[Federal Register Volume 76, Number 211 (Tuesday, November 1, 2011)]
[Notices]
[Pages 67503-67506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-28243]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65631; File No. SR-MSRB-2011-19]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Amendments to Rule G-16 on Periodic Compliance Examination and Rule G-9 
on Preservation of Records

October 26, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on October 13, 2011, the Municipal Securities 
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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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 SEC a proposed rule change consisting 
of amendments to Rule G-16, on periodic compliance examination, in 
order to permit the examination of brokers, dealers, and municipal 
securities dealers (``dealers'') that are members of the Financial 
Industry Regulatory Authority (``FINRA'') at least once each four 
calendar years, rather than at least once each two calendar years as 
currently prescribed by Rule G-16. Further, the MSRB is filing with the 
SEC a proposed rule change consisting of amendments to Rule G-9, on 
preservation of records, which would require dealers to retain certain 
records for four years, rather than three years as currently prescribed 
by Rule G-9.
    The text of the proposed rule change is available on the MSRB's Web 
site at http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-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 Board 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
    The purpose of the proposed rule change is to facilitate the 
modernization of the examination process for dealers and to permit 
greater flexibility in the administration of periodic compliance 
examinations in order to focus more closely on those dealers that, by 
virtue of various identified factors, pose the greatest risk to 
investors and other market participants, as well as to the municipal 
securities market on a systemic basis.
    Periodic examinations of regulated entities are an important 
component of the regulatory oversight process. Examinations are 
intended to detect wrongful conduct, including violations of the 
federal securities laws and self-regulatory organization rules. 
Pursuant to Section 15B(b)(2)(E) of the Securities Exchange Act of 1934 
(the '' Exchange Act''), MSRB rules must provide for the periodic 
examination of municipal securities brokers, municipal securities 
dealers, or municipal advisors (``regulated entities'') to determine

[[Page 67504]]

