[Federal Register Volume 87, Number 90 (Tuesday, May 10, 2022)]
[Notices]
[Pages 28084-28097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-09960]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94850; File No. SR-MSRB-2022-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Consisting of 
Amendments to MSRB Rule G-19 Regarding Regulation Best Interest for 
Certain Municipal Securities Activities of Bank Dealers and MSRB Rule 
G-48 Regarding Quantitative Suitability for Institutional Sophisticated 
Municipal Market Professionals

May 4, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on April 29, 2022, the Municipal Securities 
Rulemaking Board (``MSRB or ``Board'') 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 filed with the Commission a proposed rule change 
consisting of amendments to: (i) MSRB Rule G-19, on suitability of 
recommendations and transactions, and (ii) MSRB Rule G-48, on 
transactions with sophisticated municipal market professionals 
(``SMMPs'') \3\ (collectively, the ``proposed rule change''). The 
proposed rule change would align MSRB Rule G-19 to the Commission's 
Rule 15l-1 under the Exchange Act (``Regulation Best Interest'') \4\ 
for certain municipal securities activities of bank dealers \5\ (the 
``Best Interest Amendments''). In addition, the proposed rule change 
would amend MSRB Rule G-48 to modify the quantitative suitability 
obligation of brokers, dealers, and municipal securities dealers 
(collectively, ``dealers'' and, individually, each a ``dealer'') by 
eliminating the quantitative suitability obligation for recommendations 
in circumstances where a dealer does not have actual control or de 
facto control over the account of an Institutional SMMP (the 
``Institutional SMMP Amendment'').\6\
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    \3\ Under MSRB Rule D-15, on the term sophisticated municipal 
market professional, ``[t]he term `sophisticated municipal market 
professional' or `SMMP' is generally defined by three essential 
requirements: the nature of the customer; a determination of 
sophistication by the broker, dealer or municipal securities dealer 
[ ]; and an affirmation by the customer; as specified [therein].'' 
See MSRB Rule D-15. See also related discussion under Background and 
Purpose of the Institutional SMMP Amendment--Background on MSRB Rule 
D-15 and SMMP Affirmation Requirements near note 37 infra.
    \4\ 17 CFR 240.15l-1; see also Exchange Act Release No. 86031 
(June 5, 2019), 84 FR 33318 (July 12, 2019) (File No. S7-07-18) 
(``Regulation Best Interest Adopting Release'').
    \5\ Consistent with MSRB Rule D-8, on the term bank dealer, the 
term ``bank dealer'' as used herein means ``a municipal securities 
dealer which is a bank or a separately identifiable department or 
division of a bank as defined in rule G-1 of the Board.'' Such 
references in this proposed rule shall be collectively to ``Bank 
Dealers'' or individually to a ``Bank Dealer.'' See also MSRB Rule 
D-11, on the term associated persons (indicating that the term bank 
dealer as used in MSRB rules shall generally refer to the associated 
persons of a bank dealer unless the context otherwise requires or a 
rule of the Board otherwise specifically provides).
    \6\ The term ``Institutional SMMP'' is used here as defined 
below under the discussion Background and Purpose of the 
Institutional SMMP Amendment. The Institutional SMMP definition used 
herein would not encompass any natural person customers who qualify 
as ``retail customers'' under the definitions of Regulation Best 
Interest, such as certain natural persons with significant total 
assets, who might otherwise meet the status requirements of an SMMP. 
See note 20 infra and related discussion under Background and 
Purpose of the Institutional SMMP Amendment.
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    Subject to Commission approval, the respective compliance dates for 
the amendments to MSRB rules included in the proposed rule change will 
be announced in a regulatory notice published by the MSRB on its 
website within 30 days of the publication of the Commission's approval 
order in the Federal Register. Such compliance date for the Best 
Interest Amendments will be no earlier than one year from the MSRB's 
publication of the regulatory notice announcing it.\7\ Such compliance 
date for the Institutional SMMP Amendment will be no earlier than 30 
days from the MSRB's publication of the regulatory notice announcing 
it.
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    \7\ This one-year minimum timeframe is roughly equivalent to the 
timeframe provided by the Commission when it adopted Regulation Best 
Interest. See Regulation Best Interest Adopting Release, 84 FR at 
33318, 33400 (setting an effective date of September 10, 2019 and a 
compliance date of June 30, 2020).
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    The text of the proposed rule change is available on the MSRB's 
website at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2022-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
    The proposed rule change consists of the Best Interest Amendments 
to MSRB Rule G-19 and the proposed Institutional SMMP Amendment to MSRB 
Rule G-48 for the respective purposes further described below.
Background and Purpose of the Best Interest Amendments
    The proposed Best Interest Amendments would amend MSRB Rule G-19 to 
extend the obligations of Regulation Best Interest to Bank Dealers when 
making recommendations to retail customers of municipal securities 
transactions or investment strategies involving municipal securities 
(collectively, ``retail municipal recommendations'' and, individually, 
each a ``retail municipal recommendation''). The Best Interest 
Amendments are intended to improve investor protection in the municipal 
securities market by ensuring that retail customers are afforded 
investor protections under Regulation Best Interest, regardless of 
whether a retail municipal recommendation received by a retail customer 
is made by a Broker-Dealer or a Bank Dealer.\8\
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    \8\ The term ``Broker-Dealer'' is used here as defined below 
under the following discussion Background on the Commission's 
Regulation Best Interest.

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[[Page 28085]]

Background on the Commission's Regulation Best Interest
    On June 5, 2019, the SEC adopted Regulation Best Interest, which 
established a new standard of conduct for broker-dealers, and the 
natural persons who are associated persons of such broker-dealers 
(collectively, ``Broker-Dealers'' and, individually, each a ``Broker-
Dealer''), when making a recommendation to a retail customer of any 
securities transaction or investment strategy involving securities.\9\ 
As defined in Regulation Best Interest, the term ``retail customer'' 
generally refers to any natural person, or the legal representative of 
such person, who receives and uses a recommendation from a Broker-
Dealer primarily for personal, family, or household purposes.\10\ 
Regulation Best Interest enhanced the Broker-Dealer standard of conduct 
beyond existing suitability obligations, such as those required by MSRB 
Rule G-19, on suitability, for such retail customers and aligned the 
applicable standard of conduct with the reasonable expectations of 
retail customers.\11\ In this regard, Regulation Best Interest imposes 
the following ``general obligation'' on Broker-Dealers, stating a 
broker, dealer, or a natural person who is an associated person of a 
broker or dealer, when making a recommendation of any securities 
transaction or investment strategy involving securities (including 
account recommendations) to a retail customer, shall act in the best 
interest of the retail customer at the time the recommendation is made, 
without placing the financial or other interest of the broker, dealer, 
or natural person who is an associated person of a broker or dealer 
making the recommendation ahead of the interest of the retail 
customer.\12\
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    \9\ See, generally, Regulation Best Interest Adopting Release 
(citation at note 4 supra). In response, on May 1, 2020, the MSRB 
filed a proposed rule change with the Commission to harmonize 
Regulation Best Interest with certain MSRB rules applicable to 
related municipal securities activities of Broker-Dealers. See 
Exchange Act Release No. 88828 (May 6, 2020), 85 FR 28082, File No. 
SR-MSRB-2020-02 (hereinafter, the ``Broker-Dealer Harmonization 
Filing''), available at https://msrb.org/-/media/Files/SEC-Filings/2020/MSRB-2020-02-Notice.ashx?. The Commission approved these 
proposed amendments on June 25, 2020. See Exchange Act Release No. 
89154 (June 25, 2020), 85 FR 39613 (July 1, 2020), File No. SR-MSRB-
2020-02, available at https://msrb.org/-/media/Files/SEC-Filings/2020/MSRB-2020-02-Federal-Register.ashx?.
    \10\ 17 CFR 240.15l-1(b)(1) (``Retail customer means a natural 
person, or the legal representative of such natural person, who (i) 
[r]eceives a recommendation of any securities transaction or 
investment strategy involving securities from a broker, dealer, or a 
natural person who is an associated person of a broker or dealer; 
and (ii) [u]ses the recommendation primarily for personal, family, 
or household purposes.'') For discussion of what it means for a 
retail customer to ``use'' a recommendation, see the SEC staff's 
Frequently Asked Questions on Regulation Best Interest, available at 
https://www.sec.gov/tm/faq-regulation-best-interest.
    \11\ Regulation Best Interest Adopting Release, 84 FR at 33319.
    \12\ 17 CFR 240.15l-1(a)(1). Regulation Best Interest provides 
that this general obligation is satisfied only if a Broker-Dealer 
complies with four component obligations: (i) An obligation to make 
certain prescribed disclosures, before or at the time of the 
recommendation, about the recommendation and the relationship 
between the retail customer and the Broker-Dealer (the ``Disclosure 
Obligation'') (see 17 CFR 240.15l-1(a)(2)(i)); (ii) an obligation to 
exercise reasonable diligence, care, and skill in making a 
recommendation (the ``Care Obligation'') (see 17 CFR 240.15l-
1(a)(2)(ii)); (iii) an obligation to establish, maintain, and 
enforce written policies and procedures reasonably designed to 
address conflicts of interest (the ``Conflict-of-Interest 
Obligation'') (see 17 CFR 240.15l-1(a)(2)(iii)); and (iv) an 
obligation to establish, maintain, and enforce written policies and 
procedures reasonably designed to achieve compliance with Regulation 
Best Interest (the ``Compliance Obligation'') (see 17 CFR 240.15l-
1(a)(2)(iv)).
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Discussion of Regulation Best Interest's Current Applicability to Bank 
Dealers
    By its terms, Regulation Best Interest does not apply to retail 
municipal recommendations made by Bank Dealers, because Bank Dealers in 
exempted securities have an exception from Broker-Dealer status under 
the Act and Regulation Best Interest applies only to Broker-Dealers. As 
a result, Bank Dealers presently are not required to comply with 
Regulation Best Interest and, therefore, retail investors may not 
benefit from its enhanced standard of conduct when receiving 
recommendations from Bank Dealers.\13\
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    \13\ See Broker-Dealer Harmonization Filing, 85 FR at 28083, n. 
5 (discussing how Bank Dealers are not subject to Regulation Best 
Interest by the terms of the SEC's rules and indicating the Board's 
intent to issue a request for comment regarding extending the 
requirements of Regulation Best Interest to Bank Dealers). Notably, 
all Bank Dealer recommendations, including retail municipal 
recommendations, are presently subject to the longstanding 
suitability obligations provided by MSRB rules, including MSRB Rule 
G-19 and, when applicable, MSRB Rule G-48.
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Application of Regulation Best Interest to Bank Dealers
    The proposed Best Interest Amendments would amend MSRB Rule G-19 to 
require a Bank Dealer to comply with Regulation Best Interest to the 
same extent as if it were a Broker-Dealer when making a retail 
municipal recommendation. Consequently, a Bank Dealer would have to act 
in the best interest of the retail customer at the time a retail 
municipal recommendation is made, without placing the financial or 
other interests of the Bank Dealer ahead of the interest of the retail 
customer. Correspondingly, the Bank Dealer would have to comply with 
the Commission's component obligations of Regulation Best Interest to 
the same extent as if it were a Broker-Dealer, including Regulation 
Best Interest's Disclosure Obligation,\14\ Care Obligation,\15\ 
Conflict-of-Interest Obligation,\16\ and Compliance Obligation.\17\ 
Under the proposed Best Interest Amendments, the component obligations 
of Regulation Best Interest would apply to those municipal securities 
activities associated with a retail municipal recommendation within the 
overall context of a Bank Dealer business model. The MSRB believes that 
any SEC guidance with respect to the understanding and application of 
Regulation Best Interest would be equally applicable to Bank Dealers.
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    \14\ 17 CFR 240.15l-1(a)(2)(i).
    \15\ 17 CFR 240.15l-1(a)(2)(ii).
    \16\ 17 CFR 240.15l-1(a)(2)(iii).
    \17\ 17 CFR 240.15l-1(a)(2)(iv).
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Application of the Disclosure Obligation to Bank Dealers
    Consistent with Regulation Best Interest's Disclosure Obligation, 
the proposed Best Interest Amendments would require a Bank Dealer, 
prior to or at the time of the retail municipal recommendation, to 
provide to its retail customer, in writing, full and fair disclosure 
of: (a) All material facts relating to the scope and terms of the 
relationship with the retail customer, including: (i) That the Bank 
Dealer is acting as a municipal securities dealer with respect to the 
retail municipal recommendation; (ii) The material fees and costs that 
apply to the retail customer's transactions, holdings, and accounts; 
and (iii) The type and scope of services provided to the retail 
customer, including any material limitations on the securities or 
investment strategies involving securities that may be recommended to 
the retail customer; \18\ and (b) All material facts relating to 
conflicts of interest that are associated with the retail municipal 
recommendation.
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    \18\ For example, if the applicable legal charter of a Bank 
Dealer only permits a Bank Dealer to conduct municipal securities 
activities or, in fact, a Bank Dealer's business model is limited to 
municipal securities activities, then the Bank Dealer generally 
would be required to accurately disclose the fact that it only 
engages in transactions involving municipal securities and, 
therefore, will only make recommendations to a retail customer 
regarding transactions involving municipal securities. See also note 
19 infra (discussing the Compliance Obligation pursuant to the Best 
Interest Amendments for Bank Dealers who do not engage in any retail 
municipal recommendations).

