[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62867-62881]
[FR Doc No: 2013-24549]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70593; File No. SR-MSRB-2013-07]

Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change Consisting of
Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations,
Proposed Revisions to MSRB Rule G-19, on Suitability of Recommendations
and Transactions, Proposed MSRB Rules D-15 and G-48, on Sophisticated
Municipal Market Professionals, and the Proposed Deletion of
Interpretive Guidance

October 1, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 17, 2013 the Municipal Securities Rulemaking Board
(the ``MSRB'' or ``Board'') filed with the Securities and Exchange
Commission (the ``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The MSRB is filing with the Commission a proposed rule change
consisting of proposed MSRB Rule G-47, on time of trade disclosure
obligations, proposed revisions to MSRB Rule G-19, on suitability of
recommendations and transactions,\3\ proposed MSRB Rules D-15 and G-48,
on sophisticated municipal market professionals, and the proposed
deletion of interpretive guidance that is being superseded by these
rule changes (the ``proposed rule change''). The MSRB requests an
effective date for the proposed rule change of 60 days following the
date of SEC approval.
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    \3\ This also includes proposed technical revisions to MSRB Rule
G-8, on books and records, to conform Rule G-8 with the proposed
revisions to Rule G-19.
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    The text of the proposed rule change is available on the MSRB's Web
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2013-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 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
Summary of Proposed Rule Change
    The MSRB has examined its interpretive guidance related to time of
trade disclosures, suitability, and SMMPs and is proposing to
consolidate this guidance and codify it into several rules: a new time
of trade disclosure rule (proposed Rule G-47), a revised suitability
rule (Rule G-19), and two new SMMP rules (proposed Rules D-15 and G-
48). Additionally, the proposed revisions to Rule G-19 would harmonize
the MSRB's suitability rule with Financial Industry Regulatory
Authority's (``FINRA's'') suitability rule as recommended by the SEC in
its 2012 Report on the Municipal Securities Market.\4\
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    \4\ See http://www.sec.gov/news/studies/2012/munireport073112.pdf.
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Rule G-47 on Time of Trade Disclosures
    MSRB Rule G-17 provides that, in the conduct of its municipal
securities or municipal advisory activities, each broker, dealer,
municipal securities dealer (``dealer''), and municipal advisor must
deal fairly with all persons and may not engage in any deceptive,
dishonest or unfair practice. The MSRB has interpreted Rule G-17 to
require a dealer, in connection with a municipal securities
transaction, to disclose to its customer, at or prior to the time of
trade, all material information about the transaction known by the
dealer, as well as material information about the security that is
reasonably accessible to the market.\5\ The MSRB has issued extensive
interpretive guidance discussing this time of trade disclosure
obligation in general, as well as in specific scenarios. Proposed Rule
G-47 would consolidate most of this guidance \6\ into rule language
which the MSRB believes would ease the burden on dealers and other
market participants who endeavor to understand, comply with and enforce
these obligations. The proposed codification of the interpretive
guidance on time of trade disclosure obligations is not intended to,
and would not, substantively change the

current obligations. Rather, the codification is an effort to
consolidate the current obligations into streamlined rule language.
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    \5\ See, e.g., MSRB Answers Frequently Asked Questions Regarding
Dealer Disclosure Obligations Under MSRB Rule G-17 (November 30,
2011).
    \6\ The time of trade disclosure guidance that has been
consolidated and condensed into proposed Rule G-47 was derived from
the following Rule G-17 interpretive notices: Guidance on Disclosure
and Other Sales Practice Obligations to Individual and Other Retail
Investors in Municipal Securities (July 14, 2009), MSRB Answers
Frequently Asked Questions Regarding Dealer Disclosure Obligations
Under MSRB Rule G-17 (November 30, 2011), Interpretive Notice
Regarding Rule G-17, on Disclosure of Material Facts (March 18,
2002), MSRB Reminds Firms of their Sales Practice and Due Diligence
Obligations When Selling Municipal Securities in the Secondary
Market (September 20, 2010), Application of MSRB Rules to
Transactions in Auction Rate Securities (February 19, 2008), Bond
Insurance Ratings--Application of MSRB Rules (January 22, 2008),
Interpretive Reminder Notice Regarding Rule G-17, on Disclosure of
Material Facts--Disclosure of Original Issue Discount Bonds (January
5, 2005), Notice of Interpretation of Rule G-17 Concerning Minimum
Denominations (January 30, 2002), Transactions in Municipal
Securities with Non-Standard Features Affecting Price/Yield
Calculations (June 12, 1995), Educational Notice on Bonds Subject to
``Detachable'' Call Features (May 13, 1993), Notice Concerning
Securities that Prepay Principal (March 19, 1991), Notice Concerning
Disclosure of Call Information to Customers of Municipal Securities
(March 4, 1986), Application of Board Rules to Transactions in
Municipal Securities Subject to Secondary Market Insurance or Other
Credit Enhancement Features (March 6, 1984), and Notice Concerning
the Application of Board Rules to Put Option Bonds (September 30,
1985); the following Rule G-15 interpretive notice: Notice
Concerning Stripped Coupon Municipal Securities (March 13, 1989);
the following Rule G-17 interpretive letters: Description provided
at or prior to the time of trade (April 30, 1986), and Put option
bonds: safekeeping, pricing (February 18, 1983); and the following
Rule G-15 interpretive letters: Disclosure of the investment of bond
proceeds (August 16, 1991), Securities description: prerefunded
securities (February 17, 1998), Callable securities: pricing to
mandatory sinking fund calls (April 30, 1986), and Callable
securities: pricing to call and extraordinary mandatory redemption
features (February 10, 1984). As discussed in more detail below, the
guidance discussing time of trade disclosure obligations in
connection with 529 college savings plans (``529 plans'') has not
been incorporated into proposed Rule G-47. The MSRB may create a
separate rule regarding time of trade disclosure obligations for 529
plans or a rule consolidating dealer obligations related to 529
plans. Until the MSRB adopts a rule specific to 529 plans, proposed
Rule G-47 and all such interpretive guidance will continue to apply
to 529 plans.
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    The structure of proposed Rule G-47 (rule language followed by
supplementary material) is the same structure used by FINRA and other
self-regulatory organizations (``SROs''). The MSRB intends generally to
transition to this structure for all of its rules going forward in
order to streamline the rules, harmonize the format with that of other
SROs, and make the rules easier for dealers and municipal advisors to
understand and follow.
    A summary of proposed Rule G-47 is as follows:
General Disclosure Obligation
    Proposed Rule G-47(a) sets forth the general time of trade
disclosure obligation as currently set forth in the MSRB's interpretive
guidance. The rule states that dealers cannot sell municipal securities
to a customer, or purchase municipal securities from a customer,
without disclosing to the customer, at or prior to the time of trade,
all material information known about the transaction and material
information about the security that is reasonably accessible to the
market. The rule applies regardless of whether the transaction is
unsolicited or recommended, occurs in a primary offering or the
secondary market, and is a principal or agency transaction. The rule
provides that the disclosure can be made orally or in writing.
    Proposed Rule G-47(b) states that information is considered to be
``material information'' if there is a substantial likelihood that the
information would be considered important or significant by a
reasonable investor in making an investment decision. The rule defines
``reasonably accessible to the market'' as information that is made
available publicly through ``established industry sources.'' Finally,
the rule defines ``established industry sources'' as including the
MSRB's Electronic Municipal Market Access (``EMMA''[supreg]) \7\
system, rating agency reports, and other sources of information
generally used by dealers that effect transactions in the type of
municipal securities at issue.
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    \7\ EMMA is a registered trademark of the MSRB.
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Supplementary Material
    In addition to stating the general disclosure obligation, proposed
Rule G-47 includes supplementary material describing the disclosure
obligation in more detail.
    Supplementary material .01 provides general information regarding
the manner and scope of required disclosures. Specifically, the
supplementary material provides that dealers have a duty to give
customers a complete description of the security which includes a
description of the features that would likely be considered significant
by a reasonable investor, and facts that are material to assessing
potential risks of the investment. This section of the supplementary
material further provides that the public availability of material
information through EMMA, or other established industry sources, does
not relieve dealers of their disclosure obligations. Section .01 of the
supplementary material also provides that dealers may not satisfy the
disclosure obligation by directing customers to established industry
sources or through disclosure in general advertising materials.
Finally, section .01 of the supplementary material states that whether
the customer is purchasing or selling the municipal securities may be a
consideration in determining what information is material.
    Supplementary material .02 provides that dealers operating
electronic trading or brokerage systems have the same time of trade
disclosure obligations as other dealers.
    Supplementary material .03 provides a list of examples describing
information that may be material in specific scenarios and require
disclosures to a customer. The guidance provides that the list is not
exhaustive and other information may be material to a customer in these
and other scenarios. This section describes the following scenarios:
variable rate demand obligations; auction rate securities; credit risks
and ratings; credit or liquidity enhanced securities; insured
securities; original issue discount bonds; securities sold below the
minimum denomination; securities with non-standard features; bonds that
prepay principal; callable securities; put option and tender option
bonds; stripped coupon securities; the investment of bond proceeds;
issuer's intent to prerefund; and failure to make continuing disclosure
filings.
    Finally, supplementary material .04 provides that dealers must
implement processes and procedures reasonably designed to ensure that
material information regarding municipal securities is disseminated to
registered representatives who are engaged in sales to and purchases
from a customer.
Current Interpretive Guidance on Time of Trade Disclosure Obligations
    The MSRB has identified two interpretive notices that were
previously filed with the Commission and would be superseded in their
entirety by the proposed time of trade disclosure rule and the MSRB
proposes deleting these two notices.\8\ Any statements in the remaining
MSRB interpretative guidance referring to Rule G-17 for the time of
trade disclosure principle should be read to refer to proposed Rule G-
47.
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    \8\ Interpretive Notice Regarding Rule G-17, on Disclosure of
Material Facts (March 18, 2002) and Notice of Interpretation of Rule
G-17 Concerning Minimum Denominations (January 30, 2002).
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Rule G-19, on Suitability of Recommendations and Transactions
    The MSRB has conducted a review of Rule G-19, on suitability of
recommendations and transactions, as well as the MSRB's interpretive
guidance addressing suitability. As a result of this review, the MSRB
is proposing the amendments described below to more closely harmonize
Rule G-19 with FINRA's suitability rule,\9\ and to incorporate elements
of the MSRB's current interpretive guidance on suitability into Rule G-
19.\10\ The

