Federal Register / Vol. 77, No. 72 / Friday, April 13, 2012 / Notices 22367 

13 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

by making clarifying and conforming 

changes to previously amended text. 

It would be unjust and inequitable to 

continue to impose in-person trading 

requirements on non-SQT ROTs without 

counting orders entered electronically 

given that their ability to trade other 

than by the use of orders has 

substantially diminished over the years. 

Making the changes proposed herein 

will remove impediments to and perfect 

the mechanism of a free and open 

market and a national market system by 

eliminating an in-person trading 

requirement that non-SQT ROTs will 

have difficulty meeting given the 

current electronic trading environment, 

thus enabling them to continue making 

markets by open outcry, to the extent 

they are able, to the benefit of investors. 

Investors and the public interest are 

protected by including as market makers 

those individuals who, while unable or 

unwilling to invest resources necessary 

for streaming, are able to provide 

liquidity in the open outcry trading that 

does remain on the floor of the 

Exchange. The changes that conform 

rule text to an earlier Exchange 

amendment benefit investors and the 

public interest by providing clarity and 

eliminating potential confusion. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

No written comments were either 

solicited or received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the self-regulatory organization 

consents, the Commission will: 

(A) by order approve or disapprove 

the proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rulecomments@sec.gov. Please include File 

Number SR–Phlx–2012–40 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–Phlx–2012–40. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of the filing will 

also be available for inspection and 

copying at the Exchange’s principal 

office. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make publicly available. All 

submissions should refer to File 

Number SR–Phlx–2012–40 and should 

be submitted on or before May 4, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8877 Filed 4–12–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66772; File No. SR–MSRB– 

2012–05] 

Self-Regulatory Organizations; 

Municipal Securities Rulemaking 

Board; Notice of Filing of a Proposed 

Rule Change Consisting of a 

Restatement of an Interpretive Notice 

Concerning the Application of MSRB 

Rule G–17 to Sophisticated Municipal 

Market Professionals 

April 9, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘the 

Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on March 26, 2012, the Municipal 

Securities Rulemaking Board (‘‘Board’’ 

or ‘‘MSRB’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the MSRB. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The MSRB is filing with the SEC a 

proposed rule change consisting of a 

restatement of an interpretive notice 

(the ‘‘Existing SMMP Notice’’ and the 

‘‘Restated SMMP Notice,’’ respectively) 

concerning the application of MSRB 

Rule G–17 (on conduct of municipal 

securities and municipal advisory 

activities) to sophisticated municipal 

market professionals (‘‘SMMPs’’). 

Because of the relationship between the 

proposed rule change and FINRA Rule 

2111 (on suitability), the MSRB requests 

that the proposed rule change be made 

effective on July 9, 2012, which is the 

date on which FINRA Rule 2111 will 

become effective. 

The text of the proposed rule change 

is available on the MSRB’s Web site at 

www.msrb.org/Rules-andInterpretations/SEC-Filings/2012- 

Filings.aspx, at the MSRB’s principal 

office, and at the Commission’s Public 

Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

MSRB included statements concerning 

the purpose of and basis for the 


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3For purposes of the Existing SMMP Notice, an 

institutional customer is defined as ‘‘an entity, 

other than a natural person (corporation, 

partnership, trust, or otherwise), with total assets of 

at least $100 million invested in municipal 

securities in the aggregate in its portfolio and/or 

under management.’’ 

4MSRB Interpretive Notice Regarding Rule G–17, 

On Disclosure of Material Facts (March 20, 2002) 

(the ‘‘2002 Rule G–17 Notice’’). 

5The 2002 Rule G–17 Notice was updated in 

2009 to reflect, among other things, the addition of 

EMMA as an established industry source. See 

MSRB Guidance On Disclosure and Other Sales 

Practice Obligations to Individual and Other Retail 

Investors in Municipal Securities (July 14, 2009). 

The 2009 Notice also extended the Rule G–17 

affirmative disclosure obligation to ‘‘material 

information.’’ 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. The MSRB has 

prepared summaries, set forth in 

Sections A, B, and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Existing Definition of SMMP 

Under the Existing SMMP Notice, a 

dealer is permitted to treat an 

institutional customer 3 as an SMMP if 

the dealer has reasonable grounds for 

concluding the following and other 

known facts do not contradict such a 

conclusion: 

• The customer has timely access to 

the publicly available material facts 

concerning a municipal securities 

transaction; 

• The customer is capable of 

independently evaluating the 

investment risk and market value of the 

municipal securities at issue; and 

• The customer is making 

independent decisions about its 

investments in municipal securities. 

