[Federal Register Volume 79, Number 209 (Wednesday, October 29, 2014)]
[Notices]
[Pages 64423-64430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25669]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73415; File No. SR-MSRB-2014-06]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Consisting of Proposed New Rule G-44, on Supervisory 
and Compliance Obligations of Municipal Advisors; Proposed Amendments 
to Rule G-8, on Books and Records To Be Made by Brokers, Dealers and 
Municipal Securities Dealers; and Proposed Amendments to Rule G-9, on 
Preservation of Records

October 23, 2014.

I. Introduction

    On July 24, 2014, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change consisting of proposed new 
Rule G-44, on supervisory and compliance obligations of municipal 
advisors and proposed amendments to Rule G-8, on books and records to 
be made by brokers, dealers and municipal securities dealers, and 
proposed amendments to Rule G-9, on preservation of records. The 
proposed rule change was published for comment in the Federal Register 
on August 5, 2014.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 72706 (July 29, 2014) 
(the ``Proposing Release''), 79 FR 45546 (August 5, 2014).
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    The Commission received eight comment letters on the proposal.\4\ 
On October 17, 2014, the MSRB responded to the comments \5\ and filed 
Amendment No. 1 to the proposed rule change.\6\ The Commission is 
publishing this notice to solicit comments on Amendment No. 1 to the 
proposed rule change from interested persons and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \4\ See Letters to Secretary, Commission, from Tamara K. Salmon, 
Senior Associate Counsel, Investment Company Institute (``ICI''), 
dated August 19, 2014 (the ``ICI Letter''); David L. Cohen, Managing 
Director and Associate General Counsel, Securities Industry and 
Financial Markets Association (``SIFMA''), dated August 21, 2014 
(the ``SIFMA Letter''); Dave A. Sanchez (``Sanchez''), dated August 
25, 2014 (the ``Sanchez Letter''); Michael Nicholas, Chief Executive 
Officer, Bond Dealers of America (``BDA''), dated August 26, 2014 
(the ``BDA Letter''); Anonymous Attorney, dated August 26, 2014 (the 
``Anonymous Attorney Letter''); Nathan R. Howard, Counsel, National 
Association of Independent Public Finance Advisors (``NAIPFA''), 
dated August 26, 2014 (the ``NAIPFA Letter''); Cristeena G. Naser, 
Vice President, American Bankers Association (``ABA''), dated August 
26, 2014 (the ``ABA Letter''); and Joshua Cooperman, Cooperman 
Associates (``Cooperman''), dated August 30, 2014 (the ``Cooperman 
Letter'').
    \5\ See Letter to Secretary, Commission, from Michael L. Post, 
Deputy General Counsel, MSRB, dated October 17, 2014 (the ``MSRB 
Response Letter''), available at http://www.sec.gov/comments/sr-msrb-2014-06/msrb201406-9.pdf.
    \6\ See Letter to Secretary, Commission, from Michael L. Post, 
Deputy General Counsel, MSRB, dated October 17, 2014 (the ``MSRB 
Amendment Letter''), available at http://www.sec.gov/comments/sr-msrb-2014-06/msrb201406-10.pdf. In Amendment No. 1, the MSRB 
partially amended the text of the original proposed rule change to 
(i) revise paragraphs .01 and .02 of the Supplementary Material to 
Rule G-44 to expand the applicability of the provision, requiring a 
municipal advisor's written supervisory procedures to address how 
its supervision is adequate even without having separate 
supervisors, to account for instances of self-supervision that may 
occur in firms that are not sole proprietorships; (ii) amend the 
text of Rule G-44(e) to reference Rule G-8(h)(v)(A)-(E) rather than 
Rule G-8(h)(iii); and (iii) amend the text of Rule G-9(k) to 
reference Rule 15Ba1-8(d) under the Act rather than Rule 15a1-8(d) 
under the Act.
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II. Description of the Proposed Rule Change

    As further described in the Proposing Release, the MSRB states that 
the purpose of the proposed rule change is to establish supervisory and 
compliance obligations of municipal advisors when engaging in municipal 
advisory activities. Proposed Rule G-44 utilizes a primarily 
principles-based approach to supervision and compliance in order to, 
among other things, accommodate the diversity of the municipal advisor 
population, including small and single-person entities. Proposed Rule 
G-44 is accompanied by proposed amendments to Rules G-8 and G-9 to 
establish fundamental books-and-records requirements for municipal 
advisors, including those related to their supervisory and compliance 
obligations.\7\
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    \7\ See supra note 3.
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Proposed Rule G-44

    In the Proposing Release, the MSRB stated that proposed Rule G-44 
follows a widely accepted model in the securities industry consisting 
of a reasonably designed supervisory system complemented by the 
designation of a chief compliance officer (``CCO''). The proposed rule 
draws on aspects of existing supervision and compliance regulation 
under other regimes, including those for broker-dealers under rules of 
the MSRB and Financial Industry Regulatory Authority (``FINRA'') and 
for investment advisers under the Investment Advisers Act of 1940 
(``Advisers Act'').\8\
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    \8\ Id.
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    In summary, proposed Rule G-44 would require:
    <bullet> A supervisory system reasonably designed to achieve 
compliance with applicable securities laws;
    <bullet> Written supervisory procedures;
    <bullet> The designation of one or more municipal advisor 
principals to be responsible for supervision;
    <bullet> Compliance processes reasonably designed to achieve 
compliance with applicable securities laws;
    <bullet> An annual certification regarding those compliance 
processes;
    <bullet> The designation of a CCO to administer those compliance 
processes; and
    <bullet> At least annual reviews of compliance policies and 
supervisory procedures.
    The proposed amendments to Rules G-8 and G-9, in summary, would 
require each municipal advisor to make and keep records of its:
    <bullet> Written supervisory procedures;
    <bullet> Designations of persons as responsible for supervision;
    <bullet> Written compliance policies;
    <bullet> Designations of persons as CCO;
    <bullet> Reviews of compliance policies and supervisory procedures; 
and
    <bullet> Annual certifications regarding compliance processes.
    Paragraph (a) of proposed Rule G-44 is the core provision, which 
would require all municipal advisors to establish, implement and 
maintain a system to supervise their municipal advisory activities and 
those of their

