[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79738-79741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32754]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65992, File No. SR-MSRB-2011-19]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, Consisting of Amendments to Rule G-16, on Periodic 
Compliance Examination, and Rule G-9, on Preservation of Records

 December 16, 2011.

I. Introduction

    On October 13, 2011, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change consisting of amendments to Rule 
G-16, on periodic compliance examination, and Rule G-9, on preservation 
of records. The proposed rule change was published for comment in the 
Federal Register on November 1, 2011.\3\ The Commission received two 
comment letters regarding the proposed rule change and the MSRB's 
response to those comment letters.\4\ On December 12, 2011, the MSRB 
filed with the Commission, pursuant to Section 19(b)(1) of the Exchange 
Act \5\ and Rule 19b-4 thereunder,\6\ Partial Amendment No. 1 
(``Amendment No. 1'') to the proposed rule change.\7\ The Commission is 
publishing this notice and order to solicit comment on Amendment No. 1 
and to approve the proposed rule change, as modified by Amendment No. 
1, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 65631 (October 26, 
2011), 76 FR 67503 (November 1, 2011) (the ``Commission's Notice'').
    \4\ See letter from David L. Cohen, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated November 21, 2011 (``SIFMA Letter''); 
letter from Tamara K. Salmon, Associate General Counsel, Investment 
Company Institute (``ICI''), dated November 22, 2011 (``ICI 
Letter''); and letter from Lawrence P. Sandor, Senior Associate 
General Counsel, Municipal Securities Rulemaking Board (``MSRB''), 
dated December 12, 2011 (``MSRB Letter'').
    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ Amendment No. 1 to the proposed rule change requested that 
the Commission approve the amendment to Rule G-9 with an effective 
date that is six months from the date of the approval order. The 
text of Amendment No. 1 and the MSRB Letter are available on the 
MSRB's Web site at http://www.msrb.org, at the principal office of 
the MSRB, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change, As Modified by Amendment 
No. 1 to the Proposed Rule Change

    Pursuant to Section 15B(b)(2)(E) of the Exchange Act,\8\ MSRB rules 
must provide for the periodic examination of municipal securities 
brokers, municipal securities dealers, or municipal advisors 
(``regulated entities'') to determine 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o(b)(2)(E).
---------------------------------------------------------------------------

    Section 15B(c)(7) of the Exchange Act \9\ 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o(c)(7).
---------------------------------------------------------------------------

    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

[[Page 79739]]

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.
    The municipal securities business has also 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.\10\ 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.
---------------------------------------------------------------------------

    \10\ All 2011 figures are through September 2011. Underwriting 
statistics are provided by Thomson Reuters.
---------------------------------------------------------------------------

    With input from the MSRB, consistent with Section 15B(b)(4) of the 
Exchange Act,\11\ 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o(b)(4).
---------------------------------------------------------------------------

    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 is also proposing to change MSRB Rule G-9 to 
require dealers that are FINRA members to retain certain records for 
four years, rather than for three years, in order to ensure that the 
records are available at those firms that are examined every four 
calendar years.

III. Discussion of Comments and MSRB's Response

    As previously noted, the Commission received two comment letters on 
the original proposed rule change.\12\ Both commenters expressed 
support for the proposed amendments to Rule G-16, which would allow 
FINRA and the MSRB to establish a risk-based compliance program 
consistent with FINRA's requirement for cycle examinations of all other 
FINRA members. One commenter, however, did not support the proposed 
amendments to Rule G-9, which would extend certain recordkeeping 
requirements from three to four years, stating that such change is not 
warranted to support the proposed changes to the frequency of the cycle 
examinations.\13\
---------------------------------------------------------------------------

    \12\ See supra note 4.
    \13\ See SIFMA Letter.
---------------------------------------------------------------------------

    ICI stated that it supported the proposed revisions because they 
should result in a more efficient examination process without 
diminishing the effectiveness of the MSRB's oversight. ICI further 
stated that changes in technology and in the municipal securities 
business provide the MSRB greater access to information on registrants, 
thereby reducing the need for frequent examinations of registrants. 
Finally, ICI stated that in instances where there is cause for the MSRB 
to conduct more frequent examinations of a particular registrant, its 
ability to do so is not impeded by the revisions.
    Although SIFMA believes that the current examination cycle appears 
to be working adequately, SIFMA supports the proposed rule change. 
SIFMA stated that the proposed rule change would facilitate the 
modernization of the examination process for dealers and 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, other 
market participants, and the municipal securities market. SIFMA further 
stated, however, that it believes that such identified factors should 
be specifically enumerated by FINRA and the MSRB after further 
discussions with interested market participants. SIFMA concluded that 
changes to a dealer's examination cycle frequency should not be 
implemented until this process is complete. Additionally, SIFMA stated 
that since the voluminous real-time transaction data received by the 
MSRB on a daily basis has allowed FINRA to develop robust automated 
surveillance reviews of municipal securities transactions, it is 
critical that such data be leveraged to maximize the efficiency of on-
site visits.
    The MSRB noted that FINRA is the designated examination and 
enforcement authority for its members that are MSRB registered dealers. 
The MSRB further noted that although the MSRB provides advice and 
consultation on examination and enforcement matters, the authority for 
such examinations rests solely with FINRA for its member firms. While 
the MSRB has generally described the considerations in determining the

