Document ID: SEC-2012-0595-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2012-04-13T04:00Z

[Federal Register Volume 77, Number 72 (Friday, April 13, 2012)]
[Notices]
[Pages 22367-22372]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8878]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66772; File No. SR-MSRB-2012-05]

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of a 
Restatement of an Interpretive Notice Concerning the Application of 
MSRB Rule G-17 to Sophisticated Municipal Market Professionals

April 9, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``the Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on March 26, 2012, the Municipal Securities 
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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 is filing with the SEC a proposed rule change consisting 
of a restatement of an interpretive notice (the ``Existing SMMP 
Notice'' and the ``Restated SMMP Notice,'' respectively) concerning the 
application of MSRB Rule G-17 (on conduct of municipal securities and 
municipal advisory activities) to sophisticated municipal market 
professionals (``SMMPs''). Because of the relationship between the 
proposed rule change and FINRA Rule 2111 (on suitability), the MSRB 
requests that the proposed rule change be made effective on July 9, 
2012, which is the date on which FINRA Rule 2111 will become effective.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2012-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the

[[Page 22368]]

proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The MSRB has prepared summaries, 
set forth in Sections A, B, and C below, of the most significant 
aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Existing Definition of SMMP
    Under the Existing SMMP Notice, a dealer is permitted to treat an 
institutional customer \3\ as an SMMP if the dealer has reasonable 
grounds for concluding the following and other known facts do not 
contradict such a conclusion:
---------------------------------------------------------------------------

    \3\ For purposes of the Existing SMMP Notice, an institutional 
customer is defined as ``an entity, other than a natural person 
(corporation, partnership, trust, or otherwise), with total assets 
of at least $100 million invested in municipal securities in the 
aggregate in its portfolio and/or under management.''
---------------------------------------------------------------------------

     The customer has timely access to the publicly available 
material facts concerning a municipal securities transaction;
     The customer is capable of independently evaluating the 
investment risk and market value of the municipal securities at issue; 
and
     The customer is making independent decisions about its 
investments in municipal securities.
    Although the Existing SMMP Notice permits a dealer to have an 
investor attest to SMMP status ``as a means of streamlining the 
dealers' process for determining that the customer is an SMMP,'' it 
also provides that a dealer may not rely on such an attestation if the 
dealer knows or has reason to know that the investor lacks 
sophistication concerning a municipal securities transaction based on a 
number of factors set forth in the notice.
    Access to Material Facts. As to the first part of the definition of 
SMMP, access to material facts, the Existing SMMP Notice provides that 
a dealer's analysis may depend on the customer's resources to 
investigate the transaction (e.g., research analysts) and the 
customer's ready access to established industry sources for 
disseminating material information concerning the transaction (e.g., 
the predecessors of the MSRB's Electronic Municipal Market Access 
(``EMMA'') System and the MSRB's Real-Time Trade Reporting System 
(``RTRS''), rating agency data, and other indicative data sources).
    Independent Evaluation of Investment Risk and Market Value. As to 
the second part of the definition of SMMP, independent evaluation of 
risk and market value, the Existing SMMP Notice identifies the 
following relevant factors:
     The customer's use of one or more consultants, investment 
advisers, research analysts or bank trust departments;
     The customer's general level of experience in municipal 
securities markets and specific experience with the type of municipal 
securities under consideration;
     The customer's ability to understand the economic features 
of the municipal security;
     The customer's ability to independently evaluate how 
market developments would affect the municipal security under 
consideration; and
     The complexity of the municipal security or securities 
involved.
    Independent Investment Decisions. As to the third part of the 
definition, independent investment decisions, the Existing SMMP Notice 
provides that such a determination will depend on the nature of the 
relationship between the dealer and the institutional customer and 
provides that the following considerations may be relevant:
     Any written or oral understanding that exists between the 
dealer and the institutional customer regarding the nature of the 
relationship between the dealer and the institutional customer and the 
services to be rendered by the dealer;
     The presence or absence of a pattern of acceptance of the 
dealer's recommendations;
     The use by the institutional customer of ideas, 
suggestions, market views, and information relating to municipal 
securities obtained from sources other than the dealer; and
     The extent to which the dealer has received from the 
institutional customer current comprehensive portfolio information in 
connection with discussing potential municipal securities transactions 
or has not been provided important information regarding the 
institutional customer's portfolio or investment objectives.
    Application of Existing SMMP Definition
    The Existing SMMP Notice addresses a dealer's obligations to an 
SMMP under Rule G-17 (on fair dealing), Rule G-18 (on execution of 
transactions), Rule G-19 (on suitability), and Rule G-13 (on 
quotations).
    Rule G-17. Just prior to the adoption of the Existing SMMP Notice, 
the SEC approved another MSRB notice \4\ in which the MSRB interpreted 
Rule G-17 to require brokers, dealers, and municipal securities dealers 
(``dealers'') to disclose to customers at or before the time of trade 
all material facts about a transaction known by the dealer, as well as 
all material facts about a security reasonably accessible to the market 
from established industry sources.\5\ The Existing SMMP Notice provides 
that, when a dealer effects a non-recommended secondary market 
transaction with an SMMP, its affirmative Rule G-17 disclosure duty 
concerning material facts available from established industry sources 
will be deemed satisfied. The Existing SMMP Notice does not alter a 
dealer's duty not to engage in deceptive, dishonest, or unfair 
practices under Rule G-17 or under the federal securities laws. In 
essence, it puts the dealer's disclosure obligations to SMMPs when 
effecting non-recommended secondary market transactions on a par with 
inter-dealer disclosure obligations. The Existing SMMP Notice provides 
that, as in the case of an inter-dealer transaction, in a transaction 
with an SMMP, a dealer's intentional withholding of a material fact 
about a security, when the information is not accessible through 
established industry sources, may constitute an unfair practice that 
violates Rule G-17.
---------------------------------------------------------------------------

