[Federal Register Volume 79, Number 234 (Friday, December 5, 2014)]
[Notices]
[Pages 72225-72233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28543]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73708; File No. SR-MSRB-2014-08]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Proposed Amendments to MSRB Rules G-1, on Separately Identifiable 
Department or Division of a Bank; G-2, on Standards of Professional 
Qualification; G-3, on Professional Qualification Requirements; and D-
13, on Municipal Advisory Activities

December 1, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 18, 2014, the Municipal Securities Rulemaking Board 
(the ``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change 
consisting of proposed amendments to MSRB Rules G-1, on separately 
identifiable department or division of a bank; G-2, on standards of 
professional qualification; G-3, on professional qualification 
requirements; and D-13, on municipal advisory activities (the 
``proposed rule change''). The MSRB is

[[Page 72226]]

proposing that these amendments become effective 60 days following the 
date of SEC approval.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2014-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 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
Description of the Proposed Rule Change
    The purpose of the proposed rule change is to establish 
professional qualification requirements for municipal advisors and 
their associated persons and to make related changes to select MSRB 
rules. The MSRB is charged with setting professional standards and 
continuing education requirements for municipal advisors. Specifically, 
the Act requires associated persons of brokers, dealers and municipal 
securities dealers (``dealers'') and municipal advisors to pass 
examinations as the MSRB may establish to demonstrate that such 
individuals meet the standards of competence as the MSRB finds 
necessary or appropriate in the public interest or for the protection 
of investors and municipal entities or obligated persons.\3\ A 
professional qualification examination is intended to determine whether 
an individual meets the MSRB's basic qualification standards for a 
particular registration category. The examination measures a 
candidate's knowledge of the business activities, as well as the 
regulatory requirements, including MSRB rules, rule interpretations and 
federal law applicable to a particular registration category.
---------------------------------------------------------------------------

    \3\ See Section 15B(b)(2)(A) of the Act, 15 U.S.C. 78o-
4(b)(2)(A).
---------------------------------------------------------------------------

    MSRB Rule G-3 establishes classifications and qualification 
requirements for associated persons of dealers. The proposed rule 
change would add the following two new registration classifications for 
municipal advisors under Rule G-3: (a) Municipal advisor 
representatives--those individuals who engage in municipal advisory 
activities; and (b) municipal advisor principals--those individuals who 
engage in the management, direction or supervision of the municipal 
advisory activities of the municipal advisor and its associated 
persons.\4\ The proposed amendments also would require each prospective 
municipal advisor representative to take and pass the municipal advisor 
representative qualification examination being developed by the MSRB 
prior to being qualified as a municipal advisor representative. 
Qualification as a municipal advisor representative would be a 
prerequisite to qualification as a municipal advisor principal. Each 
municipal advisor would be required to designate at least one 
individual as a municipal advisor principal who would be responsible 
for supervising the municipal advisory activities of the municipal 
advisor, and each municipal advisor principal would be required to pass 
the municipal advisor representative qualification examination to 
perform the supervisory activities of a principal.
---------------------------------------------------------------------------

    \4\ The definition of municipal advisor representative would be 
substantially identical to the category of individuals for whom a 
Form MA-I is required to be completed as part of a municipal 
advisor's registration with the SEC--natural persons associated with 
the municipal advisor engaged in municipal advisory activities on 
behalf of the firm.
---------------------------------------------------------------------------

    To provide prospective municipal advisor representatives with 
sufficient time to prepare for and take the examination, the MSRB 
proposes a one-year grace period for test takers to pass the 
examination. In addition, given the general view of industry 
participants that the 90-day apprenticeship requirement for municipal 
securities representatives in Rule G-3 does not provide any additional 
benefit, the MSRB proposes to eliminate the requirement for municipal 
securities representatives and, similarly, does not propose an 
apprenticeship requirement for municipal advisor representatives.
    MSRB Rule G-2 establishes the standards of professional 
qualification for dealers and currently provides that no dealer shall 
engage in municipal securities activities unless such dealer and every 
natural person associated with such dealer is qualified in accordance 
with MSRB rules. The proposed rule change amends Rule G-2 to add a 
basic requirement that no municipal advisor shall engage in municipal 
advisory activities unless such municipal advisor and every natural 
person associated with such municipal advisor is qualified in 
accordance with MSRB rules.
    The proposed rule change would also amend Rule D-13, on municipal 
advisory activities, to incorporate SEC rules by providing that the 
term ``municipal advisory activities'' means, except as otherwise 
specifically provided by rule of the Board, the activities described in 
Section 15B(e)(4)(A)(i) and (ii) of the Act \5\ and the rules and 
regulations promulgated thereunder. In recognition of the new 
regulatory scheme for municipal advisors, the proposed rule change 
would amend Rules G-1 and G-3 to provide that dealers and their 
municipal securities representatives may continue to perform financial 
advisory or consultative services for issuers in connection with the 
issuance of municipal securities, except to the extent the municipal 
securities representatives engaged in the activities must be qualified 
as municipal advisor representatives to perform such services. Finally, 
Rule G-1 also would be amended to provide that, for purposes of its 
municipal advisory activities, the term ``separately identifiable 
department or division of a bank'' would have the same meaning as in 
Securities Exchange Act Rule 15Ba1-1(d)(4).\6\
---------------------------------------------------------------------------

    \5\ See Section 15B(e)(4)(A)(i) and (ii) of the Act, 15 U.S.C. 
78o-4(e)(4)(A)(i) and (ii).
    \6\ 17 CFR 240.15Ba1-1(d)(4).
---------------------------------------------------------------------------