Although the Existing SMMP Notice 

permits a dealer to have an investor 

attest to SMMP status ‘‘as a means of 

streamlining the dealers’ process for 

determining that the customer is an 

SMMP,’’ it also provides that a dealer 

may not rely on such an attestation if 

the dealer knows or has reason to know 

that the investor lacks sophistication 

concerning a municipal securities 

transaction based on a number of factors 

set forth in the notice. 

Access to Material Facts. As to the 

first part of the definition of SMMP, 

access to material facts, the Existing 

SMMP Notice provides that a dealer’s 

analysis may depend on the customer’s 

resources to investigate the transaction 

(e.g., research analysts) and the 

customer’s ready access to established 

industry sources for disseminating 

material information concerning the 

transaction (e.g., the predecessors of the 

MSRB’s Electronic Municipal Market 

Access (‘‘EMMA’’) System and the 

MSRB’s Real-Time Trade Reporting 

System (‘‘RTRS’’), rating agency data, 

and other indicative data sources). 

Independent Evaluation of Investment 

Risk and Market Value. As to the second 

part of the definition of SMMP, 

independent evaluation of risk and 

market value, the Existing SMMP Notice 

identifies the following relevant factors: 

• The customer’s use of one or more 

consultants, investment advisers, 

research analysts or bank trust 

departments; 

• The customer’s general level of 

experience in municipal securities 

markets and specific experience with 

the type of municipal securities under 

consideration; 

• The customer’s ability to 

understand the economic features of the 

municipal security; 

• The customer’s ability to 

independently evaluate how market 

developments would affect the 

municipal security under consideration; 

and 

• The complexity of the municipal 

security or securities involved. 

Independent Investment Decisions. As 

to the third part of the definition, 

independent investment decisions, the 

Existing SMMP Notice provides that 

such a determination will depend on 

the nature of the relationship between 

the dealer and the institutional 

customer and provides that the 

following considerations may be 

relevant: 

• Any written or oral understanding 

that exists between the dealer and the 

institutional customer regarding the 

nature of the relationship between the 

dealer and the institutional customer 

and the services to be rendered by the 

dealer; 

• The presence or absence of a 

pattern of acceptance of the dealer’s 

recommendations; 

• The use by the institutional 

customer of ideas, suggestions, market 

views, and information relating to 

municipal securities obtained from 

sources other than the dealer; and 

• The extent to which the dealer has 

received from the institutional customer 

current comprehensive portfolio 

information in connection with 

discussing potential municipal 

securities transactions or has not been 

provided important information 

regarding the institutional customer’s 

portfolio or investment objectives. 

Application of Existing SMMP 

Definition 

The Existing SMMP Notice addresses 

a dealer’s obligations to an SMMP under 

Rule G–17 (on fair dealing), Rule G–18 

(on execution of transactions), Rule G– 

19 (on suitability), and Rule G–13 (on 

quotations). 

Rule G–17. Just prior to the adoption 

of the Existing SMMP Notice, the SEC 

approved another MSRB notice 4 in 

which the MSRB interpreted Rule G–17 

to require brokers, dealers, and 

municipal securities dealers (‘‘dealers’’) 

to disclose to customers at or before the 

time of trade all material facts about a 

transaction known by the dealer, as well 

as all material facts about a security 

reasonably accessible to the market from 

established industry sources.5 The 

Existing SMMP Notice provides that, 

when a dealer effects a nonrecommended secondary market 

transaction with an SMMP, its 

affirmative Rule G–17 disclosure duty 

concerning material facts available from 

established industry sources will be 

deemed satisfied. The Existing SMMP 

Notice does not alter a dealer’s duty not 

to engage in deceptive, dishonest, or 

unfair practices under Rule G–17 or 

under the federal securities laws. In 

essence, it puts the dealer’s disclosure 

obligations to SMMPs when effecting 

non-recommended secondary market 

transactions on a par with inter-dealer 

disclosure obligations. The Existing 

SMMP Notice provides that, as in the 

case of an inter-dealer transaction, in a 

transaction with an SMMP, a dealer’s 

intentional withholding of a material 

fact about a security, when the 

information is not accessible through 

established industry sources, may 

constitute an unfair practice that 

violates Rule G–17. 

