About the MSRB

Municipals, Municipals, MunicipalsIt’s All About the Advisor

Today’s Speakers:

Ernesto A. LanzaDeputy Executive Director and Chief Legal Officer,

Municipal Securities Rulemaking Board

David WattenbargerSenior Fixed Income Trader, Securities Service

Network

Amanda KlueverCompliance Officer, Coordinated Capital Securities

Inc.

About the MSRB

• Created by Congress in 1975

• Self-regulatory organization for municipal securities dealers and municipal advisors

• No rulemaking authority over issuers or other market participants

• The MSRB partners with SEC, FINRA and bank regulators on enforcement, examinations and surveillance

• Congressionally mandated mission:

• Protect investors, municipal entities and the public interest

• Promote a fair and efficient municipal bond market

Overview of MSRB Rulemaking & Related Activities

Dealer Regulation

• Sales practices, including suitability, pricing & disclosures to customers

• Underwriting activities

• Licensing, compliance & examination

Municipal Advisor Regulation

• Proposed baseline fiduciary, fair practice & other rules – pending final SEC action

Information Systems

• Existing systems & long-range plan

MSRB Dealer Regulation –Sales Practices

Basic investor protection obligations in connection with customer sales activities

• disclosure of material information (MSRB Rule G-17 interpretations)

• suitability of recommendations (MSRB Rule G-19)

• fair pricing (MSRB Rules G-18 and G-30)


• Requirements as applied to retail investors enunciated in a series of MSRB notices

• MSRB Notice 2011-67 (Nov. 30, 2011) – FAQs

• MSRB Notice 2010-37 (Sept. 20, 2010) – Reminder

• MSRB Notice 2009-42 (July 14, 2009) – Guidance

• MSRB Notice 2007-17 (Mar. 30, 2007) – Reminder

• MSRB Notice 2006-23 (Aug. 7, 2006) – 529 Plan Guidance

• MSRB Notice 2002-10 (Mar. 25, 2002) – Interpretation



• disclosure of material information• must disclose to customer, at or prior to time of sale, all material

facts about transaction known by dealer, as well as material facts about the security that are reasonably accessible to the market

• information available from “established industry sources” deemed to be reasonably accessible to the market

• disclosure required for all transactions – recommended or not recommended



• suitability of recommendations• dealer recommending municipal security must have reasonable

ground for believing recommendation is suitable

• based on information available from issuer or otherwise (including established industry sources) and facts disclosed or known about investor

• requires meaningful analysis based on appropriately weighted relevant factors – no municipal security is automatically suitable for all investors



• fair pricing• transaction price to customer must be fair and reasonable,

taking into consideration all relevant factors

• low mark-up does not excuse poor pricing (i.e., can’t pass on a bad decision to a customer by charging a low mark-up)

• must consider information available in established industry sources, including pricing data and continuing disclosures

• use of broker’s broker does not automatically fulfill fair pricing duty – see MSRB Notice 2011-55 (Sept. 8, 2011)

MSRB Dealer Regulation – Underwriting Activities

• Prohibition on underwriting new issue if served as financial advisor (MSRB Rule G-23)

• applies to competitive and negotiated underwritings, as well as private placements, with limited exceptions

• does not prohibit underwriter from providing advice on structure, timing, terms, and similar matters for issue, or on investment of proceeds or integrally-related derivative

• certain disclosures and maintenance of arm’s length relationship required if advice as underwriter is provided

• See MSRB Notice 2011-65 (Nov. 18, 2011)

MSRB Dealer Regulation – Underwriting Activities

• Placement of bank loans

• MSRB Notice 2011-52 (Sept. 12, 2011) noted that, under existing legal principles, certain financings that are called “bank loans” may, in fact, be municipal securities

• dealer helping to place “bank loan” that is a security may be a placement agent under MSRB and SEC rules

• Proposed fair dealing duties of underwriters

• MSRB proposed interpretive notice on Rule G-17 fair dealing duty of underwriters to issuers – see MSRB Notice 2011-36 (Aug. 2, 2011)

• SEC proceeding to approve or disapprove is pending

MSRB Dealer Regulation – Licensing/Compliance/Examination

• Municipal Securities Representative Qualification

• passage of Series 7 exam sufficient only for sales to or purchases from customers of municipal securities