New Registration Classifications
    The proposed amendments to Rule G-3 would create two new 
registration classifications: (a) Municipal advisor representative and 
(b) municipal advisor principal. These classifications are consistent 
with other regulatory schemes, including those for broker-dealers.\7\
---------------------------------------------------------------------------

    \7\ Examples of these other schemes include the following 
classifications: Series 7 (General Securities Representative) and 
Series 24 (General Securities Principal); Series 42 (Registered 
Options Representative) and Series 4 (Registered Options Principal); 
Series 22 (Direct Participation Programs Limited Representative) and 
Series 39 (Direct Participation Programs Limited Principal).
---------------------------------------------------------------------------

    The new classifications would distinguish between municipal advisor 
representatives who would be qualified to engage in municipal advisory 
activities and municipal advisor principals who would be qualified to 
engage in and supervise the municipal advisory activities of the 
municipal

[[Page 72227]]

advisor and its associated persons. The proposed amendments to Rule G-3 
would define a municipal advisor representative as a natural person 
associated with a municipal advisor, other than a person performing 
only clerical, administrative, support or similar functions.\8\
---------------------------------------------------------------------------

    \8\ Rule D-13 defines municipal advisory activities as the 
activities described in Section 15B(e)(4)(A)(i) and (ii) of the Act. 
Rule D-13 would be amended to reflect the SEC's interpretation of 
the statutory definition of municipal advisor. Hence, ``municipal 
advisory activities'' would mean the activities described in Section 
15B(e)(4)(A)(i) and (ii) of the Act and the rules and regulations 
promulgated thereunder.
---------------------------------------------------------------------------

    The proposed amendments would define a municipal advisor principal 
as a natural person associated with a municipal advisor who is directly 
engaged in the management, direction or supervision of the municipal 
advisory activities, as defined in Rule D-13, of the municipal advisor. 
In addition, the proposed amendments to Rule G-3 would require each 
municipal advisor to designate at least one municipal advisor principal 
to be responsible for the municipal advisory activities of the 
municipal advisor.\9\ Further, the proposed rule change would require 
each municipal advisor representative and municipal advisor principal 
to take and pass the municipal advisor representative qualification 
examination prior to being qualified as a municipal advisor 
representative or municipal advisor principal, respectively. The 
examination is discussed in more detail below.
---------------------------------------------------------------------------

    \9\ MSRB Rule G-44 sets forth the obligation of municipal 
advisors to supervise the municipal advisory activities of the 
municipal advisor and its associated persons to ensure compliance 
with applicable MSRB and SEC rules. Exchange Act Release No. 73415 
(Oct. 23, 2014), 79 FR 64423 (Oct. 29, 2014), File No. SR-MSRB-2014-
06, available at http://www.sec.gov/rules/sro/msrb/2014/34-73415.pdf.
---------------------------------------------------------------------------

Grace Period
    To provide for an orderly transition to the new professional 
qualification requirements for municipal advisors, the MSRB proposes 
that prospective municipal advisor representatives have one year from 
the effective date of the examination to pass it.\10\ During this grace 
period, municipal advisor professionals could continue to engage in 
municipal advisory activities. The grace period is intended to provide 
municipal advisor representatives with sufficient time to study and 
take (and, if necessary retake) the examination without causing undue 
disruption to the business of the municipal advisor. As is the case for 
all MSRB qualification examinations, individuals who do not pass the 
examination would be permitted to retake the examination after 30 days. 
However, any person who fails the examination three or more times in 
succession would be prohibited from taking the examination for six 
months.\11\
---------------------------------------------------------------------------

    \10\ The MSRB will announce the effective date of the municipal 
advisor representative qualification examination at a later date.
    \11\ See MSRB Rule G-3(f), proposed MSRB Rule G-3(g) in Exhibit 
5.
---------------------------------------------------------------------------

    Prior to the effective date of the examination and prior to the 
commencement of the one-year grace period, the MSRB will file a study 
outline describing the topics on the examination, the percentage of the 
examination devoted to the topic areas, and the number of questions on 
the examination. The study outline will also contain reference material 
and sample examination questions to assist examination takers. The MSRB 
expects that it will provide more information about the study outline 
through a webinar or other means, subsequent to the filing of the study 
outline with the SEC. A pilot examination is expected to be delivered 
in 2015. The MSRB will use the results of the pilot examination to set 
the passing grade, which will be added to the study outline.
Uniform Requirement--Grandfathering
    The proposed rule change would require that all persons deemed 
municipal advisor representatives under Rule G-3 pass the qualification 
examination, regardless of whether such persons have passed other MSRB 
or MSRB-recognized examinations (such as the Series 52 or 7 
examinations), or previously have been engaged in municipal advisory 
activities. While commenters requested, as discussed below, that the 
MSRB waive the requirement or ``grandfather'' those individuals who 
have passed certain other professional qualifications examinations or 
have experience in providing municipal advisory services, the MSRB 
believes that the significant changes that accompany the new regulatory 
regime for municipal advisors dictate that each individual engaged in 
municipal advisory activities demonstrate a minimum level of knowledge 
of the job responsibilities and regulatory requirements by passing a 
general qualification examination.
    The MSRB has considered this issue carefully and has determined 
that the practice of grandfathering will not effectively ensure a 
minimum level of competency by those individuals acting as municipal 
advisor representatives. For example, the MSRB has no practical means 
to determine whether an individual is competent based on experience. 
The MSRB believes that Congress, through the Act, requires more than 
reliance on a representation of competence.\12\ As for those who 
suggest they have demonstrated a basic competence by passing another 
qualification examination, the MSRB believes the job responsibilities 
of a municipal advisor professional and the regulations governing such 
individuals are sufficiently distinct in application as to require that 
they pass a separate examination.
---------------------------------------------------------------------------