    \4\ MSRB Interpretive Notice Regarding Rule G-17, On Disclosure 
of Material Facts (March 20, 2002) (the ``2002 Rule G-17 Notice'').
    \5\ The 2002 Rule G-17 Notice was updated in 2009 to reflect, 
among other things, the addition of EMMA as an established industry 
source. See MSRB Guidance On Disclosure and Other Sales Practice 
Obligations to Individual and Other Retail Investors in Municipal 
Securities (July 14, 2009). The 2009 Notice also extended the Rule 
G-17 affirmative disclosure obligation to ``material information.''
---------------------------------------------------------------------------

    Rule G-18. Rule G-18 provides that each dealer, when executing a 
transaction in municipal securities for or on behalf of a customer as 
agent, must make a reasonable effort to obtain a price for the customer 
that is fair and reasonable in relation to prevailing market 
conditions. The Existing SMMP Notice provides that a dealer effecting a 
non-recommended secondary market agency transaction to an SMMP is not 
required to take further actions to ensure that the transaction is 
effected at a fair and reasonable price, if its services have been 
explicitly limited to providing anonymity, communication, order 
matching, and/or clearance functions and the dealer does not exercise 
discretion as to how or when a transaction is executed. The Existing 
SMMP Notice then states that this interpretation of Rule G-18 is

[[Page 22369]]