Rule G–18. Rule G–18 provides that 

each dealer, when executing a 

transaction in municipal securities for 

or on behalf of a customer as agent, 

must make a reasonable effort to obtain 

a price for the customer that is fair and 

reasonable in relation to prevailing 

market conditions. The Existing SMMP 

Notice provides that a dealer effecting a 

non-recommended secondary market 

agency transaction to an SMMP is not 

required to take further actions to 

ensure that the transaction is effected at 

a fair and reasonable price, if its services 

have been explicitly limited to 

providing anonymity, communication, 

order matching, and/or clearance 

functions and the dealer does not 

exercise discretion as to how or when a 

transaction is executed. The Existing 

SMMP Notice then states that this 

interpretation of Rule G–18 is 


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6See IM–2310–3. Suitability Obligations to 

Institutional Customers. 

7The term ‘‘institutional account’’ will be defined 

in the same manner as under MSRB Rule G–8(a)(xi). 

MSRB Rule G–8(a)(xi) defines ‘‘institutional 

account’’ as: the account of (i) a bank, savings and 

loan association, insurance company, or registered 

investment company; (ii) an investment adviser 

registered either with the Commission under 

Section 203 of the Investment Advisers Act of 1940 

or with a state securities commission (or any agency 

or office performing like functions); or (iii) any 

other entity (whether a natural person, corporation, 

partnership, trust, or otherwise) with total assets of 

at least $50 million. 

8 ‘‘Institutional customer’’ would be defined as a 

customer with an institutional account (as defined 

under MSRB Rule G–8(a)(xi). 

particularly relevant to dealers 

operating alternative trading systems, 

stating that dealers operating such 

systems may be merely aggregating the 

buy and sell interest of other dealers or 

SMMPs. A footnote to the Existing 

SMMP Notice says that the same 

interpretation would apply to a broker’s 

broker when executing an agency 

transaction for another dealer. 

Rule G–19. Under Rule G–19, in the 

case of a recommended transaction, a 

dealer must have a reasonable basis for 

recommending a particular security 

(‘‘reasonable-basis suitability’’), as well 

as reasonable grounds for believing the 

recommendation is suitable for the 

customer to whom it is made, based 

upon information available from the 

issuer of the security or otherwise and 

based upon the facts disclosed by the 

customer or otherwise known about the 

customer (‘‘customer-specific 

suitability’’). The Existing SMMP Notice 

provides that, when a dealer has 

reasonable grounds for concluding that 

an institutional customer is an SMMP, 

the dealer’s customer-specific suitability 

obligation is fulfilled. 

Rule G–13. Under Rule G–13, no 

dealer may distribute or publish, or 

cause to be distributed or published, 

any quotation relating to municipal 

securities, unless the quotation is bona 

fide (i.e., the dealer making the 

quotation is prepared to execute at the 

quoted price) and the price stated in the 

quotation is based on the best judgment 

of the dealer of the fair market value of 

the securities that are the subject of the 

quotation at the time the quotation is 

made. In general, any quotation 

disseminated by a dealer (including the 

quotation of an investor) is presumed to 

be a quotation made by the dealer and 

the dealer is responsible for ensuring 

compliance with the bona fide and fair 

market value requirements with respect 

to the quotation. However, if a dealer 

disseminates a quotation that is actually 

made by another dealer and the 

quotation is labeled as such, then the 

quotation is presumed to be a quotation 

made by such other dealer and not by 

the disseminating dealer. In such a case, 

the disseminating dealer is only 

required to have no reason to believe 

that either: (i) The quotation does not 

represent a bona fide bid for, or offer of, 

municipal securities by the maker of the 

quotation or (ii) the price stated in the 

quotation is not based on the best 

judgment of the maker of the quotation 

of the fair market value of the securities. 