    \12\ See Exchange Act Release No. 70462 at 6 (Sept. 20, 2013), 
78 FR 67467 at 67469 (Nov. 12, 2013) (``SEC Final Registration 
Rule'') and Section 15B(b)(2)(A) of the Act, 15 U.S.C. 78o-
4(b)(2)(A).
---------------------------------------------------------------------------

Waivers
    The Board will consider waiving the requirement that a municipal 
advisor representative or municipal advisor principal pass the 
municipal advisor representative qualification examination in 
extraordinary cases: (1) Where the applicant participated in the 
development of the municipal advisor representative qualification 
examination as a member of the Board's Professional Qualifications 
Advisory Committee (PQAC); or (2) where good cause is shown by an 
applicant who previously qualified as a municipal advisor 
representative by passing the municipal advisor representative 
qualification examination and such qualification lapsed. The Board will 
review each waiver request on its individual merits, taking into 
consideration relevant facts presented by the applicant. For example, 
the Board may consider granting a waiver for an individual whose 
municipal advisor representative qualification lapsed but who 
demonstrated subsequent investment industry or related professional 
experience.
Apprenticeship
    MSRB Rule G-3 currently requires a municipal securities 
representative to serve an apprenticeship period of 90 days before 
transacting business with any member of the public or receiving 
compensation for such activities. The intent of the provision was to 
ensure that persons with no prior experience in the securities industry 
would learn from an experienced professional before conducting business 
with the public. Regulated entities have provided feedback that the 
requirement does not provide any additional benefit because the 90-day 
training period is short and the rule provides no specific training 
requirements. Moreover, the SEC approved a similar rule change by 
Financial Industry Regulatory Authority

[[Page 72228]]

(FINRA) in eliminating the apprenticeship requirement established under 
prior New York Stock Exchange (NYSE) Rule 345 for certain registered 
persons, noting that the change would permit its member firms to 
determine, consistent with their supervisory obligations, the extent 
and duration of the initial training of such registered persons.\13\ 
The MSRB believes that dealers and municipal advisors should determine 
the length and nature of the initial training for newly registered 
persons, consistent with the approach taken by FINRA. Consequently, the 
MSRB proposes to eliminate the apprenticeship requirement for municipal 
securities representatives and proposes no such requirement for 
municipal advisor representatives.
---------------------------------------------------------------------------

    \13\ See FINRA Regulatory Notice 08-64 (Oct. 2008). Exchange Act 
Release No. 58103 (Jul. 3, 2008), 73 FR 40403 (Jul. 14, 2008), File 
No. SR-FINRA-2008-036.
---------------------------------------------------------------------------

Technical Amendments
    The MSRB is amending Rule G-3(a)(ii) to correctly re-letter G-
3(a)(ii)(D) as G-3(a)(ii)(C).
Effective Date
    The MSRB is proposing that these amendments become effective 60 
days following the date of SEC approval. The effective date and the 
compliance date of the municipal advisor representative qualification 
examination will be announced by the MSRB with at least 30 days notice. 
The one-year grace period will extend from the effective date to the 
compliance date.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(A) of the Act,\14\ which provides that the MSRB's 
rules shall:
---------------------------------------------------------------------------

    \14\ See Section 15B(b)(2)(A) of the Act, 15 U.S.C. 78o-
4(b)(2)(A).

provide that no municipal securities broker or municipal securities 
dealer shall effect any transaction in, or induce or attempt to 
induce the purchase or sale of, any municipal security, and no 
broker, dealer, municipal securities dealer, or municipal advisor 
shall provide advice to or on behalf of a municipal entity or 
obligated person with respect to municipal financial products or the 
issuance of municipal securities, unless . . . such municipal 
securities broker or municipal securities dealer and every natural 
person associated with such municipal securities broker or municipal 
securities dealer meet such standards of training, experience, 
competence, and such other qualifications as the Board finds 
necessary or appropriate in the public interest or for the 
---------------------------------------------------------------------------
protection of investors and municipal entities or obligated persons.

    This provision provides the MSRB with authority to establish 
standards of competence as the MSRB finds necessary to carry out its 
regulatory duties. It also provides that, in connection with the 
definition and application of such standards, the MSRB may 
appropriately classify municipal advisors and their associated persons, 
specify that all or any portion of such standards shall be applicable 
to any such class, and require persons in any such class to pass an 
examination regarding such standards of competence.
    Professional qualification examinations are an established means 
for determining the basic competency of individuals in a particular 
class. The proposed rule change would require individuals who engage in 
or supervise municipal advisory activities to pass such an examination. 
The MSRB believes that requiring prospective municipal advisor 
representatives to pass a basic qualification examination will protect 
investors, municipal entities and obligated persons by ensuring such 
representatives have a basic understanding of the role of a municipal 
advisor representative and the rules and regulations governing such 
individuals.
    In its final rule on the permanent registration of municipal 
advisors, the SEC noted that ``[t]he new registration requirements and 
regulatory standards are intended to mitigate some of the problems 
observed with the conduct of some municipal advisors, including . . . 
advice rendered by financial advisors without adequate training or 
qualifications. '' \15\ The municipal advisor representative 
qualification examination is consistent with the intent to mitigate 
problems associated with advice provided by those individuals without 
adequate training or qualifications.
---------------------------------------------------------------------------

    \15\ See 78 FR 67467 at 67469 (Nov. 12, 2013).
---------------------------------------------------------------------------

