Document ID: SEC-2020-1025-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2020-07-01T04:00Z

[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Notices]
[Pages 39613-39619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14115]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89154; File No. SR-MSRB-2020-02]

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change To Align 
Certain MSRB Rules to Securities Exchange Act Rule 15 l -1, Regulation 
Best Interest

June 25, 2020.

I. Introduction

    On May 1, 2020, 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 to align MSRB rules to the 
Commission's recently adopted Rule 15l-1 under the Exchange Act 
(``Regulation Best Interest''); \3\ specifically, amendments to MSRB 
Rule G-8 (on books and records), MSRB Rule G-9 (on preservation of 
records), MSRB Rule G-19 (on suitability of recommendations and 
transactions), MSRB Rule G-20 (on gifts, gratuities, non-cash 
compensation and expenses of issuance), MSRB Rule G-48 (on transactions 
with Sophisticated Municipal Market Professionals (``SMMPs'')), and the 
deletion of an interpretation of MSRB Rule G-20 (the ``proposed rule 
change'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.15 l -1; see also Exchange Act Release No. 86031 
(June 5, 2019), 84 FR 33318 (July 12, 2019) (File No. S7-07-18) 
(``Regulation Best Interest Adopting Release'').
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    The proposed rule change was published for comment in the Federal 
Register on May 12, 2020.\4\ The public comment period closed on June 
2, 2020.\5\ As described further below, the Commission is approving the 
proposed rule change.
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    \4\ Securities Exchange Act Release No. 88829 (May 6, 2020) (the 
``Notice''), 85 FR 28082 (May 12, 2020) (MSRB-2020-02).
    \5\ All comment letters received on the proposed rule change are 
available on the Commission's website at https://www.sec.gov.
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II. Description of Proposed Rule Change

    As described further below, the MSRB proposed to align MSRB rules 
with Regulation Best Interest by revising the MSRB's rules to comport 
with Regulation Best Interest obligations involving: (i) Suitability, 
by amending MSRB Rule G-19 to apply only in circumstances in which 
Regulation Best Interest does not apply and eliminate the control 
element from the quantitative suitability obligation for 
recommendations subject to MSRB Rule G-19, and MSRB Rule G-48 to make 
clear that the exception from the requirement to perform a customer-
specific suitability analysis when making a recommendation to a 
Sophisticated Municipal Market Participant (``SMMP'') (as defined in 
MSRB Rule D-15) is available only for recommendations that are subject 
to MSRB Rule G-19; (ii) non-cash compensation, by updating MSRB Rule G-
20 to require any permissible non-cash compensation to align with the 
applicable requirements of Regulation Best Interest; and (iii) books 
and records, by requiring dealers to maintain books and records 
required by Regulation Best Interest and the related SEC Form CRS 
requirement through revisions to MSRB Rules G-8 and G-9.

A. Background

    On June 5, 2019, the SEC adopted Regulation Best Interest, which 
establishes a new standard of conduct for Broker-Dealers \6\ and 
natural persons who are associated persons of a Broker-Dealer.
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    \6\ Under Regulation Best Interest, ``broker-dealers'' are 
defined as ``broker-dealers and natural persons who are associated 
persons of a broker-dealer (unless otherwise indicated, together 
referred to as ``broker-dealer[s]''). Regulation Best Interest 
Adopting Release, 84 FR at 33318. Each broker-dealer subject to 
Regulation Best Interest is referred to herein as a ``Broker-
Dealer'' and, collectively as ``Broker-Dealers.''
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    Specifically, this standard of conduct for a Broker-Dealer applies 
when making a recommendation to a retail customer, defined generally as 
a natural person or the legal representative of such person, who 
receives and uses a recommendation from a Broker-Dealer primarily for 
personal, family, or household purposes, of any securities transaction 
or investment strategy involving securities.\7\ The Commission

[[Page 39614]]

stated that Regulation Best Interest enhances the Broker-Dealer 
standard of conduct beyond existing suitability obligations, and aligns 
the standard of conduct with retail customers' reasonable expectations 
by imposing certain new requirements on Broker-Dealers.\8\ 
Specifically, Regulation Best Interest imposes the following ``general 
obligation'' on Broker-Dealers:
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    \7\ Id.
    \8\ Regulation Best Interest Adopting Release, 84 FR at 33319.

    [W]hen making a recommendation of any securities transaction or 
investment strategy involving securities (including account 
recommendations) to a retail customer, shall act in the best 
interest of the retail customer at the time the recommendation is 
made, without placing the financial or other interest of the 
[Broker-Dealer] making the recommendation ahead of the interest of 
the retail customer.\9\
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    \9\ 17 CFR 240.15l -1(a)(1).