proposed revisions to Rule G-19 are aligned with a recommendation of
the SEC in its 2012 Report on the Municipal Securities Market that the
MSRB consider ``amending Rule G-19 (suitability) in a manner generally
consistent with recent amendments by FINRA to its Rule 2111, including
with respect to the scope of the term `strategy'. . . .'' \11\ Given
the extensive interpretive guidance surrounding FINRA Rule 2111 and the
impracticality and inefficiency of republishing each iteration of such
FINRA guidance, substantively similar provisions of Rule G-19 will be
interpreted in a manner consistent with FINRA's interpretations of Rule
2111. If the MSRB believes an interpretation should not be applicable
to Rule G-19, it will affirmatively state that specific provisions of
FINRA's interpretation do not apply. Additionally, the MSRB is
proposing technical amendments to Rule G-8(a)(xi)(F) to conform it to
the proposed revisions to Rule G-19.
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    \9\ See FINRA Rule 2111.
    \10\ The suitability guidance that has been consolidated and
condensed into the proposed revisions to Rule G-19 was derived from
the following Rule G-17 interpretive notices: MSRB Reminds Firms of
their Sales Practice and Due Diligence Obligations When Selling
Municipal Securities in the Secondary Market (September 20, 2010);
Guidance on Disclosure and Other Sales Practice Obligations to
Individual and Other Retail Investors in Municipal Securities (July
14, 2009); Application of MSRB Rules to Transactions in Auction Rate
Securities (February 19, 2008); Bond Insurance Ratings--Application
of MSRB Rules (January 22, 2008); Reminder of Customer Protection
Obligations in Connection with Sales of Municipal Securities (March
30, 2007); Interpretive Notice Regarding Rule G-17, on Disclosure of
Material Facts (March 18, 2002); Notice Concerning Disclosure of
Call Information to Customers of Municipal Securities (March 4,
1986); the following Rule G-19 interpretive notices: Notice
Regarding Application of Rule G-19, on Suitability of
Recommendations and Transactions, to Online Communications
(September 25, 2002); Application of Suitability Requirements to
Investment Seminars and Customer Inquiries Made in Response to a
Dealer's Advertisements (April 25, 1985); the following Rule G-19
interpretive letters: Recommendations (February 17, 1998); and
Recommendations: advertisements (February 24, 1994); the following
Rule G-15 interpretive notice: Notice Concerning Stripped Coupon
Municipal Securities (March 13, 1989); the following Rule G-15
interpretive letter: Securities description: prerefunded securities
(February 17, 1998); the following Rule G-21 interpretive notice:
Interpretation on General Advertising Disclosures, Blind
Advertisements and Annual Reports Relating to Municipal Fund
Securities under Rule G-21 (June 5, 2007); the following Rule G-21
interpretive letter: Disclosure obligations (May 21, 1998); and the
following Rule G-32 interpretive notices: Notice Regarding
Electronic Delivery and Receipt of Information by Brokers, Dealers
and Municipal Securities Dealers (November 20, 1998); and
Interpretation on the Application of Rules G-32 and G-36 to New
Issue Offerings Through Auction Procedures (March 26, 2001).
    \11\ See http://www.sec.gov/news/studies/2012/munireport073112.pdf at 141.
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    A summary of the proposed revisions to Rule G-19 is as follows:
Account Information
    Current MSRB Rule G-19(a) requires dealers to obtain certain
customer information prior to completing a transaction in municipal
securities for that customer account. The required customer information
consists of, by cross-reference, the customer information required
under MSRB Rule G-8(a)(xi), on books and records. A provision
equivalent to current Rule G-19(a) is not included in proposed Rule G-
19 since MSRB Rule G-8 already independently requires dealers to make
and keep a record of this information for each customer. Additionally,
deleting this provision streamlines the rule and more closely aligns it
with FINRA's suitability rule, which does not have this specific
requirement.\12\
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    \12\ See FINRA Rule 2111.
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Information Required for Suitability Determinations
    The current MSRB suitability rule contains a list of customer
information that dealers must obtain prior to recommending a
transaction to a non-institutional account.\13\ The proposed revisions
to Rule G-19 would expand this list to include additional items from
FINRA's suitability rule \14\ such as: Age, investment time horizon,
liquidity needs, investment experience and risk tolerance. The proposed
revision also would delete Rule G-19(b) and replace it with rule
language corresponding to FINRA's suitability rule. The MSRB believes
that the items added to the rule generally are directly relevant for
recommendations involving municipal securities and having such items
explicitly identified will promote more consistent application of the
suitability rule. The list of customer information that dealers must
assess in the proposed rule also includes ``any other information the
customer may disclose to the broker, dealer or municipal securities
dealer in connection with such recommendation'' which is taken from the
FINRA rule.\15\ This is similar to the requirement in current MSRB Rule
G-19(c)(ii) which states that, in recommending a transaction, a dealer
shall have reasonable grounds ``based upon the facts disclosed by such
customer or otherwise known about such customer for believing that the
recommendation is suitable.'' Therefore, the proposal would delete
section (c)(ii) of Rule G-19.
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    \13\ See MSRB Rule G-19(b).
    \14\ See FINRA Rule 2111(a).
    \15\ See FINRA Rule 2111(b).
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    The current MSRB suitability rule also requires dealers to consider
information available from the issuer of the security or otherwise in
making suitability determinations.\16\ Similarly, the supplementary
material to FINRA's suitability rule establishes a reasonable-basis
suitability obligation, which requires a broker-dealer to have a
reasonable basis to believe, based on reasonable diligence, that the
recommendation is suitable for at least some investors.\17\ In order to
perform a reasonable-basis suitability analysis, dealers must
necessarily consider information available from the issuer of the
security. The proposed revisions to Rule G-19 incorporate the
reasonable-basis suitability terminology from FINRA Rule 2111 in
supplementary material .05(a) and delete section (c)(i) of Rule G-19.
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    \16\ See MSRB Rule G-19(c)(i).
    \17\ FINRA Rule 2111, Supplementary Material .05(a).
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Discretionary Accounts
    The current MSRB suitability rule includes a provision on
discretionary accounts which provides that dealers cannot effect
transactions in municipal securities with or for a discretionary
account unless permitted by the customer's prior written authorization
which has been accepted in writing by a municipal securities
principal.\18\ The MSRB proposes to delete this provision because there
is a substantially similar provision already included in MSRB Rule G-
8(a)(xi)(I) which requires that, for customer discretionary accounts,
dealers must make and keep a record of the customer's written
authorization to exercise discretionary power over the account, written
approval of the municipal securities principal who supervises the
account, and written approval of the municipal securities principal
with respect to each transaction in the account stating the date and
time of approval.
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    \18\ See MSRB Rule G-19(d)(i).
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    The current MSRB suitability rule also includes a provision stating
that a dealer cannot effect a transaction in municipal securities with
or for a discretionary account unless the dealer first determines that
the transaction is suitable for the customer or the transaction is
specifically directed by the customer and was not recommended by the
dealer.\19\ Similarly, the proposed suitability rule provides that a
dealer must have a reasonable basis to believe that a recommended
transaction or investment strategy is suitable for the customer. The
suitability obligation is the same for discretionary and non-
discretionary accounts and there is no reason to restate the obligation
as it specifically relates to discretionary accounts. In addition,
there is no corresponding provision in FINRA Rule 2111. For these
reasons, the MSRB proposes deleting Rule G-19(d)(ii).
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    \19\ See MSRB Rule G-19(d)(ii).
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Churning
    The proposed revisions to Rule G-19 retain the substance of the
existing MSRB prohibition on churning,\20\ but recast it using the
current terminology of ``quantitative suitability'' used in FINRA's
suitability rule.\21\ The quantitative suitability requirement is
included in proposed Rule G-19, supplementary material .05(c).
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    \20\ See MSRB Rule G-19(e).
    \21\ See FINRA Rule 2111, Supplementary Material .05(c).
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Investment Strategies
    The proposed amendments to Rule G-19 incorporate the application of
suitability to ``investment strategies.'' Specifically, proposed
supplementary material .03 defines the phrase ``investment strategy
involving a municipal security or municipal securities'' by stating
that it is ``to be interpreted broadly and would include, among other
things, an explicit