[[Page 64424]]

associated persons that is reasonably designed to achieve compliance 
with all applicable securities laws and regulations, including 
applicable MSRB rules (defined as ``applicable rules''). Paragraph (a) 
specifies that final responsibility for proper supervision rests with 
the municipal advisor. Subparagraph (a)(i) requires the establishment, 
implementation, maintenance and enforcement of written supervisory 
procedures reasonably designed to achieve compliance with applicable 
rules. Paragraph .01 of the Supplementary Material specifies several 
factors that municipal advisors' written supervisory procedures must 
take into consideration, including the advisor's size, organizational 
structure, nature and scope of activities, number of offices, 
disciplinary and legal history of its associated persons, the 
likelihood that associated persons may be engaged in relevant outside 
business activities, and any indicators of irregularities or misconduct 
(i.e., ``red flags''). This guidance allows municipal advisors to 
tailor their supervisory procedures to, among other things, their size, 
particular business model and structure. Paragraph .01 also requires in 
the case of a municipal advisor with any associated persons permitted 
under all applicable law to supervise their own activities, the written 
supervisory procedures must address the manner in which, in the absence 
of separate supervisory personnel, such procedures are nevertheless 
reasonably designed to achieve compliance with applicable rules.\9\ 
Paragraph .02 of the Supplementary Material emphasizes the flexibility 
of the proposed rule to accommodate small municipal advisor firms, even 
those with only one associated person. Proposed Rule G-44(a)(i) also 
specifies requirements to promptly amend supervisory procedures (i) to 
reflect changes in applicable rules and (ii) as changes occur in the 
municipal advisor's supervisory system; and to communicate the 
procedures and amendments to the municipal advisor's relevant 
associated persons.
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    \9\ See supra note 6.
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    Proposed Rule G-44(a)(ii) would require municipal advisors to 
designate one or more municipal advisor principals to be responsible 
for the supervision required by the proposed rule. Paragraph .03 of the 
Supplementary Material specifies the authority and specific 
qualifications required for municipal advisor principals designated as 
responsible for supervisory functions. According to the proposed rule, 
they must have the authority to carry out the supervision for which 
they are responsible, including the authority to implement the 
municipal advisor's established written supervisory procedures and take 
any other action necessary to fulfill their responsibilities. They also 
must have sufficient knowledge, experience and training to understand 
and effectively discharge their supervisory responsibilities.\10\ 
Paragraph .03 of the Supplementary Material also specifies that, even 
if not designated as a supervisory principal, whether a person has 
responsibility for supervision under the proposed rule would depend on 
whether, under the facts and circumstances of a particular case, the 
person has the requisite degree of responsibility, ability or authority 
to affect the conduct of the employee whose behavior is at issue.
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    \10\ The MSRB intends to propose amendments to MSRB Rules G-2 
and G-3 to create the ``municipal advisor principal'' 
classification, define the term and require qualification in 
accordance with the rules of the Board. The MSRB expects those 
changes to become effective well in advance of the proposed 
implementation dates of the proposed rule change. Although the MSRB 
does not expect a municipal advisor principal examination to be in 
place by the time of the implementation dates of the proposed rule 
change, the MSRB may develop such an examination in the future. The 
absence of such an examination does not preclude the creation of the 
classification.
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    Paragraph (b) of proposed Rule G-44 would require municipal 
advisors to implement processes to establish, maintain, review, test 
and modify written compliance policies and supervisory procedures. 
Proposed Rule G-44(b) would specify that the reviews of compliance 
policies and supervisory procedures must be conducted at least 
annually. Paragraph .04 of the Supplementary Material would provide, 
however, that municipal advisors should consider the need, in order to 
comply with all of the other requirements of the proposed rule, for 
more frequent reviews. The paragraph also would provide guidance on 
what, at a minimum, municipal advisors should consider during their 
reviews of compliance policies and supervisory procedures. These 
considerations include any compliance matters that arose since the 
previous review, any changes in municipal advisory activities and any 
changes in applicable law.
    Paragraph (c) of proposed Rule G-44 would require municipal 
advisors to designate one individual as their CCO. Paragraph .05 of the 
Supplementary Material would explain the role of a CCO and the 
importance of that role. Specifically, a CCO is a primary advisor to 
the municipal advisor on its overall compliance scheme and the policies 
and procedures that the municipal advisor adopts in order to comply 
with applicable law. To fulfill this role, a CCO should have competence 
in the process of (1) gaining an understanding of the services and 
activities that need to be the subject of written compliance policies 
and written supervisory procedures; (2) identifying the applicable 
rules pertaining to those services and activities; (3) developing 
policies and procedures that are reasonably designed to achieve 
compliance with applicable law; and (4) developing programs to test 
compliance with the municipal advisor's policies and procedures.\11\ 
Paragraph .05 would further explain that the CCO can be a principal of 
the firm or a person external to the firm; though, in that case, the 
person must have the described competence and the municipal advisor 
retains ultimate responsibility for its compliance obligations. This 
approach to the CCO function in the proposed rule, which would give 
municipal advisors the option to outsource the CCO role, follows the 
approach applicable to investment advisers under the Advisers Act.\12\
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    \11\ These qualifications of a CCO draw on those specified in 
FINRA's CCO requirement for its member firms. See FINRA Rule 3130 
Supplementary Material .05.
    \12\ See Section 202(25) of the Advisers Act, 15 U.S.C. 80b-
2(25), and Rule 206(4)-7, 17 CFR 275.206(4)-7.
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    Paragraph .06 of the Supplementary Material specifies that the CCO, 
and any compliance officers that report to the CCO, shall have 
responsibility for and perform the compliance functions required by the 
proposed rule. Paragraph .07 of the Supplementary Material provides 
that a municipal advisor's CCO may hold any other position within the 
municipal advisor, including senior management positions, so long as 
the person can discharge the duties of CCO in light of all of the 
responsibilities of any other positions. This guidance is especially 
relevant to small municipal advisors, including sole proprietorships 
and other one-person entities. It makes clear that a single individual 
may, for example, serve under appropriate circumstances as chief 
executive officer (``CEO''), supervisory principal and CCO. In 
addition, as discussed above, the CCO may be external to the firm, such 
as an outside consultant.
    Paragraph (d) of proposed Rule G-44 would require municipal 
advisors to have their CEO(s) (or equivalent officer(s)) annually 
certify in writing that the municipal advisor has in place processes to 
establish, maintain, review, test and modify written compliance

