Firm Element

(New) Two-Day Settlement Cycle for Municipal Securities Transactions

The MSRB announced September 5, 2017 as the effective date of amendments to MSRB Rules G-12, on uniform practice, and G-15, on confirmation, clearance, settlement and other uniform practice requirements with respect to transactions with customers, to define regular-way settlement for municipal securities transactions as occurring on a two-day settlement cycle (“T+2”). The SEC approved the MSRB’s proposal to make these rule amendments and other technical amendments on April 29, 2016. The migration to T+2 settlement is expected to provide significant benefits to the financial industry broadly, including the mitigation of counterparty risk, a decrease in margin requirements for members of the National Securities Clearing Corporation, a reduction in pro-cyclical margin and liquidity demands especially during periods of market volatility, and an increase in global settlement harmonization by aligning the U.S. markets with other major markets, such as the European Union.

• MSRB Regulatory Notice 2017-07 (March 28, 2017):  MSRB Announces Date of Transition to a Two-Day Settlement Cycle for Municipal Securities Transactions

The MSRB received approval from the SEC on April 29, 2016 to amend MSRB Rules G-12, on uniform practice, and G-15 on confirmation, clearance, settlement and other uniform practice requirements with respect to transactions with customers, to define regular-way settlement for municipal securities transactions as occurring on a two-day settlement cycle (“T+2”) and technical conforming amendments.

• MSRB Regulatory Notice 2016-15 (May 2, 2016):  MSRB to Amend Rules to Define Two-Day Settlement Cycle

 

(New) Designation Information Regarding Mandatory Participation in Business Continuity and Disaster Recovery Testing

 Regulation Systems Compliance and Integrity (Regulation SCI) was adopted by the SEC and requires the MSRB, as an SCI entity, to, among other things, require certain brokers, dealers, municipal securities dealers and municipal advisors registered with the MSRB (MSRB Registrants) to participate in the testing of the operation of the MSRB’s business continuity and disaster recovery plans, at least once every 12 months. To facilitate this Regulation SCI requirement, the MSRB adopted Rule A-18, on mandatory participation in business continuity and disaster recovery testing, on November 2, 2015.

Under Rule A-18, the MSRB designates as Participants in the mandatory functional and performance testing of the operation of the MSRB’s BC/DR Plans those MSRB Registrants whose submissions of data to the MSRB, taken as a whole, account for a meaningful percentage of the MSRB’s data submission volume required to be provided by MSRB Registrants, measured during an established time period.

• MSRB Regulatory Notice 2017-06 (March 7, 2017):  Designation Information Regarding Mandatory Participation in Business Continuity and Disaster Recovery Testing

• MSRB Regulatory Notice 2016-04 (January 2016):  Designation Information Regarding Mandatory Participation in Business Continuity and Disaster Recovery Testing

 

Extension Of MSRB's Customer Complaint And Related Recordkeeping Rules To Municipal Advisors And The Modernization Of Those Rules

On January 13, 2017, the MSRB received approval from the SEC of a proposed rule change consisting of: (i) amendments to MSRB Rule G-10, on delivery of investor brochure; Rule G-8, on books and records to be made by brokers, dealers, and municipal securities dealers and municipal advisors; and Rule G-9, on preservation of records; and (ii) an MSRB notice regarding electronic delivery and receipt of information by municipal advisors under Rule G-32, on disclosures in connection with primary offerings (amendments). The adoption of the amendments represents another milestone in the MSRB’s development of a comprehensive regulatory framework for municipal advisors in the exercise of the rulemaking granted to the MSRB by the Dodd-Frank Act. In addition, the adoption of the amendments furthers the MSRB’s mandate to protect investors, municipal entities, obligated persons and the public interest by modernizing the MSRB’s customer complaint and related recordkeeping rules. The amendments will become effective on October 13, 2017.

• MSRB Regulatory Notice 2017-03 (January 18, 2017): SEC Approves Extension of MSRB’s Customer Complaint and Related Recordkeeping Rules to Municipal Advisors and the Modernization of Those Rules

 

New Disclosure Requirements Under MSRB Rule G-15 And Prevailing Market Price Guidance Pursuant To Rule G-30

On November 17, 2016, the MSRB received approval from the SEC for a proposed rule change to MSRB Rule G-15 on confirmation, clearance, settlement and other uniform practice requirements with respect to customer transactions, and Rule G-30, on prices and commissions, to require brokers, dealers and municipal securities dealers (collectively, dealers) to disclose mark-ups and mark-downs (collectively, mark-ups unless the context requires otherwise) to retail customers on certain principal transactions and to provide dealers guidance on prevailing market price for the purpose of determining mark-ups and other Rule G-30 determinations. The MSRB believes requiring dealers to disclose their mark-ups on retail customer confirmations would provide meaningful and useful pricing information to retail investors and may result in lower transaction costs for such investors. The MSRB also believes that additional guidance on establishing the prevailing market price and determining markups would promote consistent compliance by dealers with their existing fair pricing obligations under MSRB rules and would support effective compliance with amendments to Rule G-15. The new disclosure requirements and prevailing market price guidance will become effective on May 14, 2018.