    Additionally, the MSRB believes that the proposed rule change is 
consistent with Section 15B(b)(2)(L)(iii) of the Act,\16\ which 
provides that the MSRB's rules shall, with respect to municipal 
advisors, provide professional standards. The proposed rule change 
would establish professional standards for those individuals engaged in 
or supervising municipal advisory activities by requiring such 
individuals to demonstrate a basic competency regarding the role of 
municipal advisor representatives and the rules and regulations 
governing the conduct of such persons.
---------------------------------------------------------------------------

    \16\ See Section 15B(b)(2)(L)(iii) of the Act, 15 U.S.C. 78o-
4(b)(2)(L)(iii).
---------------------------------------------------------------------------

    Section 15B(b)(2)(L)(iv) of the Act \17\ requires that rules 
adopted by the Board 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, provided that there is robust protection of investors against 
fraud. The MSRB believes that the proposed rule change is consistent 
with this provision. While the proposed rule change would affect all 
municipal advisors, including small municipal advisors, it would be a 
necessary and appropriate regulatory burden in order to establish the 
baseline competence of those individuals engaged in municipal advisory 
activities, and it also would promote compliance with MSRB rules. While 
there will be one-time costs associated with preparing for and taking 
the municipal advisor representative qualification examination, the 
MSRB does not believe that such costs will impose a regulatory burden 
on small municipal advisors that is not necessary or appropriate to 
protect investors, municipal entities and obligated persons. A 
discussion of the economic analysis of the proposed rule change and its 
impact on small municipal advisors is provided below.
---------------------------------------------------------------------------

    \17\ See Section 15B(b)(2)(L)(iv) of the Act, 15 U.S.C. 78o-
4(b)(2)(L)(iv).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 15B(b)(2)(C) of the Act \18\ requires that MSRB rules not 
be designed to impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. In determining 
whether this standard has been met, the MSRB has been guided by the 
Board's recently-adopted policy to more formally integrate economic 
analysis into the rulemaking process. In accordance with this policy 
the Board has evaluated the potential impacts of the proposed rule 
change, including in comparison to reasonable alternative regulatory 
approaches.
---------------------------------------------------------------------------

    \18\ See Section 15B(b)(2)(C) of the Act, 15 U.S.C. 78o-
4(b)(2)(C).
---------------------------------------------------------------------------

    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 Act, in so far as the proposed rule 
change merely establishes baseline professional qualification standards 
for all municipal advisors. The baseline standard would provide the 
MSRB assurance that individuals

[[Page 72229]]

who take and pass the municipal advisor representative qualification 
examination demonstrate a basic knowledge of the role of a municipal 
advisor representative and the rules and regulations governing the 
conduct of individuals engaging in municipal advisory activities. The 
MSRB has considered whether it is possible that the costs associated 
with preparing for and taking the municipal advisor representative 
qualification examination, relative to the baseline of no professional 
qualification examination, may affect the competitive landscape by 
leading some municipal advisors to exit the market, curtail their 
activities or consolidate with other firms. For example, some municipal 
advisors may determine to consolidate with other municipal advisors in 
order to benefit from economies of scale (e.g., by leveraging existing 
resources of a larger firm to prepare candidates to take the 
qualification examination) rather than to incur separately the costs 
associated with the proposed rule change. Others may exit the market, 
rather than incurring the cost of preparing for and taking a 
qualification examination.
    In the SEC Final Registration Rule, the SEC recognized that 
municipal advisors would incur programmatic costs, including ``costs to 
meet standards of training, experience, competence, and other 
qualifications, as well as continuing education requirements, that the 
MSRB may establish in the future.'' \19\ Such exits from the market may 
lead to a reduced pool of municipal advisors. However, the SEC also 
noted that the market for municipal advisory services is likely to 
remain competitive despite the potential exit of some municipal 
advisors (including small entity municipal advisors), consolidation of 
municipal advisors, or lack of new entrants into the market.\20\
---------------------------------------------------------------------------

    \19\ See 78 FR 67467 at 67611 (Nov. 12, 2013).
    \20\ See 78 FR 67467 at 67630 (Nov. 12, 2013).
---------------------------------------------------------------------------

    It is also possible that competition for municipal advisory 
services can be affected by whether incremental costs associated with 
the municipal advisor representative qualification examination are 
passed on to advisory clients. The amount of costs passed on may be 
influenced by the size of the municipal advisory firm. For smaller 
municipal advisors with fewer clients, the incremental costs associated 
with the qualification examination may represent a greater percentage 
of annual revenues, and, thus, such advisors may be more likely to pass 
those costs along to their advisory clients. As noted above, however, 
the costs of preparing for and taking the examination would be incurred 
only once for each municipal advisor representative, assuming the 
representative passed the examination on the first occasion.
    The Act provides that MSRB rules may 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 provided that there is robust 
protection of investors against fraud.\21\ The MSRB is sensitive to the 
potential impact of the requirements contained in the proposed rule 
change on small municipal advisors. The MSRB understands that some 
small municipal advisors and sole proprietors, unlike larger municipal 
advisory firms, may not employ full-time staff to train individuals to 
take and pass professional qualification examinations and that the cost 
of complying with the requirements of the proposed rule change may be 
proportionally higher for these smaller firms. To minimize potential 
disruption to firms' business activities and to allow sufficient time 
for municipal advisor professionals to study for the examination, the 
proposed rule change would provide covered registered persons with a 
one-year grace period to pass the examination. The MSRB recognizes that 
requiring all individuals engaged in municipal advisory activities to 
take the examination means that many individuals with ongoing business 
obligations would be required to prepare for and take the examination 
in addition to fulfilling their business commitments. The MSRB believes 
that the one-year grace period would provide such individuals with 
sufficient flexibility to plan their examination preparation time 
around their existing and ongoing business obligations. Going forward, 
new municipal advisor professionals entering the market would be able 
to study for and take the examination before incurring municipal 
advisory business commitments. The MSRB believes that the proposed rule 
change is consistent with the Act's provision with respect to burdens 
imposed on small municipal advisors because the financial burden of 
preparing for and taking the qualification examination is offset by the 
need to ensure that municipal advisor professionals have a basic level 
of competency.
---------------------------------------------------------------------------