[[Page 64425]]

procedures and written supervisory procedures reasonably designed to 
achieve compliance with applicable rules. FINRA member firms that also 
are municipal advisors are already required under FINRA Rule 3130 to 
make annually a substantially similar certification with respect to 
applicable federal securities laws and regulations, including MSRB 
rules. In light of this existing FINRA requirement, proposed Rule G-
44(d) would provide for an exception from the annual certification 
requirement for municipal advisors that are subject to a substantially 
similar FINRA requirement. Paragraph .08 of the Supplementary Material 
provides that the execution of the certification and any consultation 
rendered in connection with the certification does not by itself 
establish business line responsibility.
    Paragraph (e) of proposed Rule G-44 would provide an exemption for 
banks engaging in municipal advisory activities in the exercise of bank 
fiduciary powers from Rule G-44 and the related books and records 
requirements if the municipal advisor certifies in writing annually 
that it is, with respect to those activities, subject to federal 
supervisory and compliance obligations and books and record 
requirements that are substantially equivalent to the supervisory and 
compliance obligations in Rule G-44 and the books and records 
requirements of Rule G-8(h)(v)(A)-(E). The ability to so certify and 
utilize this exemption is provided because it is unnecessary for a 
municipal advisor to comply with each other provision of proposed Rule 
G-44 if it is subject to substantially equivalent supervisory and 
compliance obligations as part of the extensive federal regulatory 
regime to which banks are already subject.
    Paragraph (f) of proposed Rule G-44 would provide a definition of 
the term ``municipal advisor'' for purposes of the rule as a person 
that is registered or required to be registered as a municipal advisor 
under Section 15B of the Act and rules and regulations thereunder.

Proposed Amendments to Rules G-8 and G-9

    The proposed amendments to Rules G-8 \13\ and G-9 would be the 
first revisions to those rules to address the books and records that 
must be made and preserved by municipal advisors registered or required 
to be registered with the SEC. As a fundamental element, new Rule G-
8(h)(i) would require each municipal advisor to keep all of the general 
business records described in Exchange Act Rule 15Ba1-8(a)(1)-(8). New 
Rule G-8(h)(v) would require each municipal advisor to make and keep 
records related to its supervisory and compliance obligations. It would 
require each municipal advisor to make and keep its written supervisory 
procedures and written compliance policies, records of designations of 
persons as CCO and of persons responsible for supervision, records of 
reviews of its written compliance policies and written supervisory 
procedures, annual certifications as to compliance processes, and, if 
applicable, certifications regarding the exemption for federally 
regulated banks.
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    \13\ Proposed Rule G-8(h) includes reserved subparagraphs (ii)-
(iv) for books and records provisions that the MSRB may propose in 
relation to other rules for municipal advisors. The MSRB will make 
conforming changes to this proposal as appropriate depending on 
relevant future rulemaking actions by the MSRB and SEC.
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    The proposed amendments to Rule G-9 would require each municipal 
advisor to preserve the books and records described in Rule G-8(h), 
including records related to the municipal advisor's supervisory and 
compliance obligations, for a period of not less than five years. This 
five-year preservation requirement would be consistent with the 
requirement of Exchange Act Rule 15Ba1-8 (on books and records to be 
made and maintained by municipal advisors).\14\ New subsection (h) to 
Rule G-9 would require, however, that records of the designations of 
persons responsible for supervision and designations of persons as CCO 
be preserved for the period of designation of each person designated 
and for at least six years following any change in such designation. 
This six-year preservation requirement is supported by, among other 
things, the importance of such documents in later ascertaining the 
identity of responsible persons during particular periods of time. 
Moreover, it would be consistent with the current provisions of Rule G-
9 for records of similar designations by brokers, dealers and municipal 
securities dealers.
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    \14\ See 17 CFR 240.15Ba1-8(b)(1).
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    The proposed amendments to existing Rule G-9(e) would expressly 
provide that municipal advisors may retain records using electronic 
storage media or by other similar medium of record retention, subject 
to the retrieval and reproduction requirements of Rule G-9. The 
allowance for this means of compliance would be made generally 
applicable, so as to expressly accommodate the use of electronic 
storage media by dealers as well as municipal advisors.
    Proposed Rule G-9(i) would require compliance with Exchange Act 
Rule 15Ba1-8(b)(2) and (c),\15\ regarding records related to the 
formation and cessation of business. Proposed Rule G-9(j) would require 
non-resident municipal advisors to comply with Exchange Act Rule 15Ba1-
8(f),\16\ regarding records of non-resident municipal advisors. 
Proposed Rule G-9(k) would provide that whenever a record is preserved 
by a municipal advisor on electronic storage media, if the manner of 
storage complies with Exchange Act Rule 15Ba1-8(d),\17\ it will be 
deemed to be preserved in a manner that is in compliance with the 
requirements of Rule G-9. This provision would give municipal advisors 
the choice to comply with either the SEC's or the MSRB's preservation 
requirements.
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    \15\ 17 CFR 240.15Ba1-8(b)(2) & (c).
    \16\ 17 CFR 240.15Ba1-8(f).
    \17\ 17 CFR 240.15Ba1-8(d).
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III. Summary of Comments Received and the MSRB's Response