• MSRB Regulatory Notice 2016-28 (November 29, 2016): New Disclosure Requirements Under MSRB Rule G-15 and Prevailing Market Price Guidance Pursuant to Rule G-30 Effective May 14, 2018

 

Interpretive Notice Regarding Rule G-47, On Time Of Trade Disclosure

MSRB Rule G-47, on time of trade disclosure, requires brokers, dealers and municipal securities dealers (collectively, “dealers”) to disclose to their customers, at or prior to the time of trade, all material information known about the transaction, as well as material information about the municipal security that is reasonably accessible to the market. The MSRB has previously provided interpretive guidance, now codified in supplementary material to Rule G-47, on specific types of information that is material where specific scenarios occur and requires time of trade disclosure. Rule G-47, however, emphasizes that this list of specific disclosures is not exhaustive, and that other information may be material to a customer and required to be disclosed. The MSRB published Regulatory Notice 2016-27 to state its interpretation that the fact that a municipal security bears market discount is material information that must be disclosed to a customer under MSRB Rule G-47.

• MSRB Regulatory Notice 2016-27 (November 22, 2016): Interpretive Notice Regarding Rule G-47, On Time Of Trade Disclosure

 

Political Contributions and Prohibitions on Municipal Securities Business

The amendments to MSRB Rule G-37, on political contributions and prohibitions on municipal securities business, and related amendments to MSRB Rules G-8, on books and records, and G-9, on preservation of records, and Forms G-37 and G-37x became effective on August 17, 2016. Amended Rule G-37 extends the core standards under Rule G-37 to municipal advisors, their political contributions and the provision of municipal advisory business. The amendments are specifically designed to address potential “pay-to-play” practices by municipal advisors consistently with the MSRB's existing regulation of dealers.

• MSRB Regulatory Notice 2016-06 (February 17, 2016):  Amendments to MSRB Rule G-37 on Political Contributions and Prohibitions on Municipal Securities Business and Related Amendments are Deemed Approved Under the Securities Exchange Act of 1934

Effective August 17, 2016, the amendments to Rule G-37 extend the core standards under Rule G-37 to municipal advisors, their political contributions and the provision of municipal advisory business. The amendments are designed to address potential “pay-to-play” practices by municipal advisors consistently with the MSRB’s existing regulation of dealers.

• MSRB Regulatory Notice 2016-18 (August 4, 2016):  MSRB Files Amendment to Rule G-37 to Clarify its Application to Contributions before August 17, 2016

 

Direct Purchases and Bank Loans as Alternatives to Public Financing in the Municipal Securities Market

FINRA and the MSRB are providing guidance to remind firms of their obligations in connection with privately placing municipal securities directly with a single purchaser and of the use of bank loans in the municipal securities market.

• MSRB Regulatory Notice 2016-12 (April 4, 2016):  Direct Purchases and Bank Loans as Alternatives to Public Financing in the Municipal Securities Market
• FINRA Regulatory Notice 16-10 (April 2016):  Direct Purchases and Bank Loans as Alternatives to Public Financing in the Municipal Securities Market

 

Best Execution Rule

In light of the increasingly automated market for equity securities and standardized options, and recent advances in trading technology and communications in the fixed income markets, FINRA reiterates the best execution obligations that apply when firms receive, handle, route or execute customer orders in equities, options and fixed income securities. FINRA reminds firms of their obligations, as previously articulated by the SEC and FINRA, to regularly and rigorously examine execution quality likely to be obtained from the different markets trading a security.

• FINRA Regulatory Notice 15-46 (November 2015):  Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets

The MSRB published the implementation guidance, which provides answers to frequently asked questions about the best-execution rule and the SMMP exemption. Accordingly, the effective date for Rule G-18 and the related amendments was March 21, 2016.