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[[Page 28086]]

Application of the Care Obligation to Bank Dealers
    Consistent with Regulation Best Interest's Care Obligation, the 
proposed Best Interest Amendments would require a Bank Dealer to 
exercise reasonable diligence, care, and skill to: (a) Understand the 
potential risks, rewards, and costs associated with any retail 
municipal recommendation, and have a reasonable basis to believe that a 
retail municipal recommendation could be in the best interest of at 
least some retail customers; (b) Have a reasonable basis to believe 
that the retail municipal recommendation is in the best interest of a 
particular retail customer, based on that retail customer's investment 
profile and the potential risks, rewards, and costs associated with the 
recommendation, and does not place the financial or other interest of 
the Bank Dealer ahead of the interest of the retail customer; (c) Have 
a reasonable basis to believe that a series of retail municipal 
recommendations, even if in the retail customer's best interest when 
viewed in isolation, is not excessive and is in the retail customer's 
best interest when taken together in light of the retail customer's 
investment profile and does not place the financial or other interest 
of the Bank Dealer ahead of the interest of the retail customer.
Application of the Conflict-of-Interest Obligation to Bank Dealers
    Consistent with Regulation Best Interest's Conflict-of-Interest 
Obligation, the proposed Best Interest Amendments would require a Bank 
Dealer to establish, maintain, and enforce written policies and 
procedures reasonably designed to: (a) Identify and at a minimum 
disclose, in accordance with its Disclosure Obligation, or eliminate, 
all conflicts of interest associated with such retail municipal 
recommendations; (b) Identify and mitigate any conflicts of interest 
associated with such retail municipal recommendations that create an 
incentive for a natural person who is an associated person of the Bank 
Dealer to place the interests of the Bank Dealer or such associated 
person ahead of the interest of the retail customer; (c)(i) Identify 
and disclose any material limitations placed on the securities or 
investment strategies involving securities that may be recommended to a 
retail customer and any conflicts of interest associated with such 
limitations, in accordance with its Disclosure Obligation, and (ii) 
Prevent such limitations and associated conflicts of interest from 
causing the Bank Dealer to make retail municipal recommendations that 
place the interest of the Bank Dealer ahead of the interest of the 
retail customer; and (d) Identify and eliminate any sales contests, 
sales quotas, bonuses, and non-cash compensation that are based on the 
sales of specific municipal securities or specific types of municipal 
securities within a limited period of time.
Application of the Compliance Obligation to Bank Dealers
    Consistent with Regulation Best Interest's Compliance Obligation, 
the proposed Best Interest Amendments would require a Bank Dealer to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to achieve compliance with Regulation Best 
Interest.\19\
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    \19\ If a Bank Dealer's business model is such that it and its 
associated persons are not permitted to make any retail municipal 
recommendations, then a Bank Dealer may opt not to establish 
policies and procedures outlining the affirmative regulatory 
obligations pursuant to the Disclosure Obligation, Care Obligation, 
and Conflict of Interest Obligation. However, it would be prudent 
for a Bank Dealer to have policies and procedures that make clear 
that, prior to permitting the making of any such retail municipal 
recommendations, the Bank Dealer would need to establish policies 
and procedures reasonably designed to ensure compliance with the 
Best Interest Amendments to MSRB Rule G-19.
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Purpose and Intent of the Best Interest Amendments
    The MSRB is proposing the Best Interest Amendments to MSRB Rule G-
19 for purposes of enhancing the standard of investor protection in the 
municipal securities market and enhancing fairness and efficiency in 
the municipal securities market by promoting regulatory parity among 
Bank Dealers and Broker-Dealers. Specific to enhancing the standard of 
investor protection, the MSRB believes that all retail customers 
receiving a retail municipal recommendation should benefit from the 
enhanced investor protections afforded by Regulation Best Interest, 
regardless of whether such a retail customer is a customer of a Broker-
Dealer or a Bank Dealer. Currently, retail customers of Bank Dealers 
are not afforded the protections of Regulation Best Interest when 
receiving a retail municipal recommendation from a Bank Dealer. The 
proposed Best Interest Amendments would require a Bank Dealer to comply 
with the enhanced standard of conduct required by Regulation Best 
Interest and, thereby, improve overall investor protection in the 
municipal securities market.
    Specific to promoting regulatory parity, the MSRB believes that the 
proposed Best Interest Amendments would establish a uniform regulatory 
standard in the municipal securities market by requiring the same 
standard of conduct for Bank Dealers and Broker-Dealers when making 
retail municipal recommendations. This uniform standard would enhance 
the fairness and efficiency of the municipal securities market by 
ensuring Bank Dealers have regulatory obligations and burdens when 
engaging in retail municipal recommendations that are equivalent to the 
regulatory obligations and burdens of Broker-Dealers when engaging in 
the same municipal securities activities. This uniformity would better 
ensure that Bank Dealers do not have a competitive advantage in the 
municipal securities market by operation of a less burdensome 
regulatory standard of conduct and, thereby, mitigate the potential for 
regulatory arbitrage.
Background and Purpose of the Institutional SMMP Amendment
    The proposed Institutional SMMP Amendment would amend MSRB Rule G-
48 to modify the current obligation to perform a quantitative 
suitability analysis for recommendations where the dealer does not have 
actual control or de facto control over the account of an SMMP who is 
not a retail customer under Regulation Best Interest (collectively, 
``Institutional SMMPs'' and, individually, each an ``Institutional 
SMMP'').\20\
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    \20\ See supra note 10 for the applicable definition of ``retail 
customer'' and related citation. Any customer meeting such 
definition of retail customer pursuant to Regulation Best Interest 
would not be considered an Institutional SMMP for the purposes of 
the proposed Institutional SMMP Amendment and its modification to 
MSRB Rule G-48. For purposes of MSRB rules, such a customer meeting 
the definition of a ``retail customer'' would receive the 
protections afforded by Regulation Best Interest.
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    Similar to the reduced customer-specific suitability obligations 
currently afforded to Institutional SMMPs under MSRB Rule G-48(c), the 
MSRB believes that dealers transacting with Institutional SMMPs should 
have similarly reduced quantitative-suitability obligations in 
instances where the dealer does not have actual control or de facto 
control over the account of an Institutional SMMP. This modification 
would effectively revert the quantitative suitability standard for 
Institutional SMMPs back to the longstanding standard that was in place 
under MSRB rules prior to June 30, 2020.\21\ The proposed Institutional

[[Page 28087]]

