MSRB Dealer Regulation - Financial Services Institute

Report
Municipals, Municipals, Municipals
It’s All About the Advisor
Today’s Speakers:
Ernesto A. Lanza
Deputy Executive Director and Chief Legal Officer,
Municipal Securities Rulemaking Board
David Wattenbarger
Senior Fixed Income Trader, Securities Service Network
Amanda Kluever
Compliance Officer, Coordinated Capital Securities Inc.
About the MSRB
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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:
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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
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Municipal Advisor Regulation
Proposed baseline fiduciary, fair practice & other
rules – pending final SEC action
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Information Systems
Existing systems & long-range plan
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MSRB Dealer Regulation –
Sales Practices
Basic investor protection obligations in
connection with customer sales activities
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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)
MSRB Dealer Regulation –
Sales Practices
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Requirements as applied to retail investors
enunciated in a series of MSRB notices
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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
MSRB Dealer Regulation –
Sales Practices
Basic investor protection obligations in
connection with customer sales activities
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disclosure of material information
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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
MSRB Dealer Regulation –
Sales Practices
Basic investor protection obligations in
connection with customer sales activities
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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
MSRB Dealer Regulation –
Sales Practices
Basic investor protection obligations in
connection with customer sales activities
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fair pricing
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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
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Prohibition on underwriting new issue if served as
financial advisor (MSRB Rule G-23)
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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
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Placement of bank loans
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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
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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
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Municipal Securities Representative Qualification
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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
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Compliance Examinations
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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
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MSRB municipal advisor rulemaking proposals:
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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
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MSRB Main Number: (703) 797-6600
Sign up to receive email alerts
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Follow us on Twitter
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http://www.msrb.org/msrb1/subscribe/subscribe.asp
http://twitter.com/#!/MSRB_News
Visit the MSRB’s websites
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www.msrb.org
http://emma.msrb.org
Practical Challenges
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Timing constraints
Turn around time from order inquiry through execution involves a
number of time consuming steps in an essentially timely
transaction
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Audit trail
Document delivery, “affirmations” from reps/clients, and records of
procedure followed can be data intensive and subject to slippage
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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
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Disclosure “noise”
Large and redundant docs on EMMA add confusion and disrupt
efficient communication / trading process
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Retreating bid side
Anecdotal evidence points to fewer dealers involved with odd-lot /
retail size business
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Low Yields
Super low yields distort “traditional” flows
Practical Challenges - continued
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No insurance
The implosion of the muni bond insurance space heightened
exposure to individual issue risks
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Build America Bonds
An enormous anomaly
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Competition from packaged products
Muni bond funds / ETFs, leveraged ETFs, annuity products divert
traditional muni buyers
Solutions?
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One standard for disclosure
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Standardize typical disclosure items (updated financials, ratings
changes, etc) and eliminate redundancies
EMMA as the one primary reference
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Encourage disclosure along the chain: issuer->market, secondary
dealer->dealer, dealer->retail
Simplify and consolidate best practices compliance for retail
brokers and their clients
Systems development
Solutions?
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Automated and electronic systems
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EMMA updates by email subscription
Electronic order management from inquiry to execution; electronic
affirmation capture
Automated post-trade document delivery (eg. PROS via NFS)
Disclosure
What 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

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