• MSRB Regulatory Notice 2015-23 (November 20, 2015):  MSRB Provides Implementation Guidance on MSRB Rule G-18, on Best Execution

• Implementation Guidance on MSRB Rule G-18, on Best Execution (November 20, 2015)

 

Guidance Relating to Firm Short Positions and Fails-to-Receive in Municipal Securities

FINRA issued guidance to remind firms engaging in municipal securities transactions that their written supervisory procedures should identify the process for detecting, resolving and preventing the consequences of firm short positions and fails-to-receive in municipal securities, as well as the controls for ensuring that communications with customers regarding municipal securities transactions, including the tax status of interest payments, are not false or misleading. FINRA examinations have found that, as a result of trading errors and inadequate firm controls, some customers who purchased tax-exempt municipal securities have been paid substitute interest, which is not tax-exempt under the Internal Revenue Code.

• FINRA Regulatory Notice 15-27 (July 2015):  Guidance Relating to Firm Short Positions and Fails-to-Receive in Municipal Securities

(New) Application of MSRB Rules to Solicitor Municipal Advisors

In MSRB Regulatory Notice 2017-08, the MSRB: (i) summarizes several of the most important MSRB rules applicable to municipal advisors that undertake the solicitation of a municipal entity or obligated person and includes references to various provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and Exchange Act rules adopted by the SEC that are applicable to the registration of such municipal advisors with the SEC; (ii) sets forth an exhaustive list of all the general MSRB rules applicable to such municipal advisors as well as the key administrative and definitional MSRB rules applicable to them; and (iii) refers to various MSRB and/or SEC resources for additional information on the content summarized herein and, more generally, to select additional resources that may be of interest to all municipal advisors. Because much of the content of this Notice applies to municipal advisors generally, this guidance may be useful to non-solicitor municipal advisors as well.

• MSRB Regulatory Notice 2017-08 (May 4, 2017): Application of MSRB Rules to Solicitor Municipal Advisors

 

Municipal Advisor Representative Qualification Examination (Series 50)

The MSRB will make available the permanent Municipal Advisor Representative Qualification Examination (Series 50) test beginning September 12, 2016. As provided for under MSRB Rule G-3, municipal advisor representatives are required to take and pass the Series 50 in order to engage in municipal advisory activities. To facilitate the transition to the new exam requirement, the MSRB is providing a one year grace period, ending on September 12, 2017, during which individuals will be able to take the exam while continuing to engage in municipal advisory activities. The score required to pass the Series 50 Exam is 71 percent.

• MSRB Regulatory Notice 2016-16 (May 31, 2016): MSRB to Launch Permanent Series 50 Exam September 12, 2016

 Periodic reviews of the content of the MSRB’s qualification examinations are required to determine whether revisions are necessary or appropriate in view of changes to the laws, rules and regulations pertaining to the subject matter of the qualification examination. The content outline for the Series 50 has been amended to reflect changes to the laws, rules and regulations covered by the examination and, among other things, incorporate the functions and associated tasks performed by a municipal advisor representative.

• MSRB Regulatory Notice 2016-17 (June 15, 2016): MSRB Revises Content Outline for the Municipal Advisor Qualification Examination

 

MSRB Rule G-3 Regarding Continuing Education

Effective January 1, 2015, MSRB Rule G-3, on professional qualification requirements, requires certain persons registered with brokers, dealers and municipal securities dealers (collectively, dealers) to participate in annual firm training on municipal securities matters. Dealers must complete the training by December 31, 2015, and each year thereafter.

The rule amendments provide greater specificity regarding the MSRB’s Firm Element continuing education requirements by requiring dealers to conduct annual municipal securities training for registered persons who regularly engage in or supervise municipal securities activities. The rule specifically requires dealers to train certain individuals annually on municipal securities issues. Dealers have the flexibility to determine which of their registered representatives regularly engage in, and which of their registered principals regularly supervise, municipal securities activities. The methodology for determining who should be trained must be documented in the annual written training plan, so it may be reviewed by the appropriate examining authority.

• MSRB Regulatory Notice 2014-17 (October 17, 2014): SEC Approves Amendments to MSRB Rule G-3 regarding Continuing Education

 

MSRB Registration

MSRB registrants, including broker-dealers and municipal advisors, are reminded that revised MSRB Rule A-12 was implemented in May 2014 as a single registration rule, combining certain requirements of former Rules A-12, A-15, and G-40 as well as existing Rule G-14, and establishing new Form A-12. Firms are required to provide information for several new contact persons in addition to a primary regulatory contact (i.e., master account administrator, billing contact, compliance contact and primary data quality contact) on Form A-12. Firms are reminded that, similar to FINRA Rule 4517, MSRB Rule A-12 requires MSRB registrants to review, update and affirm the information on Form A-12 during the first 17 business days of each calendar year. Rule A-12 also imposes a late fee on regulated entities that fail to pay MSRB assessments (such as annual registration fees, underwriting and other fees required by Rule A-13) in a timely manner.