The Existing SMMP Notice provides 

that, if a dealer disseminates the 

quotation of an SMMP and it is labeled 

as such, the disseminating dealer will be 

held to the same standard as if it were 

disseminating a quotation made by 

another dealer. The notice says that the 

following factors are relevant to the 

dealer’s assessment of whether 

dissemination of the SMMP’s quotation 

may be considered to be a violation of 

Rule G–13 by the dealer: (i) Complaints 

received from dealers and investors 

seeking to execute against such 

quotations, (ii) a pattern of an SMMP 

failing to update, confirm or withdraw 

its outstanding quotations so as to raise 

an inference that such quotations may 

be stale or invalid, or (iii) a pattern of 

an SMMP effecting transactions at 

prices that depart materially from the 

prices listed in the quotations in a 

manner that consistently is favorable to 

the SMMP making the quotation. 

Considerations for Change 

Increased Availability of Information 

about Municipal Securities. In 2002, the 

MSRB decided to adopt a definition of 

SMMP that differed from certain other 

regulatory definitions of investors 

considered sophisticated enough to 

receive special treatment under the 

federal securities law. The SMMP 

definition was closely modeled on an 

NASD interpretation of its suitability 

rule,6 which contained a comparable list 

of factors found relevant to an investor’s 

independent evaluation of risk and 

independent investment decisions. A 

notable difference was that the 

definition of SMMP also looked to 

whether the investor had access to 

material facts. A key factor in the 

MSRB’s decision was the lack of 

information available about municipal 

securities at that time. Since the 

adoption of the existing definition of 

SMMP, there has been a vast increase in 

the availability of information about 

municipal securities reasonably 

accessible by institutional investors 

regardless of the amount of their 

holdings of municipal securities (e.g., 

on EMMA, from rating agencies, and 

from other information vendors). 

New FINRA Institutional Suitability 

Rule. Effective July 9, 2012, the NASD 

guidance on institutional suitability will 

no longer be in effect. It will be replaced 

by FINRA Rule 2111, which adopts a 

different approach to a FINRA member’s 

customer-specific duty of suitability to 

an ‘‘institutional account.’’ 7 Under 

FINRA Rule 2111, a dealer’s customerspecific suitability obligation to an 

institutional customer will be 

considered satisfied if (1) the dealer has 

a reasonable basis to believe that the 

institutional customer is capable of 

evaluating investment risks 

independently, both in general and with 

regard to particular transactions and 

investment strategies involving a 

security or securities and (2) the 

institutional customer affirmatively 

indicates that it is exercising 

independent judgment in evaluating the 

dealer’s recommendations. There will 

no longer be a detailed listing of factors, 

such as that found in the Existing 

SMMP Notice. The MSRB generally 

considers it desirable from the 

standpoint of reducing the cost of dealer 

compliance to maintain consistency 

with FINRA rules, absent clear reasons 

for treating transactions in municipal 

securities differently. 

Proposal to Restate SMMP Notice 

Revised Definition of SMMP. Because 

the quality and availability of 

information concerning municipal 

securities has improved substantially 

since 2002, and to maintain consistency 

with the revised FINRA suitability rule 

for institutional customers, the MSRB 

proposes to retain the concept of an 

SMMP, but revise its definition so that 

it is consistent with the new FINRA 

suitability rule for institutional 

customers. Specifically, the MSRB 

proposes that an ‘‘SMMP’’ be defined as 

an ‘‘institutional customer 8 of a dealer 

that: (1) The dealer has a reasonable 

basis to believe is capable of evaluating 

investment risks and market value 

independently, both in general and with 

regard to particular transactions in 

municipal securities, and (2) 

affirmatively indicates that it is 

exercising independent judgment in 

evaluating the recommendations of the 

dealer.’’ 

The MSRB also proposes to include 

the following statement in the Restated 

SMMP Notice’s discussion of the 

definition of SMMP: ‘‘As part of the 

reasonable basis analysis required by 

clause (1), the dealer should consider 

the amount and type of municipal 

securities owned or under management 

by the institutional customer.’’ 

The key to the revised definition of 

SMMP is the requirement that a dealer 

have a reasonable basis to believe that 

an investor is capable of evaluating 


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9File No. SR–MSRB–2012–04 (March 5, 2012). 

The MSRB notes that, under proposed Rule G– 

43(d)(iii)(A), an alternative trading system that had 

any customers (as defined in MSRB Rule D–9) that 

were not SMMPs would not be excepted from the 

definition of ‘‘broker’s broker.’’ 