SMMP Amendment is intended to improve the efficiency of the municipal 
securities market without eroding investor protection by aligning the 
compliance burden associated with certain recommendations made by 
dealers to the reasonable expectations and capabilities of 
Institutional SMMPs--who by their nature are more sophisticated, non-
natural-person customers and must affirmatively indicate their capacity 
to (i) exercise independent judgment and (ii) access material 
information.\22\
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    \21\ See Broker-Dealer Harmonization Filing, 85 FR at 28082, n. 
4. The MSRB notes that it has had a long held prohibition against 
``churning,'' and the MSRB formally ``recast'' this prohibition as 
quantitative suitability through an amendment to MSRB Rule G-19 
approved by the SEC in 2014. See Exchange Act Release No. 71665 
(Mar. 7, 2014), 79 FR 2432 (Mar. 13, 2014), File No. SR-MSRB-2013-07 
(discussing the then-existing MSRB prohibition on churning and a 
proposed rule change to recast this prohibition using the phrase 
``quantitative suitability''), available at http://www.msrb.org/~/
media/Files/SEC-Filings/2013/MSRB-2013-07-Fed-Reg-
Approval.ashx?la=en&hash=AEDA0B5509630E25473E9F6F3A3F9C34.
    \22\ See MSRB Rule G-48(c). See also related discussion infra 
under Background and Purpose of the Institutional SMMP Amendment--
Background on MSRB Rule D-15 and SMMP Affirmation Requirements.
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Background on MSRB Rule G-19's Quantitative Suitability Requirements
    MSRB Rule G-19 sets the MSRB's baseline investor protection 
standards regarding the suitability of recommendations made by dealers 
to their customers of purchases, sales, or exchanges of municipal 
securities that are not subject to Regulation Best Interest. Among 
other requirements, Supplementary Material .05 of MSRB Rule G-19 
enumerates three components of a dealer's suitability analysis when 
recommending a transaction or investment strategy involving a municipal 
security or municipal securities to a non-retail customer (i.e., a 
recommendation that is not subject to Regulation Best Interest).\23\ As 
further defined in the text of the rule, MSRB Rule G-19 provides that a 
dealer's suitability obligation is composed of (i) reasonable-basis 
suitability, (ii) customer-specific suitability, and (iii) quantitative 
suitability. Most relevant to the proposed Institutional SMMP Amendment 
of this proposed rule change, quantitative suitability requires a 
dealer to have a reasonable basis for believing that a series of 
recommended transactions, even if suitable when viewed in isolation, 
are not excessive and unsuitable for the customer when taken together 
in light of the customer's investment profile, as delineated in MSRB 
Rule G-19.\24\ No single test defines excessive activity, but factors 
such as the turnover rate, the cost-equity ratio, and the use of in-
and-out trading in a customer's account may provide a basis for a 
finding that a dealer has violated the quantitative suitability 
obligation.\25\
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    \23\ See the Broker-Dealer Harmonization Filing, 85 FR at 28084. 
The Broker-Dealer Harmonization Filing amended MSRB Rule G-19 to 
provide that the rule does not apply to recommendations subject to 
Regulation Best Interest.
    \24\ MSRB Rule G-19, Supplementary Material .05(c).
    \25\ Id.
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    Pursuant to the amendments effectuated by the Broker-Dealer 
Harmonization Filing, discussed above and effective as of June 30, 
2020, the quantitative suitability obligation of MSRB Rule G-19 no 
longer incorporates an element of control in relation to a customer's 
account.\26\As a result, dealers are currently obligated to conduct a 
quantitative suitability analysis under MSRB Rule G-19 when making 
recommendations to Institutional SMMPs, even in instances where the 
dealer does not have actual control or de facto control over the 
account. The obligation applies notwithstanding the fact that 
Institutional SMMPs self-identify under MSRB Rule G-48 and MSRB Rule D-
15 as having the willingness and requisite investment sophistication 
to, for example, independently evaluate the recommendations of a dealer 
and the quality of a dealer's execution, as further discussed 
below.\27\
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    \26\ In other words, as of June 30, 2020, if the obligations of 
MSRB Rule G-19 attach to a dealer's recommendation, then the 
investor protections regarding quantitative suitability apply 
regardless of whether the dealer making the recommendation exercises 
any actual control or de facto control over the customer's account. 
The Broker-Dealer Harmonization Filing amended this language of 
Supplementary Material .05(c) to eliminate such control 
requirements, effectively extending the requirements of quantitative 
suitability to any customer account. See Broker-Dealer Harmonization 
Filing, 85 FR at 28084. June 30, 2020 was the compliance date for 
the amendments enacted by the Broker-Dealer Harmonization Filing. 
See Broker-Dealer Harmonization Filing, 85 FR at 28082, n. 4. 
Pursuant to the Broker-Dealer Harmonization Filing, the MSRB also 
notes that this quantitative suitability obligation applies 
uniformly to any dealer (i.e., the same regulatory obligations apply 
to both Broker-Dealers and Bank Dealers).
    \27\ See MSRB Rule D-15(c) (requiring Institutional SMMPs to 
``affirmatively indicate,'' among other things, that it is 
exercising independent judgment in evaluating (A) the 
recommendations of the dealer and (B) the quality of execution of 
the customer's transactions by the dealer).
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Background on MSRB Rule G-48 and Modified Regulatory Obligations
    MSRB Rule G-48 provides for modified dealer regulatory obligations 
under MSRB rules when dealing with certain customers that meet the 
definition of a Sophisticated Municipal Market Participant \28\ (i.e., 
an SMMP). More specifically, when transacting with an SMMP customer, 
Rule G-48 modifies aspects of a dealer's baseline regulatory 
obligations in terms of: (i) Time of trade disclosures,\29\ (ii) 
transaction pricing,\30\ (iii) bona fide quotations,\31\ (iv) best 
execution,\32\ and (vi) suitability.\33\ The modified regulatory 
obligations afforded to SMMPs under MSRB rules are intended to account 
for the distinct capabilities of certain sophisticated, non-retail 
customers and the varied types of dealer-customer relationships 
occurring in the municipal securities market.\34\
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    \28\ See discussion under Background and Purpose of the 
Institutional SMMP Amendment--Background on MSRB Rule D-15 and SMMP 
Affirmation Requirements near note 37 infra (discussing the 
definition of Sophisticated Municipal Market Participant under MSRB 
Rule D-15).
    \29\ MSRB Rule G-48(a) (``The broker, dealer, or municipal 
securities dealer shall not have any obligation under Rule G-47 to 
ensure disclosure of material information that is reasonably 
accessible to the market.'')
    \30\ MSRB Rule G-48(b).
    \31\ MSRB Rule G-48(d) (``The broker, dealer, or municipal 
securities 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 broker, dealer, or municipal securities 
dealer.'')
    \32\ MSRB Rule G-48(e) (``The broker, dealer, or municipal 
securities dealer shall not have any obligation under Rule G-18 to 
use reasonable diligence to ascertain the best market for the 
subject security and buy or sell in that market so that the 
resultant price to the SMMP is as favorable as possible under 
prevailing market conditions.'')
    \33\ MSRB Rule G-48(c).
    \34\ See, e.g., Exchange Act Release No. 67064 (May 25, 2012), 
77 FR 32704 (June 1, 2012), File No. SR-MSRB-2012-05 (May 25, 2012) 
(approving an MSRB proposed rule change to relax certain 
qualifications for a dealer to afford a customer SMMP status in 
light of market developments regarding the increased availability of 
municipal securities market information and the desire of certain 
institutional customers to access alternative trading systems).
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    Most relevant to the proposed Institutional SMMP Amendment, Rule G-
48(c) currently modifies the suitability requirements of MSRB Rule G-19 
by eliminating the requirement for dealers to conduct a customer-
specific suitability analysis for recommendations made to an 
Institutional SMMP.\35\ The operative provision of MSRB Rule G-48 
provides that, ``[w]hen making a recommendation subject to Rule G-19 
and not Regulation Best Interest, Rule 15l-1 under the Act, a broker, 
dealer, or municipal securities dealer shall not have any obligation 
under Rule G-19 to perform a customer-specific suitability analysis.'' 
\36\ This

[[Page 28088]]

relaxed customer-specific suitability obligation is generally aligned 
with the ``independent judgment'' affirmations a customer seeking SMMP 
status makes under MSRB Rule D-15. The proposed Institutional SMMP 
Amendment would likewise relax the quantitative suitability obligation 
for similar reasons, as further described in the following 
sections.\37\
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    \35\ Id. The amendments to MSRB Rule G-48 enacted by the Broker-
Dealer Harmonization Filing carved out recommendations to customers 
that are subject to Regulation Best Interest from the rule's 
modified standards. See Broker-Dealer Harmonization Filing, 85 FR at 
28084-85.
    \36\ MSRB Rule G-48(c).
    \37\ See Exchange Act Release No. 71665 (Mar. 7, 2014), 79 FR 
14321 (Mar. 13, 2014), File No. SR-MSRB-2013-07 (Sept. 17, 2013) 
(codifying the relaxed customer-specific suitability obligation for 
recommendations made to SMMPs in MSRB Rule G-48 and the actual 
control or de facto control requirement, thereafter eliminated in 
2020 as described herein, for the applicability of quantitative 
suitability to recommendations made to customers in MSRB Rule G-19).
---------------------------------------------------------------------------

Background on MSRB Rule D-15 and SMMP Affirmation Requirements
    MSRB Rule G-48 incorporates the definition of SMMP under MSRB Rule 
D-15 for purposes of defining which customers do (or do not) qualify as 
an SMMP for purposes of Rule G-48 and, therefore, MSRB Rule D-15 
establishes the scope of potential customers who might qualify for MSRB 
Rule G-48's modified obligations. The SMMP definition of MSRB Rule D-15 
enumerates three definitional components, which separately address: (i) 
The minimum qualifying traits and characteristics of an SMMP customer; 
\38\ (ii) that a dealer must develop a reasonable basis for determining 
whether a customer has the requisite level of expertise and 
sophistication to be deemed an SMMP customer (the ``SMMP Reasonable 
Basis Determination''); \39\ and (iii) what affirmations a customer 
must communicate to the dealer regarding its own investment judgment 
and access to information in order to be appropriately deemed an SMMP 
customer (the ``SMMP Customer Affirmations'').\40\ In terms of the SMMP 
Customer Affirmations, MSRB Rule D-15(c) provides that the customer 
must affirmatively indicate to the dealer that (i) it is exercising 
independent judgment in evaluating the recommendations of the dealer; 
the quality of execution of the customer's transactions by the dealer; 
and the transaction price for non-recommended secondary market agency 
transactions as to which the dealer's services have been explicitly 
limited to providing anonymity, communication, order matching and/or 
clearance functions and the dealer does not exercise discretion as to 
how or when the transactions are executed; \41\ and (ii) it has timely 
access to material information that is available publicly through 
established industry sources as defined in MSRB Rule G-47(b)(i) and 
MSRB Rule G-47(b)(ii) (i.e., ``material information'' from 
``established industry sources,'' such as EMMA website information and 
rating agency reports).\42\
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    \38\ MSRB Rule D-15(a). A customer is only eligible to be 
treated as an SMMP if the customer is: (i) A bank, savings and loan 
association, insurance company, or registered investment company, 
(ii) a registered investment advisor, or (iii) a person or entity 
with total assets of at least $50 million.
    \39\ MSRB Rule D-15(b). A customer is only eligible to be 
treated as an SMMP if the dealer has developed 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. In addition, Supplementary Material .01 of MSRB Rule D-
15 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.
    \40\ MSRB Rule D-15(c).
    \41\ See MSRB Rule D-15(c)(1) (``The customer must affirmatively 
indicate that it: (1) is exercising independent judgment in 
evaluating: (A) the recommendations of the dealer; (B) the quality 
of execution of the customer's transactions by the dealer; and (C) 
the transaction price for non-recommended secondary market agency 
transactions as to which (i) the dealer's services have been 
explicitly limited to providing anonymity, communication, order 
matching and/or clearance functions and (ii) the dealer does not 
exercise discretion as to how or when the transactions are executed 
. . .'').
    \42\ See MSRB Rule D-15(c)(2) (``The customer must affirmatively 
indicate that it . . . (2) has timely access to material information 
that is available publicly through established industry sources as 
defined in Rule G-47(b)(i) and (ii).'')
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    Thus, an institutional customer who self-identifies as an SMMP has 
freely affirmed to a dealer its willingness to be treated as a 
sophisticated customer with the capacity and resources to exercise its 
own independent judgment. In this way, the SMMP Customer Affirmations 
are designed to ensure that any customer treated as an SMMP has 
affirmatively and knowingly provided the grounds on which a dealer may 
afford such SMMP customer lesser protections under certain MSRB rules. 
As an additional investor protection safeguard beyond the requirement 
for SMMP Customer Affirmations, the SMMP Reasonable Basis Determination 
also requires a dealer to have a reasonable basis to believe that an 
SMMP 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.\43\ In 
this way, the SMMP Reasonable Basis Determination further ensures that 
an Institutional SMMP does in fact possess a more sophisticated 
understanding of the municipal securities market. Importantly, the 
proposed Institutional SMMP Amendment would not alter the SMMP Customer 
Affirmations, the SMMP Reasonable Basis Determination, nor any of the 
other definitional elements of MSRB Rule D-15.
---------------------------------------------------------------------------