• passage of Series 52 exam required for any other representative activities, such as trading or underwriting municipal securities

• individuals who passed Series 7 exam prior to November 7, 2011 are grandfathered as long as they maintain registration

• See MSRB Rule G-3, MSRB Notice 2011-69 (Nov. 7, 2011)

MSRB Dealer Regulation – Licensing/Compliance/Examination

• Compliance Examinations

• MSRB coordinated with FINRA to institute risk-based compliance exams of FINRA member firms on municipal securities activities

• MSRB Rule G-16 amended to provide flexibility to schedule exams from annually to as much as once every four years

• MSRB Rule G-9 amended to extend the preservation period for records previously required to be held for three years to four years, effective June 16, 2012

• See MSRB Notice 2011-69 (Dec. 19, 2011)

MSRB Municipal Advisor Regulation –Pending Rule Proposals

• MSRB municipal advisor rulemaking proposals:

• Draft MSRB Rule G-17: Fair Dealing Interpretive Notice

• Draft MSRB Rule G-20: Gifts and Gratuities

• Draft MSRB Rule G-36: Fiduciary Duty

• Draft MSRB Rule G-42: Pay to Play

• Draft MSRB Rule G-44: Supervision

• Draft MSRB Rule G-46: Activities of Municipal Advisors

• Draft MSRB Rule G-21: Advertising

• Draft MSRB Rule A-11: Interim Municipal Advisor Assessment

MSRB Information

• MSRB Main Number: (703) 797-6600

• Sign up to receive email alerts

• http://www.msrb.org/msrb1/subscribe/subscribe.asp

• Follow us on Twitter

• http://twitter.com/#!/MSRB_News

• Visit the MSRB’s websites

• www.msrb.org

• http://emma.msrb.org

Practical Challenges

• Timing constraints

Turn around time from order inquiry through execution involves a number of time consuming steps in an essentially timely transaction

• Audit trail

Document delivery, “affirmations” from reps/clients, and records of procedure followed can be data intensive and subject to slippage

• Disclosure Availability

Gaps and inconsistencies in disclosure docs available on EMMA, etc introduce stumbling points in sales and trade process. ECNs and “upstream” dealers not necessarily engaged in disclosure

Practical Challenges - continued

• Disclosure “noise”

Large and redundant docs on EMMA add confusion and disrupt efficient communication / trading process

• Retreating bid side

Anecdotal evidence points to fewer dealers involved with odd-lot / retail size business

• Low Yields

Super low yields distort “traditional” flows

Practical Challenges - continued

• No insurance

The implosion of the muni bond insurance space heightened exposure to individual issue risks

• Build America Bonds

An enormous anomaly

• Competition from packaged products

Muni bond funds / ETFs, leveraged ETFs, annuity products divert traditional muni buyers

Solutions?• One standard for disclosure

• Encourage disclosure along the chain: issuer->market, secondary dealer->dealer, dealer->retail

• Standardize typical disclosure items (updated financials, ratings changes, etc) and eliminate redundancies

• EMMA as the one primary reference

• Simplify and consolidate best practices compliance for retail brokers and their clients

• Systems development

Solutions?

• Automated and electronic systems

• EMMA updates by email subscription

• Electronic order management from inquiry to execution; electronic affirmation capture

• Automated post-trade document delivery (eg. PROS via NFS)

DisclosureWhat is the requirement?

•FINRA Notice 10-41

•Customer Checklist for Disclosure

Books & Records

How do you document that you are following the requirements?

•Documentation kept with trade file

•Spreadsheet with suitability information

Firm Oversight

How do you make sure you are doing what you say you are doing?

•Exception reports available from clearing firm

•Reports available through FINRA’s Report Center

•Quarterly (or other) review of files

•Follow up through branch office audits and annual compliance questionnaires

Regulatory Oversight

Did you do a good job?

Alternative Muni Exam (AME) – 2010• 11 page questionnaire• Provided 30 days for response

FINRA Routine Exam - 2011• Focused more on reporting• Proving negatives

About the MSRB

Documents

Transcript of About the MSRB