The Securities Industry and Financial Markets Association is asking the Municipal Securities Rulemaking Board to explicitly exempt sophisticated institutional investors from certain standards under the MSRB's suitability rule following its recent revision attempting to harmonize the rule with Regulation Best Interest.
Leslie Norwood, SIFMA’s head of municipal securities, filed a letter to that effect with the MSRB late Wednesday along with separate comments regarding the application of RegBI to bank dealers. Norwood told the board the MSRB’s 2020 amendments to Rule G-19, intended to harmonize the rule with the Securities and Exchange Commission’s 2019 adoption of Reg BI, could unnecessarily burden dealers by providing protections to institutional sophisticated municipal market professional (SMMP) customers who don’t require them.
“SIFMA members feel strongly that the quantitative suitability requirement in Rule G-19 should be clarified, and interpreted as applicable only to natural person SMMPs, but not to institutional SMMPs,” Norwood wrote. “Extending the quantitative suitability requirement to all SMMPs would be unduly costly and burdensome and would not harmonize the MSRB rules with Regulation Best Interest.”
RegBI strengthened the broker-dealer standard of conduct beyond previously existing suitability obligations to require that a broker-dealer may not put its financial interests ahead of the interests of a retail investor. SIFMA’s concern stems from changes the MSRB made to G-19 supplemental material as part of its effort to harmonize its rules with Reg BI.
Specifically, that material now requires a dealer to have “a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer's investment profile.” It previously included a clause specifying that the dealer must have “actual or de facto control” of the account for that requirement to apply.
Rule G-48 on transactions with sophisticated municipal market professionals grants dealers exemptions from suitability requirements with SMMPs under many circumstances, but it does not apply to the clause at issue.
“Some SIFMA members believe that as a result of removal of the language stricken below in the supplemental material, the quantitative suitability requirement may now be applicable to SMMPs with non-discretionary accounts, as Rule G-48 only exempts the customer-specific suitability requirement,” Norwood wrote.
Norwood told the MSRB that while it was clear the MSRB was trying to harmonize its treatment of SMMPs with the way the Financial Industry Regulatory Authority treats Exempt Institutional Investors (EIIs), there is precedent for the MSRB to diverge from FINRA in this area and that it should do so in this case.
“SIFMA is requesting MSRB to make another reasoned departure in how it treats SMMPs from how FINRA treats EIIs with respect to the quantitative suitability requirement,” Norwood wrote.
SIFMA was also among the few respondents to the MSRB’s request for comment on
Bank dealers are not regulated by the SEC or covered by RegBI, but have a small presence in the municipal market. Non-bank dealers conducted almost four million trades in 2019, compared to just 61,909 from the top seven bank dealers, according to MSRB data.
Some bank dealers include FHN Financial, Wells Fargo, Bank of America, Zions Bancorporation, BOK Financial Corporation and UMB Financial Corp.
Dealer groups were initially supportive, and comments received by the MSRB reiterated that support.
“Although our members do not normally conduct retail activity through their affiliated banks that would implicate this rule, we believe that regulatory parity among regulated entities, which this amendment achieves, is a worthwhile goal,” Norwood wrote.
American Securities Association CEO Christopher Iacovella told the MSRB the proposed change is an important part of creating a strong national standard for dealers.
“Reg BI raises the bar for the entire broker-dealer industry and will prevent bad actors from taking advantage of vulnerable investors,” Iacovella wrote. “While technical in nature, the proposal will reduce regulatory confusion for municipal dealers and further establish Reg BI as the national standard for broker-dealers and bank dealers.”
The SEC must approve rule changes the MSRB proposes, and will often have its own comment period prior to doing so.