    \43\ See MSRB Rule D-15(b) and Rule D-15 Supplementary Material 
.01.
---------------------------------------------------------------------------

Purpose and Intent of the Institutional SMMP Amendment to MSRB Rule G-
48
    The proposed Institutional SMMP Amendment would amend MSRB Rule G-
48 to modify the quantitative suitability obligations of dealers when 
effecting transactions for their Institutional SMMPs. The proposed 
Institutional SMMP Amendment would require a dealer to conduct a 
quantitative suitability analysis only in situations where the dealer 
has actual control or de facto control over an Institutional SMMP's 
account.\44\ As stated above, the proposed amendments to MSRB Rule G-48 
would narrowly reinstate the scope of suitability protections afforded 
to Institutional SMMPs in effect prior to the amendments effectuated by 
the Broker-Dealer Harmonization Filing and so should be a familiar 
regulatory concept to dealers and Institutional SMMPs alike.\45\ More 
importantly, because each Institutional SMMP must self-identify as an 
SMMP by making the SMMP Customer Affirmations, as well as must fulfill 
the requirements associated with a dealer's SMMP Reasonable Basis 
Determination, the MSRB believes that the proposed Institutional SMMP 
Amendment will ease a regulatory burden on dealers that effectively 
replicates the sort of analysis an Institutional SMMP is willing and 
capable of performing itself. As a result, the proposed Institutional 
SMMP Amendment would align the compliance burden associated with 
certain recommendations made by dealers to the reasonable expectations 
and capabilities of Institutional SMMPs.
---------------------------------------------------------------------------

    \44\ Where a dealer exercises actual control or de facto control 
over an Institutional SMMP's account, the dealer would still be 
required to perform a quantitative suitability analysis in 
accordance with Supplementary Material .05 of MSRB Rule G-19. 
Relatedly, if an Institutional SMMP limitedly provides its customer 
affirmation on a trade-by-trade basis, then the dealer would be 
required to comply with all aspects of MSRB Rule G-19, including 
both the quantitative suitability requirement and the customer-
specific suitability requirement, for those recommendations for 
which the Institutional SMMP did not provide the applicable customer 
affirmation. See Supplementary Material .02 of MSRB Rule D-15 
(discussing trade-by-trade affirmations).
    \45\ See supra note 21 and related discussion.
---------------------------------------------------------------------------

    While the investor protection benefits associated with requiring 
dealers to perform a potentially duplicative suitability analysis can 
be appropriate

[[Page 28089]]

in other circumstances,\46\ the MSRB believes that the compliance 
burden associated with performing a quantitative suitability analysis 
on recommendations made to Institutional SMMPs outweighs the potential 
marginal investor protection benefits. In this way, the proposed 
Institutional SMMP Amendment would promote efficiency in the municipal 
securities market by eliminating a regulatory burden on dealers that 
generally provides a duplicative or unneeded analyses in supplement of 
an Institutional SMMPs' own independent and informed judgment, and, 
consequently, the proposed Institutional SMMP Amendment would allow 
dealers to redirect the resources associated with this regulatory 
burden to other more productive market activities.
---------------------------------------------------------------------------

    \46\ For example, the MSRB believes that the obligation to 
perform quantitative suitability analyses under MSRB rules remains 
appropriate, regardless of the potential for such duplication, in 
circumstances of recommendations made to retail customers; non-
retail, institutional customers who fail to meet the characteristics 
of an SMMP; and/or non-retail customers who have declined to make 
the affirmations necessary to be appropriately deemed an SMMP.
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2) of the Act,\47\ which provides that the Board shall 
propose and adopt rules to effect the purposes of this title with 
respect to transactions in municipal securities effected by brokers, 
dealers, and municipal securities dealers and advice provided to or on 
behalf of municipal entities or obligated persons by brokers, dealers, 
municipal securities dealers, and municipal advisors with respect to 
municipal financial products, the issuance of municipal securities, and 
solicitations of municipal entities or obligated persons undertaken by 
brokers, dealers, municipal securities dealers, and municipal 
advisors.\48\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78o-4(b)(2).
    \48\ Id.
---------------------------------------------------------------------------

    Section 15B(b)(2)(C) of the Act \49\ provides that the MSRB's rules 
shall 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.\50\ The MSRB 
believes the proposed rule change is consistent with Section 
15B(b)(2)(C) of the Act \51\ for the following reasons.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78o-4(b)(2)(C).
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

Statutory Basis for the Best Interest Amendments
    The proposed Best Interest Amendments are consistent with Section 
15B(b)(2)(C) of the Act \52\ because the amendments would: Foster 
cooperation and coordination with regulators; prevent fraudulent and 
manipulative acts and practices; protect investors; remove impediments 
to and perfect the mechanism of a free and open market in municipal 
securities; and promote capital formation in the municipal securities 
market.
---------------------------------------------------------------------------

    \52\ Id.
---------------------------------------------------------------------------

Fostering Cooperation and Coordination With Regulators
    The proposed Best Interest Amendments would foster cooperation and 
coordination with regulators by more tightly aligning the suitability 
obligations of MSRB Rule G-19 with the suitability obligations of 
Regulation Best Interest. By providing a uniform standard for all types 
of dealers, this alignment of the regulatory scheme applicable to 
retail municipal recommendations will foster greater cooperation and 
coordination among the MSRB and the SEC, as well as greater cooperation 
and coordination among the authorities that examine Broker-Dealers and 
Bank Dealers for compliance with MSRB rules.
Protecting Investors and Preventing Fraudulent and Manipulative Act and 
Practices
    The proposed Best Interest Amendments would protect investors and 
prevent fraudulent and manipulative acts and practices by extending the 
enhanced standards of conduct required by Regulation Best Interest to 
the retail municipal recommendations of Bank Dealers. As noted by the 
Commission in the adopting release for Regulation Best Interest, 
Regulation Best Interest enhances the broker-dealer standard of conduct 
beyond existing suitability obligations, and aligns the standard of 
conduct with retail customers' reasonable expectations by requiring 
broker-dealers, among other things, to: Act in the best interest of the 
retail customer at the time the recommendation is made, without placing 
the financial or other interest of the broker-dealer ahead of the 
interests of the retail customer; and address conflicts of interest by 
establishing, maintaining, and enforcing policies and procedures 
reasonably designed to identify and fully and fairly disclose material 
facts about conflicts of interest, and in instances where we have 
determined that disclosure is insufficient to reasonably address the 
conflict, to mitigate or, in certain instances, eliminate the 
conflict.\53\
---------------------------------------------------------------------------

    \53\ Regulation Best Interest Adopting Release, 84 FR at 33318.
---------------------------------------------------------------------------

    In addition, the Commission stated the enhancements contained in 
Regulation Best Interest are designed to improve investor protection by 
enhancing the quality of broker-dealer recommendations to retail 
customers and reducing the potential harm to retail customers that may 
be caused by conflicts of interest.\54\ For the same reasons, the MSRB 
believes that extending Regulation Best Interest to the retail 
municipal recommendations of Bank Dealers would prevent potential 
fraudulent and manipulative acts and practices and promote the 
protection of the retail customers of Bank Dealers.
---------------------------------------------------------------------------

    \54\ Regulation Best Interest Adopting Release, 84 FR at 33321.
---------------------------------------------------------------------------

Removing Impediments and Perfecting the Mechanisms of a Free and Open 
Market
    The proposed Best Interest Amendments would remove impediments to 
and perfect the mechanism of a free and open market in municipal 
securities by applying a uniform regulatory standard for retail 
municipal recommendations that would promote parity regarding the 
regulatory obligations of Broker-Dealers and Bank Dealers and, thereby, 
reduce potential confusion among market participants as to which 
standard of conduct applies.
Promoting Capital Formation
    The proposed Best Interest Amendments would not have a deleterious 
effect on capital formation in the municipal securities market and 
would have the potential to improve capital formation for the following 
reasons. Similar to the Commission's reasoning in its adoption of 
Regulation Best Interest,\55\ the enhanced obligations

[[Page 28090]]

of Regulation Best Interest may increase the efficiency of retail 
municipal recommendations and increase the attractiveness of Bank 
Dealer services for those retail customers who do not invest with a 
Bank Dealer because recommendations made by bank dealers are not 
currently subject to the additional standards of investor protection 
afforded by Regulation Best Interest. Additionally, by adopting a 
uniform regulatory standard for retail municipal recommendations across 
all dealers (i.e., across Bank Dealers and Broker-Dealers), the overall 
attractiveness of the municipal securities activities of dealers may 
improve. Consequently, if more retail customers are more willing to 
participate in municipal securities activities, then the proposed Best 
Interest Amendments would promote capital formation in the municipal 
securities market.
---------------------------------------------------------------------------

    \55\ Regulation Best Interest Adopting Release, 84 FR at 33462 
(``The possibility that Regulation Best Interest may increase the 
efficiency of the recommendations provided by the associated persons 
of the broker-dealer may enhance the attractiveness of broker-dealer 
services for those investors who currently do not invest through 
broker-dealers . . . If retail customers are more willing to 
participate in the securities markets through broker-dealers, 
Regulation Best Interest would have a positive effect on capital 
formation.'')
---------------------------------------------------------------------------

