Document ID: SEC-2014-1334-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2014-08-07T04:00Z

[Federal Register Volume 79, Number 152 (Thursday, August 7, 2014)]
[Notices]
[Pages 46290-46292]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18651]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72743; File No. SR-MSRB-2014-04]

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change Consisting of 
Proposed Amendments to Rule G-3, on Classification of Principals and 
Representatives, Numerical Requirements, Testing, Continuing Education 
Requirements; Rule G-7, on Information Concerning Associated Persons; 
and Rule G-27, on Supervision

August 1, 2014.

I. Introduction

    On June 6, 2014, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change consisting of proposed 
amendments to Rule G-3, on classification of principals and 
representatives, numerical requirements, testing, continuing education 
requirements; Rule G-7, on information concerning associated persons; 
and Rule G-27, on supervision. The proposed rule change was published 
for comment in the Federal Register on June 24, 2014.\3\ The Commission 
received one comment letter on the proposal.\4\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-72425 (June 18, 
2014), 79 FR 35829 (June 24, 2014) (the ``Notice'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from David L. Cohen, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated July 15, 2014 (``SIFMA Letter'').
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II. Description of the Proposed Rule Change

    The MSRB states that the proposed rule change would: (1) Amend MSRB 
Rule G-3(a) to limit the scope of permitted activities of a limited 
representative--investment company and variable contracts products 
(``Limited Representative'') to sales to and purchases from customers 
of municipal fund securities; (2) eliminate the Financial and 
Operations Principal (``FINOP'') classification, qualification and 
numerical requirements in MSRB Rule G-3(d); (3) clarify in 
Supplementary Material .01 to Rule G-3 that references to sales include 
the solicitation of sales of municipal securities; and (4) make certain 
technical amendments to (i) re-title Rule G-3 and its subparagraph (a) 
and define the Limited Representative classification, (ii) reorganize 
Rules G-3 and G-7(a), and (iii) remove references to the FINOP in Rules 
G-7 and G-27.\5\
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    \5\ See supra note 3.
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1. Proposed Changes to Rule G-3(a)--Limited Representative

    According to the MSRB, the proposed rule change will better align 
the activities permitted of Limited Representatives with the 
competencies tested in the Limited Representative--Investment Company 
and Variable Contracts Products Examination (``Series 6 examination'') 
administered by the Financial Industry Regulatory Authority 
(``FINRA'').\6\ Currently, Limited Representatives are individuals 
whose activities, with respect to municipal fund securities,\7\ may 
include (1) underwriting or sales; (2) research or investment advice 
with regard to underwriting or sales; or (3) any other activities that 
involve communication, directly or indirectly, with public investors 
with regard to underwriting or sales. According to the MSRB, Limited 
Representatives qualify as such by, among other requirements, passing 
the Series 6 examination.\8\
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    \6\ Id.
    \7\ Under MSRB Rule D-12, ``municipal fund security shall mean a 
municipal security issued by an issuer that, but for the application 
of Section 2(b) of the Investment Company Act of 1940, would 
constitute an investment company within the meaning of Section 3 of 
the Investment Company Act of 1940.''
    \8\ See supra note 3.
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    The MSRB has represented that the proposed rule change would narrow 
the activities permitted of Limited Representatives exclusively to 
sales to and purchases from customers of municipal fund securities.\9\ 
The MSRB stated that the proposed rule change is appropriate because 
the Series 6 examination focuses on purchases and sales activities, 
commensurate with the scope of permissible activities under NASD Rule 
1032(b).\10\ The MSRB believes that individuals engaging in activities 
other than sales of municipal fund securities should be required to 
take and pass the Municipal Securities Representative Qualification 
Examination (``Series 52 exam''), which tests the basic competency to 
perform the activities described in MSRB Rule G-3(a)(i)(A).\11\ 
According to the MSRB, the proposed rule change would harmonize MSRB 
and FINRA rules by limiting the activities of individuals solely 
qualified by having passed the Series 6 examination to sales-related 
activities and, under MSRB rules, exclusively to municipal fund 
securities sales-related activities.\12\
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    \9\ Id.
    \10\ NASD Rule 1032(b) has been incorporated in the FINRA Manual 
and continues to be referred to as an NASD rule.
    \11\ See supra note 3.
    \12\ Under NASD Rule 1032(b), individuals who have taken and 
passed the Series 6 examination may only engage in sales activity 
related to investment company and variable contracts products.
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2. Elimination of MSRB's FINOP Requirement

    According to the MSRB, the proposed rule change also would 
eliminate the MSRB FINOP classification and the requirement that 
certain dealers designate at least one such principal (collectively 
referred to herein as the ``FINOP requirement'').\13\ The MSRB 
conducted a review of the professional qualification requirements in 
Rule G-3 and determined that the FINOP requirement in Rule G-3(d) is 
unnecessary and duplicative of other regulations, such as NASD Rule 
1022(b).\14\ According to the MSRB, the responsibilities and duties of 
FINOPs pertaining to municipal securities are not unique, and FINRA 
rules establish general responsibilities and duties for such 
individuals.\15\ The MSRB believes that FINRA's regulation of FINOPs is 
more appropriate in that the core responsibilities of a FINOP pertain 
to the dealer's financial reports and supervision of the dealer's 
activities