particularly relevant to dealers operating alternative trading systems, 
stating that dealers operating such systems may be merely aggregating 
the buy and sell interest of other dealers or SMMPs. A footnote to the 
Existing SMMP Notice says that the same interpretation would apply to a 
broker's broker when executing an agency transaction for another 
dealer.
    Rule G-19. Under Rule G-19, in the case of a recommended 
transaction, a dealer must have a reasonable basis for recommending a 
particular security (``reasonable-basis suitability''), as well as 
reasonable grounds for believing the recommendation is suitable for the 
customer to whom it is made, based upon information available from the 
issuer of the security or otherwise and based upon the facts disclosed 
by the customer or otherwise known about the customer (``customer-
specific suitability''). The Existing SMMP Notice provides that, when a 
dealer has reasonable grounds for concluding that an institutional 
customer is an SMMP, the dealer's customer-specific suitability 
obligation is fulfilled.
    Rule G-13. Under Rule G-13, no dealer may distribute or publish, or 
cause to be distributed or published, any quotation relating to 
municipal securities, unless the quotation is bona fide (i.e., the 
dealer making the quotation is prepared to execute at the quoted price) 
and the price stated in the quotation is based on the best judgment of 
the dealer of the fair market value of the securities that are the 
subject of the quotation at the time the quotation is made. In general, 
any quotation disseminated by a dealer (including the quotation of an 
investor) is presumed to be a quotation made by the dealer and the 
dealer is responsible for ensuring compliance with the bona fide and 
fair market value requirements with respect to the quotation. However, 
if a dealer disseminates a quotation that is actually made by another 
dealer and the quotation is labeled as such, then the quotation is 
presumed to be a quotation made by such other dealer and not by the 
disseminating dealer. In such a case, the disseminating dealer is only 
required to have no reason to believe that either: (i) The quotation 
does not represent a bona fide bid for, or offer of, municipal 
securities by the maker of the quotation or (ii) the price stated in 
the quotation is not based on the best judgment of the maker of the 
quotation of the fair market value of the securities.
    The Existing SMMP Notice provides that, if a dealer disseminates 
the quotation of an SMMP and it is labeled as such, the disseminating 
dealer will be held to the same standard as if it were disseminating a 
quotation made by another dealer. The notice says that the following 
factors are relevant to the dealer's assessment of whether 
dissemination of the SMMP's quotation may be considered to be a 
violation of Rule G-13 by the dealer: (i) Complaints received from 
dealers and investors seeking to execute against such quotations, (ii) 
a pattern of an SMMP failing to update, confirm or withdraw its 
outstanding quotations so as to raise an inference that such quotations 
may be stale or invalid, or (iii) a pattern of an SMMP effecting 
transactions at prices that depart materially from the prices listed in 
the quotations in a manner that consistently is favorable to the SMMP 
making the quotation.

Considerations for Change

    Increased Availability of Information about Municipal Securities. 
In 2002, the MSRB decided to adopt a definition of SMMP that differed 
from certain other regulatory definitions of investors considered 
sophisticated enough to receive special treatment under the federal 
securities law. The SMMP definition was closely modeled on an NASD 
interpretation of its suitability rule,\6\ which contained a comparable 
list of factors found relevant to an investor's independent evaluation 
of risk and independent investment decisions. A notable difference was 
that the definition of SMMP also looked to whether the investor had 
access to material facts. A key factor in the MSRB's decision was the 
lack of information available about municipal securities at that time. 
Since the adoption of the existing definition of SMMP, there has been a 
vast increase in the availability of information about municipal 
securities reasonably accessible by institutional investors regardless 
of the amount of their holdings of municipal securities (e.g., on EMMA, 
from rating agencies, and from other information vendors).
---------------------------------------------------------------------------

    \6\ See IM-2310-3. Suitability Obligations to Institutional 
Customers.
---------------------------------------------------------------------------

    New FINRA Institutional Suitability Rule. Effective July 9, 2012, 
the NASD guidance on institutional suitability will no longer be in 
effect. It will be replaced by FINRA Rule 2111, which adopts a 
different approach to a FINRA member's customer-specific duty of 
suitability to an ``institutional account.'' \7\ Under FINRA Rule 2111, 
a dealer's customer-specific suitability obligation to an institutional 
customer will be considered satisfied if (1) the dealer has a 
reasonable basis to believe that the institutional customer is capable 
of evaluating investment risks independently, both in general and with 
regard to particular transactions and investment strategies involving a 
security or securities and (2) the institutional customer affirmatively 
indicates that it is exercising independent judgment in evaluating the 
dealer's recommendations. There will no longer be a detailed listing of 
factors, such as that found in the Existing SMMP Notice. The MSRB 
generally considers it desirable from the standpoint of reducing the 
cost of dealer compliance to maintain consistency with FINRA rules, 
absent clear reasons for treating transactions in municipal securities 
differently.
---------------------------------------------------------------------------