Statutory Basis for the Institutional SMMP Amendment
    The proposed Institutional SMMP Amendment is consistent with 
Section 15B(b)(2)(C) \56\ of the Act because the amendment would 
facilitate transactions in municipal securities and remove impediments 
to and perfect the mechanism of a free and open market in municipal 
securities, while not compromising investor protection.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The proposed Institutional SMMP Amendment would facilitate 
transactions in municipal securities and remove impediments to and 
perfect the mechanism of a free and open market in municipal securities 
by reducing a compliance burden on dealers. The modification of a 
dealer's suitability obligations to eliminate the current requirement 
to perform a quantitative suitability analysis for recommendations in 
circumstances where the dealer does not have actual control or de facto 
control over an Institutional SMMP's account will eliminate what could 
potentially be duplicative analyses undertaken by dealers on behalf of 
Institutional SMMPs--analyses which Institutional SMMPs have already 
affirmed their capacity and expertise to conduct for themselves, and 
which the Institutional SMMPs presumably have taken upon themselves to 
perform. In this regard, the proposed Institutional SMMP Amendment will 
remove an impediment to the mechanisms of a free and open market in 
municipal securities and promote greater efficiency. By eliminating 
this regulatory burden, the proposed Institutional SMMP Amendment would 
allow dealers to redirect the resources associated with this regulatory 
burden to other more productive market activities. As a separate, but 
related benefit, the MSRB believes that the Institutional SMMP 
Amendment would allow dealers to more efficiently serve those 
Institutional SMMPs who may be seeking relatively greater transaction 
activity and/or are more comfortable taking on the risks associated 
with more frequent transaction activity.
    The MSRB believes that the proposed Institutional SMMP Amendment to 
MSRB Rule G-48 will not compromise investor protections. The MSRB 
believes that allowing dealers to make recommendations to their 
Institutional SMMP customers without the burden of performing a 
quantitative suitability analysis is consistent with the SMMP Customer 
Affirmations and dealers' SMMP Reasonable Basis Determination. More 
specifically, the SMMP Customer Affirmations ensure that an 
Institutional SMMP itself believes that it has the requisite knowledge 
and judgment to be afforded SMMP status; and, as an additional 
safeguard to investor protection, the SMMP Reasonable Basis 
Determination separately ensures that the dealer also has a reasonable 
basis to conclude that an Institutional SMMP has the knowledge and 
sophistication to be treated as a SMMP based on supplemental factors 
beyond just the SMMP Customer Affirmations. If either definitional 
prong is not met, a dealer is not permitted to afford an institutional 
customer the status of a SMMP. Therefore, the MSRB believes that the 
proposed Institutional SMMP Amendment is generally consistent with an 
Institutional SMMP's more sophisticated understanding of (i) the 
commercial nature of its relationship with a dealer and (ii) the lesser 
regulatory standards of conduct governing the SMMP-dealer relationship.
    In addition, the proposed Institutional SMMP Amendment would 
incorporate the concepts of actual control or de facto control. 
Reinstating these control elements would help address potential 
scenarios in which the ability of an Institutional SMMP to exercise 
independent judgment is undermined or circumvented, such as when a 
dealer may not have formal discretionary authority over an 
Institutional SMMP's account, but nevertheless exercises de facto 
control over the account to, for example, engage in churning activity 
in clear contravention of an Institutional SMMP's investment 
interests.\57\ The MSRB believes that incorporating the actual control 
or de facto control elements maintains baseline investor protections 
for Institutional SMMPs in such scenarios of greater dealer impropriety 
or intentional wrongdoing.
---------------------------------------------------------------------------

    \57\ See, e.g., Harry Gliksman, 54 SEC. 471, 475 (1999) 
(upholding a NASD finding that a registered representative violated 
his suitability obligations by recommending frequent and short-term 
securities transactions even though the registered representative 
did not have written discretionary authority).
---------------------------------------------------------------------------

    The MSRB also notes that new institutional customers, who otherwise 
would qualify as SMMPs but desire the additional investor protections 
afforded by quantitative suitability under MSRB Rule G-19, can decline 
to provide the required affirmations under MSRB Rule D-15.\58\ 
Similarly, existing Institutional SMMPs could withdraw their SMMP 
status and obtain the suitability protections afforded by MSRB Rule G-
19. This ability to self-identify as an Institutional SMMP will ensure 
that those institutional customers who desire additional investor 
protection can secure them under MSRB rules, and thus, require the 
dealers to undertake a quantitative suitability analysis.
---------------------------------------------------------------------------

    \58\ See related discussion supra under Background and Purpose 
of the Institutional SMMP Amendment--Background on MSRB Rule D-15 
and SMMP Affirmation Requirements. See also MSRB Rule D-15(c)(1)-
(2).
---------------------------------------------------------------------------

    Accordingly, the MSRB believes that the proposed Institutional SMMP 
Amendment would maintain essential safeguards for investor protection 
and, overall, not compromise investor protections inconsistent with 
Section 15B(b)(2)(C) \59\ of the Act.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

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

    Section 15B(b)(2)(C) of the Act \60\ requires that MSRB rules not 
be designed to impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
MSRB considered the economic impact associated with the proposed rule 
change, including a comparison to reasonable alternative regulatory 
approaches, relative to the baseline.\61\ The MSRB believes the 
proposed rule changes would relieve a burden on competition and do not 
impose any

[[Page 28091]]

burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \60\ Id.
    \61\ See Policy on the Use of Economic Analysis in MSRB 
Rulemaking, available at http://msrb.org/Rules-and-Interpretations/Economic-Analysis-Policy.aspx. In evaluating whether there was a 
burden on competition, the Board was guided by its principles that 
required the Board to consider costs and benefits of a rule change, 
its impact on capital formation and the main reasonable alternative 
regulatory approach.
---------------------------------------------------------------------------

Necessity of Rule Change
Best Interest Amendments
    As previously mentioned, the retail municipal recommendations made 
by Bank Dealers currently are outside the scope of Regulation Best 
Interest,\62\ and the municipal securities activities of Bank Dealers 
continue to be subject to the existing investor protection obligations 
of MSRB rules, including MSRB Rule G-19. The proposed Best Interest 
Amendments to MSRB Rule G-19 would require each Bank Dealer to comply 
with the requirements of Regulation Best Interest to the same extent as 
a Broker-Dealer must. The proposed Best Interest Amendments are 
necessary because they would increase investor protection in the 
municipal securities market by creating regulatory uniformity in the 
market between the municipal securities activities of Bank Dealers and 
those of Broker-Dealers, each of whom may provide retail municipal 
recommendations. Similar to the Broker-Dealer Harmonization Filing for 
Broker-Dealers in 2020, the MSRB believes another benefit of the 
proposed Best Interest Amendments is that the amendments would reduce 
agency costs and information asymmetry between Bank Dealers and retail 
customers.\63\
---------------------------------------------------------------------------

    \62\ Regulation Best Interest applies to ``a broker, dealer or a 
natural person who is an associated person of a broker or dealer,'' 
which does not apply Bank Dealers. See 17 CFR 240.15l-1(a)(1).
    \63\ The SEC describes this reduction in agency cost, in the 
Regulation Best Interest Adopting Release, as ``the difference 
between the net benefit to the retail customer from accepting a less 
than efficient recommendation about a securities transaction or 
investment strategy, where the associated person or Broker-Dealer 
puts its interests ahead of the interests of the retail customer, 
and the net benefit the retail customer might expect from a similar 
securities transaction or investment strategy that is efficient for 
him or her.'' See Regulation Best Interest Adopting Release, 84 FR 
at 33403.
---------------------------------------------------------------------------

    The MSRB addresses reasonable alternatives where applicable when 
considering the costs, benefits, and impact of a proposed amendment. 
The MSRB believes the only reasonable alternative for evaluation is the 
option of leaving in place the current regulatory state in which a Bank 
Dealer's retail municipal recommendations are not subject to the 
requirements of Regulation Best Interest, while a Broker-Dealer's 
retail municipal recommendations are subject to the full requirements 
of Regulation Best Interest, even though the activities of both groups 
of dealers are similar. As shown below, the MSRB believes that 
maintaining the status quo would preserve a regulatory imbalance and 
therefore competitive imbalance in this regard between Bank Dealers and 
Broker-Dealers engaged in the same activity, as well as deprive certain 
retail customers of the investor protections afforded by Regulation 
Best Interest. In this way, maintaining the status quo would maintain a 
discrepancy in the investor protections afforded to the retail 
customers receiving retail municipal recommendations from Bank Dealers 
as compared to the investor protections afforded to retail customers 
receiving retail municipal recommendations from Broker-Dealers and, 
thereby, maintain a competitive imbalance in terms of the compliance 
burdens of Bank Dealers versus Broker-Dealers.
Institutional SMMP Amendment
    The purpose of amending MSRB Rule G-48 is to reinstate the 
requirement that a dealer have actual control or de facto control with 
respect to Institutional SMMP accounts to trigger a dealer's 
quantitative suitability obligation. A prior rule provision, applying 
the quantitative suitability obligation only when a dealer had actual 
control or de facto control over the account, was removed as part of 
the Broker-Dealer Harmonization Filing; and, as a result, dealers 
currently have an obligation to conduct a quantitative suitability 
analysis for transactions with Institutional SMMP customers whether or 
not the dealer has actual control or de facto control over the 
Institutional SMMP's account. The proposed Institutional SMMP Amendment 
to MSRB Rule G-48 will clarify that the quantitative suitability 
requirement of MSRB Rule G-19 is only applicable to natural person 
SMMPs but not to Institutional SMMPs. Since the proposed Institutional 
SMMP Amendment reinstates a previous requirement in the MSRB's 
suitability rule, the MSRB considered the alternative of placing the 
reinstated requirement in MSRB Rule G-19 for all institutional entities 
but decided that MSRB Rule G-48 is a more appropriate place to 
incorporate the reinstated standard, as Institutional SMMPs are by 
their nature sophisticated entities that have freely affirmed and self-
identified their capacity to independently evaluate dealers' 
recommendations.
Benefits, Costs and Effect on Competition
Best Interest Amendments
    The proposed Best Interest Amendments to MSRB Rule G-19 would help 
create a uniform standard of investor protection for retail municipal 
recommendations. The proposed Best Interest Amendments to MSRB Rule G-
19 would obligate a Bank Dealer to comply with Regulation Best Interest 
to the same extent as a Broker-Dealer making retail municipal 
recommendations. In this regard, the MSRB believes the effects of the 
proposed Best Interest Amendments would be similar and comparable to 
the effects resulting from when Broker-Dealers were first required to 
comply with Regulation Best Interest, though at a much smaller scale 
concerning only retail municipal recommendations.\64\ Therefore, the 
MSRB believes that the SEC's estimates of the burdens on competition 
and benefits of applying Regulation Best Interest to Broker-Dealers is 
a reasonable reference point for analyzing burdens on competition and 
benefits of applying Regulation Best Interest to Bank Dealers' retail 
municipal recommendations. The MSRB therefore built upon the findings 
of the SEC's multiyear in-depth analysis for its analysis of the 
proposed Best Interest Amendments.
---------------------------------------------------------------------------

    \64\ See Regulation Best Interest Adopting Release, 84 FR at 
33403.
---------------------------------------------------------------------------

    Notably, in the Regulation Best Interest Adopting Release, the SEC 
emphasized that it is ``difficult to quantify such benefits and costs 
with meaningful precision'' for Broker-Dealers and, particularly over 
long time periods, the quantification may be insufficiently precise and 
inherently speculative,\65\ mainly due to the following factors, among 
others, (i) a lack of data on the extent to which Broker-Dealers with 
different business practices engage in disclosure and conflict 
mitigation activities to comply with existing requirements, and 
therefore how costly it would be to comply with the proposed 
requirements; \66\ (ii) Regulation Best Interest provides Broker-
Dealers flexibility in how to comply with the obligations and, as a 
result, there could be multiple ways in which Broker-Dealers will 
satisfy their obligations; \67\ and (iii) Regulation Best Interest may 
affect Broker-Dealers differently depending on their business model 
(e.g., full-service Broker-Dealer, Broker-Dealer that uses independent 
contractors,