    As noted previously, the Commission received eight comment letters 
on the proposed rule change and a response letter from the MSRB.\18\ 
The commenters generally support the proposed rule change.\19\ However, 
some commenters asked for further clarification and provided 
suggestions to the proposed rule change.\20\ The MSRB has responded to 
the commenters, as discussed below.\21\
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    \18\ See supra notes 4 and 5.
    \19\ Id.
    \20\ Id.
    \21\ See MSRB Response Letter.
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1. Flexibility for Small Municipal Advisors
    BDA commented that proposed Rule G-44 provides too much flexibility 
for small firms by allowing them to determine and make accommodations 
for themselves simply because of their size, and that those 
accommodations should be circumscribed.\22\ Alternatively, Cooperman 
commented that the proposed Rule G-44 imposes regulatory burdens on 
small municipal advisors and particularly sole proprietors that are not 
necessary, appropriate or logical to the protection of the municipal 
clients of such advisors.\23\ NAIPFA stated that proposed Rule G-44 
appropriately accommodates small and single-person municipal advisors 
by, among other things, allowing supervisory systems to

[[Page 64426]]

be tailored to the size of the firm.\24\ However, NAIPFA suggested 
exempting single-person firms from developing a compliance manual to 
the extent such firms are not otherwise required to maintain policies 
pursuant to any other applicable laws.\25\ NAIPFA also believes the 
imposition of supervisory obligations on sole proprietors is likely not 
necessary or appropriate since such individuals will be obligated to 
monitor their own compliance thereby making a requirement that they 
maintain supervisory procedures superfluous.\26\
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    \22\ See BDA Letter.
    \23\ See Cooperman Letter.
    \24\ See NAIPFA Letter.
    \25\ Id.
    \26\ Id.
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    Sanchez stated that compliance with proposed Rule G-44(a) and (b), 
paragraph .04 of the Supplementary Material and the associated 
recordkeeping requirements should be deemed a sufficient supervisory 
system for municipal advisors with a single associated person.\27\ 
Sanchez suggested deleting the last sentence of paragraph .02 of the 
Supplementary Material, which requires that written supervisory 
procedures of municipal advisors with a single associated person 
address the manner in which, in the absence of separate supervisory 
personnel, such procedures are nevertheless reasonably designed to 
achieve compliance with applicable rules.\28\
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    \27\ See Sanchez Letter.
    \28\ Id.
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    In response to comments, the MSRB acknowledged that proposed Rule 
G-44 contains standards that may vary based on firm size and that the 
MSRB deliberately drafted the rule to give firms flexibility to tailor 
their supervisory systems accordingly, striking an appropriate balance 
between burdens on, and flexibility for, small municipal advisors.\29\ 
MSRB also stated that the approach set forth in proposed Rule G-44 
seems particularly appropriate for an industry in which many 
participants are becoming regulated at the federal level for the first 
time.\30\
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    \29\ See MSRB Response Letter.
    \30\ Id.
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    With respect to paragraph .02 of the Supplementary Material, the 
MSRB believes this provision is important to ensuring all municipal 
advisors establish meaningful procedures that will satisfy the minimum 
standard established by proposed Rule G-44.\31\ The MSRB stated that 
developing appropriate systems and documenting and following written 
procedures is a well-established practice among businesses, regardless 
of size, for facilitating compliance with regulation in a broad range 
of other areas (e.g., taxes, human resources). Additionally, the MSRB 
noted that FINRA's consolidated supervision rule (FINRA Rule 3110) 
includes a substantially similar requirement. Although the provision 
will always apply to sole proprietorships, the MSRB believes it is 
relevant to other firms in which associated persons may be otherwise 
permitted to supervise their own activities. Accordingly, the MSRB 
filed Amendment No. 1 to revise the rule text to expand the 
