Why MSRB is proposing a discretionary account rule

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WASHINGTON - The Municipal Securities Rulemaking Board is asking market participants to comment on a proposal aimed at protecting bond investors with discretionary accounts by re-establishing a stand-alone rule handling transactions in those accounts.

The MSRB made the request Wednesday and said that comments on the proposal should be submitted by July 16, 2018.

The proposed Rule G-36 on discretionary transactions in customer accounts would consolidate and make explicit existing requirements for such transactions, the MSRB said in its notice, stating among other things that dealers need a “signed, dated prior written authorization to exercise discretionary power.” Discretionary accounts are customer accounts in which a dealer is authorized to determine what municipal securities will be purchased or sold.

Prior to 1985 the MSRB had a standalone rule -- former MSRB Rule G-26 -- that governed the administration of discretionary and other accounts. That year the MSRB deleted it and reorganized its requirements into Rules G-19 on suitability and Rule G-27 on supervision because the board wanted all suitability and supervision-based requirements contained in dedicated rules.

In 2014, the MSRB amended Rule G-19 to more closely harmonize with the suitability rule of the Financial Industry Regulatory Authority. The MSRB noted then that the suitability obligation is the same for discretionary and non-discretionary accounts and said there was “no reason to restate the obligation as it specifically related to discretionary accounts.”

The MSRB instead stated that it would be more appropriate for the non-suitability-related provisions on discretionary accounts contained in Rule G-19 to be set forth in a separate rule.

“The MSRB believes that re-establishing a substantive rule directly addressing the issues, and consolidating and articulating affirmative requirements, rather than primarily relying on implicit requirements in a books-and-records rule would provide dealers clarity as to their obligations for such accounts,” the board said in its request for comments.

MSRB president Lynnette Kelly said the rule is a question of providing equal protection in the muni market.

“We want to be sure municipal bond investors with discretionary accounts are protected to the same extent as those who have granted such discretion for other financial products,” Kelly said.

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