[[Page 28092]]

insurance-affiliated Broker-Dealer) and size.\68\
---------------------------------------------------------------------------

    \65\ Id. The MSRB is not aware of any post-implementation study 
or other analysis that provides data on the costs and benefits of 
adopting Regulation Best Interest.
    \66\ See Regulation Best Interest Adopting Release, 84 FR at 
33434.
    \67\ Id.
    \68\ Id.
---------------------------------------------------------------------------

    The SEC further cautioned that the associated costs for each 
individual Broker-Dealer firm could not be anticipated because of the 
wide variation in size and scope of business practices across firms as 
well as the many unknown factors associated with the principles-based 
nature of the Regulation Best Interest.\69\ The MSRB believes the same 
difficulties and complexities experienced by the SEC in attempting to 
analyze the economic effects of applying Regulation Best Interest to 
Broker-Dealers also applies to the MSRB's attempt to provide a 
meaningful quantitative estimate of the impact of the proposed Best 
Interest Amendments on Bank Dealers.\70\
---------------------------------------------------------------------------

    \69\ Id.
    \70\ The MSRB sought public comment to solicit data to use in a 
quantitative analysis relating to the proposed changes in its 
Request for Comments. While commenters did provide some specifics on 
the scope of Bank Dealers' activities that would be subject to the 
proposed Best Interest Amendments, the MSRB did not receive any 
quantitative estimate of the impact of the proposed Best Interest 
Amendments on Bank Dealers. In addition, the MSRB is not aware of 
any post-implementation study that provides data on the costs and 
benefits of adopting Regulation Best Interest.
---------------------------------------------------------------------------

    While acknowledging these challenges, the MSRB attempted to 
determine the scope of activity that would be subject to the proposed 
Best Interest Amendments, which is summarized in Table 1 below. The 
summary table provides an estimate of the number of Bank Dealers likely 
to be affected by the proposed Best Interest Amendments. The Bank 
Dealers were included in that table based on their market share of 
retail-sized dealer-to-customer trades in calendar year 2020 (i.e., 
dealer-to-customer trades with a par value of $100,000 or less).\71\ 
Among the over 1,200 dealers registered with the MSRB, only 21 firms 
are registered as Bank Dealers. Those 21 Bank Dealers conducted only 
1.6% of all retail-sized dealer-to-customer trades in municipal 
securities in 2020.\72\ Even among the 21 Bank Dealers, nearly all of 
this activity was concentrated in a small number of firms, with the top 
seven most-active Bank Dealers conducting the vast majority of all 
retail-sized customer trades in 2020 (about 99.5%). The remaining 
number of registered Bank Dealers were significantly less active in 
executing retail-sized trades with customers during that same period, 
with six Bank Dealers not executing any retail-sized customer trades 
over the course of the entire year and the remaining eight Bank Dealers 
altogether averaging a little over one retail-sized customer trade per 
day.
---------------------------------------------------------------------------

    \71\ The MSRB does not have access to reliable data to determine 
the precise number of Bank Dealers who provide (or may provide) 
recommendations to investors who meet the definition of a retail 
customer. To develop a reasonable proxy, the MSRB analyzed market 
data to determine the number of retail-sized trades (par value at 
$100,000 or less in this case). In the absence of more specific data 
about a trade, total par size of $100,000 or less is commonly used 
in the municipal securities market as an indicator of a retail 
activity. Data were obtained from the MSRB's Real-Time Transaction 
Reporting System (RTRS) and the MSRB's registration database.
    \72\ These figures are provided by an MSRB analysis with data 
obtained from MSRB's Real-Time Transaction Reporting System (RTRS) 
combined with existing registration data.

   Table 1--Market Share of Municipal Securities Retail-Sized Customer
              Trades by Dealers January 2020-December 2020
------------------------------------------------------------------------
                                             Number of     Market share
                                           retail-sized     of retail-
             Type of dealers                 customer     sized customer
                                              trades        trades (%)
------------------------------------------------------------------------
Non-Bank Dealers........................       3,865,880            98.4
Top Seven Bank Dealers..................          61,140             1.6
All Fourteen Other Bank Dealers.........             325             0.0
------------------------------------------------------------------------
Source: MSRB analysis with data obtained from the MSRB's Real-Time
  Transaction Reporting System (RTRS) and the MSRB's registration
  database.

    In developing these numbers, the MSRB believes they are likely 
overly inclusive of potential retail activity, because there is a high 
probability the numbers capture more trades than would be subject to 
the requirements of the proposed Best Interest Amendments. 
Nevertheless, the MSRB believes the numbers are a reasonable estimate 
for the purpose of this economic analysis and are conservative to the 
extent that they are more likely to over-estimate the potential burden 
on Bank Dealers than underestimate it. In terms of the limitations of 
this data, dealer-to-customer trades with a par value of $100,000 or 
less are not always conducted with investors who would meet the 
definition of a retail customer under Regulation Best Interest, as 
representatives acting on behalf of non-retail customers potentially 
execute trades with a par value of $100,000 or less (i.e., small 
institutional trades). Conversely, retail investors may execute trades 
above $100,000 par value (i.e., large retail trades); however, the MSRB 
believes large retail trades occur less frequently and, thus, do not 
fully offset the more frequent occurrences of sub-$100,000 par value 
non-retail trades.\73\
---------------------------------------------------------------------------

    \73\ For example, one commenter, the Capital Markets Group of 
Commerce Bank (``CMG'') based in Kansas City, MO, stated that ``For 
CMG, retail customers comprise approximately 9% of CMG's total open 
account customer base. Further, only a portion of these retail 
accounts actually executed transactions in the last 12 months, 
comprising approximately 3% of CMG's total customers. . . .'' See 
letter from Erik Swanson, Managing Director, and Joseph Reece, Chief 
Compliance Officer, Capital Markets Group of Commerce Bank 
(``Commerce Bank''), not dated (the ``Commerce Bank Letter'') in 
response to MSRB Notice 2021-06 (March 4, 2021).
---------------------------------------------------------------------------

    Additionally, the MSRB acknowledges that the number of trades is 
not a reasonable proxy for the number of retail municipal 
recommendations. That is, the fact that a Bank Dealer executes a trade 
with an investor who meets the definition of a retail customer under 
Regulation Best Interest does not necessarily mean that the Bank Dealer 
has made a ``recommendation'' to such retail customer for purposes of 
Regulation Best Interest. The Bank Dealer may have, for example, 
executed a non-recommended trade at the customer's request. Hence, the 
MSRB believes that some unknown number of these retail-sized trades 
would not be subject to the proposed Best Interest Amendments (i.e., 
the trades would not be subject to Regulation Best Interest).
Benefits
    The MSRB believes extending the requirements of Regulation Best 
Interest to Bank Dealers would reduce or eliminate a regulatory 
imbalance between Bank Dealers, on the one hand,

[[Page 28093]]

and Broker-Dealers, on the other, as the terms of Regulation Best 
Interest do not currently apply to Bank Dealers. The proposed Best 
Interest Amendments would both close a regulatory gap and also mitigate 
certain market risks and inefficiencies associated with a potentially 
lower compliance standard.\74\ Therefore, the proposed Best Interest 
Amendments would protect retail customers seeking investment 
recommendations and transacting in municipal securities, regardless of 
whether they are customers of a Broker-Dealer or a Bank Dealer. The 
MSRB believes retail customers receiving retail municipal 
recommendations should benefit from a uniform standard of enhanced 
investor protections, which would not be dependent upon the type of 
dealer entity making the retail municipal recommendation.
---------------------------------------------------------------------------

    \74\ As one potential example, where a Bank Dealer and a Broker-
Dealer are both subsidiary entities of a common parent holding 
company, the MSRB is concerned that the parent holding company may 
attempt to take advantage of any regulatory imbalance by utilizing a 
regulatory arbitraging strategy to move retail customer accounts to 
the subsidiary with the lowest compliance standard, and, thus, 
Broker-Dealers may relocate retail customers accounts to affiliated 
Bank Dealers to avoid compliance with Regulation Best Interest.
---------------------------------------------------------------------------

    As to the overall merit of the proposed new requirements, they are 
intended to reduce Bank-Dealer retail customer agency costs by 
lessening conflicts of interest that currently exist between Bank 
Dealers and retail customers and reduce information asymmetries 
limiting the ability of retail customers to assess the efficiency of 
recommendations from Bank Dealers.\75\
---------------------------------------------------------------------------

    \75\ For a detailed discussion of the economic theory behind 
agency costs, please refer to the Regulation Best Interest Adopting 
Release, 84 FR at 33400-41.
---------------------------------------------------------------------------

Costs
    If the proposed Best Interest Amendments were enacted, the MSRB 
believes Bank Dealers would experience initial costs associated with 
establishing the revised policies and procedures to comply with the 
requirements of Regulation Best Interest, as well as the costs of 
ongoing compliance. The initial setup costs likely would be 
proportionately higher for smaller and less active Bank Dealers with 
fewer retail municipal recommendations than for the larger and more 
active Bank Dealers with more retail municipal recommendations, while 
the ongoing costs would likely be proportionate with each Bank Dealer's 
retail business activities. Additionally, Bank Dealers with an 
affiliated Broker-Dealer that is subject to Regulation Best Interest 
likely would not experience as much initial set-up costs as other Bank 
Dealers because they can leverage established policies and procedures 
from their Broker-Dealers affiliates presumably in compliance with 
Regulation Best Interest.
    The MSRB believes the average per-firm total costs (initial and 
ongoing) would be substantially lower for a Bank Dealer providing 
retail municipal recommendations that are only related to municipal 
securities, as compared to the overall costs associated with a Broker-
Dealer providing recommendations to retail customers of securities 
transactions or investment strategies involving securities related to 
many different types of securities. On average, there are many more 
retail-sized trades in other types of securities--for example, 
equities, corporate bonds, treasury and agency securities, options, 
convertible bonds, mutual funds, and exchange-traded funds--than in 
municipal securities alone.\76\ A Broker-Dealer subject to Regulation 
Best Interest incurs compliance costs any time it provides a 
recommendation to its retail customers on any security, while a Bank 
Dealer would only incur cost when it provides a retail municipal 
recommendation. As a result, the MSRB believes the average per-Bank 
Dealer total costs would not approach the per-Broker-Dealer level, as 
estimated by the SEC in relation to Regulation Best Interest. Table 2 
provides an illustration of potential costs to be expected for a Bank 
Dealer with an average number of retail-sized trades in municipal 
securities as a result of the proposed rule change. Using the SEC's 
estimates of initial cost and ongoing cost for 2,766 Broker-Dealers, 
the MSRB estimated the portion of the costs attributable to municipal 
securities only for a Broker-Dealer with an average number of retail-
sized trades in municipal securities, with the assumption that the same 
Broker-Dealer would incur only 35% of the initial cost and one percent 
of the ongoing cost if the Broker-Dealer only provided recommendations 
on municipal securities to retail customers.\77\ The MSRB then applied 
the cost estimates to an average Bank Dealer.
---------------------------------------------------------------------------