recommendation to hold a municipal security or municipal securities.''
This definition is consistent with the definition of ``investment
strategy involving a security or securities'' in FINRA's suitability
rule.\22\ The proposed MSRB suitability rule, like the FINRA rule,
carves out communications of certain types of educational material as
long as such communications do not recommend a particular municipal
security or municipal securities.\23\ The list of educational materials
in proposed Rule G-19, supplementary material .03, differs in minor
respects from the list of educational materials in FINRA's suitability
rule \24\ to account for unique attributes of the municipal securities
market.
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    \22\ See FINRA Rule 2111, Supplementary Material .03.
    \23\ Id.
    \24\ Id.
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Institutional Accounts
    Provisions in guidance to MSRB Rule G-17 and proposed MSRB Rules D-
15 and G-48 (discussed below) exempt dealers from the duty to perform a
customer-specific suitability determination for recommendations to
SMMPs.\25\ FINRA's suitability rule has similar provisions with respect
to institutional accounts that is included as a provision in its
suitability rule.\26\ The MSRB SMMP exemption applies not only to Rule
G-19, but also has applicability to MSRB Rules G-47, on time of trade
disclosures, G-18, on transaction pricing, and G-13, on bona fide
quotations. Therefore, the MSRB proposes to include the SMMP exemption
in proposed Rules D-15 and G-48 instead of incorporating it into Rule
G-19 and the other rules to which the SMMP exemption applies.
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    \25\ See e.g., Interpretive Notice effective July 9, 2012,
Restated Interpretive Notice Regarding the Application of MSRB Rules
to Transactions with Sophisticated Municipal Market Professionals;
see also MSRB Notice 2013-10, Request for Comment on Proposed
Sophisticated Municipal Market Professional Rules (May 1, 2013).
    \26\ See FINRA Rule 2111(b).
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Proposed Technical Revisions to Rule G-8, on Books and Records
    MSRB Rule G-8(a)(xi)(F) includes references to MSRB Rule G-
19(c)(ii) and G-19(b). These referenced provisions are not codified as
such in the proposed revisions to MSRB Rule G-19, but the concepts
would remain in the proposed rule. Therefore, the MSRB proposes
revising MSRB Rule G-8(a)(xi)(F) simply to include a reference to the
entire MSRB Rule G-19.
Current Interpretive Guidance on Suitability
    Over the years, the MSRB has issued guidance on suitability in
connection with other issues under MSRB Rule G-17. This guidance
provides that a dealer must take into account all material information
that is known to the dealer or that is available through established
industry sources in meeting its suitability obligations.\27\ This is
the same type of information that dealers are required to disclose to
customers at the time of trade.\28\ The Rule G-17 guidance also
describes material information that dealers should consider in making
suitability determinations in specific scenarios such as credit or
liquidity enhanced securities,\29\ auction rate securities,\30\ and
insured bonds.\31\ Rather than listing information in the supplementary
material to Rule G-19 that may be material to an investor, proposed
Rule G-19, supplementary material .05(a) includes a general requirement
for dealers to understand information about the municipal security or
strategy and contains an explicit cross-reference to a dealer's
obligations under proposed MSRB Rule G-47, on time of trade
disclosure.\32\ The remaining suitability obligations currently
described in the Rule G-17 guidance \33\ are incorporated into revised
Rule G-19.\34\
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    \27\ See, e.g., Interpretive Notice dated September 20, 2010,
MSRB Reminds Firms of their Sales Practice and Due Diligence
Obligations when Selling Municipal Securities in the Secondary
Market.
    \28\ See, e.g., Interpretive Notice dated July 14, 2009,
Guidance on Disclosure and Other Sales Practice Obligations to
Individual and Other Retail Investors in Municipal Securities.
    \29\ Id.
    \30\ Interpretive Notice dated February 19, 2008, Application of
MSRB Rules to Transactions in Auction Rate Securities.
    \31\ Interpretive Notice dated January 22, 2008, Bond Insurance
Ratings--Application of MSRB Rules.
    \32\ FINRA Rule 2111 does not include a comparable provision.
    \33\ Interpretive Notice dated March 30, 2007, Reminder of
Customer Protection Obligations in Connection with Sales of
Municipal Securities; Interpretive Notice dated March 18, 2002,
Interpretive Notice Regarding Rule G-17, on Disclosure of Material
Facts; and Interpretive Notice dated March 4, 1986, Notice
Concerning Disclosure of Call Information to Customers of Municipal
Securities.
    \34\ This does not include suitability obligations with respect
to 529 plans. The MSRB may create a separate rule regarding the
suitability obligations for 529 plans. Until the MSRB adopts a rule
specific to 529 plans, MSRB Rule G-19 and any related interpretive
guidance will continue to apply to 529 plans.
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    The MSRB also has issued interpretive guidance under Rule G-19 that
has been previously filed with the Commission and addresses online
communications, investment seminars, and customers contacting a dealer
in response to an advertisement.\35\ This guidance would be superseded
by revised Rule G-19 and the MSRB proposes deleting the guidance. The
MSRB also has issued interpretations under Rules G-15,\36\ G-21,\37\
and G-32 \38\ that nominally reference suitability obligations. Since
these interpretations address areas other than suitability and are not
inconsistent with the proposed revisions, the MSRB will leave these
interpretations intact.
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    \35\ Interpretive Notice dated September 25, 2002, Notice
Regarding Application of Rule G-19, on Suitability of
Recommendations and Transactions, to Online Communications and
Interpretive Notice dated April 25, 1985, Application of Suitability
Requirements to Investment Seminars and Customer Inquiries Made in
Response to a Dealer's Advertisements; see SEC Release No. 34-21990
(April 25, 1985), 50 FR 18602 (May 1, 1985) (File No. SR-MSRB-85-6).
The latter notice, as currently published on the MSRB Web site, was
non-substantially revised to reflect amendments to Rule G-19 that
became effective on April 7, 1994 (File No. SR-MSRB-94-01), and
those revisions were not made part of a rule filing.
    \36\ Interpretive Notice dated March 13, 1989, Notice Concerning
Stripped Coupon Municipal Securities; and Interpretive Letter dated
February 17, 1998, Securities description: prerefunded securities.
    \37\ Interpretive Notice dated June 5, 2007, Interpretation on
General Advertising Disclosures, Blind Advertisements and Annual
Reports Relating to Municipal Fund Securities under Rule G-21; and
Interpretive Letter dated May 21, 1998, Disclosure obligations.
    \38\ Interpretive Notice dated November 20, 1998, Notice
Regarding Electronic Delivery and Receipt of Information by Brokers,
Dealers and Municipal Securities Dealers; and Interpretive Notice
dated March 26, 2001, Interpretation on the Application of Rules G-
32 and G-36 to New Issue Offerings Through Auction Procedures.
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Rules D-15 and G-48 on SMMPs
    Proposed Rules D-15 and G-48 on SMMPs (the ``proposed SMMP rules'')
would streamline and codify the existing MSRB Rule G-17 guidance
regarding the application of MSRB rules to transactions with SMMPs. The
proposed SMMP rules would consist of a new definitional rule, D-15,
defining an SMMP and a new general rule, G-48, on the regulatory
obligations of dealers to SMMPs.
    On May 25, 2012, the SEC approved an interpretive notice to Rule G-
17 revising prior guidance on the application of MSRB rules to
transactions with SMMPs.\39\ The

proposed SMMP rules preserve the substance of this guidance but codify
it into two proposed rules that define an SMMP and describe the
application of the following obligations to SMMPs: (1) Time of trade
disclosure; (2) transaction pricing; (3) suitability; and (4) bona fide
quotations. The proposed SMMP rules do not change the substance of the
restated SMMP notice except that the proposed definition of SMMP
includes a reference to the term ``investment strategies'' to be
consistent with inclusion of that term in the proposed suitability rule
described above. The MSRB believes that the proposed definitional rule,
together with the proposed general rule that describes the regulatory
obligations of dealers working with SMMPs, will underscore the
differences between dealers' obligations to non-SMMPs and SMMPs, while
highlighting the eligibility standards for being an SMMP.
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    \39\ Interpretive Notice effective July 9, 2012, Restated
Interpretive Notice Regarding the Application of MSRB Rules to
Transactions with Sophisticated Municipal Market Professionals (the
``restated SMMP notice''). At the time of issuance of the restated
interpretive guidance, the MSRB noted that FINRA adopted Rule 2111,
which included revised treatment of customer-specific suitability
for institutional accounts, and that it generally considered it
desirable from the standpoint of reducing the cost of dealer
compliance to maintain consistency with FINRA rules.
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    A summary of proposed Rules D-15 and G-48 is as follows:
    Proposed Rule D-15 defines the term ``sophisticated municipal
market professional'' or ``SMMP'' as a customer of a dealer that is a
bank, savings and loan association, insurance company, or registered
investment company; or an investment adviser registered 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 any other entity with total assets of at least $50
million. Additionally, 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, and affirmatively indicates that it is exercising
independent judgment in evaluating the recommendations of the dealer.
    The supplementary material to proposed Rule D-15 addresses the
reasonable basis analysis and the customer affirmation. Section .01
states that as part of the reasonable basis analysis, the dealer should
consider the amount and type of municipal securities owned or under
management by the customer. Section .02 states that a customer may
affirm that it is exercising independent judgment either orally or in
writing, and such affirmation may be given on a trade-by-trade basis,
on a type-of-municipal-security basis, or on an account-wide basis.
    Proposed Rule G-48 describes the application of certain obligations
to SMMPs. More specifically, the proposed rule provides that a dealer's
obligations to a customer that it reasonably concludes is an SMMP are
modified as follows: (1) With respect to the time of trade disclosure
obligation in proposed Rule G-47, the dealer does not have any
obligation to disclose material information that is reasonably
accessible to the market; (2) with respect to transaction pricing
obligations under Rule G-18, the dealer does not have any obligation to
take action to ensure that transactions meeting certain conditions set
forth in the proposed rule are effected at fair and reasonable prices;
(3) with respect to the suitability obligation in Rule G-19, the
proposed rule provides that the dealer does not have any obligation to
perform a customer-specific suitability analysis; and (4) with respect
to the obligation regarding bona fide quotations in Rule G-13, the
dealer disseminating an SMMP's quotation which is labeled as such shall
apply the same standards described in Rule G-13(b) for quotations made
by another dealer.
Current Interpretive Guidance on SMMPs
    There are two interpretive notices that were previously filed with
the Commission that would be superseded in their entirety by the SMMP
rule \40\ and the MSRB proposes to delete these interpretive notices.
---------------------------------------------------------------------------

    \40\ Interpretive Notice effective July 9, 2012, Restated
Interpretive Notice Regarding the Application of MSRB Rules to
Transactions with Sophisticated Municipal Market Professionals and
Interpretive Notice dated April 30, 2002, Interpretive Notice
Regarding the Application of MSRB Rules to Transactions with
Sophisticated Municipal Market Professionals.
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act,\41\ which provides that the MSRB's
rules shall
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78o-4(b)(2)(c).

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 Section 15B(b)(2)(C) of
the Act. The disclosure of material information about a transaction to
investors and the performance of a meaningful suitability analysis is
central to the role of a dealer in facilitating municipal securities
transactions. Proposed Rule G-47, on time of trade disclosures,
codifies current interpretive guidance and protects investors by
requiring dealers to make disclosures to customers in connection with
purchases and sales of municipal securities. These required disclosures
are designed to prevent fraudulent and manipulative acts and practices
by dealers, and promote just and equitable principles of trade, by
requiring dealers to disclose information about a security and
transaction that would be considered significant or important to a
reasonable investor in making an investment decision. Similarly, the
proposed revisions to Rule G-19, on suitability, furthers these
purposes by requiring dealers and their associated persons to make only
suitable recommendations to customers and fosters cooperation and
coordination by harmonizing the rule with FINRA's suitability rule.
Finally, the proposed SMMP rules codify current interpretive guidance
that was approved by the SEC in 2012 \42\ and these proposed rules do
not change the substance of that guidance.
---------------------------------------------------------------------------

    \42\ See SEC Release No. 34-67064 (May 25, 2012).
---------------------------------------------------------------------------

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

    The MSRB does not believe that the proposed rule change would
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As discussed
above, the proposed time of trade disclosure rule and proposed SMMP
rules codify current interpretive guidance, therefore, they do not add
any burden on competition. The proposed revisions to the suitability
rule codify current interpretive guidance and add new requirements that
are largely harmonized with FINRA's suitability rule in response to a
recommendation by the Commission to harmonize MSRB Rule G-19 with FINRA
Rule 2111.\43\ The MSRB believes that these changes will, in fact, ease
burdens on dealers and promote competition by clarifying certain core
dealer obligations and the relief available when transacting business
with SMMPs.
---------------------------------------------------------------------------

    \43\ See http://www.sec.gov/news/studies/2012/munireport073112.pdf at 141.