10The MSRB notes that proposed MSRB Rule G– 

43 would provide for additional regulation of such 

alternative trading systems. 

investment risks and market value 

independently, both in general and with 

regard to particular transactions in 

municipal securities (sometimes 

referred to in this filing as the 

‘‘reasonable basis analysis’’). When the 

MSRB created the existing definition of 

SMMP, alternative trading systems for 

municipal securities were new and 

access to material facts about municipal 

securities was in large part limited to 

very large institutional investors. The 

high threshold for determining whether 

an investor would be considered an 

institutional customer under the 

Existing SMMP Notice ($100 million of 

municipal securities owned and/or 

under management) was considered 

necessary to make sure that only the 

most sophisticated institutions and 

dealers were likely to use alternative 

trading systems. The Restated SMMP 

Notice would provide that, as part of its 

reasonable basis analysis, a dealer 

should consider the amount and type of 

municipal securities owned or under 

management by the institutional 

customer. However, there would no 

longer be a threshold requirement that 

a customer own or manage a certain 

amount of municipal securities in order 

to be considered an SMMP. 

The MSRB also proposes that, in the 

case of the affirmation described in 

clause (2) of the revised definition of 

SMMP (i.e., ‘‘capable of evaluating 

investment risks and market value 

independently’’), customers be allowed 

to make the affirmation orally or in 

writing and to provide the affirmation 

on a trade-by-trade basis, on a type-ofmunicipal-security basis (e.g., general 

obligation, revenue, VRDO, etc.), or for 

all potential transactions for the 

customer’s account. This would be 

consistent with the affirmation 

requirement of FINRA Rule 2111, so 

receipt by a dealer of the FINRA 2111 

affirmation would also satisfy this 

requirement. 

Application of Revised SMMP 

Definition. The Restated SMMP Notice 

would not change the application of 

Rules G–18, G–19, and G–13 to SMMPs. 

However, it would change the 

application of Rule G–17 to SMMPs, 

under the assumption that institutional 

customers now have substantial access 

to material information about municipal 

securities. The Existing SMMP Notice 

limits the exclusion from the duty to 

disclose all material facts to SMMPs to 

non-recommended transactions. The 

Restated SMMP Notice would apply the 

exclusion to all transactions with 

SMMPs, whether recommended or selfdirected. The Restated SMMP Notice 

would also remove the lists of factors 

that were deemed by the Board in 2002 

to be relevant to the components of the 

original definition of SMMP. It would 

also update the Existing SMMP Notice 

to reflect developments in the MSRB’s 

interpretations of Rule G–17 since 2002 

and remove endnote 9 to the Existing 

SMMP Notice, which has been 

construed by some to lessen the duty of 

a broker’s broker under Rule G–18 in a 

manner that is inconsistent with the 

Board’s proposed Rule G–43 (on 

broker’s brokers).9 Furthermore, it 

would remove the language that 

suggests that transactions on alternative 

trading systems are done on an agency 

basis, because at least one major 

alternative trading system engages only 

in principal transactions. 

2. Statutory Basis 

The MSRB believes that the proposed 

rule change is consistent with Section 

15B(b)(2) of the Securities Exchange Act 

(‘‘Exchange Act’’), which provides that: 

The Board shall propose and adopt rules to 

effect the purposes of this title with respect 

to transactions in municipal securities 

effected by brokers, dealers, and municipal 

securities dealers and advice provided to or 

on behalf of municipal entities or obligated 

persons by brokers, dealers, municipal 

securities dealers, and municipal advisors 

with respect to municipal financial products, 

the issuance of municipal securities, and 

solicitations of municipal entities or 

obligated persons undertaken by brokers, 

dealers, municipal securities dealers, and 

municipal advisors. 

Section 15B(b)(2)(C) of the Exchange 

Act, provides that the rules of the MSRB 

shall: 

be designed to prevent fraudulent and 

manipulative acts and practices, to promote 

just and equitable principles of trade, to 

foster cooperation and coordination with 

persons engaged in regulating, clearing, 

settling, processing information with respect 

to, and facilitating transactions in municipal 

securities and municipal financial products, 

to remove impediments to and perfect the 

mechanism of a free and open market in 

municipal securities and municipal financial 

products, and, in general, to protect 

investors, municipal entities, obligated 

persons, and the public interest. 