    \21\ See Section 15B(b)(2)(L)(iv) of the Act, 15 U.S.C. 78o-
4(b)(2)(L)(iv).
---------------------------------------------------------------------------

    On March 17, 2014, the MSRB published a request for public comment 
on a draft of the proposed rule change.\22\ In response, the MSRB 
received thirty-five comment letters.\23\ The comments, which are 
summarized in Section 5 below, focused principally on the qualification 
examination.
---------------------------------------------------------------------------

    \22\ See MSRB Notice 2014-08 (Mar. 17, 2014) (March Notice).
    \23\ Letters were received from Arrow Partners (``Arrow''), 
Association of Registration Management (``ARM''), Bond Dealers of 
America (``BDA''), Cedar Partners, Ltd (``Cedar''), Central States 
Capital Markets (``Central States''), CFA Institute (``CFA''), 
Compass Securities Corporation (``Compass''), Dixworks LLC 
(``Dixworks''), Fitzgibbon Toigo Associates (``Fitzgibbon''), 
Fortress Group, Inc. (``Fortress''), Frank Taylor, George K. Baum & 
Company (``George K. Baum''), Government Credit Corporation 
(``GCC''), Hamersley Partners, LLC (``Hamersley''), IMMS LLC 
(``IMMS''), Investment Company Institute (``ICI''), Jorge Rosso, 
Monahan & Roth, LLC (``Monahan''), MVision Private Equity Advisers 
USA LLC (``MVision''), National Association of Independent Public 
Finance Advisors (``NAIPFA''), New Albany Capital Partners, LLC 
(``New Albany''), Oyster River Capital LP (``Oyster River''), 
Perkins Fund Marketing LLC (``Perkins''), Raftelis Financial 
Consultants, Inc. (``Raftelis''), Securities Industry and Financial 
Markets Association (``SIFMA''), Sonja Sullivan, Stacy Havener, 
Stonehaven, Tessera Capital Partners (``Tessera''), Third Party 
Marketers Association (``3PM''), Tibor Partners Inc. (``Tibor''), 
Timothy D. Wasson, Yuba Group (``Yuba''), Zions First National Bank, 
by W. David Hemingway (``Zions Bank I''), Zions First National Bank, 
by James G. Livingston (``Zions Bank II'').
---------------------------------------------------------------------------

    The qualification examination is intended to determine whether a 
municipal advisor representative meets a minimum level of competency 
and, in general, commenters acknowledged that municipal advisor 
representatives should meet or exceed a minimum level of competency. 
However, several commenters expressed concerns about implementation 
costs associated with the proposed examination. These commenters 
suggested that the MSRB consider alternatives for determining a 
municipal advisor representative's competency. Although the suggested 
alternatives vary, they fall into two main categories. First, several 
commenters asked the MSRB to reconsider the scope of the proposed 
qualification examination, suggesting the examination should be 
administered separately or as part of an existing qualification 
examination. Second, commenters suggested that municipal advisor 
professionals be grandfathered based on either their experience or 
their existing professional qualifications. These options are discussed 
in Section 5 below.
    Commenters expressed concerns about the costs of preparing for and 
taking a qualification examination. SIFMA offered estimates of the 
costs to firms and individuals associated with taking the examination. 
These costs included fees per examination, study materials, the value 
of time used to

[[Page 72230]]

study for the exam, recordkeeping costs, and compliance costs. Although 
many of these costs are unknown, SIFMA estimates that the known likely 
costs to individuals and firms will be at least $5,000 per individual 
taking the examination. In addition, SIFMA noted that costs also would 
be incurred by the MSRB to support development of questions for the new 
examination and by FINRA to administer the examination. SIFMA argued 
that these costs would ``multiply exponentially'' as potentially 
thousands of people who are or will be dually registered as municipal 
securities representatives and municipal advisory representatives--or 
will be moving from one classification to another--will need to take an 
additional qualification examination and incur additional expenses. 
SIFMA suggested that costs could be reduced by broadening the scope of 
the Series 52 examination to include questions related to competency as 
a municipal advisor representative.
    BDA estimated costs of up to $100,000 per individual to meet the 
requirements as a municipal securities representative and as a 
municipal advisor representative. BDA did not explain how it arrived at 
this estimate, although it indicated that the figure includes the lost 
time of municipal advisor representatives that could have been used 
serving clients. BDA assumes that 75,000 individuals (33,000 
individuals from non-dealer municipal advisors and 42,000 from dealer-
municipal advisors) would need to take the new examination.\24\ The 
product of BDA's estimated cost per individual and their estimated 
number of test takers yields a total estimated cost in the billions of 
dollars. Although BDA admits that it performed a ``back of the 
envelope'' assessment of the costs, the MSRB does not believe this cost 
estimate has adequate foundation.
---------------------------------------------------------------------------