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

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

Rule G-47 on Time of Trade Disclosures
    On February 11, 2013, the MSRB requested comment on a draft of Rule
G-47, on time of trade disclosures.\44\ The time of trade disclosure
notice generated eight comment letters.\45\
---------------------------------------------------------------------------

    \44\ See MSRB Notice 2013-04 (February 11, 2013) (the ``time of
trade disclosure notice'').
    \45\ Comment letters were received from: (1) Bond Dealers of
America (``BDA''); (2) Charles Schwab & Co., Inc. (``Schwab''); (3)
Lumesis, Inc. (``Lumesis'') (Lumesis sent two separate comment
letters, one on March 11, 2013 and a second letter on July 17, 2013
after the comment period was closed); (4) R.W. Smith & Associates,
Inc. (``RWSA'') (RWSA's comment letter simply states that they
contributed to and support the SIFMA comment letter and its
positions in relation to codifying the time of trade disclosure
obligation); (5) Securities Industry and Financial Markets
Association (``SIFMA''); (6) TMC Bonds, L.L.C. (``TMC''); and (7)
Wells Fargo Advisors, LLC (``WFA'').
---------------------------------------------------------------------------

    The comment letters are summarized by topic as follows:
 Support for the Proposal
    COMMENTS: All of the commenters generally support the MSRB's
initiative to clarify and codify the time of trade disclosure
requirements. BDA states that the incorporation of interpretive notices
into rules should help provide much desired clarity to market
participants. Lumesis indicates that the proposed rule would provide
greater clarity to market participants and support enhanced
transparency and disclosure for the retail investor. Lumesis further
states that the proposed rule is a significant step in clarifying the
requirements for time of trade disclosures to retail investors. Schwab
states that, generally speaking, it supports the MSRB's effort to
consolidate years of interpretive guidance related to time of trade
disclosure obligations into a rule. SIFMA comments that it generally
supports the concept behind the MSRB's initial effort to provide
clarity to regulated entities by reorganizing or eliminating certain
interpretive guidance associated with MSRB Rule G-17 into new or
revised rules highlighting core principles. TMC states that it supports
the MSRB's efforts to more clearly define Rule G-17. Finally, WFA
commends the MSRB's efforts to simplify dealer compliance with time of
trade disclosure guidance and to harmonize the MSRB's rule structure
with FINRA's rule structure.
    MSRB RESPONSE: The MSRB believes these comments support the MSRB's
statement on the burden on competition.
 Handling of Current Notices
    COMMENT: SIFMA suggests that the MSRB should consolidate the
existing time of trade disclosure guidance into a user friendly format
similar to the format used when the MSRB reorganized guidance on Rule
G-37, on political contributions and prohibitions on municipal
securities business. SIFMA proposes preserving the text of the time of
trade disclosure guidance, but consolidating it in one place since the
guidance contains nuances that are easily lost in a short bullet point
format.
    MSRB RESPONSE: The MSRB believes the supplementary material
incorporates the necessary information from the interpretive guidance
and that it is not necessary to preserve the text of the current
guidance or create a set of questions and answers similar to Rule G-37
at the present time. Moreover, to codify the existing interpretative
guidance into a rule but preserve the text of the guidance would not
advance the MSRB's goal to streamline its rulebook.
 SMMP Guidance
    COMMENT: SIFMA states that, since the current SMMP guidance
primarily relates to time of trade disclosures, Rule G-47 should affirm
such guidance. Similarly, BDA states that the Rule G-17 SMMP guidance
should apply to Rule G-47 and a reference to the exception should be
added to the proposed rule or, at a minimum, the SMMP guidance should
be revised to reference Rule G-47.
    MSRB RESPONSE: The SMMP guidance does not primarily relate to time
of trade disclosures as it addresses four separate areas: time of trade
disclosures, transaction pricing, suitability, and bona fide
quotations. The MSRB has proposed a draft SMMP rule that references
proposed Rule G-47 and does not believe it is necessary or appropriate
to reference this new SMMP rule in proposed Rule G-47 (and the other
rules to which the SMMP guidance applies). Because the proposed SMMP
rule references proposed Rule G-47, the MSRB has effectively addressed
the comment that the SMMP guidance should, at a minimum, reference
proposed Rule G-47.
 Electronic Trading Platforms
    COMMENT: Schwab and SIFMA are concerned about the proposed deletion
of the Interpretive Notice dated March 18, 2002 entitled ``Interpretive
Notice Regarding Rule G-17, on Disclosure of Material Facts'' (the
``March 18, 2002 Notice''). Specifically, Schwab and SIFMA are
concerned about deleting the following sentence:

    The MSRB believes that the provision of electronic access to
material information to customers who elect to transact in municipal
securities on an electronic platform is generally consistent with a
dealer's obligation to disclose such information, but that whether
such access is effective disclosure ultimately depends upon the
particular facts and circumstances present.

SIFMA \46\ states that its members have relied on this language in
developing policies and procedures to provide time of trade disclosures
to customers using electronic trading platforms. Similarly, Schwab
states that dealers providing online access to customers have relied on
this language for years and the absence of specific language that
recognizes a dealer's ability to meet their time of trade disclosure
obligations via electronic access could lead to confusion among dealers
and disruption of disclosure processes across the industry.
Additionally, BDA indicates that dealers believe access equals
disclosure for online trading.
---------------------------------------------------------------------------

    \46\ SIFMA states that the March 18, 2002 Notice should not be
deleted because it is one of the few MSRB notices discussing a
dealer's time of trade disclosure obligations that has been approved
by the SEC. Proposed Rule G-47 and the related supplementary
material which would supersede that Notice, however, are likewise
being submitted to the SEC for approval.
---------------------------------------------------------------------------

    MSRB RESPONSE: The sentence quoted above was intentionally excluded
from the proposed rule because the ability to use electronic disclosure
is now so widely accepted and the qualifying phrase ``whether such
access is effective disclosure ultimately depends upon the particular
facts and circumstances present'' renders the guidance less definitive.
Moreover, based on the comments received, some industry members appear
to have misinterpreted this sentence to mean that ``access'' equals
disclosure for online trading. This apparent misunderstanding of the
guidance supports deletion of the sentence and highlights the
importance of clarifying the time of trade disclosure guidance by
codifying it into a short and easy to understand rule.
    COMMENT: BDA encourages the MSRB to establish a separate section of
the proposed rule addressing disclosure obligations in connection with
online trading to provide more clarity.
    MSRB RESPONSE: The codification of interpretive guidance in this
rulemaking initiative is not intended to substantively change the time
of trade disclosure obligation. The MSRB can consider adding provisions
addressing online trading if the Board undertakes to amend the rule
substantively in the future.

 Electronic Trading Systems--Institutional Customers
    COMMENT: TMC suggests that the proposed rule exempt institutional
market professionals from the disclosure requirement.
    MSRB RESPONSE: The proposed rule, in conjunction with the SMMP
guidance and proposed SMMP rule, should address TMC's concerns by
exempting dealers from the requirement to disclose to SMMPs material
information that is reasonably accessible to the market. Therefore, the
MSRB is not proposing any changes to the proposed rule based on these
comments.
 Minimum Denominations
    COMMENT: SIFMA believes that the Interpretive Notice dated January
30, 2002 entitled ``Notice of Interpretation of Rule G-17 Concerning
Minimum Denominations'' should not be deleted because it is the only
guidance concerning the disclosure obligation for securities sold below
minimum denominations. SIFMA states that its members believe the
background information in this notice is important.
    MSRB RESPONSE: The proposed rule addresses disclosure obligations
related to minimum denominations as described in the current Rule G-17
guidance. The MSRB does not believe that it is necessary to include the
background information included in the guidance; however, in response
to this comment, the MSRB has proposed a revision to Rule G-47,
supplementary material .03(g), clarifying that the disclosure
obligation relates to minimum denominations authorized by bond
documents.
 Disclosure Obligations for Sales to Customers vs. Purchases
From Customers
    COMMENT: SIFMA argues that the rule should make a distinction
between a dealer's disclosure obligation for sales to customers, as
opposed to purchases from customers, and that the rule's failure to do
so is inconsistent with current guidance. SIFMA states that existing
guidance primarily focuses on disclosure obligations when a dealer is
selling a bond to a customer and very limited guidance has been issued
covering situations when a dealer is purchasing. SIFMA states that this
proposed extension of the disclosure obligation is not warranted, as
arguably the selling customer knows the features of the security that
it owns and the potentially purchasing dealer is about to assume the
risks of those features. SIFMA acknowledges, however, that knowledge
professionally available to dealers, such as a ratings change that has
not yet been noticed to EMMA, or a call at par announced minutes ago
via a recognized information vendor, is material and should be
disclosed. However, SIFMA argues that this new requirement could be
harmful to customers and would also be unnecessarily burdensome for
dealers.\47\ SIFMA states that the MSRB should explicitly recognize
that a substantially different time of trade disclosure obligation
exists in these circumstances and that the specific scenarios in the
proposed rule may not be applicable when a customer is selling.
Finally, SIFMA states that, if the MSRB extends an undifferentiated
obligation to customer sale transactions, a thorough cost benefit
analysis should be undertaken. BDA also argues that the burden of
applying this rule to sales of securities by customers outweighs any
tangential value to customers. BDA urges the MSRB to apply the proposed
rule to sales by customers in a narrow set of instances, such as when
an issuer has made a tender offer for the bonds at a price that is
higher than what the dealer is offering.
---------------------------------------------------------------------------

    \47\ For example, SIFMA states that a particular dealer may not
have recommended or even sold the bond to the customer so
researching and disclosing all material facts about the bond will
delay the trade. Additionally, SIFMA states that when an estate has
given a dealer instructions to liquidate an entire portfolio, the
disclosure obligation could decrease liquidity while the dealer does
its own diligence and increase the cost of the trade.
---------------------------------------------------------------------------