    \76\ Based on the MSRB's estimate, there were approximately five 
million retail-sized customer trades in municipal securities in 
2018, compared to 6.8 million retail-sized customer trades in 
corporate bonds, 132.5 million retail-sized customer trades in 
treasury securities and 4.4 billion retail-sized customer trades in 
equities, which include exchange-traded funds.
    \77\ The MSRB's analysis focuses on four securities that have 
substantial retail customer trades: Municipal securities, corporate 
bonds, treasury securities and equities, which include exchange-
traded funds. To be conservative, all other securities, such as 
stock options, federal agency securities, mortgage-backed 
securities, asset-backed securities, mutual funds, etc., are assumed 
to have no retail trades. For the initial cost, the MSRB assumes a 
cost saving of 65% when establishing policies and procedures for one 
security only, municipal bonds, as opposed to for four securities, 
accounting for some fixed costs when working on a single security 
product. For the ongoing cost, the MSRB estimated the number of 
retail-sized customer trades for municipal securities that are 
likely based on a Broker-Dealer's recommendation relative to 
comparable retail-sized customer trades for corporate bonds, 
treasury securities and equities (including exchange-traded funds), 
and derived that the proportion for municipal securities would be 
less than one percent of the total. Conservatively, one percent is 
used for estimating the ongoing costs related to municipal 
securities. Data were obtained from the MSRB's Real-Time Transaction 
Reporting System (RTRS), MSRB's registration database, and SEC's 
estimates of costs and benefits of applying Regulation Best Interest 
to Broker-Dealers.
    \78\ See Regulation Best Interest Adopting Release, 84 FR at 
33318.

            Table 2--Estimated Initial Setup and Ongoing Compliance Costs for an Average Bank Dealer
----------------------------------------------------------------------------------------------------------------
                                                                                                     Number of
                                                                                                   retail-sized
                                                                   Initial cost    Ongoing cost      customer
                                                                                                      trades
----------------------------------------------------------------------------------------------------------------
SEC Estimate
Average Broker-Dealer (Non-Bank Dealer).........................      $2,153,290        $855,897
Average Broker-Dealer Trading Municipal Bonds Only..............         753,651           8,559           5,523
Apply SEC Estimate to Average Bank Dealer Trading Municipal              753,651           4,590           2,962
 Bonds..........................................................
----------------------------------------------------------------------------------------------------------------
Source: MSRB analysis with data obtained from the MSRB's Real-Time Transaction Reporting System (RTRS), MSRB's
  registration data and SEC's estimates of costs and benefits of applying Regulation Best Interest to Broker-
  Dealers.\78\


[[Page 28094]]

Effect on Competition, Efficiency, and Capital Formation \79\
    The MSRB believes that, if the proposed Best Interest Amendments 
were adopted, there is a possibility some Bank Dealers that rarely 
execute retail-sized customer trades, assuming those trades represent 
retail municipal recommendations, may choose to forgo retail business 
entirely to avoid the costs of compliance with proposed Best Interest 
Amendments and Regulation Best Interest, or more narrowly, stop 
providing retail municipal recommendations to limit the costs of 
compliance. Therefore, some Bank Dealers may be impacted by the 
proposed Regulation Best Interest Amendments by deciding to forego 
retail municipal recommendations or retail customer business 
altogether, though the broader impact on competition in the municipal 
securities market is expected to be minor given these Bank Dealers' 
relatively minor presence in executing retail-sized trades for 
municipal securities currently; accordingly, even if those Bank Dealers 
choose to relinquish their retail business, there should not be any 
significant reduction in the supply of services to retail investors. On 
the other hand, the MSRB does not expect a significant alteration to 
the competitive landscape from retail investors' perspective if the 
proposed Best Interest Amendments were adopted, as retail investors 
rarely use Bank Dealers for retail trading. Moreover, for those retail 
investors who do choose Bank Dealers to conduct retail activities, 
their activities are concentrated in a small number of Bank Dealers who 
are less likely to withdraw from the retail business as a result of the 
burdens created by the proposed Best Interest Amendments.
---------------------------------------------------------------------------

    \79\ Capital formation is defined by the SEC on their website 
``What we do,'' available at https://www.sec.gov/about/what-we-do#section2. It refers to companies and entrepreneurs accessing 
America's capital markets to help them create jobs, develop 
innovations and technology, and provide financial opportunities for 
those who invest in them. Id.
---------------------------------------------------------------------------

    The MSRB believes requiring Bank Dealers to comply with the 
requirements of Regulation Best Interest, when making retail municipal 
recommendations, would improve market efficiency by imposing the same 
requirements on Bank Dealers when making such recommendations as on 
Broker-Dealers under Regulation Best Interest. The harmonization of 
MSRB rule requirements for Bank Dealers with SEC requirements for 
Broker-Dealers would create consistency for firms who have both Broker-
Dealer and Bank Dealer subsidiaries, and, thus, would increase 
efficiency in terms of firms' compliance burdens. It also may encourage 
competition for retail customers among Bank Dealers (and between Bank 
Dealers and Broker-Dealers in some instances) to the extent that the 
disclosure of fees and conflicts of interest would increase 
transparency and facilitate more comparability across Bank Dealers and 
Broker-Dealers among retail investors, and, therefore, would further 
inform customers' decisions of whether to utilize a Bank Dealer versus 
a Broker-Dealer for transactions in municipal securities. In addition, 
the MSRB believes investors should benefit from receiving the same type 
of information from Bank Dealers and Broker-Dealers in relation to an 
investment recommendation. Therefore, as stated above, because of the 
creation of consistent regulatory requirements across Bank Dealers and 
Broker-Dealers for their retail municipal recommendations and the 
greater competition fostered by this consistency among firms serving 
retail customers, the MSRB believes that the proposed Best Interest 
Amendments would facilitate capital formation.
Institutional SMMP Amendment
    The MSRB proposal to amend MSRB Rule G-48 would reinstate a 
previously existing actual control or de facto control standard for 
Institutional SMMP accounts for purposes of dealers' quantitative 
suitability obligations.
Benefits
    The proposed Institutional SMMP Amendment to MSRB Rule G-48 would 
reduce the compliance burden for all dealers, including Bank Dealers 
and Broker-Dealers, by eliminating the requirements to undertake a 
quantitative suitability analysis for Institutional SMMPs when a dealer 
does not have actual control or de facto control over the customer's 
accounts. The requirement is not necessary because of the 
sophistication and differing needs of Institutional SMMPs who have 
knowingly declined to have such requirements apply to them, as 
described herein.
Costs
    The MSRB believes the proposed Institutional SMMP Amendment to MSRB 
Rule G-48 to modify the quantitative suitability obligation of a dealer 
in the limited circumstances provided under the proposed Institutional 
SMMP Amendment would have minimal costs associated, particularly since 
the intent was to reinstate an exemption from quantitative suitability 
previously enacted for all recommendations through MSRB Rule G-19. One 
potential one-time cost would be for all dealers, including Bank 
Dealers and Broker-Dealers, to update their policies and procedures. 
Because of the recent existence of the same actual control or de facto 
control standard that would be reestablished by the proposed 
Institutional SMMP Amendment, the MSRB believes this one-time change 
should be familiar to firms and the cost of compliance implementation 
will be reduced in this regard. Moreover, to the degree that dealers 
are likely to reintroduce the same standards in their policies and 
procedures as previously existed, the cost of implementation would be 
minimized.
    In addition, one impetus of the Broker-Dealer Harmonization Filing 
was to harmonize the rule with Regulation Best Interest and FINRA Rule 
2111 and to reduce inconsistency on suitability requirements between 
FINRA's rules and MSRB's rules. By amending MSRB Rule G-48 to provide a 
narrow exemption from the application of quantitative suitability, this 
rule would not be fully harmonized with FINRA Rule 2111, and, thus, 
would establish two standards for accounts across the corporate and 
municipal securities markets. The MSRB believes that this lack of 
harmonization is justified in this instance for all the reasons stated 
herein,\80\ including the fact that Institutional SMMPs are by their 
nature sophisticated entities that have affirmed and self-identified 
their capacity to independently evaluate dealers' recommendations of 
municipal securities transactions.
---------------------------------------------------------------------------

    \80\ See related discussion supra under Purpose and Intent of 
the Institutional SMMP Amendment to MSRB Rule G-48.
---------------------------------------------------------------------------

Effect on Competition, Efficiency, and Capital Formation
    The MSRB believes the proposed Institutional SMMP Amendment to MSRB 
Rule G-48 would improve the operational efficiency of the municipal 
securities market by reintroducing the element of actual control or de 
facto control with respect to Institutional SMMP accounts that would 
trigger a dealer's quantitative suitability obligation, as dealers 
would have one fewer compliance burden. The MSRB does not expect that 
the proposed Institutional SMMP Amendment to MSRB Rule G-48 would harm 
competition in the municipal securities market, because the proposed 
Institutional SMMP Amendment would be applicable to all dealers and,

[[Page 28095]]

therefore, any of the benefits and burdens created by the proposed 
Institutional SMMP Amendments would be evenly applied to all such firms 
transacting with Institutional SMMP customers and, thereby, avoid 
discriminatory impacts among dealer firms.

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

    On March 4, 2021, the Board published a request for comment seeking 
public feedback on requiring Bank Dealers to comply with Regulation 
Best Interest when making a retail municipal recommendation (the 
``Request for Comments'').\81\ The Board received five comments letters 
in response to the Request for Comments.\82\ Each of these will be 
addressed below. The comment letters addressing the proposed Best 
Interest Amendments will be discussed separately from the one comment 
letter addressing the proposed Institutional SMMP Amendment.
---------------------------------------------------------------------------

    \81\ MSRB Notice 2021-06 (March 4, 2021).
    \82\ Letter from Justin M. Underwood, Executive Director, 
American Bankers Association (``Bankers Association''), dated June 
2, 2021 (the ``Bankers Association Letter''); Letter from 
Christopher A. Iacovella, Chief Executive Officer, American 
Securities Association (``Securities Association''), dated May 27, 
2021 (the ``Securities Association Letter''); the Commerce Bank 
Letter; Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated June 2, 2021 (the ``SIFMA Bank Dealer 
Letter''); and Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, SIFMA, dated June 2, 2021 (the ``SIFMA 
SMMP Letter'').
---------------------------------------------------------------------------