The proposed rule change is 

consistent with Sections 15B(b)(2) and 

15B(b)(2)(C) of the Exchange Act. Its 

principal purpose is to remove 

impediments to and perfect the 

mechanism of a free and open market in 

municipal securities, particularly in the 

case of the alternative trading systems 

that have been an increasingly 

important venue for the provision of 

secondary market liquidity for 

municipal securities. New municipal 

securities products, such as Build 

America Bonds, and decreasing spreads 

between interest rates on Treasury 

bonds and municipal securities, have 

attracted investors that were not 

previously invested in municipal 

securities to the municipal securities 

market. At the same time, the amount of 

available information about municipal 

securities has vastly increased since the 

Existing SMMP Notice was approved. 

While the Restated SMMP Notice would 

provide that a dealer should consider 

the amount and type of municipal 

securities owned or under management 

by the institutional customer, the MSRB 

no longer considers it essential that an 

institutional customer own or manage 

municipal securities in order to engage 

in informed decisionmaking about 

municipal securities investments. The 

MSRB believes it is appropriate to allow 

sophisticated investors to trade in 

municipal securities on alternative 

trading systems even though they do not 

meet the $100 million threshold of 

municipal securities owned and/or 

managed found in the Existing SMMP 

Notice. This change would not come at 

the expense of investor protection. 

While the application of the proposed 

rule change would not be limited to 

transactions on alternative trading 

systems, the application of certain 

MSRB rules to such systems has proven 

difficult in practice, especially with the 

increasing use of computerized 

algorithmic trading. The MSRB notes 

that such systems, if monitored closely 

and subjected to appropriate 

rulemaking,10 have the potential to 

increase pre-trade transparency in the 

municipal marketplace, which should 

eventually improve prices for all 

investors. The MSRB also generally 

considers it desirable from the 

standpoint of reducing the cost of dealer 

compliance to maintain consistency 

with FINRA rules, absent clear reasons 

for treating transactions in municipal 

securities differently. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The MSRB does not believe that the 

proposed rule change would impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act, since it 

would apply equally to all dealers that 

have SMMP customers, whether 

alternative trading systems or not. 


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11See MSRB Notice 2011–63 (November 8, 2011). 

12Both the general rule and the safe harbor 

contained ‘‘attestation’’ requirements, unlike the 

version of the SMMP definition in the proposed 

rule change. 

13The following statement from FINRA 

Regulatory Notice 11–02 (January 2011) is useful: a 

broker-dealer must know its customers not only at 

account opening but also throughout the life of its 

relationship with customers in order to, among 

other things, effectively service and supervise the 

customers’ accounts. Since a broker-dealer’s 

relationship with its customers is dynamic, FINRA 

does not believe that it can prescribe a period 

within which broker-dealers must attempt to update 

this information. As with a customer’s investment 

profile under the suitability rule, a firm should 

verify the ‘‘essential facts’’ about a customer under 

the know-your-customer rule at intervals reasonably 

calculated to prevent and detect any mishandling 

of a customer’s account that might result from the 

customer’s change in circumstances. The 

reasonableness of a broker-dealer’s efforts in this 

regard will depend on the facts and circumstances 

of the particular case. Firms should note, however, 

that SEA Rule 17a–3 requires broker-dealers to, 

among other things, attempt to update certain 

account information every 36 months regarding 

accounts for which the broker-dealers were required 

to make suitability determinations. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

On November 8, 2011, the MSRB 

requested comment on the original 

version of the proposed rule change.11

The MSRB received comment letters 

from (1) Alternative Regulatory 

Solutions, LLC (‘‘ARS’’); (2) Bond 

Dealers of America (‘‘BDA’’); (3) 

Securities Industry and Financial 

Markets Association (‘‘SIFMA’’); and (4) 

TMC Bonds L.L.C. (‘‘TMC’’), formerly 

The MuniCenter. 

Safe Harbor. The original version of 

the Restated SMMP Notice on which 

comment was requested proposed a safe 

harbor for satisfaction of the dealer’s 

reasonable basis analysis. Most of the 

comments concerned that safe harbor. 