applicability of the requirement to all firms with associated persons 
who supervise their own activities.\32\
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    \31\ Id.
    \32\ See MSRB Amendment Letter.
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2. Annual Certification
    Several comment letters addressed the proposed annual certification 
requirement in proposed Rule G-44. ICI supports the proposed annual 
certification requirement as drafted because it is consistent with the 
requirements imposed on FINRA members pursuant to FINRA Rule 
3130(b).\33\ Anonymous Attorney supports the exception from the annual 
certification for municipal advisors that are subject to FINRA Rule 
3130.\34\ While BDA supports the MSRB's effort to ensure alignment of 
its annual certification requirement with FINRA Rule 3130, it stated 
that proposed Rule G-44 should require all municipal advisors to 
complete a periodic self-certification regarding the meeting of 
professional qualification standards by its associated persons, as well 
as to certify to the municipal advisor's ability to comply, and history 
of complying, with all applicable regulatory requirements.\35\ NAIPFA 
opposes any self-certification requirement, unless some objective basis 
can be provided that indicates such a requirement would result in a 
decrease in the number of compliance violations.\36\
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    \33\ See ICI Letter.
    \34\ See Anonymous Attorney Letter.
    \35\ See BDA Letter.
    \36\ See NAIPFA Letter.
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    Sanchez commented that the regulatory purpose of the annual 
certification requirement as to compliance processes in proposed Rule 
G-44(d) is unclear because the associated recordkeeping requirements 
essentially already require the equivalent of an annual 
certification.\37\ In addition, Sanchez does not believe the annual 
certification would foster discussion between persons responsible for 
compliance matters and upper management, and questions whether such a 
provision is necessary for small municipal advisors, particularly sole 
proprietors, in light of Section 15B(b)(2)(L)(iv) of the Act.\38\ 
Finally, Sanchez believes there would be no ``harmonizing'' benefit 
achieved by imposing the annual certification requirement similar to 
FINRA's requirement because the vast majority of registered municipal 
advisors are not FINRA members, and FINRA members would be specifically 
exempted from proposed Rule G-44(d).\39\
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    \37\ See Sanchez Letter.
    \38\ Id.
    \39\ Id.
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    In response to the comments, the MSRB stated that the certification 
requirement would result in the creation, maintenance and modification 
of robust written supervisory procedures that would promote compliance 
with all applicable rules.\40\ The MSRB noted that requiring the 
broader certification proposed by BDA would reduce the harmonization 
between the MSRB and FINRA certifications, which is an aspect of the 
proposal that BDA and ICI specifically support.\41\ The MSRB also noted 
that it would be an unnecessary burden at this time to require a 
broader certification such as the one proposed by BDA.\42\
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    \40\ See MSRB Response Letter.
    \41\ Id.
    \42\ Id.
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    In response to Sanchez's comments, the MSRB stated that requiring 
each firm's chief executive officer (or equivalent officer) to provide 
an annual certification would help ensure that compliance processes are 
given sufficient attention at the highest levels of management and 
would help promote compliance, without adding a significant burden.\43\ 
The MSRB further stated that the annual certification requirement will 
foster discussion between compliance personnel and upper management, as 
it creates accountability for, and incentivizes, the chief executive 
officer (or equivalent officer) to ensure that the certification is 
truthful and otherwise satisfies proposed Rule G-44(d).\44\ The MSRB 
acknowledged that the benefit from certification of fostering 
discussion does not exist in sole proprietorships and perhaps some very 
small firms, but stated that the benefits from certification can extend 
beyond fostering such discussion.\45\ The MSRB believes the annual 
certification requirement would help ensure that municipal advisors 
have in place a compliance framework

[[Page 64427]]