    MSRB RESPONSE: Although recent time of trade disclosure guidance
focuses on sales of municipal securities to customers, certain earlier
guidance requires dealers to make disclosures in connection with both
sales to and purchases from customers, and that guidance remains in
effect. The MSRB believes, from a fair dealing perspective, that it is
difficult to categorically exclude purchases from customers.
Significantly, both SIFMA and BDA have pointed out instances where
disclosure to a customer selling a bond would be appropriate.
Therefore, the MSRB proposes to retain the disclosure requirement for
purchases from customers. However, in response to this comment, the
MSRB proposes to add the following sentence to the rule to clarify that
whether the customer is purchasing or selling is a factor that can be
considered in making the materiality determination: ``Whether the
customer is purchasing or selling the municipal securities may be a
consideration in determining what information is material.''
 Material, Non-Public Information
    COMMENT: SIFMA and BDA propose that the MSRB modify the definition
of ``material'' to exclude material non-public information.
    MSRB RESPONSE: As discussed above, the MSRB is not proposing
substantively to revise the current time of trade disclosure
obligations but simply to codify them. While the MSRB understands the
issue raised by the commenters, the MSRB can consider this comment if
the Board undertakes to amend the rule substantively in the future.
 Access Equals Delivery for Time of Trade Disclosures
    COMMENT: SIFMA states that the proposed rule seems to eviscerate
recent MSRB access equals delivery initiatives. SIFMA states that, in
connection with marketing new issues of municipal securities to
customers, dealers have relied on MSRB guidance that providing a
preliminary official statement (``POS'') to a customer ``can serve as a
primary vehicle for providing the required time-of-trade disclosures
under Rule G-17, depending upon the accuracy and completeness of the
POS as of the time of trade.'' SIFMA believes that providing access to
a POS, whether on EMMA or some other electronic platform, should
continue to satisfy a dealer's time of trade obligation for new issues
of municipal securities. SIFMA states that proposed Rule G-47,
supplementary material .01(b) and (c), seem to prohibit activity
recently championed by the MSRB and that the proposed new obligation
could create a risk of having dealers misinterpret or inadequately
summarize information in a POS.
    MSRB RESPONSE: This comment does not sufficiently differentiate
between Rule G-32, on disclosures in connection with primary offerings,
and Rule G-17, which are two separate and distinct obligations. The
guidance cited by SIFMA states that a POS can serve as a primary
vehicle for providing the required time-of-trade disclosures but does
not state that providing access to a POS would be sufficient. The MSRB
has not stated that access to a POS, or to all material information
regarding a security and transaction, is sufficient to satisfy the Rule
G-17 time of trade disclosure obligation. Rather, the MSRB has
explained that whether providing access to material information is
effective disclosure is determined by the specific facts and
circumstances. Supplementary material .01 (b) and (c) does not preclude
the disclosure of material information by delivery of a