[[Page 46291]]

under the financial responsibility rules.\16\
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    \13\ See supra note 3.
    \14\ Id.
    \15\ Id.
    \16\ Id.
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    Currently, MSRB Rule G-3(d) requires that every dealer, excluding 
bank dealers or certain other dealers identified by reference to the 
SEC net capital rule, designate at least one FINOP, including its chief 
financial officer.\17\ According to the MSRB, given the exclusions in 
the rule, only a limited number of dealers are required to designate an 
individual as a FINOP, and under Rule G-3(d)(ii) these individuals must 
be qualified in accordance with FINRA rules.\18\ As such, individuals 
seeking qualification as a FINOP must pass the Financial and Operations 
Principal Qualification Examination (``Series 27 examination'') 
administered by FINRA.\19\ According to the MSRB, the Series 27 
examination focuses primarily on financial reporting requirements, net 
capital requirements, customer protection rules, and other regulations 
relevant to the role of a chief financial officer or similar financial 
officer at an investment firm.\20\ The MSRB stated that the examination 
tests few concepts specifically related to MSRB rules or municipal 
securities, and the MSRB believes that adding additional municipal 
securities content to the examination would likely be at odds with 
regulatory priorities.\21\
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    \17\ MSRB Rule G-3(d)(i) excludes from the financial and 
operations principal requirement, any ``bank dealer or a broker, 
dealer or municipal securities dealer meeting the requirements of 
subparagraph (a)(2)(iv), (v) or (vi) of rule 15c3-1 under the Act or 
exempted from the requirements of Rule 15c3-1 in accordance with 
paragraph (b)(3) thereof.''
    \18\ See supra note 3.
    \19\ Id.
    \20\ Id.
    \21\ Id.
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    The MSRB further stated that a dealer's municipal securities 
principal would remain responsible for supervising its municipal 
securities activities, including its operations (such as processing, 
clearance and safekeeping of municipal securities), pursuant to Rule G-
3(b)(i) and G-27(b)(ii)(C).\22\ The MSRB believes that the municipal 
securities principal requirement ensures sufficient oversight of the 
operations activities of dealers pertaining to municipal securities 
transactions.\23\
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    \22\ Id.
    \23\ Id.
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3. Rule G-3 Supplementary Material .01

    Supplementary Material .01 makes clear that the term ``sales'' in 
Rule G-3 also includes the solicitation of sales.\24\ According to the 
MSRB, including the solicitation of sales would apply to all references 
to sales in the rule and would serve to clarify the permissible 
activities of municipal securities professionals that are appropriately 
registered to engage in, or to supervise, sales to and purchases from 
customers of municipal securities.\25\
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    \24\ Id.
    \25\ Id.
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4. Technical and Conforming Amendments

    To clarify certain MSRB rules and to conform other rules to the 
rules amended by the proposed rule change, the MSRB proposed several 
technical amendments.\26\ The MSRB believes that these non-substantive 
changes will provide clarity and promote a better understanding of MSRB 
rules.\27\ First, the MSRB proposed to simplify the title of Rule G-3 
by changing it to the more self-explanatory: ``Professional 
Qualification Requirements.'' \28\ Second, (i) the heading of Rule G-
3(a) would be changed to incorporate the Limited Representative 
classification, (ii) paragraph (a)(i)(C) of Rule G-3 would be added to 
define the Limited Representative classification, (iii) paragraph 
(a)(ii)(C) would be renumbered as new paragraph (a)(ii)(B)(3), with 
slight modification to make it consistent with paragraph (a)(i)(C), and 
(iv) the introductory paragraph preceding Rule G-3(a) would be amended 
to eliminate the reference to the FINOP while also adding references to 
municipal securities sales limited representatives, limited 
representative--investment company and variable contracts products, and 
municipal fund securities limited principals.\29\ Third, Rule G-7(a) 
would be amended to add Limited Representatives and general securities 
principals to the list of associated persons.\30\ Fourth, the MSRB 
proposed to delete Rule G-3(g)(ii), waiver of qualification 
requirements with respect to the FINOP, as such an exemption would be 
rendered moot by the elimination of the FINOP classification.\31\ 
Lastly, the proposed rule change would make conforming changes by 
eliminating references in Rule G-7 and G-27 to the FINOP.\32\
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    \26\ Id.
    \27\ Id.
    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ Id.
    \32\ Id.
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III. Summary of Comment Received

    The Commission notes that it received only one comment letter.\33\ 
The comment letter expressed general support and agreement with the 
proposed rule change.\34\
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    \33\ SIFMA Letter.
    \34\ Id.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
as well as the SIFMA Letter. The Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to the MSRB. In particular, 
the proposed rule change is consistent with Section 15B(b)(2)(C) of the 
Act, which provides that the MSRB's rules 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.\35\ The Commission believes that the proposed rule 
change is consistent with Section 15B(b)(2)(C) of the Act because the 
proposed rule change would better align the responsibilities of the 
Limited Representative with the competencies a Limited Representative 
is tested for. The Commission also believes the proposed rule change 
would result in consistent regulatory treatment of Limited 
Representatives by the MSRB and FINRA, thereby reducing potential 
dealer confusion. In addition, the Commission believes the proposed 
rule change will ease burdens on dealers by eliminating the FINOP 
requirement. The Commission notes that the MSRB has represented the 
FINOP requirement is unnecessary and duplicative of other regulations 
and that municipal securities principals will continue to be 
responsible for overall supervision of the municipal securities 
activities of dealers.
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    \35\ 15 U.S.C. 78o-4(b)(2)(C).
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    In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, and 
capital formation.\36\ The Commission believes that the proposed rule 
change includes accommodations that help promote efficiency and legal 
certainty. Specifically, the Commission does not

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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 addition, the Commission believes, as discussed above, 
that the proposed rule change will ease burdens on dealers and reduce 
compliance costs by clarifying dealer obligations and eliminating 
regulatory redundancy.
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    \36\ 15 U.S.C. 78c(f).
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    For the reasons noted above, the Commission believes that the 
proposed rule change is consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-MSRB-2014-04) be, and hereby 
is, approved.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-18651 Filed 8-6-14; 8:45 am]
BILLING CODE 8011-01-P