Discussion of Comments Related to the Best Interest Amendments
    The MSRB received four comment letters addressing the proposed Best 
Interest Amendments in response to its Request for Comments. Comments 
submitted by SIFMA and the Securities Association were supportive of 
the proposed Best Interest Amendments, while the comments submitted by 
the Bankers Association and Commerce Bank expressed concerns about the 
proposed Best Interest Amendments, generally, in terms of the 
consequences of the potential compliance burden in relation to Bank 
Dealers' limited retail customer activity, as further discussed below.
Support for a Uniform Regulatory Standard
    SIFMA cited the goal of achieving regulatory parity among regulated 
entities as the reason for being in favor of the proposed rule 
change.\83\ Specifically, the SIFMA Bank Dealer Letter stated that 
``SIFMA supports the proposed amendment to extend Regulation Best 
Interest to bank dealers, as defined in the notice'' and that ``we 
believe that regulatory parity among regulated entities, which this 
amendment achieves, is a worthwhile goal.'' \84\ The Securities 
Association cited a reduction in regulatory confusion and establishing 
Regulation Best Interest as the standard for Broker-Dealers and Bank 
Dealers as the reasons for being in favor of the proposed rule 
change.\85\ The Securities Association stated that adopting Regulation 
Best Interest for bank dealers will ``reduce regulatory confusion for 
municipal dealers and further establish [Regulation Best Interest] as 
the national standard for broker-dealers and bank dealers.'' \86\ 
Further, the Securities Association stated that ``[it] appreciates the 
work by the MSRB in the Proposal to align their rules with the SEC and 
Financial Industry Regulatory Authority's (FINRA) when possible so that 
broker-dealers are not subjected to multiple standards.'' \87\ As 
discussed above, the Board agrees with the commenters that the proposed 
Best Interest Amendments would benefit the municipal securities market 
through more uniform regulatory standards.
---------------------------------------------------------------------------

    \83\ SIFMA Bank Dealer Letter at 2.
    \84\ SIFMA Bank Dealer Letter at 1-2.
    \85\ Securities Association Letter at 1.
    \86\ Id. at 1.
    \87\ Id. at 2.
---------------------------------------------------------------------------

Concerns Regarding Bank Dealer's Compliance Burden and Effects on 
Competition
    Among other topics in the Request for Comments, the Board sought 
public input on the potential burdens associated with the proposed Best 
Interest Amendments and, in particular, if requiring Bank Dealers to 
comply with Regulation Best Interest would disincentivize Bank Dealers 
from engaging in certain municipal securities activities with retail 
customers.\88\ Commerce Bank and the Bankers Association offered 
comments. The Bankers Association commented that, while its members 
have long supported the notion that financial professionals offering 
investment advice to retail customers should be subject to a best 
interest standard, the Bankers Association urged the Board to consider 
the compliance costs imposed by such a rule on Bank Dealers in relation 
to their limited amount of retail customer activity.\89\ The Bankers 
Association continued, stating that, ultimately, Bank Dealers in 
municipal securities do not have a significant retail customer base to 
warrant a new regulatory compliance regime in this manner.\90\
---------------------------------------------------------------------------

    \88\ Request for Comments at 7.
    \89\ Bankers Association Letter at 2
    \90\ Id.
---------------------------------------------------------------------------

    Echoing this concern regarding the potential compliance burden of 
the proposed Best Interest Amendments, Commerce Bank responded that 
they would assess the additional compliance costs that come with 
compliance with Regulation Best Interest and consider the elimination 
of providing recommendations for securities or strategies to retail 
customers.\91\ Commerce Bank also expressed concern that the compliance 
burden of the proposed Best Interest Amendments may cause it to 
eliminate or become uncompetitive in relation to certain underwriting 
activities, particularly for services provided to issuers utilizing 
retail order periods.\92\
---------------------------------------------------------------------------

    \91\ Commerce Bank Letter at 2.
    \92\ Commerce Bank Letter at 3 (``Assuming the amendments are 
approved as adopted and bank dealers begin to move away from 
providing services to retail customers, bank dealers that underwrite 
municipal bonds would need controls in place to ensure underwriting 
or related commitments are appropriate for any retail order periods 
required by an issuer. The potential impact may be a smaller number 
of underwriting firms available or willing to work with smaller 
issuers and public entities in the market, limiting the number of 
competitors available for either competitive or negotiated deals.'') 
In addition to the reasons discussed below, the MSRB observes that 
analogous concerns regarding such dampening effects of Regulation 
Best Interest's requirements on the competition for underwriting 
activities equally apply to Broker-Dealers. Yet, the Commission 
ultimately found that Regulation Best Interest would not have a 
deleterious effect on capital formation. See, generally, Regulation 
Best Interest Adopting Release, 84 FR at 33461 et seq.
---------------------------------------------------------------------------

    While the Board believes that commenters' concerns regarding the 
potential compliance burden for Bank Dealers associated with the 
proposed Best Interest Amendments are valid, the Board also believes 
that the potential investor protection benefits associated with the 
proposed Best Interest Amendments outweigh these potential compliance 
burdens for Bank Dealers. The Bankers Association Letter and the 
Commerce Bank Letter articulated concerns regarding the potential 
compliance burden associated with the proposed Best Interest 
Amendments,\93\ but these commenters did not specifically address why 
Bank Dealers face compliance burdens that are materially different from 
those faced by

[[Page 28096]]

Broker-Dealers, who are already required to adhere to the enhanced 
suitability standards required by Regulation Best Interest. 
Consequently, the MSRB is unaware of any material distinctions between 
the municipal securities activities of Bank Dealers and Broker-Dealers 
that would persuade the MSRB to propose a non-uniform regulatory scheme 
of lesser investor protections for the retail municipal recommendations 
of Bank Dealers.
---------------------------------------------------------------------------

    \93\ See, respectively, Bankers Association Letter at 2 and 
Commerce Bank Letter at 2 (noting that retail accounts account for 
approximately 9% of their total open accounts and only a portion of 
these accounts transacted in the previous twelve months).
---------------------------------------------------------------------------

    Moreover, in developing the proposed Best Interest Amendments, the 
MSRB observed that Regulation Best Interest did not adopt de minimis 
thresholds or other standards to exclude smaller regulated entities 
with lesser amounts of retail customer activity from Regulation Best 
Interest's baseline compliance burdens.\94\ Relatedly, the Commission 
concluded that the final version of its Regulation Best Interest 
appropriately balanced the concerns of various commenters from larger 
and smaller entities.\95\ Similar to the Commission's determination, 
the MSRB believes that the proposed Best Interest Amendments are 
written to balance the interests of commenters, including the various 
types and sizes of dealer entities, to best achieve the important goals 
of enhancing retail investor protection and decision making, while 
preserving, to the extent possible, retail investor access (in terms of 
choice and cost) to differing types of municipal security investment 
services and municipal security products.
---------------------------------------------------------------------------

    \94\ See, generally, Regulation Best Interest Adopting Release, 
84 FR at 33485 et seq (discussing impact on ``Small Entities Subject 
to the Rule'').
    \95\ Regulation Best Interest Adopting Release, 84 FR at 33323 
(``After careful consideration of the comments and additional 
information we have received, we believe that Regulation Best 
Interest, as modified, appropriately balances the concerns of the 
various commenters in a way that will best achieve the Commission's 
important goals of enhancing retail investor protection and decision 
making, while preserving, to the extent possible, retail investor 
access (in terms of choice and cost) to differing types of 
investment services and products.'')
---------------------------------------------------------------------------

    Relatedly, the MSRB observes that the Commission determined that 
Regulation Best Interest would not have a deleterious effect on capital 
formation.\96\ More specifically, the Commission concluded that (i) the 
possibility that Regulation Best Interest may increase the efficiency 
of the recommendations provided by the associated persons of the 
broker-dealer may enhance the attractiveness of broker-dealer services 
for those investors who currently do not invest through broker-
dealers,\97\ and (ii) if retail customers are more willing to 
participate in the securities markets through broker-dealers, 
Regulation Best Interest would have a positive effect on capital 
formation.\98\
---------------------------------------------------------------------------

    \96\ See, generally, Regulation Best Interest Adopting Release, 
84 FR at 33461 et seq.
    \97\ Regulation Best Interest Adopting Release, 84 FR at 33462.
    \98\ Id.
---------------------------------------------------------------------------

    For similar reasons, the MSRB believes that the proposed Best 
Interest Amendments would not hinder capital formation in the municipal 
securities market, as suggested by the Commerce Bank Letter, such as in 
instances where there is less underwriter competition for small 
municipal issuers or municipal issuers who seek to utilize retail order 
periods. To the degree that retail municipal recommendations are 
subject to a uniform regulatory standard across Bank Dealers and 
Broker-Dealers, the MSRB believes that the proposed Best Interest 
Amendments may increase the efficiency of retail municipal 
recommendations and enhance the attractiveness of dealer's municipal 
security services. This uniform regulatory standard could draw more 
retail customers to the primary offering of municipal securities with 
retail order periods and, in this respect, incrementally reduce issuer 
borrowing costs.
Discussion of Comments Related to the Institutional SMMP Amendment
    The Board did not seek separate comment on the proposed 
Institutional SMMP Amendment but did receive the SIFMA SMMP Letter as 
part of the Request for Comments, which was generally supportive of the 
proposed Institutional SMMP Amendment. SIFMA stated in the SMMP Letter 
that its members ``feel strongly that the Quantitative Suitability 
Requirement in Rule G-19 should be clarified, and interpreted as 
applicable only to natural person SMMPs, but not to institutional 
SMMPs. Extending the Quantitative Suitability Requirement to all SMMPs 
would be unduly costly and burdensome.'' \99\ As discussed above, the 
Board agrees with the commenter that requiring a dealer to undertake a 
quantitative suitability analysis, when an institutional customer has 
already affirmatively opted out of receiving such an analysis, is an 
unnecessarily burdensome requirement to place on dealer's 
recommendations to Institutional SMMPs.
---------------------------------------------------------------------------

    \99\ SIFMA SMMP Letter at 2.
---------------------------------------------------------------------------

    SIFMA cited the MSRB's ``history of treating SMMPs differently from 
non-SMMPs, based on a reasoned recognition of the differences between 
these two investor classes and the relative protections that should be 
afforded to both.'' \100\ The Board agrees that in limited 
circumstances it is appropriate for certain investor classes to be 
afforded different protections under MSRB rules, as different classes 
can have differing levels of sophistication, differing risk tolerances, 
and differing investment goals. As noted above, the SMMP concept and 
the modified regulatory obligations afforded to SMMPs under MSRB rules 
are intended to account for the distinct capabilities of certain self-
identifying, sophisticated, non-retail customers, as well as the varied 
types of dealer-customer relationships occurring in the municipal 
securities markets. Thus, the MSRB believes it is appropriate to afford 
Institutional SMMPS more finely tailored protections, and that the 
proposed Institutional SMMP Amendment would not erode the overall 
protections afforded to Institutional SMMPs.
---------------------------------------------------------------------------

    \100\ SIFMA SMMP Letter at 3.
---------------------------------------------------------------------------

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 protected]. Please 
include File Number SR-MSRB-2022-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2022-02. This file

[[Page 28097]]

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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of the MSRB. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2022-02 and should be submitted on 
or before May 31, 2022.
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    \101\ 17 CFR 200.30-3(a)(12).

    For the Commission, pursuant to delegated authority.\101\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-09960 Filed 5-9-22; 8:45 am]
BILLING CODE 8011-01-P