    Regulation Best Interest \10\ provides that this general obligation 
is satisfied only if a Broker-Dealer complies with four component 
obligations: (i) An obligation to make certain prescribed disclosures, 
before or at the time of the recommendation, about the recommendation 
and the relationship between the retail customer and the Broker-Dealer 
(the ``Disclosure Obligation''); \11\ (ii) an obligation to exercise 
reasonable diligence, care, and skill in making a recommendation (the 
``Care Obligation''); \12\ (iii) an obligation to establish, maintain, 
and enforce written policies and procedures reasonably designed to 
address conflicts of interest (the ``Conflict of Interest 
Obligation''); \13\ and (iv) an obligation to establish, maintain, and 
enforce written policies and procedures reasonably designed to achieve 
compliance with Regulation Best Interest (the ``Compliance 
Obligation'').\14\
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    \10\ SEC staff frequently asked questions on Regulation Best 
Interest are available at: https://www.sec.gov/tm/faq-regulation-best-interest.
    \11\ 17 CFR 240.15l-1(a)(2)(i).
    \12\ 17 CFR 240.15l-1(a)(2)(ii).
    \13\ 17 CFR 240.15l-1(a)(2)(iii).
    \14\ 17 CFR 240.15l-1(a)(2)(iv).
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    The MSRB stated that the following changes to its rules reflect its 
attempt to harmonize the MSRB's rules with Regulation Best Interest and 
Form CRS and reduce the potential for conflicting or duplicative 
regulation in the municipal securities market among Dealers.\15\
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    \15\ To effect transactions in municipal securities, a person 
must be a Broker-Dealer subject to registration with the Commission 
under Section 15(b)(1) or a municipal securities dealer subject to 
registration with the Commission under Section 15B(a)(2) of the 
Exchange Act. See 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o-4(b)(2)(C).
    With respect to municipal securities dealers subject to 
registration under Section 15B(a)(2) of the Exchange Act, MSRB Rule 
D-8 provides that ``a municipal securities dealer which is a bank or 
a separately identifiable department or division of a bank'' is a 
bank dealer (``Bank Dealer''). As used herein, a Bank Dealer, 
together with a Broker-Dealer is a ``Dealer.''
    Bank Dealers are registered with the Commission under Exchange 
Section 15B(a)(2), and thus are not subject to Regulation Best 
Interest. Nevertheless, because Bank Dealers can make 
recommendations of municipal securities transactions or investment 
strategies involving municipal securities to retail customers, the 
Board stated it plans to issue a separate Request for Comment on 
whether the Board will apply the requirements of Regulation Best 
Interest, through further amendments to MSRB rules, to Bank Dealers. 
See Notice, 85 FR at 28083 n.5.
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B. Suitability

i. MSRB Rule G-19
    MSRB Rule G-19 provides that a Dealer must have a reasonable basis 
to believe that a recommended transaction or investment strategy 
involving municipal securities is suitable for the customer, based on 
the information obtained through the reasonable diligence of the Dealer 
to ascertain the customer's investment profile.\16\ The MSRB Rule G-19 
suitability standard is composed of three component obligations:
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    \16\ MSRB Rule G-19 defines a customer's investment profile to 
include the customer's age, other investments, financial situation 
and needs, tax status, investment objectives, investment experience, 
investment time horizon, liquidity needs, risk tolerance, and any 
other information the customer may disclose to the dealer in 
connection with such recommendation.

    1. Reasonable-basis suitability, which requires a dealer to have 
a reasonable basis to believe, based on reasonable diligence, that 
the recommendation is suitable for at least some investors; \17\
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    \17\ MSRB Rule G-19, Supplementary Material .05(a).
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    2. Customer-specific suitability, which requires a dealer to 
have a reasonable basis to believe that the recommendation is 
suitable for a particular customer based on that customer's 
investment profile; \18\ and
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    \18\ MSRB Rule G-19, Supplementary Material .05(b).
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    3. Quantitative suitability, which requires a dealer who has 
actual or de facto control over a customer account to have a 
reasonable basis for believing that a series of recommended 
transactions, even if suitable when viewed in isolation, are not 
excessive and unsuitable for the customer when taken together in 
light of the customer's investment profile.\19\
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    \19\ MSRB Rule G-19(c).

