WASHINGTON — An industry group has asked regulators to disclose the factors they will use to determine which muni broker-dealers pose more risks and should undergo compliance examinations more often under a new proposed exam program.
In a comment letter filed with the Securities and Exchange Commission last week, the Securities Industry and Financial Markets Association said the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority should “specifically enumerate” the factors they will invoke in shifting to a program that would examine the riskiest broker-dealers more frequently — as often as once a year.
In addition, SIFMA said, the self-regulators should not implement any proposed changes to the exam cycle until they have engaged in a dialogue with market participants.
“The risk factors should be identified,” David Cohen, SIFMA’s managing director and associate general counsel, said in an interview. “We don’t think it’s spelled out in the notice.”
Nancy Condon, a FINRA spokesperson, did not comment on SIFMA’s request, writing in an e-mail, “We do not comment on letters submitted on rule proposals prior to responding to the SEC.”
A spokesperson for the MSRB did not respond to a request for comment.
SIFMA’s remarks come as the MSRB has floated proposed amendments to Rule G-16 on periodic examinations, citing recent industry consolidation into a small number of large firms that account for the majority of public-finance business.
In a notice filed with the SEC on Oct. 13, the board said that by par amount, the top 200 dealers executed approximately 98% of all muni transactions reported to the MSRB in 2010 and 2011. The top 200 underwriters accounted for almost 100% of underwritings, by par amount, in 2010 and 2011, the notice said.
The remaining 1,600 firms are less active, generally do not engage in financial advisory activities, muni underwriting, research, or trading, and thus “do not pose systemic risk to the market in these areas,” the board said.
Under the current rule, which has been in place since the late 1970s, FINRA must conduct an exam of every muni broker-dealer at least once every two years — and the exam must cover, “at a minimum,” whether the dealer and its associated persons are in compliance with all of the board’s rules.
But the board has proposed establishing a risk-based compliance program that would enable FINRA to examine firms with low volumes of muni business less frequently than every two years, but at least once every four years.
FINRA would rank dealers by “certain risk factors,” as well as size and scope of business, to determine the frequency of their exams, but the board did not identify the risk factors.
The notice also said the MSRB anticipated that higher-risk firms, as well as those that “pose a systemic threat based on the scope and scale” of their muni activities, would be examined annually.
In addition, SIFMA criticized a proposed change to Rule G-9 on record keeping that would require broker-dealers to maintain certain records for four years, rather than three, calling the requirement “unnecessarily burdensome.”
“Such a change is not warranted to support the proposed changes to the frequency of the cycle examinations,” Cohen wrote.
Separately, the Investment Company Institute filed a comment letter supporting the proposed revisions, saying they would boost efficiency in the exam process “without diminishing the effectiveness of the MSRB’s oversight.”
