compliance, technology and data. However, Nicholas said dealers for the most part are prepared for Reg BI.
Nicholas said SEC Chair Jay Clayton did not push back the implementation date due to focusing on larger firms’ preparedness versus regional middle-market firms. He said many global investment banks build their solutions in house while smaller firms can’t and have to pay for outside counsel.
“It’s not as much of a burden for a large firm,” Nicholas said. “Chairman Clayton is guilty of focusing on larger firms versus smaller firms.”
Ron Bernardi, CEO of broker-dealer firm Bernardi Securities, said complying with Reg BI has been a heavy lift, but called it a good rule.
“Various regulatory agencies will start examining both investment advisors and broker-dealers for compliance,” Bernardi said. “Presumably, those in the industry will get additional guidance as those exams are completed. Bottom line, it’s a good rule for investors.”
Bernardi expects Reg BI to evolve, and said it achieves a need in raising the disclosure standards for investment advisors. Reg BI forces people to ask questions that they otherwise wouldn’t, Bernardi said.
Bernardi Securities formed a Reg BI committee in July to prepare and met weekly to prepare for the rule. It also had an outside compliance consultant and attorneys, Bernardi said.
As for the continual impacts of Reg BI changes, Bernardi said real-life guidance will shape its future.
“We’ll have to clearly amend our policies and procedures over time as the months and years go by and we get some practical experience and some real-life guidance from the various regulators,” Bernardi said. “That’s not in the rearview mirror yet, that’s out in front of us.
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.
The Securities Industry and Financial Markets Association said harmonizing Reg BI rules with municipal securities rules is understandable.
“SIFMA has long believed there is no justification for different suitability rules for municipal securities,” wrote Leslie Norwood, a managing director, associate general counsel, head of munis at SIFMA. “Harmonizing the rule set makes it easier for investors to understand, and less costly for firms to implement.”
The American Securities Association said dealers have been working around the clock to implement Reg BI.
“Reg BI is a strong national standard that includes significant investor protections and establishes clear rules for broker-dealers, without crippling business models that have served investors well for years,” said Chris Iacovella, ASA CEO.
Reg BI generally addresses the same conduct as MSRB Rule G-19 except it employs a best interest standard rather than a suitability standard. That rule is now limited to circumstances in which Reg BI doesn’t apply. The rule will be narrowed 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.
Among other 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.
Also on Thursday, the MSRB clarified how an SEC temporary order announced last week that allows municipal advisors to arrange some private placement activities without registering as broker-dealers, would impact its Rule G-23, on activities of financial advisors.
The MSRB clarified that the relief granted by the order is also available to MA broker-dealers, not just MAs.
“NAMA appreciates MSRB’s efforts to navigate the intersection of the Temporary Exemptive Order and MSRB rulemaking,” wrote Susan Gaffney, NAMA executive director.
SIFMA remains firm that the temporary exemptive order reduces investors’ protections, however it was pleased that the MSRB clarified that the relief applied equally to all MAs.
“The MSRB G-23 prohibition on role-switching is now side-stepped by the TEO’s expansion of municipal advisor activity,” Norwood said. “We continue to believe, as we have for years, the SEC should not permit municipal advisors to act as placement agents without registering as broker-dealers.”