    MSRB Rule G-19 applies to all Dealers when making a recommendation 
to a ``customer,'' which is defined in MSRB Rule D-9 as any person 
other than a Dealer acting in its capacity as a Dealer or an issuer in 
transactions involving the sale of a new issue of its securities.\20\ 
When a Dealer reasonably concludes that a customer is an SMMP,\21\ such 
Dealer is not obligated to perform a customer-specific suitability 
analysis under MSRB Rule G-19.\22\
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    \20\ MSRB Rule D-9 states that, ``Except as otherwise 
specifically provided by rule of the Board, the term `customer' 
shall mean any person other than a broker, dealer, or municipal 
securities dealer acting in its capacity as such or an issuer in 
transactions involving the sale by the issuer of a new issue of its 
securities.''
    \21\ MSRB Rule D-15 defines a customer as an SMMP according to 
three elements:
    (a) Nature of the Customer. The customer must be:
    (1) a bank, savings and loan association, insurance company, or 
registered investment company;
    (2) an investment adviser registered either with the Commission 
under Section 203 of the Investment Advisers Act of 1940 or with a 
state securities commission (or any agency or office performing like 
functions); or
    (3) any other person or entity with total assets of at least $50 
million.
    (b) Dealer Determination of Customer Sophistication. The dealer 
must have a reasonable basis to believe that the customer is capable 
of evaluating investment risks and market value independently, both 
in general and with regard to particular transactions and investment 
strategies in municipal securities.
    (c) Customer Affirmation. The customer must affirmatively 
indicate that it:
    (1) Is exercising independent judgment in evaluating:
    (A) the recommendations of the dealer;
    (B) the quality of execution of the customer's transactions by 
the dealer; and
    (C) the transaction price for non-recommended secondary market 
agency transactions as to which (i) the dealer's services have been 
explicitly limited to providing anonymity, communication, order 
matching and/or clearance functions and (ii) the dealer does not 
exercise discretion as to how or when the transactions are executed; 
and
    (2) has timely access to material information that is available 
publicly through established industry sources as defined in Rule G-
47(b)(i) and (ii).
    \22\ MSRB Rule G-48(c).
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    Conceptually similar to MSRB Rule G-19, the Care Obligation of 
Regulation Best Interest also requires a three-part analysis to 
evaluate recommendations to retail customers but employs the higher 
best interest standard instead of MSRB Rule G-19's suitability 
standard.\23\ In addition, while Regulation Best Interest applies only 
to recommendations to ``retail customers,'' defined generally as a 
natural person or the legal representative of such person, who receives 
and uses a recommendation from a Broker-Dealer primarily for personal, 
family, or household purposes,\24\ MSRB Rule G-19 applies to 
``customers'' (with an exception to the customer-specific suitability 
requirement for recommendations to SMMPs).\25\
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    \23\ See Notice, 85 FR at 28084.
    \24\ See 17 CFR 240.15l-1(b)(1).
    \25\ See Notice, 85 FR at 28084.
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    The proposed rule change includes two amendments to MSRB Rule G-19 
designed to harmonize MSRB

[[Page 39615]]

requirements with Regulation Best Interest.\26\ First, to avoid 
unnecessary regulatory complexity, the applicability of MSRB Rule G-19 
would be limited only to circumstances in which Regulation Best 
Interest does not apply.\27\ Second, the proposed rule change would 
remove the existing limitation in MSRB Rule G-19 that requires a 
quantitative suitability determination only when a Dealer has ``actual 
or de facto control'' over the customer's account.\28\ These proposed 
amendments are discussed below.
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    \26\ Id.
    \27\ Id.
    \28\ Id.
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a. Eliminate Applicability of MSRB Rule G-19 to Recommendations Subject 
to Regulation Best Interest
    The MSRB stated that Regulation Best Interest addresses generally 
the same conduct that is addressed by MSRB Rule G-19 but employs a best 
interest, rather than a suitability, standard. The MSRB also stated 
that, absent action by the Board, a Broker-Dealer would be required to 
reconcile compliance with both Regulation Best Interest and MSRB Rule 
G-19 in many circumstances.\29\ In such circumstances, the MSRB 
believed that compliance with Regulation Best Interest would result in 
compliance with MSRB Rule G-19 because a Broker-Dealer that ``act[s] in 
the best interest of the retail customer'' \30\ when making a 
recommendation to a retail customer of any securities transaction or 
investment strategy involving securities would necessarily also meet 
the MSRB Rule G-19 requirement to ``have a reasonable basis to believe 
that [the recommendation] is suitable for the customer.'' \31\
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    \29\ Id.
    \30\ 17 CFR 240.15l-1(a)(1).
    \31\ See Notice, 85 FR at 28084.
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    The MSRB stated that the proposed rule change reduces the potential 
for duplicative regulation and unnecessary complexity and provides 
regulatory clarity about the applicability and requirements of MSRB 
Rule G-19 and Regulation Best Interest to market participants in an 
effective and efficient manner.\32\ In particular, the proposed rule 
change adds new text to MSRB Rule G-19 that states that MSRB Rule G-19 
does not apply to recommendations subject to Regulation Best 
Interest.\33\ MSRB Rule G-19 would thus apply only to:
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    \32\ Id.
    \33\ Id.

    1. Recommendations to customers that are not ``retail 
customers,'' \34\ as defined by Regulation Best Interest; and
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    \34\ Regulation Best Interest defines a retail customer as a 
natural person, or the legal representative of such natural person, 
who receives a recommendation of any securities transaction or 
investment strategy involving securities from a broker-dealer and 
uses the recommendation primarily for personal, family, or household 
purposes. See 17 CFR 240.15l-1(b)(1).
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    2. Recommendations to any customers by Bank Dealers.\35\
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    \35\ As noted above, the MSRB plans to issue a Request for 
Comment on whether the MSRB will apply the requirements of 
Regulation Best Interest to Bank Dealers through further amendments 
to MSRB rules. See Notice, 85 FR at 28083 n.5.
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b. Align MSRB Rule G-19's Quantitative Suitability Obligation to the 
Requirements of Regulation Best Interest
    MSRB Rule G-19's quantitative suitability obligation requires a 
Dealer to have a reasonable basis for believing that a series of 
recommended transactions are not excessive and unsuitable for the 
customer when taken together in light of the customer's profile, but 
only if the Dealer has actual or de facto control over the customer's 
account.\36\ In contrast, the quantitative care obligation of 
Regulation Best Interest applies regardless of whether the Broker-
Dealer exercises actual or de facto control over the customer's 
account.\37\ In the Regulation Best Interest Adopting Release, the 
Commission stated:
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    \36\ MSRB Rule G-19, Supplementary Material .05(c).
    \37\ See 17 CFR 240.15l-1(a)(2)(ii)(C); see also Regulation Best 
Interest Adopting Release, 84 FR at 33327.