that would allow them to adapt compliance efforts to an evolving 
business and regulatory environment, and promote prompt maintenance and 
modification of compliance programs.\46\ In addition, the MSRB believes 
this requirement includes multiple accommodations for small municipal 
advisors and is consistent with Section 15B(b)(2)(L)(iv) of the 
Act.\47\
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    \43\ Id.
    \44\ Id.
    \45\ Id.
    \46\ Id.
    \47\ Id.
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3. Comparison to Rule G-27
    Sanchez suggested replacing the proposed timing standard for 
amending written supervisory procedures and communicating such 
amendments to associated persons (i.e., ``promptly'') to the standard 
in MSRB Rule G-27(c)(iii) (i.e., ``as appropriate within a reasonable 
time after changes occur'').\48\ Sanchez stated the Rule G-27 standard 
is more reasonable and will be less confusing for entities that are 
registered as both broker-dealers and municipal advisors.\49\ Sanchez 
also stated the proposed standard of ``prompt amendment'' and ``prompt 
communication'' is vague and more burdensome than the standard the MSRB 
requires of other regulated activities without any apparent 
justification.\50\
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    \48\ See Sanchez Letter.
    \49\ Id.
    \50\ Id.
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    The MSRB responded that the provision requiring prompt amendments 
of written supervisory procedures and prompt communication of such 
amendments to associated persons is intended to harmonize proposed Rule 
G-44 with FINRA's rule on the maintenance of supervisory procedures in 
its consolidated supervision rule.\51\ The MSRB recognizes the proposed 
timing standards are different than those provided in the analogous 
provision in Rule G-27 and the MSRB may consider amending Rule G-27 in 
the future to harmonize it with proposed Rule G-44(a)(i) and the FINRA 
rule.
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    \51\ See MSRB Response Letter.
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4. Outsourcing CCO Function
    BDA commented that the language in paragraph .05 of the 
Supplementary Material to proposed Rule G-44, providing that a 
municipal advisor retains the ultimate responsibility for its 
compliance obligations, whether the CCO is outsourced or not, should be 
incorporated into the rule text.\52\ BDA believes some firms will take 
a strict reading of the rule text without appropriately considering the 
Supplementary Material as a component of their compliance with proposed 
Rule G-44.\53\
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    \52\ See BDA Letter.
    \53\ Id.
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    The MSRB responded that it is not relocating the provision into the 
rule text because the Supplementary Material would be part of new Rule 
G-44, if approved, and the provision's location there is intended to 
improve the readability of the rule and does not affect the weight, 
significance or enforceability of the provision.\54\ Moreover, the MSRB 
stated that BDA's comment that some firms would not appropriately 
consider the Supplementary Material when reading proposed Rule G-44 is 
speculative in nature and, if fully accepted, could suggest a need to 
remove all supplementary material from the rules of the MSRB and other 
self-regulatory organizations.\55\
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    \54\ See MSRB Response Letter.
    \55\ Id.
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5. Bank Trust Departments and Trust Companies
    The ABA praised the MSRB's exemption in the proposed Rule G-44(e) 
for banks that certify they are subject to federal supervisory and 
compliance obligations and books and records requirements that are 
substantially equivalent to the supervisory and compliance obligations 
of proposed Rule G-44 and the books and records requirements of Rule G-
8(h)(v)(A)-(E), and the ABA requested that a similar exemption be 
available for state-chartered trust companies.\56\
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    \56\ See ABA Letter.
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    The MSRB responded that it would not extend the exemption of 
proposed Rule G-44 to bank trust departments or trust companies that 
are not federally regulated.\57\ The MSRB stated that the need for 
proposed Rule G-44 arises from the MSRB's regulatory oversight of 
municipal advisors as provided under the Dodd-Frank Wall Street Reform 
and Consumer Protection Act,\58\ which grants the MSRB broad rulemaking 
authority to develop a new, federal regulatory framework for municipal 
advisors.\59\ The MSRB believes all municipal advisors should be 
required, at a minimum, to adhere to federal supervisory and compliance 
obligations that are substantially equivalent to those set forth in 
proposed Rule G-44, regardless of their other business activities and 
regulatory obligations.\60\ MSRB noted that, as ABA acknowledges, not 
all states have adopted fiduciary regulations which are substantially 
based on the Office of the Comptroller of the Currency's (``OCC'') 
rules and not all such state regulations are identical to the OCC's 
rules.\61\ As a result of this lack of consistency between, and 
potential gaps in, state regulatory regimes, the MSRB stated it was not 
extending the exemption of proposed Rule G-44(e) to bank trust 
departments or trust companies that are not federally regulated with 
regard to relevant activities.
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    \57\ See MSRB Response Letter.
    \58\ Public Law 111-2013, 124 Stat. 1376 (2010).
    \59\ See MSRB Response Letter.
    \60\ Id.
    \61\ Id.
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6. Recordkeeping Requirements
    SIFMA supports the proposed amendments to Rules G-8 and G-9 which 
it believes are reasonable and in line with existing MSRB recordkeeping 
and record retention requirements.\62\ NAIPFA requested that the 
proposed amendments to Rule G-9(h) be amended to state that the records 
described in Rule G-8(h)(v)(B) and (D) shall be preserved for the 
duration of a person's designation as a supervisor and/or CCO and for 
at least five years following any change in such designation.\63\ 
NAIPFA stated that establishing a six-year requirement when all other 
similar retention requirements are five years creates an inconsistent 
and overly complex regulatory regime that is not likely to achieve any 
appreciable benefit for municipal entities or obligated persons.\64\ 
Sanchez also suggests a five-year requirement for such records because 
he believes imposing a six-year period of record retention is an 
unnecessary complexity.\65\
---------------------------------------------------------------------------

    \62\ See SIFMA Letter.
    \63\ See NAIPFA Letter.
    \64\ Id.
    \65\ See Sanchez Letter.
---------------------------------------------------------------------------

    In response to comments, the MSRB stated there is a six-year 
retention period for records relating to designations of persons 
responsible for supervision and as CCO to be consistent with the 
current provisions of Rule G-9 for records of similar designations by 
brokers, dealers and municipal securities dealers.\66\ MSRB further 
stated that the longer requirement is supported by the importance of 
such records in ascertaining the identity of responsible persons during 
particular periods of time, including for purposes of examination and 
enforcement.\67\
---------------------------------------------------------------------------

    \66\ See MSRB Response Letter.
    \67\ Id.
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7. Requests for Clarification and Guidance
    Anonymous Attorney requested clarification on three issues: (1) 
Whether a municipal advisor and investment advisor (``MA/IA'') firm's 
compliance

[[Page 64428]]

manual must have two separate sets of written supervisory procedures 
for municipal advisor and investment advisor activities, and, if so, 
whether it would be permissible to incorporate by reference applicable 
existing procedures that apply to investment adviser activities, (2) 
whether the annual review of the municipal advisor and investment 
advisor compliance processes may be conducted jointly, and (3) whether 
a principal, designated pursuant to proposed Rule G-44(a)(ii), may be 
designated by title or position, instead of as a specific individual, 
and, if so, whether it would be acceptable to identify a principal by 
reference to a separate document or record.\68\
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    \68\ See Anonymous Attorney Letter.
---------------------------------------------------------------------------