The reasonable basis analysis portion of 

the definition of SMMP is referred to in 

this discussion of comments as the 

‘‘general rule.’’ SIFMA said that the safe 

harbor was too restrictive. It requested 

that: (1) The types of assets owned or 

under management required by the safe 

harbor not be limited to municipal 

securities, and (2) the attestation 

requirement of the safe harbor 12 either 

be eliminated entirely or eliminated for 

certain types of institutional customers 

(i.e., banks, savings and loan 

associations, insurance companies, 

registered investment companies, and 

federally- or state-registered investment 

advisers). SIFMA said that, if the assets 

required for the safe harbor were 

required to be municipal securities, the 

dollar threshold should be reduced from 

$50 million to $25 million of municipal 

securities owned or under management. 

TMC said that the safe harbor should 

require ownership and/or management 

of at least $50 million of direct fixed 

income securities. BDA advocated that 

an institutional investor with at least 

$25 million of fixed income securities 

should qualify for the safe harbor 

without the need for an attestation. ARS 

recommended that the attestations of 

the general rule and the safe harbor be 

combined and that all attestations be 

required to be in writing. ARS also 

recommended that the safe harbor 

requirement of $50 million of municipal 

securities be determined on an average 

annual basis and asked how often a 

dealer would be required to verify this 

asset concentration. 

The MSRB has determined to 

eliminate the safe harbor from the 

proposed rule due to a concern that the 

amount of municipal securities owned 

or managed by a customer does not 

necessarily equate to sophistication. 

Nevertheless, the Restated SMMP 

Notice would provide that, as part of its 

reasonable basis analysis, a dealer 

should consider the amount and type of 

municipal securities owned or under 

management by an institutional 

customer. 

As to ARS’s comment concerning the 

frequency with which the $50 million 

threshold of the safe harbor would need 

to be measured, while the safe harbor 

has been eliminated, the question is still 

relevant to the frequency with which 

dealers would need to take steps to 

reassess their reasonable basis 

determinations with respect to their 

institutional customers. Dealers should 

monitor their reasonable basis 

determinations as frequently as they 

consider prudent, just as they would 

need to do so if they planned to treat 

natural persons with total assets of at 

least $50 million as institutional 

customers under either FINRA Rule 

2111 or the Restated SMMP Notice.13

As to ARS’s suggestion that the 

affirmation be required to be in writing, 

although it appears that many dealers 

plan to rely on written affirmations, the 

MSRB is not requiring that the 

affirmations be in writing in view of the 

goal to be consistent with FINRA Rule 

2111 unless a different rule is justified. 

General Rule. SIFMA noted that the 

original version of the Restated SMMP 

Notice would have required an 

attestation from each institutional 

customer, while FINRA Rule 2111 

requires an affirmation. It asked that the 

MSRB language track the FINRA rule 

precisely and requested clarification 

that the FINRA Rule 2111 affirmation 

would suffice for the SMMP affirmation. 

BDA questioned how a dealer could 

satisfy the reasonable basis requirement 

of the general rule absent use of the safe 

harbor and suggested that the list of 

factors set forth in the Existing SMMP 

Notice be retained. It said that, at a 

minimum, the MSRB should make it 

clear that there is no negative 

implication to the deletion of the list 

and that the deletion of the list is not 

an indication that the considerations are 

no longer considered relevant by the 

MSRB. BDA objected to the need for 

attestations from investors even under 

the general rule and suggested that a 

dealer should be able to inform its 

customer that the dealer considers the 

customer to be an SMMP, capable of 

exercising independent judgment and 

evaluating market risks and market 

value. As to customers that qualify as 

SMMPs under the current notice, BDA 

requested that the MSRB provide a 

transition rule that would permit 

dealers six months within which to 

obtain the required attestations from 

customers that meet the current 

definition of SMMP. TMC questioned 

whether attestations from customers 

that meet the current definition of 

SMMP would be required. 

The MSRB has changed the words 

‘‘affirmatively attest’’ in the definition of 

SMMP to ‘‘affirmatively indicate’’ to 

track precisely the affirmation language 

of FINRA Rule 2111 and wishes to 

clarify that the FINRA Rule 2111 

customer affirmation would satisfy the 

SMMP affirmation requirement. The 

MSRB has also determined to 

recommend that the proposed effective 

date of the restated SMMP notice be the 

same as that of FINRA Rule 2111, which 

is July 9, 2012. No exception from the 

affirmation requirement would be 

provided, because under FINRA Rule 

2111 affirmations must be received from 

all institutional customers as to which 

dealers plan to avail themselves of the 

institutional customer-specific 

suitability exception. Companies that 

already provide qualified institutional 

buyer (QIB) lists for dealers are already 

in the process of obtaining the required 

FINRA Rule 2111 affirmations from 

institutional customers. 