    [I]mposing the quantitative care obligation without a 
``control'' element would provide consistency in the investor 
protections provided to retail customers by requiring a broker-
dealer to always form a reasonable basis as to the recommended 
frequency of trading in a retail customer's account--irrespective of 
whether the broker-dealer ``controls'' or exercises ``de facto 
control'' over the retail customer's account. This would also be 
consistent with the other obligations of the Care Obligation, which 
apply regardless of whether a broker-dealer ``controls'' or 
exercises ``de facto control'' over the retail customers' 
account.\38\
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    \38\ Regulation Best Interest Adopting Release, 84 FR at 33384 
(citation omitted).

The MSRB offered the same rationale eliminating the control element of 
the quantitative suitability obligation prescribed in Supplementary 
Material .05(c) of MSRB Rule G-19.\39\
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    \39\ See Notice, 85 FR at 28084.
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ii. MSRB Rule G-48
    MSRB Rule G-48(c) provides that a Dealer making a municipal 
securities recommendation to an SMMP does not have any obligation under 
MSRB Rule G-19 to perform a customer-specific suitability analysis.\40\ 
Under MSRB Rule D-15, an SMMP is defined by three components:
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    \40\ Id.

    1. The customer must fit within a prescribed category of 
institutional investor or be a natural person or entity with total 
assets of at least $50 million; \41\
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    \41\ MSRB Rule D-15(a).
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    2. The dealer must have a reasonable basis to believe that the 
customer is capable of evaluating investment risks and market value 
independently; \42\ and
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    \42\ MSRB Rule D-15(b).
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    3. The customer must make certain affirmations regarding the 
exercise of independent judgment and access to information.\43\
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    \43\ MSRB Rule D-15(c).

As provided in MSRB Rule G-48(c), a Dealer making a recommendation to a 
natural person with at least $50 million in assets and who otherwise 
meets the definition of SMMP, shall not have an obligation under MSRB 
Rule G-19 to perform a customer-specific suitability analysis.\44\
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    \44\ See Notice, 85 FR at 28085.
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    Though as discussed above in Section II(B)(i)(a), the proposed rule 
change would exclude the recommendations of Broker-Dealers to retail 
customers from the scope of MSRB Rule G-19, the MSRB also proposes to 
amend MSRB Rule G-48(c) to make clear that the exception contained 
therein from the obligation to conduct a customer-specific suitability 
analysis only applies when a recommendation is subject to MSRB Rule G-
19 and not Regulation Best Interest.\45\ As the MSRB stated in its 
Notice, there is no exception from the customer-specific care 
obligation for high-net worth individuals.\46\
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    \45\ Id.
    \46\ Id.
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C. Non-Cash Compensation

    MSRB Rule G-20(g) broadly prohibits Dealers and their associated 
persons from directly or indirectly accepting or making payments or 
offers of payments of any non-cash compensation in connection with the 
sale and distribution of a primary offering of municipal securities, 
subject to certain limited exceptions.\47\ The MSRB stated that 
described generally, these exceptions are:
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    \47\ Id.

    1. Gifts that do not exceed $100 per individual per year and are 
not preconditioned on achievement of a sales target; \48\
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    \48\ MSRB Rule G-20(d)(i).
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    2. Occasional gifts of meals or tickets to theatrical, sporting, 
and other entertainments, provided that such gifts are

[[Page 39616]]

not so frequent or so extensive as to raise any question of 
propriety and are not preconditioned on achievement of a sales 
target; \49\
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    \49\ MSRB Rule G-20(d)(ii).
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    3. Payment or reimbursement by offerors (generally, the issuer 
and any advisors to the issuer, the underwriters, and their 
affiliates) in connection with training or education meetings, 
subject to specified conditions, including that the payment is not 
conditioned on achieving a sales target; \50\
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    \50\ MSRB Rule G-20(d)(iii).
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    4. Internal non-cash compensation arrangements between the 
dealer and its associated persons, subject to specified conditions 
including that any non-cash compensation related to a sales contest 
must be based on the total production of all associated persons with 
respect to all municipal securities within respective product types 
distributed by the dealer and credit for those sales must be 
weighted equally; \51\ and
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    \51\ MSRB Rule G-20(d)(iv).
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    5. Contributions by any person other than the dealer to a non-
cash compensation arrangement between a dealer and its associated 
persons, subject to the same conditions for permissible internal 
non-cash compensation arrangements, described above.\52\
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    \52\ MSRB Rule G-20(d)(v).