compliance with Section 15B of the Exchange Act, the rules and 
regulations thereunder, and MSRB rules. The same provision requires 
that the MSRB specify the minimum scope and frequency of the 
examinations and that the examination rules be designed to avoid 
unnecessary regulatory duplication or undue regulatory burden for any 
regulated entity.
    Section 15B(c)(7) of the Exchange Act provides that the periodic 
examination of regulated entities shall be conducted by (a) A 
registered securities association in the case of dealers that are 
members of the registered securities association, (b) the appropriate 
regulatory agency (``bank regulators'') in the case of dealers that are 
not members of a registered securities association, and (c) the SEC, or 
its designee, in the case of municipal advisors. There is one 
securities association registered with the SEC--FINRA. Approximately 
1,800 MSRB registered dealers are members of and examined by FINRA, 
with the remaining dealers registered with the SEC as municipal 
securities dealers and examined primarily by the various federal bank 
regulators.
    Rule G-16 currently provides that, at least once every two calendar 
years, dealers must be examined in accordance with Section 15B of the 
Exchange Act, in order to determine whether the dealers are in 
compliance with all MSRB rules and applicable provisions of the 
Exchange Act. Separately, FINRA examines its members pursuant to a 
risk-based approach at least every four calendar years. In order to 
comply with Rule G-16, FINRA and the MSRB agreed to a protocol allowing 
for a questionnaire to be completed by certain firms every two calendar 
years. These dealers are typically less active in the municipal 
securities market and, therefore, pose less overall risk to market 
participants. The questionnaire, entitled the Alternative Municipal 
Examination (``AME'') module, was implemented in 1998, after review by 
SEC and MSRB staff.
    The AME is used as an off-site examination for low-risk dealers 
that: (a) Conduct a limited municipal securities business; (b) do not 
conduct a public finance business; and (c) are not otherwise identified 
as high risk firms for regulatory purposes. The AME is necessarily 
general and not tailored to the specific business of any one firm. It 
relies on each responding dealer to self report rule violations and to 
certify that the information provided is truthful and accurate.
    After many years of experience with the AME, the MSRB and FINRA 
believe that a more risk-based examination protocol should be 
implemented and that Rule G-16 should be amended to allow for up to a 
four year examination cycle for FINRA-member firms, consistent with 
FINRA's requirement for cycle examinations of all other FINRA members. 
This would also allow FINRA to integrate the municipal securities cycle 
examination program more closely with its overall cycle examination 
program, and redeploying staff resources from administering the AME to 
participating in the risk-based examination program would foster more 
meaningful oversight. Moreover, over the last few years, there have 
been significant advances in information technology, particularly with 
the development of the MSRB's Real-time Transaction Reporting System 
and Electronic Municipal Market Access system. These advancements in 
information technology and transparency have enabled FINRA to develop 
robust automated surveillance reviews of municipal securities 
transactions. FINRA is now able to review municipal securities 
transactions and other activity remotely, in order to identify 
potential MSRB rule violations by dealers. These tools permit FINRA 
staff to conduct near real-time surveillance of certain municipal 
securities activities.
    It is also apparent that the municipal securities business has 
changed dramatically over the last few years. The industry has 
consolidated and a small number of large firms account for the majority 
of public finance business. The top five underwriters accounted for 
over 50 percent, by par amount, of primary offerings in 2010 and 2011. 
\3\ The top 10 underwriters accounted for over 70 percent of the 
underwritings, by par amount, in 2010 and 2011, and the top 200 
accounted for almost 100 percent of the underwritings, by par amount, 
in 2010 and 2011. According to data gathered by the MSRB, the top 10 
dealers executed approximately 55 percent of all municipal securities 
transactions reported to the MSRB in 2010 and 2011. The top 50 dealers 
executed approximately 80 percent of all such transactions in 2010 and 
2011, and the top 200 dealers executed approximately 96 percent of all 
such transactions. By par amount, the top 200 dealers executed 
approximately 98 percent of all municipal securities transactions 
reported to the MSRB in 2010 and 2011. The remaining approximately 
1,600 firms are less active in the municipal securities market, engage 
solely in the sale of interests in 529 College Savings Plans, or effect 
municipal securities transactions primarily as an accommodation to 
their customers. Generally, these firms are not engaged in financial 
advisory activities or municipal securities underwriting, research, or 
trading. They, therefore, do not pose systemic risk to the market in 
these areas.
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    \3\ All 2011 figures are through September 2011. Underwriting 
statistics are provided by Thomson Reuters.
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    With input from the MSRB, consistent with Section 15B(b)(4) of the 
Exchange Act, FINRA is enhancing its risk assessment approach to rank 
dealers by certain risk factors, as well as by size and scope of 
business, to determine their examination cycle frequencies, which under 
the proposed rule change would range from one to four years, rather 
than every two years as currently prescribed by Rule G-16. It is 
anticipated that, based on the analysis of the various identified risks 
and related factors, those firms that represent higher risks, as well 
as firms that pose a systemic threat based on the scope and scale of 
their underlying municipal securities activities, would be examined on 
an annual basis. Other firms would be examined less frequently, every 
two to four years, depending on the risk ranking and size of their 
municipal securities business and the firm's overall business model. At 
a minimum, all firms would be examined at least once every four 
calendar years. Cycle examination frequencies for dealers would be re-
assessed at least on an annual basis. FINRA would continue to conduct 
off-site surveillance of municipal securities activity and ``cause'' 
examinations as needed. ``Cause'' examinations are event-driven and 
typically initiated as a result of customer complaints, regulatory 
tips, and other information sources identified by FINRA via its 
regulatory oversight process.
    The MSRB believes that using quantitative and qualitative criteria 
to rank dealers by appropriately identified risk measures and size no 
less frequently than on an annual basis provides better protection for 
investors, municipal entities, and other market participants, since 
FINRA's resources will be focused on those firms that pose the greatest 
risk to investors, municipal entities and the market. Such firms will 
be subject to in-depth examinations tailored to the specific municipal 
securities activities they conduct.
    Finally, the MSRB has proposed a rule change requiring dealers that 
are FINRA members to retain certain records for four years, rather than 
for three years, under Rule G-9 in order to ensure that the records are 
available at

[[Page 67505]]

those firms that are examined every four calendar years.
2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(E) of the Exchange Act, which provides that the MSRB's rules 
shall:

provide for the periodic examination in accordance with subsection 
(c)(7) of municipal securities brokers, municipal securities 
dealers, and municipal advisors to determine compliance with 
applicable provisions of this title, the rules and regulations 
thereunder, and the rules of the Board. Such rules shall specify the 
minimum scope and frequency of such examinations and shall be 
designed to avoid any unnecessary regulatory duplication or undue 
regulatory burdens for any such municipal securities broker, 
municipal securities dealer, or municipal advisor.