• MSRB Regulatory Notice 2014-05 (February 27, 2014):  SEC Approves New Consolidated Registration Rule and Registration Form for Dealers and Municipal Advisors

• FAQs on MSRB Registration:  Rule A-12 (August 2014)

MSRB Rule G-14 and Real-Time Transaction Reporting System

The MSRB amended MSRB Rule G-14 effective July 18, 2016. Rule G-14 requires brokers, dealers and municipal securities dealers to report all executed transactions in most municipal securities to the MSRB’s Real-Time Transaction Reporting System (RTRS) within 15 minutes of the time of trade, with limited exceptions. RTRS serves the dual objectives of price transparency and market surveillance. The MSRB makes transaction data for transparency purposes available to the general public through the Electronic Municipal Market Access (EMMA^®) website at no cost, and disseminates such data through paid subscription services to market data vendors, institutional market participants and others that subscribe to the data feed.

• MSRB Regulatory Notice 2016-19 (August 9, 2016):  MSRB Provides Guidance on MSRB Rule G-14, on Reports of Sales or Purchases of Municipal Securities
•  MSRB Regulatory Notice 2016-09 (March 2, 2016):  MSRB Revises Effective Date for Amendments to MSRB Rule G-14, on Transaction Reporting
• MSRB Regulatory Notice 2015-07 (May 26, 2015):  SEC Approves Amendments to MSRB Rule G-14 and Real-Time Transaction Reporting System

 

Bank Loan Disclosure Advisory

In January 2015, the MSRB published a market advisory to alert municipal market participants of the importance of voluntary disclosure of bank loans. The MSRB stated that as part of its charge to promote a fair and efficient municipal securities market, it is aware that the use of bank loans and direct-purchase debt as financing alternatives to public offerings in the municipal securities market for funding capital improvement projects or refunding outstanding bonds is increasing. The MSRB is concerned that a bank loan could impair the rights of existing bondholders, including its impact on the seniority status of existing bondholders, or its impact on the credit or liquidity profile of an issuer. The MSRB believes that informing the market of the incurrence of a bank loan and its terms is beneficial to the continued fairness and efficiency of the municipal securities market.

The MSRB previously issued Notices 2011-37 and 2011-52 regarding bank loans which discussed, among other things, that certain financings that are called “bank loans” may, in fact, be municipal securities.

• MSRB Regulatory Notice 2015-03 (January 29, 2015):  Bank Loan Disclosure Market Advisory

• MSRB Notice 2011-37 (August 3, 2011):  Financial Advisors, Private Placements, and Bank Loans

• MSRB Notice 2011-52 (September 12, 2011):  Potential Applicability of MSRB Rules to Certain “Direct Purchases” and “Bank Loans”

MSRB Revises Content Outline for the General Securities Sales Supervisor Qualification Examination

The revisions to the content outline for the General Securities Sales Supervisor Qualification Examination (Series 9/10) were implemented on March 7, 2016. The content outline for the Series 9/10 was amended to reflect changes to the laws, rules and regulations covered by the examination and, among other things, incorporate the functions and associated tasks performed by a Municipal Securities Sales Principal.

• MSRB Regulatory Notice 2016-05 (January 28, 2016):  MSRB Revises Content Outline for the General Securities Sales Supervisor Qualifications Examination

 

MSRB Rule G-44 on Supervisory and Compliance Obligations of Municipal Advisors, and Amendments to MSRB Rules G-8 and G-9

The SEC approved the first dedicated rule for municipal advisors, MSRB Rule G-44, on supervisory and compliance obligations of municipal advisors, and related amendments to MSRB Rule G-8, on books and records to be made by brokers, dealers and municipal securities dealers, and MSRB Rule G-9, on preservation of records. The rule amendments became effective on April 23, 2015, except for Rule G-44(d), which became effective on April 23, 2016.

• MSRB Regulatory Notice 2014-19 (October 24, 2014):  SEC Approves MSRB Rule G-44 on Supervisory and Compliance Obligations of Municipal Advisors, and Amendments to MSRB Rules G-8 and G-9