[[Page 79740]]

frequency of a dealer's examinations, such as the size and scope of its 
business, the MSRB believes it important to maintain confidentiality of 
the specific risk factors and not make them a matter of negotiation. 
Moreover, the MSRB stated that the risk factors are dynamic, and 
additional risk factors may be utilized as new risks emerge and 
existing risks are mitigated by market conditions or business 
practices. The MSRB believes that it would not be in the public 
interest to refrain from changing a dealer's examination cycle until 
there is disclosure and consultation with market participants. The MSRB 
stated that it agrees that transaction reporting by dealers provides an 
important source of information regarding dealer activity in the 
municipal securities market, and that the information is, and will 
continue to be, of value in surveillance and examinations of dealers.
    With respect to the proposed changes to MSRB Rule G-9, SIFMA stated 
that the current three year/six year/and lifetime record-keeping 
categories as set forth in Rule G-9 are sufficient and have long been 
an industry standard. SIFMA believes that the proposed four-year 
record-keeping requirement is unnecessarily burdensome for member 
firms, and that the MSRB's only stated reasoning for increasing the 
retention period for certain records is to mirror the proposed four-
year examination cycle. SIFMA further stated that, in order to function 
efficiently, dealers should be subject to consistent record-keeping 
requirements across product lines. SIFMA also stated that satisfying 
these regulations requires dealers to implement procedures, technology 
and training and that a well-established standard such as the current 
one should not be changed without a more comprehensive discussion of 
all related issues, including cost estimates compared to anticipated 
benefits.
    In addition, SIFMA stated that real-time transaction data is 
available for review on a daily basis. SIFMA noted that when a periodic 
examination is conducted, FINRA reviews a sampling of transactions 
occurring during the period of review. SIFMA stated that the 
substantial costs of requiring additional record-keeping for all 
dealers (especially those dealers that are examined on an annual or 
semi-annual basis) so that certain records would be available to review 
at those dealers that are examined in year four of the proposed four-
year review cycle (i.e., dealers with the smallest footprint or risk 
profile) should be weighed against the nominal benefit of allowing 
FINRA to review a few records from ``year one'' for that subset of 
dealers.
    The MSRB stated that the proposed rule change is not a significant 
departure from current record-keeping standards and will not impose an 
unnecessary burden on dealers that are already subject to a variety of 
different record retention requirements. Rule G-9 provides that, for 
dealers that are FINRA members, certain records must be retained for 
three years, while other records must be retained for six years or for 
the life of the enterprise. The proposal would extend the record 
retention obligation for certain records by one year. The MSRB stated 
that the retention of these records for one additional year is 
necessary to accommodate the four-year examination cycle for certain 
FINRA-member dealers and serves a clear regulatory purpose.
    SIFMA also noted that, to their knowledge, the MSRB has not 
conducted a cost-benefit analysis regarding the impact of the proposed 
changes to Rule G-9. SIFMA requested that such cost-benefit analysis be 
conducted prior to implementing the proposal. In response, the MSRB 
stated that it does not believe that the proposal to retain certain 
records for an additional year will impose an undue burden on dealers 
or require substantial changes to their systems or procedures, since 
the rule would merely require that the records be retained for one 
additional year. Additionally, given the limited nature of the change 
proposed, a cost-benefit analysis is unwarranted, since the records are 
already being retained by dealers and any incremental storage cost and 
one-time transitional burden of modifying policies and systems should 
be relatively minimal for firms already in compliance with the existing 
MSRB and FINRA record-keeping rules, with such costs clearly outweighed 
by the necessity to accommodate the four-year examination cycle for a 
significant number of FINRA members.
    SIFMA requested that, if the changes to Rule G-9 are approved, the 
effective date be at least one year from the date of the Commission's 
approval, in order to provide dealers with an opportunity to modify 
their policies and systems to comply with the new retention schedule. 
The MSRB believes that an extended effective date for Rule G-9 is 
appropriate but does not believe that a full year is necessary to 
comply with a new record retention period. Amendment No. 1 would 
partially amend the original proposed rule change by requesting that 
the Commission approve the amendments to Rule G-9 with an effective 
date that is six months from the date of the Commission's approval 
order. The MSRB believes that six months is an appropriate period to 
permit dealers to modify their policies and systems to comply with the 
rule change.