    \24\ BDA also expressed concern about the administration of the 
qualification examination, positing that the number of individuals 
taking the examination would create congestion at examination 
centers and may result in professionals unable to complete their 
required testing. The MSRB is confident that FINRA--assuming it is 
designated as the administrator of the municipal advisor 
representative qualification examination under Section 
15B(c)(7)(A)(iii) of the Act--and the examination centers employed 
by FINRA have the capacity to accommodate all individuals who will 
be required to take the qualification examination during the one-
year grace period and thereafter.
---------------------------------------------------------------------------

    SIFMA's estimates of cost per individual are better supported. 
Although cost estimates will vary, the SIFMA estimates appear to be 
more credible and useful and were considered by the MSRB. SIFMA notes 
that there will be unknown costs, so their estimate should be regarded 
as a minimum amount. The costs to the MSRB and FINRA in creating and 
administering the examination are relevant. However, a portion of those 
costs will likely be covered by examination fees. Given that these fees 
have been considered as part of the costs borne by individuals and 
firms, the relevant costs to the MSRB and FINRA would be those costs 
not covered by examination fees.
    The BDA estimate of 75,000 test takers appears high and 
inconsistent with the permanent municipal advisor registration 
information received by the SEC to date. A more accurate figure has 
been provided by the SEC, which estimates in the SEC Final Registration 
Rule that municipal advisors will need to submit a new Form MA-I for 
approximately 950 individuals annually.\25\ Using SIFMA's cost 
estimate, the total cost to the industry per year, excluding unknown 
recordkeeping and compliance costs, yields an estimate of approximately 
$4,750,000 in annual costs. Of course, in the first year the costs 
would be higher because those individuals currently engaged in 
municipal advisory activities will take the examination. Based on the 
initial analysis, the Board expects approximately 3,000 initial 
examination takers. This could result in a total cost of $15 million, 
using SIFMA's cost estimate of $5,000 per person. Most of this cost 
will be borne by large dealer-municipal advisors that elect to qualify 
a large number of their associated persons as municipal advisor 
representatives. The MSRB expects that many of these firms will 
leverage their training resources to lower the cost per examination 
candidate. The MSRB also believes that the total cost to municipal 
advisors to prepare individuals to take the qualification examination 
will drop significantly after the one-year grace period, as the number 
of examination takers decreases and then levels off.
---------------------------------------------------------------------------

    \25\ See 78 FR 67467 at 67589 (Nov. 12, 2013).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

Scope of the Qualification Examination
    Commenters expressed varying views about the proper scope of a 
qualification examination. BDA offered three alternatives for the Board 
to consider: (a) Qualifying municipal advisor professionals using the 
Series 52 examination; (b) creating a single, new, comprehensive 
examination for all municipal securities and advisor professionals; and 
(c) creating a supplemental examination for previously registered 
municipal securities professionals that would cover the new municipal 
advisor material.
    SIFMA recommended that the Board consider adding questions to the 
existing Series 52 qualification examination. SIFMA stated that this 
alternative would be less burdensome to the industry, and would ensure 
that there was no delay in developing examination material and 
administering the examination. SIFMA also stated that examining 
municipal securities and advisory competency in one examination would 
aid small dealers, many of whom perform both functions and are very 
sensitive to compliance costs. Further, SIFMA stated that there are 
potentially thousands of individuals who are dually registered and 
would benefit from having a single examination. This is essentially the 
same approach as the universal examination recommended by BDA.
    Consistent with SIFMA's recommendation for a single qualification 
examination, ARM also suggested that if the MSRB feels that the duties 
of municipal advisor representatives require additional expertise that 
additional questions be added to existing examinations rather than 
creating entirely new examinations.
    The Board maintains there is a need for separate qualification 
examinations because the content of such an examination will be 
designed to meet the MSRB's goal of determining whether a prospective 
municipal advisor representative meets the minimum level of competency 
required of a municipal advisor professional. The examination, while 
covering a variety of municipal advisory activities, will be more 
targeted than a combined examination that attempts to evaluate the 
competence of individuals engaged in varied municipal securities and 
municipal advisory activities. As discussed below, certain commenters 
take issue with the breadth of the proposed municipal advisor 
representative examination because of the more limited nature of their 
functions. These concerns could be exacerbated by combining the 
municipal advisor and securities representative examinations. Although 
a combined examination may be less costly to create and administer, and 
may place a smaller cost burden on dealers, such an examination may 
place a larger cost burden on non-dealer municipal advisors and their 
associated persons who have no need for or interest in demonstrating 
competency as a municipal securities representative but

[[Page 72231]]

would be required to prepare for and pass an examination that included 
significant content relating to the role and regulation of municipal 
securities representatives.
    BDA suggests, alternatively, that the MSRB develop a supplemental 
examination for municipal securities representatives. Under this 
approach, municipal advisor professionals not qualified as municipal 
securities representatives could take the municipal securities 
representative qualification examination and municipal advisor 
supplement or a new municipal advisor representative qualification 
examination developed by the MSRB. The net effect of this alternative 
is a separate examination for municipal advisory activities. While a 
supplemental examination might require fewer questions than a stand-
alone examination, the practicalities of maintaining many different 
examinations should not be underestimated. Moreover, to maintain 
consistency, the MSRB would then need to develop a supplemental 
examination for municipal advisors seeking to register as municipal 
securities representatives, which would necessitate a total of four 
examinations, adding further and unnecessary complexity to the 
registration process. Lastly, the MSRB believes that existing municipal 
securities representatives should be proficient on those portions of a 
municipal advisor representative examination that overlap with the 
municipal securities representative examination.
    In contrast to other commenters, ICI argued against a single 
general qualification exam. ICI recommended that the MSRB create a 
separate qualification examination for those who provide advice 
regarding municipal fund securities. ICI cites the MSRB's policy on 
economic analysis that allows for consideration of different rule 
specifications or differing requirements for different market 
participants. Alternatively, ICI recommends grandfathering those 
individuals who have passed the Series 6 examination.\26\ The Board 
believes that passing the Series 6 examination would demonstrate only a 
basic competency in servicing retail customers who purchase mutual 
funds, interests in 529 college savings plans and variable annuities 
and, hence, would not establish an individual's competency as a 
municipal advisor representative. The Board appreciates ICI's 
contention that the activities of municipal advisors who provide advice 
to municipal entities regarding municipal fund securities are different 
than the municipal advisory activities of traditional municipal 
advisors. The MSRB also acknowledges that some of the content on the 
examination will not be directly related to municipal fund securities. 
Nevertheless, the Board believes that individuals who engage in 
municipal advisory activities regarding municipal fund securities 
should demonstrate knowledge of the rules and regulations governing 
municipal advisors by taking the municipal advisor representative 
qualification examination.
---------------------------------------------------------------------------