    Regulation Best Interest's Conflict of Interest Obligation 
requires, among other things, Broker-Dealers to establish, maintain and 
enforce written policies and procedures reasonably designed to, among 
other things, identify and eliminate sales contests, sales quotas, 
bonuses, and non-cash compensation that are based on the sale of 
specific securities or specific types of securities within a limited 
period of time.\53\ As described above, MSRB Rule G-20 permits certain 
sales contests in connection with primary offerings.\54\ The proposed 
rule change clarifies that any non-cash compensation permitted by MSRB 
Rule G-20(g), including any sales contests, must also be consistent 
with the applicable requirements of Regulation Best Interest.\55\
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    \53\ 17 CFR 240.15l-1(a)(2)(iii)(D). The Conflict of Interest 
Obligation also requires broker-dealers to (1) identify and at a 
minimum disclose or eliminate all conflicts of interest associated 
with a recommendation of any securities transaction or investment 
strategy involving securities to a retail customer; (2) identify and 
mitigate any conflicts of interest associated with such 
recommendations that create an incentive for a natural person who is 
an associated person of a broker-dealer to place the interest of the 
broker-dealer or such natural person ahead of the interest of the 
retail customer; and (3) identify and disclose any material 
limitations placed on the securities or investment strategies 
involving securities that may be recommended to a retail customer 
and any conflicts of interest associated with such limitations and 
prevent such limitations and associated conflicts of interest from 
causing the broker-dealer, or a natural person who is an associated 
person of the broker-dealer, to make recommendations that place the 
interest of the broker-dealer or such natural person ahead of the 
interest of the retail customer. 17 CFR 240.15l -1(a)(3)(A)-(C).
    \54\ See Notice, 85 FR at 28085.
    \55\ Id.
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    Additionally, in June 1982, the MSRB published interpretive 
guidance under MSRB Rule G-20 stating that sales contests offered by an 
underwriter to participating members of a syndicate constitute 
compensation for services and, therefore, must meet the requirements of 
the then-current version of MSRB Rule G-20.\56\ The proposed rule 
change deletes the 1982 Guidance.\57\ The MSRB noted that, depending on 
the particular facts and circumstances, such sales contests, with 
respect to Dealers that make recommendations to retail customers, may 
be inconsistent with the requirements of Regulation Best Interest's 
Conflict of Interest Obligation, which requires Broker-Dealers to 
establish, maintain and enforce written policies and procedures 
reasonably designed to ``[i]dentify and eliminate any sales contests, 
sales quotas, bonuses, and non-cash compensation that are based on the 
sales of specific securities or specific types of securities within a 
limited period of time.'' \58\ In support of its decision to rescind 
the 1982 Guidance, the MSRB quoted the following from the Commission's 
Adopting Release for Regulation Best Interest:
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    \56\ See Rule G-20 Interpretive Guidance, ``Authorization of 
Sales Contests'' (June 25, 1982) (``1982 Guidance'').
    \57\ See Notice, 85 FR at 28085.
    \58\ See 17 CFR 240.15l -1(a)(2)(iii).

    [s]ales contests, sales quotas, bonuses and non-cash 
compensation that are based on the sales of specific securities 
within a limited period of time create high-pressure situations for 
associated persons to increase the sales of specific securities or 
specific types of securities within a limited period of time and 
thus compromise the best interests of their retail customers.\59\
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    \59\ Regulation Best Interest Adopting Release, 84 FR at 33331.

Deciding to rescind the 1982 Guidance for all recommendations of 
municipal securities transactions made by Dealers to all customers, the 
MSRB stated that the same policy concerns apply with respect to non-
retail customers.\60\ Specifically, the MSRB stated that the high-
pressure sales situations described above have the potential to 
compromise the best interests of non-retail customers as well. 
Accordingly, the proposed rule change deletes this interpretation in 
full.\61\
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    \60\ See Notice, 85 FR at 28085.
    \61\ Id.
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D. Books and Records

i. MSRB Rule G-8
    MSRB Rule G-8 directs Dealers to make and keep current specified 
books and records to the extent they are applicable to a Dealer's 
business.\62\ For Dealers subject to Exchange Act Rule 17a-3, MSRB Rule 
G-8(f) provides that compliance with Exchange Act Rule 17a-3 will be 
deemed compliance with MSRB Rule G-8, provided that certain records 
required by MSRB Rule G-8 must be maintained in any event. Exchange Act 
Rule 17a-3 requires Broker-Dealers to make and keep current specified 
books and records and provides that for purposes of transactions in 
municipal securities by Dealers, compliance with MSRB Rule G-8 will be 
deemed compliance with Exchange Act Rule 17a-3.\63\
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    \62\ See Notice, 85 FR at 28085-6.
    \63\ 17 CFR 240.17a-3.
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    When the Commission adopted Regulation Best Interest, it amended 
Exchange Act Rule 17a-3 to require Broker-Dealers to maintain a record 
of all information collected from and provided to a retail customer 
pursuant to Regulation Best Interest, along with the identity of each 
natural person who is an associated person, if any, responsible for the 
account.\64\ The Commission also adopted a related requirement for 
Broker-Dealers to provide retail investors with Form CRS \65\ and 
amended Exchange Act Rule 17a-3 to require Broker-Dealers to maintain a 
record of the date it provided each Form CRS to its retail 
customers.\66\
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    \64\ 17 CFR 240.17a-3(a)(35).
    \65\ 17 CFR 240.17a-14.
    \66\ 17 CFR 240.17a-3(a)(24).
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    The MSRB stated that the proposed rule change includes amendments 
to MSRB Rule G-8 that parallel the new Exchange Act Rule 17a-3 
requirements relating to Regulation Best Interest and Form CRS because 
Broker-Dealers may comply with Exchange Act Rule 17a-3 for purposes of 
transactions in municipal securities by complying with MSRB Rule G-
8.\67\ Specifically, the proposed rule change requires that each 
Broker-Dealer shall make and keep current in its books and records: (i) 
Under proposed MSRB Rule G-8(a)(xi)(F), a record of all information 
collected from, and provided to, a retail customer (as well as the 
identify of each natural person who is an associated person, if any, 
responsible for the account), to whom a recommendation of any 
securities transaction or investment strategy involving municipal 
securities is or will be provided; and (ii) under

