Broker-dealer groups support the Municipal Securities Rulemaking Board's proposal to amend its rules to stop requiring that dealers provide municipal securities disclosures to sophisticated customers and those not invested in municipals.
Comment letters largely backing amendments came Monday in response to the MSRB’s
“The rule as currently written requires disclosures specific to the MSRB and the municipal market to customers who have never and may never own or trade a municipal security,” wrote Michael Decker, senior vice president of Bond Dealers of America. “It has resulted in unnecessary and costly disclosures to customers who do not need the information.”
Rule G-10 currently requires dealers and muni advisors to provide either electronically or in writing by the end of each calendar year certain notifications to their customers and clients. The notifications include a statement that the firm is registered with the MSRB and the Securities and Exchange Commission, the MSRB’s web address, and a notification of a brochure available on the MSRB website that describes the protections of MSRB rules and how to file complaints with regulators.
Prior to a 2017 amendment, the rule applied only to dealers and required dealers to provide a customer with a paper copy of the MSRB’s investor brochure after a customer had made a complaint to the dealer.
Under the changes being proposed now, dealers could satisfy the rule’s requirements by making the disclosures only to customers who executed a muni translation in the past year or held municipal securities, and could notify sophisticated municipal market professionals [SMMPs] and all other customers with a statement on the firm’s website.
While BDA, the Securities Industry and Financial Markets Association and the American Securities Association all said in comment letters that they supported the proposal, all had at least some additional changes to suggest.
“SIFMA members feel the most critical issue is to modify the scope of customers that are required to receive the annual notifications pursuant to Rule G-10,” wrote Leslie Norwood, the group’s head of municipals.
For example, Norwood said, the phrase in the proposal stating disclosures must go to all customers “for which a purchase or sale of a municipal security was effected and to each customer who holds a municipal securities position during that calendar year,” should be changed to “to each customer that held municipal securities in an account with the broker as of a date within a reasonable period of time prior to the date the notices are made.”
This change would be less burdensome for dealers, Norwood wrote, because firms can easily identify which customers hold municipal securities but would have much more difficulty sifting through transactional records for the past several months to identify customers who held muni positions at one point but no longer have them with that dealer.
BDA made several suggestions, notably that the MSRB exempt issuers from the disclosure requirement.
“The rule specifies that dealers must provide the relevant disclosures 'to each customer,'” Decker wrote. “MSRB Rule D-9 defines customer as ‘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.’ We do not believe the broad definition of customer, which includes issuers, makes sense in the context of G-10.”
ASA CEO Christopher Iacovella told the MSRB the SMMP exemption should eventually apply to all customers.
“ASA also supports the proposed changes to Rule G-48 that would provide an exception to Rule G-10 for disclosures provided to sophisticated municipal market professionals (SMMPs), so long a dealer maintains these notifications on its website,” Iacovella wrote. “However, we believe the MSRB should eventually adopt this approach for all municipal customers under Rule G-10 given the way that investors today seek out and process information and disclosures related to their financial professional.”
The MSRB must ask the Securities and Exchange Commission for approval of any rule changes. The MSRB may choose to submit the proposal as is, or may make changes based on the comments it has received.