    Section 15B(c)(7) of the Exchange Act further provides that 
periodic examinations of dealers shall be conducted by a registered 
securities association, in the case of dealers that are members of such 
association. FINRA is currently the only registered securities 
association.
    The proposed rule change will accomplish this mandate by providing 
FINRA with the flexibility to establish a risk-based examination 
program for municipal securities that is consistent with its other 
examination programs. By conforming the municipal securities 
examination program to FINRA's other examination programs and 
integrating the municipal securities examination program into FINRA's 
overall examination protocol, the new program should reduce regulatory 
duplication and undue burden on dealers that are FINRA members by 
fostering an integrated regulatory examination protocol and targeting 
those firms for more frequent examinations that pose a greater risk to 
investors and other market participants and have a greater impact on 
the marketplace.
    With input from the MSRB, consistent with Section 15B(b)(4) of the 
Exchange Act, FINRA is enhancing its risk assessment approach to rank 
dealers by certain risk factors, as well as by size and scope of 
business, to determine their examination cycle frequencies, which under 
the proposed rule change would range from one to four years, rather 
than every two years as currently prescribed by Rule G-16. It is 
anticipated that, based on the analysis of the various identified risks 
and related factors, those firms that represent higher risks, as well 
as firms that pose a systemic threat based on the scope and scale of 
their underlying municipal securities activities, would be examined on 
an annual basis. Other firms would be examined less frequently, every 
two to four years, depending on the risk ranking and size of their 
municipal securities business and the firm's overall business model. At 
a minimum, all firms would be examined at least once every four 
calendar years. Cycle examination frequencies for dealers would be re-
assessed at least on an annual basis. FINRA would continue to conduct 
off-site surveillance of municipal securities activity and ``cause'' 
examinations as needed. ``Cause'' examinations are event-driven and 
typically initiated as a result of customer complaints, regulatory 
tips, and other information sources identified by FINRA via its 
regulatory oversight process.
    The MSRB believes that using quantitative and qualitative criteria 
to rank dealers by appropriately identified risk measures and size no 
less frequently than on an annual basis provides better protection for 
investors, municipal entities, and other market participants, since 
FINRA's resources will be focused on those firms that pose the greatest 
risk to investors, municipal entities and the market. Such firms will 
be subject to in-depth examinations tailored to the specific municipal 
securities activities they conduct. The risk-based examination protocol 
is consistent with Sections 15B(b)(2)(E) and 15B(c)(7) of the Exchange 
Act in that the examinations by FINRA would be tailored to each 
individual regulated entity to determine compliance with MSRB rules and 
applicable federal law and would be designed to avoid any unnecessary 
regulatory duplication or undue regulatory burdens.

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

    The Board does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The change would 
provide FINRA with greater flexibility to carry out the periodic 
compliance examinations of its members mandated by Sections 
15B(b)(2)(E) and 15B(c)(7) of the Exchange Act, in accordance with a 
risk-based approach that is based on the risk posed by regulated 
entities to investors and the marketplace and the impact of the 
regulated entity's municipal securities business on the marketplace. 
All such regulated entities that pose greater risk and have a higher 
impact on the municipal securities market would be inspected more 
frequently, and all such regulated entities that pose less risk to the 
market and have a lower impact on the municipal securities market would 
be inspected less frequently. All dealers that are members of FINRA 
would be examined at least every four calendar years.

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

    Written comments were neither solicited nor received on the 
proposed rule change.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MSRB-2011-19 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-2011-19. 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

[[Page 67506]]

amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the MSRB's 
offices.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-MSRB-2011-19 
and should be submitted on or before November 22, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28243 Filed 10-31-11; 8:45 am]
BILLING CODE 8011-01-P