[[Page 39617]]

proposed MSRB Rule G-8(a)(xxvii), a record of the date that each Form 
CRS was provided to each retail investor (including any Form CRS before 
any such retail investor opens an account).\68\ The MSRB stated it 
believes that the proposed rule change's amendments are necessary to 
ensure that Broker-Dealers subject to Regulation Best Interest and the 
Form CRS requirement are required to maintain the records regardless of 
which books and records rule they follow.\69\
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    \67\ See Notice, 85 FR at 28086.
    \68\ Id.
    \69\ Id.
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ii. MSRB Rule G-9
    MSRB Rule G-9 prescribes the periods of time that records must be 
preserved by Dealers.\70\ Similar to MSRB Rule G-8, MSRB Rule G-9 
provides that Dealers who are subject to and comply with Exchange Act 
Rules 17a-3 and 17a-4 will be deemed to comply with MSRB Rule G-9, 
provided that certain specified records are preserved for the 
applicable time periods specified in Rule G-9 in any event.\71\ 
Exchange Act Rule 17a-4 establishes record preservation requirements 
for Broker-Dealers and, like Exchange Act Rule 17a-3, provides that for 
purposes of transactions in municipal securities by Dealers, compliance 
with MSRB Rule G-9 will be deemed compliance with Exchange Act Rule 
17a-4.\72\
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    \70\ Id.
    \71\ Id.
    \72\ Id.
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    The Commission amended Exchange Act Rule 17a-4 to require Broker-
Dealers to retain the records related to Regulation Best Interest and 
Form CRS described above for six years.\73\ The MSRB stated that the 
proposed rule change includes amendments to MSRB Rule G-9 to parallel 
these new requirements.\74\ Specifically, this proposed rule change 
requires preserving copies of: (i) All documents required under MSRB 
Rule G-8(a)(xi)(F) (until at least six years after the earlier of the 
date the account was closed or the date on which the information was 
collected, provided, replaced, or updated); and (ii) the records 
concerning Form CRS (required to be maintained pursuant to Rule G-
8(a)(xxvii)); and (iii) a copy of each Form CRS, until at least six 
years after such record or Form CRS is created.\75\ The MSRB stated 
that the proposed rule change's revisions to MSRB G-9 are necessary to 
ensure that Broker-Dealers are subject to similar requirements, whether 
under MSRB rules or the rules of the SEC.\76\
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    \73\ 17 CFR 240.17a-4(e)(5), (e)(10).
    \74\ See Notice, 85 FR at 28086.
    \75\ Id.
    \76\ Id.
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III. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change 
and the comment letters received. The Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to the 
MSRB.
    In particular, the Commission believes that the proposed rule 
change is consistent with the provisions of Exchange Act Section 
15B(b)(2)(C), which provides, in part, that the MSRB's rules shall:

    [B]e 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, and to remove impediments to and 
perfect the mechanism of a free and open market in municipal 
securities and municipal financial products, and, in general, to 
protect investors, municipal entities, obligated persons, and the 
public interest.\77\
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    \77\ 15 U.S.C. 78o-4(b)(2)(C).
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A. Amendments Related to Suitability

    The Commission finds that the proposed rule change's proposed 
amendments to MSRB Rules G-19 and G-48 are consistent with Exchange Act 
Section 15B(b)(2)(C) because the amendments will foster cooperation and 
coordination with regulators, facilitate transactions in municipal 
securities and municipal financial products, remove impediments to and 
perfect the mechanism of a free and open market in municipal securities 
and municipal financial products, and protect investors.\78\
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    \78\ Id.
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i. Eliminating the Applicability of MSRB Rule G-19 to Recommendations 
Subject to Regulation Best Interest
    The Commission believes that the proposed rule change's revision to 
MSRB Rule G-19 will protect investors by ensuring Broker-Dealers comply 
with the heightened regulatory requirements of the Commission's 
Regulation Best Interest. As stated by the Commission in the Regulation 
Best Interest Adopting Release:

    The enhancements contained in Regulation Best Interest are 
designed to improve investor protection by enhancing the quality of 
broker-dealer recommendations to retail customers and reducing the 
potential harm to retail customers that may be caused by conflicts 
of interest.\79\
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    \79\ Regulation Best Interest Adopting Release, 83 FR at 33321.