POS to the customer, assuming the POS contains all material information
and assuming the means of disclosure are effective.
 General Advertising Materials
    COMMENT: SIFMA requests further clarification of the types of
``disclosure of general advertising materials'' as referenced in
proposed Rule G-47, supplementary material .01(c).
    MSRB RESPONSE: The MSRB does not propose to provide further
clarification on general advertising materials at this time since the
Rule G-17 interpretive notices do not elaborate on this concept. The
MSRB can consider providing additional guidance if the Board undertakes
to amend proposed Rule G-47 substantively in the future.
 Established Industry Sources
    COMMENT: Lumesis suggests that requiring market participants to
disclose ``material information about the security that is reasonably
accessible to the market'' should contemplate more than ``established
industry sources'' as currently defined. Lumesis states that this would
make the definition broad enough to encompass current or future
technology and/or dissemination systems. Lumesis suggests that the MSRB
remove the term ``established industry sources'' from the proposed rule
or provide clarity to ensure that market participants focus on
disclosing material information about the security that is reasonably
accessible to the market. Similarly, TMC suggests that the proposed
rule clarify what information is considered ``reasonably accessible to
the market.''
    MSRB RESPONSE: The proposed rule provides that dealers must
disclose ``all material information known about the transaction, as
well as material information about the security that is reasonably
accessible to the market.'' The proposed rule further provides that
```[r]easonably accessible to the market' shall mean that the
information is made available publicly through established industry
sources'' and ```[e]stablished industry sources' shall include [EMMA],
rating agency reports, and other sources of information relating to
municipal securities transactions generally used by brokers, dealers,
and municipal securities dealers that effect transactions in the type
of municipal securities at issue.'' [Emphasis added] The definition of
established industry sources is not limited to the particular sources
listed, and the definition allows for evolving technologies and systems
so long as such ``other sources'' are related and generally used as
delineated by the proposed rule.
    COMMENT: WFA states that the rule should acknowledge the role of
information vendors in helping a dealer monitor established industry
sources. WFA cites the Interpretive Notice dated November 30, 2011,
MSRB Answers Frequently Asked Questions Regarding Dealer Disclosure
Obligations under MSRB Rule G-17, which states:

    [T]he MSRB has noted that information vendors and other
organizations may provide industry professionals with access to
information that is generally used by dealers to effect transactions
in municipal securities. The MSRB expects that, as technology
evolves and municipal securities information becomes more readily
available, new `established industry sources' are likely to emerge.

    More specifically, WFA requests that the final rule clarify that
dealers may rely on vendors to help aggregate material information from
established industry sources and monitor for ``emerging'' sources.
Additionally, WFA states that the rule and guidance should recognize
that established industry sources remain reliant on the quality of
continuing and material event notifications provided by issuers.
    MSRB RESPONSE: The MSRB believes the role that information
aggregators may play in assisting dealers in compliance with the rule
is widely known and recognized and that specifically addressing the use
of aggregators in the proposed rule may imply that use of such services
is encouraged or required.
 Rating Agency Reports
    COMMENT: SIFMA requests that the MSRB clarify ``rating agency
reports'' within the definition of ``established industry sources'' in
the proposed rule. SIFMA states that the use of the term ``reports''
implies that dealers must distribute credit event-driven reports and
that disclosure of the rating action alone is insufficient. SIFMA
requests that the MSRB clarify that firms are under no obligation to
distribute such reports.
    Lumesis suggests that the definition of ``established industry
sources'' should not include ``rating agency reports.'' Lumesis states
that inclusion of the reference may be inconsistent with a focus on
material information that is timely since these reports may be issued
months or more before the trade triggering disclosure. Additionally,
Lumesis states that the inclusion of reports may be construed as an
implicit endorsement of a private, for-profit enterprise's offering as
fulfilling the requirement. Lumesis also states that the inclusion of
rating agency reports seems inconsistent with the Dodd-Frank Act which
indicates that market participants using ratings or rating reports
should not rely on them alone.
    MSRB RESPONSE: As discussed previously, the MSRB is simply
codifying the existing guidance in this rulemaking initiative. The
current guidance does not address the meaning of the reference to
``rating agency reports'' for purposes of time of trade disclosure and,
as discussed above, the definition of established industry sources is
not limited to the particular sources listed. Therefore, the MSRB does
not propose adding any additional interpretation to the meaning of
``rating agency reports'' or deleting this reference. However, the MSRB
can consider revisions in this area if the Board undertakes to amend
proposed Rule G-47 substantively in the future.
 Unsolicited Orders
    COMMENT: TMC suggests that the requirement for dealers to disclose
reasonably accessible information to a client placing an unsolicited
order is unnecessary regulation given the ease of access to the
internet.
    MSRB RESPONSE: Current guidance provides that the time of trade
disclosure obligation is the same whether the order is unsolicited or
solicited. The goal of this rulemaking initiative is to codify current
guidance in the new proposed Rule G-47.
 Location of Rule
    COMMENT: TMC suggests that it might be beneficial to codify the
time of trade disclosure rule as a subsection of Rule G-17 as opposed
to creating a new rule so that participants would only have to view a
single rule for fair dealing, as opposed to having to cross-reference
similar rules and their corresponding comments.
    MSRB RESPONSE: The MSRB does not propose to codify the provisions
as suggested because, as a result of this rulemaking initiative, there
will no longer be any time of trade disclosure guidance in Rule G-
17.\48\
---------------------------------------------------------------------------

    \48\ Rule G-17 will continue to include interpretive guidance
related to time of trade disclosures for 529 plans. As indicated
above, however, the MSRB may create a separate rule regarding time
of trade disclosure obligations for 529 plans, in which case this
guidance would likely be codified in a rule and deleted as part of
any such rulemaking initiative.
---------------------------------------------------------------------------

 Material Event Filings
    COMMENT: SIFMA states that it would be helpful for the MSRB to
explicitly address the concept that an event disclosed by an issuer or
obligated person pursuant to an SEC Rule 15c2-12 continuing disclosure
agreement does not necessarily constitute

``material information'' that would be required to be disclosed to
investors and that, even if such information was material at the time
it was disclosed, it does not remain material forever. SIFMA states
that long-past credit ratings changes, or substitutions of trustees, or
a continuing disclosure filing that was a few days late five years ago
should not automatically be deemed material at the time of trade merely
because they triggered a disclosure obligation at the time of
occurrence. SIFMA suggests that a six-month look back would be a
reasonable time limit for disclosing past information.
    MSRB RESPONSE: There is nothing in the proposed rule indicating
that events disclosed by an issuer or obligated person pursuant to Rule
15c2-12 are automatically material at the time of trade. The proposed
rule states the well established definition that ``[i]nformation is
considered to be material if there is a substantial likelihood that the
information would be considered important or significant by a
reasonable investor in making an investment decision.'' Therefore, the
MSRB does not believe that any revisions are necessary or appropriate
in response to this comment. In addition, there is no safe-harbor look
back period under the existing guidance and thus a look back period is
not included in the proposed rule, the purpose of which is only to
codify existing obligations.
 Disclosure Obligations in Specific Scenarios
    COMMENT: SIFMA states that the list of scenarios in the proposed
rule that may be material under certain circumstances and require
disclosure is too prescriptive for a principles-based rule and will
become a de facto enforcement checklist for regulators. SIFMA also
states that dealers may rely on the four corners of the notice and not
consider other factors that may become material in the future. SIFMA
suggests that the existing interpretive notices be reorganized by
specific scenarios, as many of the listed specific scenarios are the
subject of more than one interpretive notice.
    MSRB RESPONSE: The proposed rule provides that the examples
describe information that may be material in specific scenarios and
that the list is not exhaustive. The MSRB does not propose to
reorganize the existing interpretive guidance by specific scenarios
since the MSRB plans to delete the Rule G-17 time of trade disclosure
guidance.
    COMMENT: Similarly, WFA states that a final rule should provide
dealers with more clarity about the specific scenarios that trigger
time of trade disclosure obligations for the types of information
identified in the supplementary material.
    MSRB RESPONSE: The MSRB believes that the supplementary material in
the proposed rule provides dealers with sufficient clarity regarding
time of trade disclosure obligations by providing a non-exhaustive list
of examples describing information that may be material.
 Credit Risks and Ratings
    COMMENT: SIFMA states that unlike many of the other specific
scenarios addressed in the proposed rule, credit ratings are
potentially more fluid. Therefore, SIFMA argues that it would be
helpful to define a material look-back period for credit ratings
changes.
    MSRB RESPONSE: The MSRB does not propose making these changes since
they are not in the current guidance but the MSRB can consider them if
the Board undertakes to amend the proposed rule substantively in the
future.
 Securities With Non-Standard Features
    COMMENT: SIFMA states that the prior uses of the term ``non-
standard features'' have been related to situations where the bonds pay
interest annually, rather than semi-annually, a fact that affects yield
calculations. SIFMA argues that this new usage seems to have no bounds,
and adds the traditional interpretation as an afterthought. SIFMA
states that it would be helpful to know what the MSRB considers to be
standard features.
    MSRB RESPONSE: The MSRB does not propose making any revisions to
the proposed rule in response to this comment. The requirement in the
proposed rule is drawn from current interpretive guidance on time of
trade disclosure obligations, and while the discussion of non-standard
features arose in the context of price/yield calculations, the basic
principle, when limited by a materiality threshold, is appropriate for
the proposed rule change.
 Issuer's Intent to Prerefund
    COMMENT: SIFMA states that, unless an issuer's intent to prerefund
has been publicly announced, it will not be known to established
industry sources and would likely be material non-public information.
(See the discussion above regarding the disclosure of material non-
public information.)
    MSRB RESPONSE: This requirement is drawn from the current
interpretive guidance and the MSRB does not propose any changes in
response to this comment.
 Failure to Make Continuing Disclosure Filings
    COMMENT: WFA suggests that the proposed rule should provide
guidance about how to interpret the potential materiality of issuer
event reporting deficiencies. WFA believes that the rule should make
clear that an issuer's failure to make continuing disclosure filings is
a factor but is not determinative of the materiality of the issuer's
disclosure deficiency. WFA also believes the MSRB should make clear
that a dealer may consider subsequent disclosures and the curing of
late filings as relevant in determining the significance of a prior or
less severe disclosure deficiency. Finally, WFA believes the
supplementary material should specify a window of time in which an
issuer's late continuing disclosure filing would be regarded as a
clerical or ministerial issue and thus not a material deficiency.
    MSRB RESPONSE: Proposed Rule G-47, supplementary material .03(o)
provides that discovery that an issuer has failed to make filings
required under its continuing disclosure agreements may be material in
specific scenarios and require time of trade disclosures to a customer.
Therefore, this does not indicate that such a failure is always
material requiring disclosure. The proposed rule, as noted, states the
well established definition that ``[i]nformation is considered to be
material if there is a substantial likelihood that the information
would be considered important or significant by a reasonable investor
in making an investment decision.'' Additionally, the MSRB does not
propose to add the information requested by WFA relating to curing of
late filings and a time window where it would be considered clerical.
As discussed previously, the MSRB is simply codifying the existing
guidance in this rulemaking initiative and the existing guidance does
not provide for such a bright-line look back.
    COMMENT: SIFMA states that the rule should make it clear that for
secondary market trades the ``discovery'' by a dealer that an issuer
has failed to make filings required by its continuing disclosure
agreements is limited to a dealer's review of ``failure to file''
notices on EMMA pursuant to Rule 15c2-12.
    MSRB RESPONSE: The interpretive guidance states that, ``if a firm
discovers through its Rule 15c2-12 procedures or otherwise that an
issuer has failed to make filings required under its continuing
disclosure agreements, the

firm must take this information into consideration in meeting its
disclosure obligations under MSRB Rule G-17 . . .'' \49\ [Emphasis
added]. Therefore, this requirement is not as narrow as SIFMA appears
to interpret it and the MSRB does not propose to make any changes in
response to this comment.
---------------------------------------------------------------------------

    \49\ Interpretive Notice dated September 20, 2010, MSRB Reminds
Firms of their Sales Practice and Due Diligence Obligations When
Selling Municipal Securities in the Secondary Market.
---------------------------------------------------------------------------

 Processes and Procedures
    COMMENT: SIFMA argues that proposed Rule G-47, supplementary
material .04 is an expansion of current regulatory requirements, is too
narrow, and omits critical guidance as set forth in the Interpretive
Notice dated November 30, 2011, MSRB Answers Frequently Asked Questions
Regarding Dealer Disclosure Obligations under MSRB Rule G-17. The
proposed rule states:

    Brokers, dealers, and municipal securities dealers must
implement processes and procedures reasonably designed to ensure
that material information regarding municipal securities is
disseminated to registered representatives who are engaged in sales
to and purchases from a customer.

    The proposed rule does not include the following sentence contained
in the guidance:

    It would be insufficient for a dealer to possess such material
information, if there were no means by which a registered
representative could access it and provide such information to
customers.

    SIFMA argues that a dealer that provides its registered
representatives access to such information satisfies current MSRB
guidance under Rule G-17 and should similarly be sufficient under the
proposed rule. SIFMA also argues that incorporating this guidance into
the proposed rule is an expansion of existing regulatory obligations as
currently approved by the SEC and is not merely a codification of
existing regulations. Therefore, SIFMA states that any enforcement
against dealers for failing to disseminate or provide access to their