    \7\ The term ``institutional account'' will be defined in the 
same manner as under MSRB Rule G-8(a)(xi). MSRB Rule G-8(a)(xi) 
defines ``institutional account'' as: the account of (i) a bank, 
savings and loan association, insurance company, or registered 
investment company; (ii) an investment adviser registered either 
with the Commission under Section 203 of the Investment Advisers Act 
of 1940 or with a state securities commission (or any agency or 
office performing like functions); or (iii) any other entity 
(whether a natural person, corporation, partnership, trust, or 
otherwise) with total assets of at least $50 million.
---------------------------------------------------------------------------

    Proposal to Restate SMMP Notice
    Revised Definition of SMMP. Because the quality and availability of 
information concerning municipal securities has improved substantially 
since 2002, and to maintain consistency with the revised FINRA 
suitability rule for institutional customers, the MSRB proposes to 
retain the concept of an SMMP, but revise its definition so that it is 
consistent with the new FINRA suitability rule for institutional 
customers. Specifically, the MSRB proposes that an ``SMMP'' be defined 
as an ``institutional customer \8\ of a dealer that: (1) The dealer has 
a reasonable basis to believe is capable of evaluating investment risks 
and market value independently, both in general and with regard to 
particular transactions in municipal securities, and (2) affirmatively 
indicates that it is exercising independent judgment in evaluating the 
recommendations of the dealer.''
---------------------------------------------------------------------------

    \8\ ``Institutional customer'' would be defined as a customer 
with an institutional account (as defined under MSRB Rule G-
8(a)(xi).
---------------------------------------------------------------------------

    The MSRB also proposes to include the following statement in the 
Restated SMMP Notice's discussion of the definition of SMMP: ``As part 
of the reasonable basis analysis required by clause (1), the dealer 
should consider the amount and type of municipal securities owned or 
under management by the institutional customer.''
    The key to the revised definition of SMMP is the requirement that a 
dealer have a reasonable basis to believe that an investor is capable 
of evaluating

[[Page 22370]]

investment risks and market value independently, both in general and 
with regard to particular transactions in municipal securities 
(sometimes referred to in this filing as the ``reasonable basis 
analysis''). When the MSRB created the existing definition of SMMP, 
alternative trading systems for municipal securities were new and 
access to material facts about municipal securities was in large part 
limited to very large institutional investors. The high threshold for 
determining whether an investor would be considered an institutional 
customer under the Existing SMMP Notice ($100 million of municipal 
securities owned and/or under management) was considered necessary to 
make sure that only the most sophisticated institutions and dealers 
were likely to use alternative trading systems. The Restated SMMP 
Notice would provide that, as part of its reasonable basis analysis, a 
dealer should consider the amount and type of municipal securities 
owned or under management by the institutional customer. However, there 
would no longer be a threshold requirement that a customer own or 
manage a certain amount of municipal securities in order to be 
considered an SMMP.
    The MSRB also proposes that, in the case of the affirmation 
described in clause (2) of the revised definition of SMMP (i.e., 
``capable of evaluating investment risks and market value 
independently''), customers be allowed to make the affirmation orally 
or in writing and to provide the affirmation on a trade-by-trade basis, 
on a type-of-municipal-security basis (e.g., general obligation, 
revenue, VRDO, etc.), or for all potential transactions for the 
customer's account. This would be consistent with the affirmation 
requirement of FINRA Rule 2111, so receipt by a dealer of the FINRA 
2111 affirmation would also satisfy this requirement.
    Application of Revised SMMP Definition. The Restated SMMP Notice 
would not change the application of Rules G-18, G-19, and G-13 to 
SMMPs. However, it would change the application of Rule G-17 to SMMPs, 
under the assumption that institutional customers now have substantial 
access to material information about municipal securities. The Existing 
SMMP Notice limits the exclusion from the duty to disclose all material 
facts to SMMPs to non-recommended transactions. The Restated SMMP 
Notice would apply the exclusion to all transactions with SMMPs, 
whether recommended or self-directed. The Restated SMMP Notice would 
also remove the lists of factors that were deemed by the Board in 2002 
to be relevant to the components of the original definition of SMMP. It 
would also update the Existing SMMP Notice to reflect developments in 
the MSRB's interpretations of Rule G-17 since 2002 and remove endnote 9 
to the Existing SMMP Notice, which has been construed by some to lessen 
the duty of a broker's broker under Rule G-18 in a manner that is 
inconsistent with the Board's proposed Rule G-43 (on broker's 
brokers).\9\ Furthermore, it would remove the language that suggests 
that transactions on alternative trading systems are done on an agency 
basis, because at least one major alternative trading system engages 
only in principal transactions.
---------------------------------------------------------------------------