    The MSRB responded that it used a primarily principles-based 
approach to proposed Rule G-44 to afford municipal advisors flexibility 
in determining the lowest cost means to meet regulatory objectives.\69\ 
Accordingly, the MSRB believes an MA/IA firm could establish and 
conduct its review of written supervisory procedures and compliance 
policies, in the manner it deems best, and where requirements are 
substantially similar, referencing how the firm will comply with 
applicable municipal advisor and investment advisor standards may be 
appropriate.\70\ However, the MSRB believes that separate written 
supervisory procedures for municipal advisors will need to exist given 
that the regulatory regimes are not identical.\71\ The MSRB believes 
the flexibility of proposed Rule G-44 extends to a firm's designation 
of the appropriate principal(s).\72\
---------------------------------------------------------------------------

    \69\ See MSRB Response Letter.
    \70\ Id.
    \71\ Id.
    \72\ Id.
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8. Implementation Date
    SIFMA requested no less than six months as an implementation period 
for proposed Rule G-44.\73\ NAIPFA requested the proposed Rule G-44 
have an effective date that is at least ninety days following the date 
on which it is enacted.\74\ BDA requested that the implementation 
period be delayed until six months after the SEC has approved all 
municipal advisor rules and regulations.\75\
---------------------------------------------------------------------------

    \73\ See SIFMA Letter.
    \74\ See NAIPFA Letter.
    \75\ See BDA Letter.
---------------------------------------------------------------------------

    The proposed rule sets forth an implementation period of six months 
following the Commission's approval of the proposal except for proposed 
Rule G-44(d) which municipal advisors would be required to implement 
eighteen months after the Commission approval date. The MSRB responded 
that it does not intend to delay implementation of the proposed Rule G-
44 until all municipal advisor rules have been approved by the SEC. 
Municipal advisors are currently subject to applicable federal 
securities laws and the MSRB believes it is important for firms to have 
a supervisory system and compliance processes in place to foster 
compliance with those laws and that can be updated as new rules are 
adopted.\76\
---------------------------------------------------------------------------

    \76\ See MSRB Response Letter.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
as modified by Amendment No. 1, as well as the eight comment letters 
received and the MSRB's response. The Commission finds that the 
proposed rule change, as amended by Amendment No. 1, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to the MSRB.
    In particular, the proposed rule change is consistent with Sections 
15B(b)(2), 15B(b)(2)(A)(i) and 15B(b)(2)(C) of the Act. Section 
15B(b)(2) of the Act provides that MSRB shall propose and adopt rules 
to effect the purposes of that 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.\77\ Section 15B(b)(2)(A)(i) of the Act 
provides that the MSRB's rules shall appropriately classify municipal 
securities brokers, municipal securities dealers, and municipal 
advisors (taking into account relevant matters, including types of 
business done, nature of securities other than municipal securities 
sold, and character of business organization), and persons associated 
with municipal securities brokers, municipal securities dealers, and 
municipal advisors.\78\ Section 15B(b)(2)(C) of the Act requires that 
the MSRB's rules 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, in general, to protect investors, municipal 
entities, obligated persons, and the public interest.\79\ The proposed 
rule requires municipal advisors to adopt a supervisory structure and 
compliance processes in order to help ensure knowledge of, and 
compliance with, applicable securities laws and regulations, including 
the Commission's registration, form submission and recordkeeping 
requirements for municipal advisors.\80\ The Commission believes that 
supervision and compliance functions are fundamental to preventing 
securities law violations from occurring, and promoting early detection 
and prompt remediation of violations when they do occur.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78o-4(b)(2).
    \78\ 15 U.S.C. 78o-4(b)(2)(A)(i).
    \79\ See 15 U.S.C. 78o-4(b)(2)(C).
    \80\ See Registration of Municipal Advisors, Rel. No. 34-70462 
(Sept. 20, 2013) (``Municipal Advisor Registration Adopting 
Release''), 78 FR 67467 (Nov. 12, 2013).
---------------------------------------------------------------------------

    The Commission also finds that the proposed rule change is 
consistent with Section 15B(b)(2)(L)(iv), in that it does not impose a 
regulatory burden on small municipal advisors that is not necessary or 
appropriate in the public interest and for the protection of investors, 
municipal entities, and obligated persons.\81\ While the proposed rule 
change would affect all municipal advisors, including small municipal 
advisors, it is a necessary and appropriate regulatory burden in order 
to ensure knowledge of and compliance with applicable securities laws 
and regulations. The proposed rule is designed to provide flexibility 
to small municipal advisor firms, including those with only one 
associated person. Paragraph .02 of the Supplementary Material provides 
that a municipal advisor with only one associated person can have a 
sufficient supervisory system under proposed Rule G-44. Under the same 
paragraph, one person may be designated as responsible for supervision 
and the rule would allow for written supervisory procedures to be 
tailored based on factors such as the size of the firm.
---------------------------------------------------------------------------

    \81\ See 15 U.S.C. 78o-4(b)(2)(L)(iv).
---------------------------------------------------------------------------

    In addition, the Commission finds that the proposed rule change is 
consistent with Section 15B(b)(2)(G) of the Act which provides that the 
MSRB's rules shall prescribe records to be made and kept by municipal 
advisors and the