registered representatives of material information regarding municipal
securities should be applied solely prospectively.
    MSRB RESPONSE: SIFMA appears to interpret the sentence in the
guidance to mean that merely providing access is sufficient. The
sentence states that dealer possession of information is insufficient
if registered representatives lack access to it. This does not mean
that the converse is true--that mere access to the information is
sufficient. Beyond providing access, dealers must implement processes
and procedures reasonably designed to ensure that material information
is disseminated to registered representatives. The potential for
misinterpretation of this sentence supports the MSRB's determination
that it should not be included in the proposed rule. Additionally,
proposed Rule G-47, supplementary material .04 is not an expansion of
current regulatory requirements since this obligation is fairly and
reasonably implied by current MSRB rules, as enunciated by the MSRB
since November 30, 2011.\50\
---------------------------------------------------------------------------

    \50\ See Interpretive Notice dated November 30, 2011, MSRB
Answers Frequently Asked Questions Regarding Dealer Disclosure
Obligations under MSRB Rule G-17; see also Interpretive Notice dated
July 14, 2009, Guidance on Disclosure and Other Sales Practice
Obligations to Individual and Other Retail Investors in Municipal
Securities.
---------------------------------------------------------------------------

    COMMENT: WFA suggests that the proposed rule should make clear that
a dealer with a reasonably designed system for the detection and
disclosure of material information will be presumed to have complied
with its time of trade disclosure obligations.
    MSRB RESPONSE: The current guidance does not provide that a dealer
will be presumed to have complied with its time of trade disclosure
obligations by having a reasonably designed system. To do so in the
proposed rule would significantly narrow dealers' current obligations.
 Ambiguity of Rule
    COMMENT: BDA states that the proposed rule, like the interpretive
guidance, is unnecessarily ambiguous. BDA believes that there should be
at least a safe harbor or some additional clarity that allows dealers
to comply with concrete rules rather than broad-based principles.
    MSRB RESPONSE: The MSRB believes the new rule will be clear and
easier for dealers to follow. As discussed above, the MSRB is simply
codifying the guidance and can consider revisions to the proposed rule
in the future.
 Harmonizing With FINRA Notice 10-41
    COMMENT: BDA suggests that the MSRB should reconcile how the new
proposed rule will be harmonized with FINRA Regulatory Notice 10-41 and
exactly how the market should read the two in conjunction with one
another.
    MSRB RESPONSE: The MSRB's rules and guidance should be followed for
all municipal securities transactions as FINRA's notice is simply its
interpretation of MSRB rules and guidance.
 Enforcement
    COMMENT: Lumesis comments that providing dealers that have made
good faith efforts to comply with proposed Rule G-47 with ample notice
and sufficient direction to take corrective actions would support the
spirit and intent of the rule.
    MSRB RESPONSE: The MSRB appreciates this comment; however, the
approach to enforcement is beyond the scope of the proposal.
 Form of Disclosure
    COMMENT: Lumesis suggests that as the MSRB contemplates refinements
and changes to the proposed rule in the future the subject of ``form of
disclosure'' be more fully addressed as many market participants
struggle with what actions satisfy the time of trade disclosure
obligation.
    MSRB RESPONSE: The MSRB can consider this suggestion if the Board
undertakes to revise the proposed rule in the future.
Rule G-19 on Suitability of Recommendations and Transactions
    On March 11, 2013, the MSRB requested comment on proposed revisions
to Rule G-19.\51\ The suitability notice generated seven comment
letters.\52\
---------------------------------------------------------------------------

    \51\ See MSRB Notice 2013-07 (March 11, 2013) (the ``suitability
notice'').
    \52\ Comment letters were received from: BDA; College Savings
Foundation (``CSF'') (although CSF sent its own letter, the letter
simply states that CSF endorses the comments made by the Investment
Company Institute); College Savings Plans Network (``CSPN'')
(although CSPN sent its own letter, the letter simply states that
CSPN is supportive of the comments relating to 529 Plan suitability
requirements submitted by the Investment Company Institute);
Financial Services Institute (``FSI''); Investment Company Institute
(``ICI''); SIFMA; and WFA. In addition to these seven comment
letters submitted in response to the proposed revisions to Rule G-
19, an additional comment letter was submitted by an investor on
August 25, 2013. The substance of this letter is more germane to the
MSRB's request for comment on adopting a ``best execution'' standard
and this retail investor submitted a similar letter in response to
that request for comment. See, MSRB Notice 2013-16, Request for
Comment on Whether to Require Dealers to Adopt a ``Best Execution''
Standard for Municipal Securities Transactions (August 6, 2013).
Therefore, this letter will be discussed in detail in connection
with the best execution request for comment.
---------------------------------------------------------------------------

    The comment letters are summarized by topic as follows:
 Support for the Proposal
    COMMENTS: All of the commenters generally support the MSRB's
initiative to harmonize MSRB Rule G-19 with FINRA Rule 2111. BDA states
that it is encouraged by many of the changes in proposed Rule G-19. FSI
states that it supports the harmonization of MSRB

Rule G-19 with FINRA Rule 2111 and that it is a positive development
that will provide significant benefits for broker-dealers and financial
advisors.\53\ ICI states that it supports the MSRB's proposal to
harmonize its suitability rule with FINRA's suitability rule because it
is in the best interests of investors and registrants. SIFMA comments
that it supports the MSRB's efforts to harmonize MSRB Rule G-19 with
FINRA Rule 2111 since such harmonization will promote more effective
business practices and efficient compliance. Finally, WFA states that
it applauds the MSRB's continuing effort to promote regulatory
efficiency.
---------------------------------------------------------------------------

    \53\ FSI also notes that it has concerns with FINRA's
suitability rule, but did not specify those concerns.
---------------------------------------------------------------------------

    MSRB RESPONSE: These comments support the MSRB's statement on
burden on competition.
 Application to SMMPs
    COMMENTS: SIFMA comments that its members would prefer the MSRB to
explicitly include the SMMP exemption in the proposed rule as with the
institutional account exemption in FINRA Rule 2111(b) even though the
MSRB is proposing separate rules codifying SMMP guidance. SIFMA states
that the suitability rule should, at a minimum, cross reference the
SMMP rules.
    Similarly, WFA requests that the MSRB reconsider its plan to handle
the SMMP exemption separately from the proposed rule. WFA requests that
the MSRB adopt a structure parallel to FINRA's suitability rule to make
clear that, under certain circumstances, a dealer has limited
suitability obligations to institutional customers.
    Additionally, WFA is concerned that the SMMP exemption continues to
impose additional suitability requirements on dealers transacting with
institutional clients beyond those required under FINRA's suitability
rule. WFA states that dealers considering whether an institutional
account is an SMMP must assess the factors required under Rule 2111(b)
as well as additional criteria such as the institutional customer's
ability to independently evaluate the ``market value'' of municipal
securities and the ``amount and type of municipal securities owned [by]
or under management'' of the institutional customer. WFA states that
since some institutional clients may satisfy FINRA's exemptive criteria
but not MSRB's, dealers will likely need to invest in costly technology
enhancements and will likely be required to maintain separate policies
and procedures. WFA is also concerned that the difference in rule
structure will lead to regulatory confusion for clients and regulators.
    BDA believes that omitting any reference to the SMMP exemption in
the proposed rule undermines the goal of harmonizing it with FINRA's
suitability rule. BDA is concerned that FINRA examiners will not be
able to consistently apply the FINRA suitability rule as contrasted
with the MSRB suitability rule, potentially causing confusion for
application of the rules by FINRA examiners.
    BDA states that, if the MSRB includes an exemption for SMMPs in the
proposed rule, the supplementary material should be updated to make
certain corresponding changes.
    MSRB RESPONSE: The MSRB does not believe that it is appropriate or
necessary to reference the SMMP exemption in Rule G-19. The SMMP
exemption addresses four separate areas: time of trade disclosures,
transaction pricing, suitability, and bona fide quotations and the
exemption is not referenced in any of these separate rules. In
connection with the proposed suitability rule, the MSRB has not
proposed any revisions to the SMMP exemption and addresses WFA's
comments in this area separately in response to the request for comment
on the proposed SMMP rules set out below.\54\
---------------------------------------------------------------------------

    \54\ MSRB Notice 2013-10, Request for Comment on Proposed
Sophisticated Municipal Market Professional Rules (May 1, 2013).
---------------------------------------------------------------------------

 Exclusions From Recommended Strategies
    COMMENTS: SIFMA states that the proposed rule omits important
exclusions from recommended strategies that are present in FINRA's
suitability rule including with respect to: Descriptive information
about an employee benefit plan; asset allocation models such as
investment analysis tools; and other interactive investment materials.
SIFMA states that these omissions solely with respect to municipal
securities will result in confusion. SIFMA believes that materials and
output of this nature provide investors with valuable information when
considering investment decisions and should be recognized by the MSRB
as exclusions from Rule G-19. SIFMA notes that the SEC, in its 2012
Report on the Municipal Securities Market, expressly discusses amending
Rule G-19 to be consistent with FINRA's Rule 2111 ``including with
respect to the scope of the term strategy.''
    SIFMA also recommends listing 529 plan education savings
calculators and tools as a type of excluded ``general investment
information.''
    MSRB RESPONSE: The proposed rule does not include the following
general financial and investment information from FINRA's suitability
rule: (1) Dollar cost averaging; (2) compounded return; (3) tax
deferred investment; (4) descriptive information about an employer-
sponsored retirement or benefit plan, participation in the plan, the
benefits of plan participation, and the investment options available
under the plan; (5) asset allocation models that are (i) based on
generally accepted investment theory, (ii) accompanied by disclosures
of all material facts and assumptions that may affect a reasonable
investor's assessment of the asset allocation model or any report
generated by such model, and (iii) in compliance with Rule 2214
(Requirements for the Use of Investment Analysis Tools) if the asset
allocation model is an ``investment analysis tool'' covered by Rule
2214; and (6) interactive investment materials that incorporate the
above. These items are not included in the proposed rule because the
MSRB chose to include the concepts that are most pertinent to the
municipal securities market. With respect to the suggestion to add 529
calculators and tools to the list, the MSRB may create a separate rule
or guidance to specifically address suitability obligations for 529
plans in the future and the MSRB can consider this comment at that
time.
 529 Plans
    COMMENTS: ICI states that it is not clear whether the proposed rule
is intended to apply to MSRB registrants selling 529 plans. However,
ICI states that, from talking to MSRB staff, they understand that the
proposed rule is intended to apply to such registrants'
recommendations. ICI recommends that the MSRB revise the current
proposal to add supplementary material to Rule G-19 that sets forth all
additional suitability obligations imposed on registrants'
recommendations of 529 plan securities. ICI also recommends that the
MSRB rescind all suitability requirements and guidance that have been
issued under other MSRB rules relating to recommendations involving 529
plan securities. If the MSRB follows this recommendation, ICI
recommends that the MSRB publish a revised request for comment that
includes any provisions designed to address 529 plans.
    SIFMA states that the request for comment creates confusion about
the

applicability of the proposed rule to firms selling 529 plan securities
and, in lieu of a separate suitability rule for 529 plans, SIFMA
suggests that the MSRB consider incorporating existing interpretive
guidance related to suitability assessments for 529 plans into the
proposed rule, either by adding a sentence to the proposed rule
specific to assessing the suitability of a 529 plan security, or by
incorporating existing interpretive guidance into the supplementary
material.
    MSRB RESPONSE: The proposed rule is intended to apply to 529 plans.
All MSRB rules and guidance apply to 529 plans unless specifically
excluded, and the proposed rule does not exclude 529 plans.
Additionally, the current guidance addressing suitability requirements
for 529 plans continues to apply. The MSRB may decide to create a
separate rule addressing 529 plans in the future; however, the proposed
suitability rule and related guidance will apply to 529 plans until any
such separate 529 plan rule is created.
 Applicability of FINRA's Guidance
    COMMENT: ICI recommends that the MSRB confirm in the notice
adopting the proposed revisions to Rule G-19 the MSRB's intent to
interpret its rule in a manner that is consistent with FINRA's
interpretation.
    MSRB RESPONSE: The MSRB will interpret proposed Rule G-19 in a
manner consistent with FINRA's interpretations of Rule 2111 except to
the extent that the MSRB affirmatively states that specific provisions
of FINRA's interpretations do not apply.
 Explicit vs. Passive Hold Recommendations
    COMMENTS: WFA comments that the MSRB should provide guidance
similar to FINRA's guidance that suitability obligations concerning
hold recommendations cover only explicit hold recommendations.
    BDA is concerned that there is a potential for confusion with
respect to explicit versus passive hold recommendations. Specifically,
proposed Rule G-19, supplementary material .03, Recommended Strategies,
would apply the suitability obligation to investment strategies that
include an explicit recommendation to hold a municipal security or
municipal securities. BDA is concerned that this might lead to
unnecessary and burdensome compliance documentation in certain
instances. BDA encourages the MSRB to provide further guidance as to
what constitutes an explicit hold recommendation for purposes of the
rule and believes that the MSRB should have guidance, as FINRA does in
Regulatory Notice 12-55, that ``implicit'' hold recommendations are not
within the scope of the suitability rule.
    MSRB RESPONSE: As noted, the MSRB will interpret Rule G-19 in a
manner that is consistent with FINRA's interpretation of its
suitability rule except to the extent that the MSRB affirmatively
states that specific provisions of FINRA's interpretations do not
apply.
 Effective Date
    COMMENTS: SIFMA appreciates that the MSRB intends to file the time
of trade disclosure, suitability, and SMMP proposals with the SEC at
the same time.
    SIFMA further requests that these three rules be implemented
simultaneously with the same effective date.
    SIFMA states that FINRA Rule 2111 was the result of a multi-year
process, including an implementation period of approximately 19 months
and that any regulatory scheme takes time to implement properly. SIFMA
further states that municipal securities dealers that are not FINRA
members, as well as FINRA members that only buy and sell municipal
securities, will need a reasonable time to allow for a sufficient
implementation period to develop, test, and implement supervisory
policies and procedures, systems and controls, as well as training.
    SIFMA also states that municipal securities dealers that are FINRA