    \9\ File No. SR-MSRB-2012-04 (March 5, 2012). The MSRB notes 
that, under proposed Rule G-43(d)(iii)(A), an alternative trading 
system that had any customers (as defined in MSRB Rule D-9) that 
were not SMMPs would not be excepted from the definition of 
``broker's broker.''
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2) of the Securities Exchange Act (``Exchange Act''), 
which provides that:

    The Board shall propose and adopt rules to effect the purposes 
of this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
municipal securities dealers, and municipal advisors.

    Section 15B(b)(2)(C) of the Exchange Act, provides that the rules 
of the MSRB shall:

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities and 
municipal financial products, to remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
municipal entities, obligated persons, and the public interest.

    The proposed rule change is consistent with Sections 15B(b)(2) and 
15B(b)(2)(C) of the Exchange Act. Its principal purpose is to remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities, particularly in the case of the alternative 
trading systems that have been an increasingly important venue for the 
provision of secondary market liquidity for municipal securities. New 
municipal securities products, such as Build America Bonds, and 
decreasing spreads between interest rates on Treasury bonds and 
municipal securities, have attracted investors that were not previously 
invested in municipal securities to the municipal securities market. At 
the same time, the amount of available information about municipal 
securities has vastly increased since the Existing SMMP Notice was 
approved. While the Restated SMMP Notice would provide that a dealer 
should consider the amount and type of municipal securities owned or 
under management by the institutional customer, the MSRB no longer 
considers it essential that an institutional customer own or manage 
municipal securities in order to engage in informed decisionmaking 
about municipal securities investments. The MSRB believes it is 
appropriate to allow sophisticated investors to trade in municipal 
securities on alternative trading systems even though they do not meet 
the $100 million threshold of municipal securities owned and/or managed 
found in the Existing SMMP Notice. This change would not come at the 
expense of investor protection. While the application of the proposed 
rule change would not be limited to transactions on alternative trading 
systems, the application of certain MSRB rules to such systems has 
proven difficult in practice, especially with the increasing use of 
computerized algorithmic trading. The MSRB notes that such systems, if 
monitored closely and subjected to appropriate rulemaking,\10\ have the 
potential to increase pre-trade transparency in the municipal 
marketplace, which should eventually improve prices for all investors. 
The MSRB also generally considers it desirable from the standpoint of 
reducing the cost of dealer compliance to maintain consistency with 
FINRA rules, absent clear reasons for treating transactions in 
municipal securities differently.
---------------------------------------------------------------------------

    \10\ The MSRB notes that proposed MSRB Rule G-43 would provide 
for additional regulation of such alternative trading systems.
---------------------------------------------------------------------------

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

    The MSRB does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, since it would apply 
equally to all dealers that have SMMP customers, whether alternative 
trading systems or not.