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's response to the comment 
letters and finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder applicable to the 
MSRB.\14\ The Commission believes that the proposed rule change is 
consistent with the provisions of Section 15B(b)(2)(E) of the Exchange 
Act,\15\ which authorizes the MSRB to provide for the periodic 
examination, in accordance with Section 15B(c)(7) of the Exchange 
Act,\16\ of municipal securities brokers, municipal securities dealers, 
and municipal advisors to determine compliance with the applicable 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the MSRB. Section 15B(b)(2)(E) of the Exchange Act \17\ also 
provides that the rules of the Board shall specify the minimum scope 
and frequency of such examinations and shall be designed to avoid 
unnecessary regulatory duplication or undue regulatory burdens for any 
such municipal securities broker, municipal securities dealer, or 
municipal advisor.
---------------------------------------------------------------------------

    \14\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78o(b)(2)(E).
    \16\ 15 U.S.C. 78o(c)(7).
    \17\ 15 U.S.C. 78o(b)(2)(E).
---------------------------------------------------------------------------

    The Commission also believes that the proposed rule change is 
consistent with the provisions of Section 15B(b)(2)(G) of the Exchange 
Act \18\ which authorizes the MSRB to prescribe records to be made and 
kept by municipal securities brokers, municipal securities dealers, and 
municipal advisors and the periods for which such records shall be 
preserved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78o(b)(2)(G).
---------------------------------------------------------------------------

    The proposed rule change will more closely align the records 
required to be made and kept by municipal securities brokers, municipal 
securities dealers and municipal advisors pursuant to Rule G-9 with the 
records already required to be made and kept by FINRA, thereby reducing 
the administrative burden on such municipal securities

[[Page 79741]]

brokers, municipal securities dealers and municipal advisors.
    The Commission believes that the MSRB has adequately responded to 
the concerns expressed in the comment letters. The Commission agrees 
with the MSRB that the requirement to retain certain records for an 
additional year will not impose an undue burden on municipal securities 
brokers, municipal securities dealers and municipal advisors or require 
substantial changes to their systems or procedures because the records 
are already being retained. Further, the Commission agrees with the 
MSRB that any incremental cost and burden of modifying policies and 
procedures should be minimal, with such cost and burden outweighed by 
the necessity to accommodate the four-year examination cycle for a 
significant number of FINRA members.

V. Order Granting Accelerated Approval of Proposed Rule Change

    Pursuant to Section 19(b)(2) of the Exchange Act,\19\ the 
Commission may not approve any proposed rule change, or amendment 
thereto, prior to the 30th day after the date of publication of notice 
of the filing thereof, unless the Commission finds good cause for so 
doing and publishes its reasons for so finding. The Commission hereby 
finds good cause for approving the proposed rule change, as modified by 
Amendment No. 1, before the 30th day after the date of publication of 
notice of filing thereof in the Federal Register. Amendment No. 1 would 
partially amend the original proposed rule change by requesting that 
the Commission approve the amendments to Rule G-9 with an effective 
date that is six months from the date of the Commission approval order. 
Originally, the proposed rule change to Rule G-9 would have become 
effective as of the date of the Commission approval order. While the 
MSRB does believe it appropriate to provide dealers with time to revise 
their policies and procedures, systems and controls to accommodate the 
longer retention period, the MSRB believes that such changes can be 
accomplished in a shorter timeframe. The MSRB stated that the modest 
extension of the retention period for certain records does not warrant 
such a delayed effective date as requested by SIFMA. Rather, the MSRB 
believes that in light of the clear importance of preserving records 
for the entire period between FINRA examination cycles, and the modest 
increase in the current retention period, six months is an appropriate 
period to permit dealers to modify their policies and systems to comply 
with the rule change. The Commission does not believe that Amendment 
No. 1 significantly alters the proposal and that the six-month 
extension in the effective date of the amendments to Rule G-9 is 
reasonable. The Commission believes that Amendment No. 1 is consistent 
with the proposal's purpose and raises no new significant issues. 
Accordingly, pursuant to Section 19(b)(2) of the Exchange Act,\20\ the 
Commission finds good cause to approve the proposed rule change, as 
amended, on an accelerated basis.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 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 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-2011-19 and should be 
submitted on or before January 12, 2012.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\21\ that the proposed rule change (SR-MSRB-2011-19), as 
modified by Amendment No. 1, be, and it hereby is, approved. The 
proposed amendment to Rule G-16 will become effective as of the date of 
this approval order and the proposed amendment to Rule G-9 will become 
effective six months after the date of this approval order.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32754 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P