members will also need time, albeit less than non-FINRA members, to
implement the proposed changes. SIFMA recommends an implementation
period of no less than one year from approval by the SEC before the
proposal becomes effective.
    MSRB RESPONSE: The MSRB contemplated implementing the time of trade
disclosure, suitability, and SMMP rules simultaneously with the same
effective date. However, the MSRB believes that an implementation
period of one year is unnecessary. The time of trade disclosure and
SMMP rules simply codify existing guidance and the suitability rule is
largely consistent with FINRA's suitability rule. Therefore, the MSRB
proposes an effective date for the proposed rule change of 60 days
following the date of SEC approval.
 Changes to Supplementary Material
    COMMENTS: BDA suggests striking the word ``retirement'' from
supplementary material .03, Recommended Strategies, item (iv). BDA
suggests that the section should be rewritten to read ``estimates of
future income needs'' as this would better align to FINRA's ``liquidity
needs'' criteria to recognize that when purchasing a position, one
might be looking for a period to help bridge income needs until they
reach retirement and not solely for ``retirement income needs.''
    MSRB RESPONSE: The language in the proposed rule regarding
estimates of future retirement income needs is identical to the
parallel language in FINRA's suitability rule relating to general
financial and investment information. The MSRB does not propose to
delete the word ``retirement'' since there is no unique aspect of the
municipal securities market that would support adopting different
language from FINRA's rule. Moreover, the MSRB does not believe that
the phrase should be aligned to the non-parallel ``liquidity needs''
criterion in FINRA's rule relating to a customer's investment profile.
Rules D-15 and G-48 on SMMPs
    On May 1, 2013, the MSRB requested comment on proposed Rules D-15
and G-48 on SMMPs.\55\ The SMMP notice generated three comment
letters.\56\
---------------------------------------------------------------------------

    \55\ See MSRB Notice 2013-10 (May 1, 2013) (the ``SMMP
notice'').
    \56\ Comment letters were received from: BDA; SIFMA; and WFA.
---------------------------------------------------------------------------

    The comment letters are summarized by topic as follows:
 Support for the Proposal
    COMMENTS: All of the commenters generally support the MSRB's
initiative to codify the SMMP guidance into Rules D-15 and G-48. BDA
states that, while it is supportive of the proposed rules, it seeks
clarity on some items. SIFMA comments that it continues to support the
efforts by the MSRB to provide clarity to regulated entities by
reorganizing or eliminating certain interpretive guidance associated
with Rule G-17 into new or revised rules. WFA states that it supports
the MSRB's continued commitment to ``streamline'' its rules and
guidance and its ongoing effort to align its rule format with that of
other regulators.
    MSRB RESPONSE: The MSRB believes these comments support the MSRB's
statement on the burden on competition.
 SMMP Definition
    COMMENTS: SIFMA comments that there is one group of customers that
may be experienced municipal market participants yet does not fall
within the current SMMP definition: Hedge funds with assets under
management of less than $50 million. SIFMA states that the

MSRB and FINRA should consider expanding the definition of
institutional account holders and SMMPs in future rulemaking to include
this type of customer.
    Last year the MSRB harmonized (with slight distinctions) the SMMP
definition and the process by which dealers confirm a customer's SMMP
status with FINRA's suitability rule and institutional account
definition. SIFMA suggests that hedge funds managing less assets than
required by the MSRB and FINRA are nevertheless sophisticated and,
therefore, should be covered by the MSRB and FINRA rules. By contrast,
BDA indicated in its comment letter that it is comfortable with the $50
million threshold.
    MSRB RESPONSE: As discussed in the SMMP notice, the codification of
the interpretive guidance on SMMPs that is currently in Rule G-17 is
intended to preserve the substance of the guidance approved by the
Board. No substantive changes are intended. It would be beyond the
scope of this initiative to determine whether small hedge funds are
sufficiently sophisticated to warrant the relief to dealers in proposed
Rule G-48.
 Cross References to SMMP Rules
    COMMENTS: SIFMA and WFA comment that the rules under which a
dealer's obligations to SMMPs are modified (proposed Rule G-47, and
Rules G-19, G-13, and G-18) \57\ should specifically include a
reference to the definition of and the modified obligations to SMMPs
delineated in the proposed rules.
---------------------------------------------------------------------------

    \57\ Although not listed in SIFMA's letter, Rule G-18
obligations related to transaction pricing are also modified by
proposed Rule G-48.
---------------------------------------------------------------------------

    MSRB RESPONSE: One of the benefits of adopting stand-alone rules is
to make them more prominent and easier for dealers and other market
participants to locate. The MSRB believes that a stand-alone SMMP
definition and a stand-alone rule describing the relief available to
dealers who do business with SMMPs will provide ample clarity to
dealers regarding their obligations. Cross-references, therefore, are
unnecessary. Moreover, if cross-references were used for rules
impacting SMMPs, a consistent practice of including cross-references in
other rules would tend to make the rulebook unmanageable. This comment
was also made in response to the requests for comment on proposed Rule
G-47 and the proposed revisions to Rule G-19. In response to the
previous comments, the MSRB indicated that it does not believe it is
necessary to reference the new SMMP rules in each of the rules to which
the SMMP guidance applies.
 Effective Dates
    COMMENT: SIFMA requests that the proposed revisions to Rule G-19,
and proposed Rules G-47, G-48, and D-15 be implemented simultaneously
with the same effective date.
    MSRB RESPONSE: The MSRB agrees that it is appropriate to file these
proposed rules simultaneously and for them to become effective together
on the same date.
 Customer Affirmation
    COMMENT: With regard to proposed Rule D-15, supplementary material
.02, Customer Affirmation, BDA requests that the MSRB consider
permitting alternate methods of affirming SMMP status in lieu of
specifically obtaining customer affirmations under the proposed
rule.\58\
---------------------------------------------------------------------------

    \58\ As an example, BDA states that a dealer who has a process
for and conducts a regular credit review of its SMMP customers
should be able to use such credit review instead of obtaining an
affirmation by the SMMP as long as the dealer determines there has
been no change in the status of the SMMP based on the internal
review of the customer's portfolio or other similar evaluation.
---------------------------------------------------------------------------

    MSRB RESPONSE: As BDA points out, the rule already provides
flexibility with regard to the affirmation process, which is
substantially similar to (and can be combined with) FINRA's process. It
can be done orally or in writing, on a trade by trade, type of
municipal security or account-wide basis. BDA's request to use the
credit review process in lieu of an affirmation would be a substantial
change in the process. The customer affirmation requirement in proposed
Rule D-15, supplementary material .02 is taken directly from the 2012
SMMP Interpretation.\59\ The proposed SMMP rules simply codify the
existing guidance and it would be beyond the scope of this rulemaking
initiative to make any substantive changes to the existing guidance.
---------------------------------------------------------------------------

    \59\ Restated Interpretive Notice Regarding the Application of
MSRB Rules to Transactions with Sophisticated Municipal Market
Professionals  (July 9, 2012) (the ``2012 SMMP Interpretation'').
---------------------------------------------------------------------------

 Reasonable Basis Analysis
    COMMENTS: BDA expresses concern regarding the more stringent
requirement in proposed Rule D-15, supplementary material .01,
Reasonable Basis Analysis, which goes beyond FINRA's rules to state
that a ``. . . dealer should consider the amount and type of municipal
securities owned or under management by the customer.'' BDA states that
FINRA does not require a consideration of the type of securities held
by the customer for qualification under FINRA's institutional investor
exemption. BDA also states that it is unaware of any feature unique to
the municipal securities market that would justify the more burdensome
requirement to consider both the amount and type of municipal
securities owned or under management by the customer. BDA further
states that this requirement might confuse examiners and allow for an
uneven application of the proposed rule. BDA believes a determination
by the dealer that the customer has total assets of at least $50
million and that the dealer has a reasonable basis to believe the
customer is capable of evaluating investment risk and market value
independently should be given deference.
    MSRB RESPONSE: The MSRB believes this additional requirement that a
dealer consider the amount and type of municipal securities owned or
under management by the customer is appropriate since it provides some
assurance that the dealer considered the investor's experience as a
municipal securities investor in forming a reasonable basis for
believing that the customer is capable of evaluating investment risks
and market value independently. The MSRB believes the concern about
misapplication in the regulatory examination process is misplaced,
since the dealer need only evidence that it considered the municipal
securities holdings of the customer in its analysis. The customer
affirmation requirement in proposed Rule D-15, supplementary material
.01 is taken directly from the 2012 SMMP Interpretation.\60\ The
proposed SMMP rules simply codify the existing guidance and do not make
any changes to the guidance.
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

 Agency Transactions
    COMMENTS: BDA requests further clarification as to how the MSRB
defines ``agency transactions'' for purposes of Rule G-48(b)(1).
Additionally, BDA states that, with respect to transaction pricing, the
2012 SMMP Interpretation included guidance that was particularly
relevant to dealers operating alternative trading systems. BDA requests
the MSRB to consider the application of this provision in the context
of alternative trading systems and whether it would be appropriate to
expand this exemption for transaction pricing under the proposed rule
to include an alternative trading system ``which functions on a
riskless principal basis disclosing all commissions in the same manner
as it would if it were acting as agent.''

    MSRB RESPONSE: The agency concept is taken directly from the
current Rule G-17 guidance and relates to agency transactions as
described in Rule G-18. The restated SMMP guidance in 2012 did not
change this concept from the original notice in 2002. It has always
been the case that fair pricing relief was limited to non-recommended
secondary market agency trades. BDA suggests that the MSRB expand the
relief to riskless principal transactions executed by alternative
trading systems. While some such systems effect trades with their
institutional customers on an agency basis, the MSRB understands that
some are executed on a riskless principal basis and include a markup or
markdown. The MSRB views BDA's requested change as substantive and
worthy of consideration at a later date. As for the request for
clarification of the definition of an agency transaction, we believe
the concept is well-settled and understood by the market. Finally, the
reference in the 2012 notice to commissions charged by ATSs was meant
to remind dealers operating ATSs that their obligation to charge a fair
and reasonable commission under Rule G-30(b) is independent of the fair
and reasonable price obligation under Rule G-18 (and corresponding SMMP
relief).
 Bona Fide Quotations
    COMMENTS: BDA states that proposed Rule G-48(d), on bona fide
quotations, provides that a ``. . . dealer disseminating an SMMP's
`quotation' as defined in Rule G-13, which is labeled as such, shall
apply the same standards. . . .'' BDA states that it is unclear whether
the MSRB intends that a quotation from an SMMP needs to be labeled as
an ``SMMP quotation'' or if the MSRB is simply referring to a quotation
that meets the requirements set forth under MSRB Rule G-13. BDA states
that under the 2012 SMMP Interpretation it was clear that, if an SMMP
makes a ``quotation'' and it is labeled as such, then it is presumed
not to be a quotation made by the disseminating dealer. BDA states
that, if proposed Rule G-48(d) is intended to codify the language from
the 2012 SMMP Interpretation, they request that the MSRB consider
modifying the language in the proposed rule to clarify that the clause
``which is labeled as such'' does not require the quotation to be
specifically labeled as an SMMP quotation.
    MSRB RESPONSE: BDA suggests that the proposed rule changes the
standard for identifying quotes from SMMPs. Such is not the case. Since
the original interpretation in 2002, dealers have been required to
identify the quote as from an SMMP to take advantage of the relief in
the guidance. To read the rule any other way would not make sense. BDA
suggests it would be sufficient to simply label the SMMP quote as a
quote, rather than an SMMP quote. This would not alert the
disseminating dealer that the quote was from an SMMP. The MSRB does not
propose to make any revisions in response to this comment. The language
in the proposed rule tracks the language in the current Rule G-17
guidance \61\ and, therefore, the clarification requested by BDA is not
necessary.
---------------------------------------------------------------------------

    \61\ The current Rule G-17 guidance states: ``If an SMMP makes a
`quotation' and it is labeled as such, then it is presumed not to be
a quotation made by the disseminating dealer.'' Similarly, proposed
Rule G-48(d) states ``The . . . dealer disseminating an SMMP's
`quotation' as defined in Rule G-13, which is labeled as such, shall
apply the same standards regarding quotations described in Rule G-
13(b) as if such quotations were made by another . . . dealer. . .
.''
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 SMMP Definition vs. FINRA Institutional Investor Definition
    COMMENTS: WFA expresses concern that dealers considering whether an
institutional account is an SMMP must assess not only the factors
required under FINRA Rule 2111(b), but also additional criteria such as
the institutional customer's ability to independently evaluate the
``market value'' of municipal securities and the ``amount and type of
municipal securities owned [by] or under management'' of the
institutional customer. WFA states that the differences in duties owed
under the SMMP rules and FINRA Rule 2111(b) may confuse clients and
regulators. WFA believes that proposed Rule D-15 should not include
these additional criteria.
    MSRB RESPONSE: The second additional criterion regarding the amount
and type of municipal securities was discussed previously. As for the
first additional criterion, the MSRB believes that the phrase ``market
value'' should be retained, since the relief goes beyond FINRA's
suitability relief and extends to fair pricing. Although the SMMP
definition does impose some obligations beyond those required by
FINRA's suitability rule, proposed Rule D-15 simply codifies the
current Rule G-17 SMMP guidance. The MSRB does not propose making any
substantive changes to the proposed rules in response to this comment.

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 of up to 90 days (i) as
the Commission may designate 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 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<EMAIL_ADDRESS>Please include
File Number SR-MSRB-2013-07 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-2013-07. 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
10:00 a.m. and 3:00 p.m. Copies of such

filing also will be available for inspection and copying at the
principal office of the MSRB. 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-2013-07, and should be submitted on or before
November 12, 2013.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24549 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P