[[Page 22371]]

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

    On November 8, 2011, the MSRB requested comment on the original 
version of the proposed rule change.\11\ The MSRB received comment 
letters from (1) Alternative Regulatory Solutions, LLC (``ARS''); (2) 
Bond Dealers of America (``BDA''); (3) Securities Industry and 
Financial Markets Association (``SIFMA''); and (4) TMC Bonds L.L.C. 
(``TMC''), formerly The MuniCenter.
---------------------------------------------------------------------------

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

    Safe Harbor. The original version of the Restated SMMP Notice on 
which comment was requested proposed a safe harbor for satisfaction of 
the dealer's reasonable basis analysis. Most of the comments concerned 
that safe harbor. The reasonable basis analysis portion of the 
definition of SMMP is referred to in this discussion of comments as the 
``general rule.'' SIFMA said that the safe harbor was too restrictive. 
It requested that: (1) The types of assets owned or under management 
required by the safe harbor not be limited to municipal securities, and 
(2) the attestation requirement of the safe harbor \12\ either be 
eliminated entirely or eliminated for certain types of institutional 
customers (i.e., banks, savings and loan associations, insurance 
companies, registered investment companies, and federally- or state-
registered investment advisers). SIFMA said that, if the assets 
required for the safe harbor were required to be municipal securities, 
the dollar threshold should be reduced from $50 million to $25 million 
of municipal securities owned or under management. TMC said that the 
safe harbor should require ownership and/or management of at least $50 
million of direct fixed income securities. BDA advocated that an 
institutional investor with at least $25 million of fixed income 
securities should qualify for the safe harbor without the need for an 
attestation. ARS recommended that the attestations of the general rule 
and the safe harbor be combined and that all attestations be required 
to be in writing. ARS also recommended that the safe harbor requirement 
of $50 million of municipal securities be determined on an average 
annual basis and asked how often a dealer would be required to verify 
this asset concentration.
---------------------------------------------------------------------------

    \12\ Both the general rule and the safe harbor contained 
``attestation'' requirements, unlike the version of the SMMP 
definition in the proposed rule change.
---------------------------------------------------------------------------

    The MSRB has determined to eliminate the safe harbor from the 
proposed rule due to a concern that the amount of municipal securities 
owned or managed by a customer does not necessarily equate to 
sophistication. Nevertheless, the Restated SMMP Notice would provide 
that, as part of its reasonable basis analysis, a dealer should 
consider the amount and type of municipal securities owned or under 
management by an institutional customer.
    As to ARS's comment concerning the frequency with which the $50 
million threshold of the safe harbor would need to be measured, while 
the safe harbor has been eliminated, the question is still relevant to 
the frequency with which dealers would need to take steps to reassess 
their reasonable basis determinations with respect to their 
institutional customers. Dealers should monitor their reasonable basis 
determinations as frequently as they consider prudent, just as they 
would need to do so if they planned to treat natural persons with total 
assets of at least $50 million as institutional customers under either 
FINRA Rule 2111 or the Restated SMMP Notice.\13\
---------------------------------------------------------------------------

    \13\ The following statement from FINRA Regulatory Notice 11-02 
(January 2011) is useful: a broker-dealer must know its customers 
not only at account opening but also throughout the life of its 
relationship with customers in order to, among other things, 
effectively service and supervise the customers' accounts. Since a 
broker-dealer's relationship with its customers is dynamic, FINRA 
does not believe that it can prescribe a period within which broker-
dealers must attempt to update this information. As with a 
customer's investment profile under the suitability rule, a firm 
should verify the ``essential facts'' about a customer under the 
know-your-customer rule at intervals reasonably calculated to 
prevent and detect any mishandling of a customer's account that 
might result from the customer's change in circumstances. The 
reasonableness of a broker-dealer's efforts in this regard will 
depend on the facts and circumstances of the particular case. Firms 
should note, however, that SEA Rule 17a-3 requires broker-dealers 
to, among other things, attempt to update certain account 
information every 36 months regarding accounts for which the broker-
dealers were required to make suitability determinations.
---------------------------------------------------------------------------

