WASHINGTON – Dealers working with sophisticated registered investment advisors that have full discretion over their clients' accounts do not owe any additional obligations to those clients apart from what is normally required from dealers working with sophisticated professionals, the Municipal Securities Rulemaking Board said Thursday.
"The MSRB is offering this guidance in response to questions from dealers about the applicability of disclosure requirements and other MSRB rules to transactions in managed accounts," said MSRB executive director Lynnette Kelly.
The dealer questions focused on whether firms have to make the time-of-trade disclosures that MSRB Rule G-47 requires and whether they would have to get affirmations from the RIA customers that the customers are qualified as SMMPs.
An SMMP, as defined in MSRB Rule D-15, can be a bank, a savings and loan association, an insurance company or a registered investment company as well as an RIA. It could also be any other person or entity with total assets of at least $50 million.
The SMMP qualification requires the dealer to have a reasonable basis to believe the customer can independently evaluate investment risks and market value both in general and with respect to particular transactions and investment strategies in munis.
The SMMP customer is also required to give a number of affirmations, including that it is exercising independent judgment when evaluating the quality of the dealer's transactions for the customer and that it has timely access to material information available publicly from established industry sources. The affirmation makes sure that SMMPs knowingly agree to forgo certain protections under MSRB rules, according to the self-regulator.
Dealers, when transacting with an SMMP, are subject to lesser obligations under MSRB Rule G-48 on transactions with sophisticated municipal market professionals. Dealers are no longer bound by: the time-of-trade disclosure obligation under Rule G-47 for information reasonably accessible to the market; the pricing obligations under MSRB Rule G-30 on prices and commissions, under certain circumstances; the customer-specific suitability duty under MSRB Rule G-19; certain obligations regarding dissemination of quotations under Rule G-13; and the best execution requirement under Rule G-18.
The MSRB guidance concludes that when an investor gives an RIA full discretion to act on the investor's behalf for all transactions in an account, "the RIA has effectively become that investor for purposes of the application of Rule G-48 when engaging in transactions with the dealer." That means that, if the RIA is an SMMP, the dealer should not be required to satisfy any greater or additional obligations with respect to the ultimate investor who holds the account, the MSRB said.
The self-regulator also said its interpretation is supported by the fact that RIAs are subject to the Investment Advisors Act of 1940, which includes obligations for the advisors to: provide full disclosure of material facts, including conflicts of interest and disciplinary events and precarious financial conditions; give suitable advice; have a reasonable basis for recommendations; and meet best execution obligations for their clients.
Those protections reduce the need for the similar investor protections that Rule G-48 modifies, the MSRB said. The board added that if an RIA is an SMMP, the dealer can reasonably conclude that the RIA is sophisticated enough to see the need for the ultimate investor to get the information and protections modified under Rule G-48.