[[Page 64429]]

periods for which such records shall be preserved.\82\ The proposed 
rule change would require each municipal advisor to make and keep all 
of the general business records described in Exchange Act Rule 15Ba1-
8(a)(1)-(8) as well as records of written supervisory procedures and 
compliance policies, designations of persons as CCO and of persons 
responsible for supervision, reviews of the adequacy of written 
compliance policies and written supervisory procedures, the annual 
certifications as to compliance processes, and, if applicable, annual 
certifications regarding the exemption for federally regulated 
fiduciary activities of banks. The proposed rule change also contains 
preservation requirements for the required records.
---------------------------------------------------------------------------

    \82\ See 15 U.S.C. 78o-4(b)(2)(G).
---------------------------------------------------------------------------

    In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, and 
capital formation.\83\ The Commission believes the proposed rule change 
includes accommodations that help promote efficiency such as an 
exemption for federally regulated banks in proposed Rule G-44(e) and an 
exemption to the annual certification requirement for municipal 
advisors that are subject to a substantially similar certification 
requirement by FINRA.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes the proposed rule takes into account 
competitive concerns that could arise as a result of the costs 
associated with the supervision and compliance requirements that could 
lead some municipal advisors to exit the market, curtail their 
activities or consolidate with other firms. By utilizing a primarily 
principles-based approach to supervision and compliance, the proposed 
rule is designed to provide flexibility to small municipal advisor 
firms, including those with only one associated person, allowing 
municipal advisors to tailor their supervisory procedures to, among 
other things, their size, particular business model and structure. 
Moreover, the Commission continues to believe ``that the market for 
municipal advisory services is likely to remain competitive despite the 
potential exit of municipal advisors, consolidation of municipal 
advisors, or lack of new entrants into the market.'' \84\
---------------------------------------------------------------------------

    \84\ Municipal Advisor Registration Adopting Release, 78 FR 
67467, at 67608.
---------------------------------------------------------------------------

    The Commission believes that the effect of the proposed rule is 
beneficial and that the changes will enhance investor confidence by 
promoting robust supervisory policies and procedures, programs and 
controls that can be flexibly applied to account for the diversity of 
the municipal advisor population, including small municipal advisors 
and sole proprietorships.
    As noted above, the Commission received eight comment letters on 
the filing. The Commission believes that the MSRB, through its 
responses and through proposed changes in Amendment No. 1, has 
addressed commenters' concerns.
    For the reasons noted above, including those discussed in the MSRB 
Response Letter and MSRB Amendment Letter, the Commission believes that 
the proposed rule change, as amended by Amendment No. 1, is consistent 
with the Act.

V. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml; or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4032352c256d232f2d2d252e3433003325236e272f36"><span class="__cf_email__" data-cfemail="354740595018565a5858505b4146754650561b525a43">[email protected]</span></a>. Please include 
File Number SR-MSRB-2014-06 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2014-06. 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the MSRB. 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-2014-06 and should be 
submitted on or before November 19, 2014.

VI. Accelerated Approval of Proposed Rule Change as Modified by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change, as amended by Amendment No. 1, prior to the 30th day after the 
date of publication of notice in the Federal Register. As discussed 
above, Amendment No. 1 amends the proposed rule change by: (i) Revising 
paragraphs .01 and .02 of the Supplementary Material to Rule G-44 to no 
longer limit the requirement in paragraph .02 that written supervisory 
procedures address the manner in which, in the absence of separate 
supervisory personnel, such procedures are nevertheless reasonably 
designed to achieve compliance with applicable rules for municipal 
advisors with a single person and expand its application to apply to 
all firms with any associated person permitted under applicable law to 
supervise their own activities and move the text from paragraph .02 or 
paragraph .01 of the Supplementary Material in light of the revised 
scope of the provisions; (ii) amending the text of Rule G-44(e) to 
reference Rule G-8(h)(v)(A)-(E) rather than Rule G-8(h)(iii); and (iii) 
amending the text of Rule G-9(k) to reference Rule 15Ba1-8(d) under the 
Act rather than Rule 15a1-8(d) under the Act.\85\
---------------------------------------------------------------------------

    \85\ See MSRB Amendment Letter.
---------------------------------------------------------------------------

    The MSRB has proposed the revisions included in item (i) of the 
previous paragraph to expand the applicability of the provision, 
requiring a municipal advisor's written supervisory procedures to 
address how its supervision is adequate even without having separate 
supervisors, to account for instances of self-supervision that may 
occur in firms that are not sole proprietorships. The MSRB believes the 
revision more properly identifies and captures the subset of municipal 
advisors for which the written supervisory procedures must address the 
additional matter. The MSRB is proposing the two technical revisions in 
items (ii) and (iii) in the previous

[[Page 64430]]

paragraph to indicate the correct cross-references.
    The Commission believes that Amendment No. 1 does not alter the 
substance of the original proposed rule change and are consistent with 
the purpose of the original proposed rule change and do not raise 
significant new issues. Accordingly, the Commission finds good cause 
for approving the proposed rule change, as modified by Amendment No. 1, 
on an accelerated basis, pursuant to Section 19(b)(2) of the Act.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\86\ that the proposed rule change (SR-MSRB-2014-06), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\87\
---------------------------------------------------------------------------

    \87\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25669 Filed 10-28-14; 8:45 am]
BILLING CODE 8011-01-P


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