    As to ARS's suggestion that the affirmation be required to be in 
writing, although it appears that many dealers plan to rely on written 
affirmations, the MSRB is not requiring that the affirmations be in 
writing in view of the goal to be consistent with FINRA Rule 2111 
unless a different rule is justified.
    General Rule. SIFMA noted that the original version of the Restated 
SMMP Notice would have required an attestation from each institutional 
customer, while FINRA Rule 2111 requires an affirmation. It asked that 
the MSRB language track the FINRA rule precisely and requested 
clarification that the FINRA Rule 2111 affirmation would suffice for 
the SMMP affirmation. BDA questioned how a dealer could satisfy the 
reasonable basis requirement of the general rule absent use of the safe 
harbor and suggested that the list of factors set forth in the Existing 
SMMP Notice be retained. It said that, at a minimum, the MSRB should 
make it clear that there is no negative implication to the deletion of 
the list and that the deletion of the list is not an indication that 
the considerations are no longer considered relevant by the MSRB. BDA 
objected to the need for attestations from investors even under the 
general rule and suggested that a dealer should be able to inform its 
customer that the dealer considers the customer to be an SMMP, capable 
of exercising independent judgment and evaluating market risks and 
market value. As to customers that qualify as SMMPs under the current 
notice, BDA requested that the MSRB provide a transition rule that 
would permit dealers six months within which to obtain the required 
attestations from customers that meet the current definition of SMMP. 
TMC questioned whether attestations from customers that meet the 
current definition of SMMP would be required.
    The MSRB has changed the words ``affirmatively attest'' in the 
definition of SMMP to ``affirmatively indicate'' to track precisely the 
affirmation language of FINRA Rule 2111 and wishes to clarify that the 
FINRA Rule 2111 customer affirmation would satisfy the SMMP affirmation 
requirement. The MSRB has also determined to recommend that the 
proposed effective date of the restated SMMP notice be the same as that 
of FINRA Rule 2111, which is July 9, 2012. No exception from the 
affirmation requirement would be provided, because under FINRA Rule 
2111 affirmations must be received from all institutional customers as 
to which dealers plan to avail themselves of the institutional 
customer-specific suitability exception. Companies that already provide 
qualified institutional buyer (QIB) lists for dealers are already in 
the process of obtaining the required FINRA Rule 2111 affirmations from 
institutional customers.
    As to BDA's comment on the list of factors that the restated notice 
would eliminate, the factors in the existing SMMP notice may actually 
have the practical effect of serving as a constraint on a dealer's 
ability to conclude that a customer is an SMMP. The text of the 
existing SMMP notice that precedes the list of factors follows:

    The MSRB has identified certain factors for evaluating an 
institutional investor's sophistication concerning a municipal 
securities transaction and these factors are discussed in detail 
below. Moreover, dealers

[[Page 22372]]

are advised that they have the option of having investors attest to 
SMMP status as a means of streamlining the dealers' process for 
determining that the customer is an SMMP. However, a dealer would 
not be able to rely upon a customer's SMMP attestation if the dealer 
knows or has reason to know that an investor lacks sophistication 
concerning a municipal securities transaction, as discussed in 
detail below.

    Because the list of factors may actually serve as a constraint on 
the dealer's reasonable basis determination, when FINRA Rule 2111 
eliminated a very similar list of factors, the MSRB decided to 
eliminate the list from the restated SMMP notice as well. This provides 
more flexibility to a dealer as to how it will satisfy the reasonable 
basis requirement of the general rule. The MSRB wishes to clarify that 
dealers might find those factors useful but would not be required to 
consider them.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2012-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2012-05. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the MSRB's offices. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2012-05 and should be submitted on 
or before May 4, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8878 Filed 4-12-12; 8:45 am]
BILLING CODE 8011-01-P