As to BDA’s comment on the list of 

factors that the restated notice would 

eliminate, the factors in the existing 

SMMP notice may actually have the 

practical effect of serving as a constraint 

on a dealer’s ability to conclude that a 

customer is an SMMP. The text of the 

existing SMMP notice that precedes the 

list of factors follows: 

The MSRB has identified certain factors for 

evaluating an institutional investor’s 

sophistication concerning a municipal 

securities transaction and these factors are 

discussed in detail below. Moreover, dealers 


pmangrum on DSK3VPTVN1PROD with NOTICES
22372 Federal Register / Vol. 77, No. 72 / Friday, April 13, 2012 / Notices 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

are advised that they have the option of 

having investors attest to SMMP status as a 

means of streamlining the dealers’ process for 

determining that the customer is an SMMP. 

However, a dealer would not be able to rely 

upon a customer’s SMMP attestation if the 

dealer knows or has reason to know that an 

investor lacks sophistication concerning a 

municipal securities transaction, as 

discussed in detail below. 

Because the list of factors may 

actually serve as a constraint on the 

dealer’s reasonable basis determination, 

when FINRA Rule 2111 eliminated a 

very similar list of factors, the MSRB 

decided to eliminate the list from the 

restated SMMP notice as well. This 

provides more flexibility to a dealer as 

to how it will satisfy the reasonable 

basis requirement of the general rule. 

The MSRB wishes to clarify that dealers 

might find those factors useful but 

would not be required to consider them. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Exchange 

Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rulecomments@sec.gov. Please include File 

Number SR–MSRB–2012–05 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–MSRB–2012–05. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the MSRB’s offices. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–MSRB–2012–05 and should 

be submitted on or before May 4, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8878 Filed 4–12–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66773; File No. SR–CME– 

2012–09] 

Self-Regulatory Organizations; 

Chicago Mercantile Exchange Inc.; 

Notice of Filing and Order Granting 

Accelerated Approval of Proposed 

Rule Change To Comply With 

Revisions to CFTC Regulations 

Governing Derivatives Clearing 

Organizations 

April 9, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 29, 

2012, the Chicago Mercantile Exchange 

Inc. (‘‘CME’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change described in Items I and II 

below, which items have been prepared 

primarily by CME. The Commission is 

publishing this Notice and Order to 

solicit comments on the proposed rule 

change from interested persons and to 

approve the proposed rule change on an 

accelerated basis. 

I. Self-Regulatory Organization’s 

Statement of Terms of Substance of the 

Proposed Rule Change 

CME proposes to amend certain of its 

rules to comply with pending revisions 

to Commodity Futures Trading 

Commission (‘‘CFTC’’) Regulations 

governing derivatives clearing 

organizations (‘‘DCOs’’). The text of the 

proposed rule change is available at the 

CME’s Web site at http:// 

www.cmegroup.com/market-regulation/ 

rule-filings.html. 

II. Self-Regulatory Organization’s 

Statement of Purpose of, and Statutory 

Basis for, the Proposed Rule Change 

In its filing with the Commission, 

CME included statements concerning 

the purpose and basis for the proposed 

rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item III below. CME has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of Purpose of, and Statutory 

Basis for, the Proposed Rule Change 

CME is registered as a DCO with the 

CFTC and operates a substantial 

business clearing futures and swaps 

contracts subject to the jurisdiction of 

the CFTC. CME proposes to amend 

certain of its rules to comply with 

pending changes to CFTC Regulations 

that require DCOs to make 

corresponding rule changes. The 

changes that are the subject of this filing 

will become effective on May 7, 2012. 

1. Amendments To Comply With CFTC 

Regulations 39.12(a)(5)(B) 

The CFTC adopted a number of new 

regulations designed to implement the 

core principles for DCOs in the 

Commodity Exchange Act (‘‘CEA’’), as 

amended by the Dodd-Frank Act. 

Certain of these new DCO regulations 

become effective on May 7, 2012, 

including CFTC Regulation 

39.12(a)(5)(B), which provides that: ‘‘(B) 

A derivatives clearing organization shall 

require clearing members that are not 


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