    \26\ The Investment Company and Variable Contracts Products 
Representative Qualifications Examination, (Series 6) authorizes 
individuals to sell a limited set of securities products including, 
mutual funds and variable annuities.
---------------------------------------------------------------------------

Grandfathering
    ARM suggested that the MSRB consider grandfathering individuals who 
have corresponding registrations as a municipal securities 
representative or municipal securities principal on the grounds that 
these individuals have completed more encompassing examinations and 
that they are experienced municipal securities professionals whose 
expertise should be sufficient to engage in municipal advisory 
activities. SIFMA, BDA and 3PM also recommended that individuals who 
are currently qualified to perform municipal securities activities be 
grandfathered.
    Yuba commented that the Board should make the supervisor 
examination available before, or simultaneously with, the 
representative examination and eliminate the need for a supervisor to 
take both examinations. The Board believes it is important that the 
representative examination be introduced prior to any principal 
examination because the examination will determine the basic competency 
of those individuals who are engaged in municipal advisory activity and 
have the most direct impact on municipal entities and investors. While 
the supervisory activities of municipal advisor principals are 
important, the MSRB will consider an examination for principals at a 
later date, and should not delay the introduction of an examination 
that has been in preparation for nearly four years. And in any event, a 
principal is customarily required to pass the representative 
examination.\27\
---------------------------------------------------------------------------

    \27\ See MSRB Rule G-3(b)(ii)(B).
---------------------------------------------------------------------------

    A focused examination for municipal advisor professionals will 
likely be more effective in meeting the MSRB's goal of determining 
whether a municipal advisor representative meets a minimum level of 
competency than recognizing a professional qualification examination 
for municipal securities representatives or accepting the self-reported 
experience of an individual who worked in a previously unregulated 
environment. While it is self-evident that relying on existing 
qualifications (such as having passed the Series 52 examination) or 
general experience would place a smaller cost burden on firms and 
individuals than requiring all individuals engaged in municipal 
advisory activities to take and pass a new qualification examination, 
the MSRB believes such an examination is necessary to establish a 
baseline of competency for municipal advisors.
    The Board determined that grandfathering would not be consistent 
with the intent of Congress and the SEC in creating a new municipal 
advisor regulatory regime. The new regulation was created in response 
to problems that Congress and the SEC observed regarding the activities 
of municipal advisors. Requiring municipal advisor professionals to 
take and pass a basic qualification examination ensures that such 
individuals demonstrate a minimum level of understanding of the role 
and responsibilities of municipal advisors and applicable rules and 
regulations.
    By contrast, grandfathering presumes that each municipal advisor 
representative has a basic competency in the subject matter. Congress 
explicitly called for the development of professional standards for 
municipal advisors.\28\ Given the MSRB's statutory obligation to 
protect investors, municipal entities and obligated persons that 
interact with and/or rely on municipal advisor professionals, there 
should be a compelling reason to rely on their prior experience as 
evidence of their competence. Even if an individual passed the Series 7 
or 52 examinations, the content was not specifically related to 
municipal advisory activities or the regulation of such activities. 
While examinations such as the Series 52 may have some overlapping 
content, the examination questions being developed for municipal 
advisor professionals by PQAC are being drafted based on the particular 
job responsibilities of municipal advisor professionals and the rules 
and regulations governing such responsibilities. In this regard, the 
Series 7 and 52 examinations do not adequately test the specific job 
responsibilities of municipal advisor professionals.
---------------------------------------------------------------------------

    \28\ See Section 15B(b)(2)(L) of the Act, 15 U.S.C. 78o-
4(b)(2)(L).
---------------------------------------------------------------------------

    The focus of the Series 52 examination is on underwriting, trading,

[[Page 72232]]

research and sales, not municipal advisory activities. Approximately 
one-quarter of the examination covers rules and regulations applicable 
to these activities and over half of the examination covers municipal 
securities features and principles relevant to municipal securities 
activities. There are few questions directly related to the job 
responsibilities of municipal advisor professionals, and those that 
exist are generally written from the perspective as municipal 
securities representative. Without significant content related to the 
job responsibilities of municipal advisor professionals, the Board 
believes that passing the Series 52 examination does not establish an 
individual's basic competency to perform municipal advisory 
activities.\29\ Moreover, the municipal advisor regulatory regime is 
still being developed by the Board, and individuals who have passed the 
Series 52 examination would not have demonstrated knowledge of the new 
core municipal advisor regulations.
---------------------------------------------------------------------------