    The Commission also finds that the proposed rule change's revisions 
to MSRB Rule G-19 to eliminate the applicability of MSRB Rule G-19's 
suitability requirements to recommendations subject to Regulation Best 
Interest will foster cooperation and coordination with regulators by 
harmonizing MSRB rules with Regulation Best Interest. The Commission 
also believes that the proposed rule change will facilitate 
transactions in municipal securities and municipal financial products 
and remove impediments to and perfect the mechanism of a free and open 
market in municipal securities and municipal financial products by 
eliminating potential regulatory duplication and complexity through the 
establishment of a uniform standard for assessing the recommendations 
of municipal securities made by Broker-Dealers to retail customers.
ii. Aligning MSRB Rule G-19's Quantitative Suitability Obligation to 
the Requirements of Regulation Best Interest
    The Commission finds that proposed rule change's amendments to MSRB 
Rule G-19 eliminating the control element from a Dealer's quantitative 
suitability obligations for recommendations subject to MSRB Rule G-19 
will enhance investor protection for customers that are not retail 
customers for purposes of Regulation Best Interest by requiring a 
Dealer to always form a reasonable basis as to the recommended 
frequency of trading in a retail customer's account--irrespective of 
whether the Dealer ``controls'' or exercises ``de facto control'' over 
the retail customer's account.\80\
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    \80\ See, e.g., Regulation Best Interest Adopting Release, 83 FR 
at 33374.
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    The Commission also believes that the proposed rule change will 
foster cooperation and coordination with regulators by joining the 
Commission (in Regulation Best Interest) and FINRA (in FINRA-2020-07) 
\81\ in collectively eliminating the control element from assessing the 
recommendations made by Dealers. In this respect, the proposed rule 
change will allow Dealers to more efficiently operationalize compliance 
with their obligations under both Regulation Best Interest and MSRB 
Rule G-19, and to more efficiently

[[Page 39618]]

recommend and ultimately execute transactions in the municipal 
securities market without any attendant reduction in investor 
protection and thereby facilitate transactions in municipal securities 
and municipal financial products and remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products.
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    \81\ See Exchange Act Release No. 89091 (June 18, 2020), 85 FR 
37970 (June 23, 2020) (SR-FINRA-2020-07).
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iii. Amending MSRB Rule G-48(c) To State That the Exception From the 
Customer-Specific Suitability Requirement Is Available Only When a 
Recommendation Is SubjectTo MSRB Rule G-19
    The Commission believes that the proposed rule change's revision of 
MSRB Rule G-48(c) (stating that the exception from the customer-
specific suitability requirement is available only when a 
recommendation is subject to MSRB Rule G-19) will foster cooperation 
and coordination with regulators by harmonizing MSRB rules with 
Regulation Best Interest and enhance investor protection by ensuring 
that the Best Interest Standard applies to all recommendations by 
Broker-Dealers made to retail customers irrespective of their net 
worth. By clarifying that there is no SMMP-based exception to a Broker-
Dealer's obligations when making a recommendation to a retail customer, 
all retail customers of Broker-Dealers will benefit from the enhanced 
quality of Broker-Dealer recommendations and reduced harm caused by 
conflicts of interest, consistent with Regulation Best Interest.
    The Commission also believes that eliminating any ambiguity 
regarding the interplay of MSRB Rule G-48 and MSRB Rule G-19 will 
enable Broker-Dealers to more efficiently fulfill their regulatory 
obligations and thereby remove impediments to and perfect the mechanism 
of a free and open market in municipal securities and municipal 
financial products market due to the greater regulatory certainty under 
the proposed rule change.

B. Amendments Related to Non-Cash Compensation

    The Commission believes that the approach proposed by the MSRB with 
respect to its non-cash compensation rules is appropriate and designed 
to protect investors and the public interest, consistent with of the 
Exchange Act. In particular, the Commission believes that the proposed 
rule change will help protect investors and the public interest by 
clarifying that the incentives Dealers may offer pursuant to non-cash 
compensation arrangements under the relevant MSRB rules as amended are 
consistent with the applicable requirements under Regulation Best 
Interest. For these reasons, the Commission finds that the proposed 
rule change to MSRB Rule G-20 is consistent with the Exchange Act.
    Furthermore, by clarifying that any non-cash compensation permitted 
by MSRB Rule G-20(g) must also be consistent with the applicable 
requirements of Regulation Best Interest to be permissible and thereby 
eliminating any potential regulatory duplication or ambiguity, the 
Commission believes that the proposed rule change will foster 
cooperation and coordination with regulators as well as remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities and municipal financial products by harmonizing 
MSRB rules with Regulation Best Interest.\82\
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    \82\ 15 U.S.C. 78o-4(b)(2)(C).
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C. Amendments Related to Books and Records