    \29\ While the Series 52 examination covers concepts related to 
the activities of a traditional financial advisor, those concepts 
are discrete and do not extend to the broader set of municipal 
advisory activities that will be covered on the municipal advisor 
representative qualification examination.
---------------------------------------------------------------------------

    Certain commenters urged the Board to adopt the approach taken by 
FINRA when implementing the investment banking representative 
qualification examination (Series 79).\30\ FINRA grandfathered general 
securities representatives (Series 7 or Series 7 equivalent) if they 
opted-in within six months of the effective date of the rule.\31\ FINRA 
explained that the new examination would provide a more targeted 
assessment (than the Series 7 examination) of the competency of 
investment banking professionals. Some commenters further suggested 
that, if grandfathering is permitted, the MSRB could ensure that 
relevant municipal advisor content is delivered through the continuing 
education program. While continuing education is important, it should 
not serve as a substitute for a basic competency examination unless 
other alternatives are not feasible. The Board believes the approach 
taken by FINRA (then National Association of Securities Dealers, 
``NASD'') in implementing the research analyst qualification 
examination (Series 86/87) is a more appropriate analogue. In that 
instance, no grandfathering was permitted due to the FINRA's desire 
that all research analysts demonstrate the same level of analytical 
competency and knowledge of the law.\32\
---------------------------------------------------------------------------

    \30\ The following commenters suggested using FINRA's approach 
to grandfathering: BDA, George K. Baum, SIFMA, and 3PM.
    \31\ See FINRA Regulatory Notice 09-41 (Jul. 2009).
    \32\ See NASD Notice to Members 04-25 (Mar. 2004).
---------------------------------------------------------------------------

    The argument for grandfathering individuals based on experience is 
not persuasive because the MSRB has no way of determining the 
competence of individuals who have been acting as municipal advisors 
but have been unregulated at the federal level. While it is likely that 
many municipal advisor professionals are experienced and knowledgeable 
and have more than a basic level of competency, the MSRB is not in a 
position to review the background and experience of each professional 
to determine whether such individual is qualified. Qualifying all 
individuals as municipal advisor representatives based solely on their 
experience would likely result in the qualification of some individuals 
who could not demonstrate a basic competency regarding the 
responsibilities of municipal advisors and the regulations governing 
municipal advisory activities.
    Given the new regulatory regime for municipal advisors, the 
differences in size and type of municipal advisors, as well as the 
varied experience and background of municipal advisor professionals, it 
is important that each individual demonstrate a basic competency.

Apprenticeship, Grace Period, and Classifications

    Commenters broadly supported the elimination of the apprenticeship 
requirement for municipal securities representatives and not 
establishing one for municipal advisor representatives.\33\ There also 
was broad support for establishing a one-year grace period to provide 
municipal advisor representatives with sufficient time to study and 
take the examination without causing undue disruption to the business 
of the municipal advisor.\34\ 3PM, however, suggested that more time 
was necessary, and NAIPFA said it could not opine as to whether the 
one-year grace period would be sufficient because it was unsure if the 
study guide would be available before the grace period commenced. As 
noted above, prior to the commencement of the grace period, the MSRB 
will file with the SEC a study outline for the examination and then 
conduct a pilot examination. The pilot examination will likely be 
administered in 2015 and will enable the Board to establish a passing 
score for the examination. After a passing score is established, the 
MSRB will issue a regulatory notice establishing an effective date and 
compliance date for the examination. The grace period will commence on 
the effective date and conclude on the compliance date.
---------------------------------------------------------------------------

    \33\ The following commenters were supportive of eliminating the 
apprenticeship requirement: George K. Baum, SIFMA, Zions Bank II, 
Yuba and 3PM.
    \34\ The following commenters were supportive of the one-year 
grace period: BDA, New Albany, ICI, SIFMA, Zions Bank II and 3PM.
---------------------------------------------------------------------------

Municipal Advisor Representative Examination Delivery and 
Administration
    Several commenters raised questions regarding the administration 
and delivery of the examination, specifically about retention of the 
registration information for non-dealer municipal advisors that are not 
included in FINRA's central registration depository.\35\ Commenters 
want to ensure a similar process is in place for non-dealer municipal 
advisors. Similarly, commenters asked that the MSRB utilize the 
existing securities industry registration forms (e.g., Form U4). These 
issues are beyond the scope of the proposed rule change. The MSRB will 
address the administration of the examination at a later date.
---------------------------------------------------------------------------

    \35\ The following commenters raised issues regarding the 
administration and delivery of the examination: ARM, BDA and George 
K. Baum.
---------------------------------------------------------------------------

Comment on the Implication of Revising Rule G-1
    In response to the proposed revisions to MSRB Rule G-1, Zions Bank 
(Zions Bank I) commented that the proposed amendments should not be 
interpreted or applied in any way that would preclude a bank, or a 
separately identifiable department or division of a bank (``SID''), or 
a bank affiliate, from engaging in municipal securities and municipal 
advisory activities. It is not the intent of the amendments to preclude 
banks, SIDS, or bank affiliates from engaging in a broad range of 
municipal securities and/or municipal advisory activities, so long as 
they are properly registered under MSRB rules and the federal 
securities laws and otherwise comply with any limitations therein.

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 of 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:

[[Page 72233]]

    (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 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#2654534a430b45494b4b434852556655434508414950"><span class="__cf_email__" data-cfemail="0a787f666f27696567676f647e794a796f69246d657c">[email protected]</span></a>. Please include 
File Number SR-MSRB-2014-08 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-2014-08. 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-2014-08 and should be 
submitted on or before December 26, 2014.

    For the Commission, pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28543 Filed 12-4-14; 8:45 am]
BILLING CODE 8011-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>