    The Commission believes that the proposed rule change's amendments 
to MSRB Rules G-8 and G-9 are consistent with Exchange Act Section 
15B(b)(2)(C) because the proposed rule change will foster cooperation 
and coordination with regulators, facilitate transactions in municipal 
securities and municipal financial products, remove impediments to and 
perfect the mechanism of a free and open market in municipal securities 
and municipal financial products, and protect investors.\83\
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    \83\ Id.
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i. Amending MSRB Rule G-8 To Align With Exchange Act Rule 17a-3
    The Commission believes that the proposed rule change to MSRB Rule 
G-8 will foster cooperation and coordination with regulators and will 
protect investors by harmonizing MSRB rules with the Commission's 
record-keeping requirements under Exchange Rule Act Rule 17a-3, as 
amended by Regulation Best Interest and Form CRS. Specifically, the 
Commission believes that the proposed rule change will enable 
regulators to assess Broker-Dealers' compliance with their obligations 
under Regulation Best Interest and Form CRS by ensuring that such 
Broker-Dealers are required to make records related to Regulation Best 
Interest and Form CRS regardless of whether they look to MSRB Rule G-8 
or Exchange Act Rule 17a-3 for their record-making obligations. The 
Commission also believes that this approach to ensuring Broker-Dealer 
compliance with the requirements of Regulation Best Interest and Form 
CRS will also protect investors by ensuring that Broker-Dealers, 
whether they follow MSRB G-8 or Exchange Act Rule 17a-3, will be 
obligated to create certain records to evidence their compliance with 
their obligations.
ii. Amending MSRB Rule G-9 To Align With Exchange Act Rule 17a-4
    The Commission finds that the proposed rule change's revisions to 
MSRB Rule G-9 to correspond with SEC books and records requirements 
will protect investors, thereby ensuring that Broker-Dealers are 
subject to similar requirements, whether under MSRB rules or the rules 
of the SEC under record-keeping requirements under Exchange Rule Act 
Rule 17a-4, as amended by Regulation Best Interest and Form CRS. 
Specifically, the Commission believes that the proposed rule change 
will enable regulators to assess Broker-Dealers' compliance with their 
obligations under Regulation Best Interest and Form CRS by ensuring 
that such Broker-Dealers are required to preserve records related to 
Regulation Best Interest and Form CRS regardless of whether they look 
to MSRB Rule G-9 or Exchange Act Rule 17a-4 for their record-making 
obligations. The Commission also believes that this approach to 
ensuring Broker-Dealer compliance with the requirements of Regulation 
Best Interest and Form CRS will also protect investors by ensuring that 
Broker-Dealers, whether they follow MSRB G-9 or Exchange Act Rule 17a-
4, will be obligated to preserve certain records to evidence their 
compliance with their obligations for the same duration.
    In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation.\84\ Exchange Act Section 
15B(b)(2)(C) \85\ requires that MSRB rules not be designed to impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act. The Commission does not believe 
that the proposed rule change would impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Exchange Act because the proposed rule change would align MSRB rules 
with (or otherwise clarify the applicability of MSRB rules in relation 
to) the requirements of Regulation Best Interest.
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    \84\ 15 U.S.C. 78c(f).
    \85\ 15 U.S.C. 78o-4(b)(2)(C).
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    Moreover, the Commission observes that because Bank Dealers are not

[[Page 39619]]

subject to Regulation Best Interest or Form CRS, any different 
compliance standards between Bank Dealers and non-Bank Dealers under 
MSRB Rules result from Regulation Best Interest and Form CRS directly 
rather than the MSRB's promulgation of rules for consistency therewith. 
Consequently, this proposed rule change will not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act, because it does not change the already existing 
competitive landscape between Broker-Dealers subject to Regulation Best 
Interest and Form CRS and Bank Dealers not subject thereto. In 
addition, to the extent the proposed rule change imposes regulatory 
obligations in excess of those prescribed by Regulation Best Interest 
or Form CRS, those new obligations apply equally to all Dealers, and 
therefore does not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
    The Commission has also reviewed the record for the proposed rule 
change and notes that the record does not contain any information to 
indicate that the proposed rule change would have a negative effect on 
capital formation. Furthermore, the Commission believes the proposed 
rule change would not impose barriers to capital formation, as the 
intention is to increase regulatory certainty by harmonizing MSRB rules 
with Regulation Best Interest. The Commission also finds that the 
proposed rule change includes provisions that help promote efficiency. 
In particular, the Commission believes the proposed rule change may 
improve Dealers' regulatory certainty by promoting clarity and 
consistency on issues related to suitability and permissible non-cash 
compensation, as well recordkeeping and record-making.
    The Commission received comment letters on the proposed rule 
change, which were supportive of the proposed rule change and suggested 
no amendments to the propose rule change.\86\
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    \86\ See Letter to Secretary, Commission, from Kelli McMorrow, 
Head of Government Affairs & Director of Fixed Income Policy, 
American Securities Association, dated May 21, 2020 (the ``ASA 
Letter''); Letter to Secretary, Commission, from Kristen 
Malinconico, Director, U.S. Chamber of Commerce's Center for Capital 
Market Competitiveness, dated June 2, 2020 (the ``CCMC Letter'').
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    For the reasons noted above, the Commission believes that the 
proposed rule change is consistent with the Exchange Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\87\ that the proposed rule change (SR-MSRB-2020-02) be, 
and hereby is, approved.
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    \87\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\88\
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    \88\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14115 Filed 6-30-20; 8:45 am]
BILLING CODE 8011-01-P