[Federal Register Volume 87, Number 124 (Wednesday, June 29, 2022)]
[Notices]
[Pages 38795-38802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13814]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 95145; File No. SR-MSRB-2022-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval 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

June 23, 2022.

I. Introduction

    On April 29, 2022, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to 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'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \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.
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    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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    \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 the definition set forth in MSRB Rule D-8, 
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 the proposed rule change shall be 
collectively to ``Bank Dealers'' or individually to a ``Bank 
Dealer.'' See also MSRB Rule D-11, which defines 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 herein 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.
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    The proposed rule change was published for comment in the Federal 
Register on May 10, 2022.\7\ The public comment period closed on May 
31, 2022, and no comment letters were received on the proposed rule 
change. As described further below, the Commission is approving the 
proposed rule change.
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    \7\ Exchange Act Release No. 88829 (May 4, 2022) (the 
``Notice''), 87 FR 28084 (May 12, 2020) (MSRB-2022-02).
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II. Description of Proposed Rule Change

    As described further below, the proposed rule change consists of 
the Best Interest Amendments and the Institutional SMMP Amendment.

[[Page 38796]]

A. Background and Purpose of the Best Interest Amendments

    The MSRB stated that 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'').\8\ The MSRB also stated that the Best Interest 
Amendments are intended to improve investor protection in the municipal 
securities market by ensuring that retail customers are afforded the 
investor protections provided by Regulation Best Interest, regardless 
of whether a retail municipal recommendation received by a retail 
customer is made by a Broker-Dealer \9\ or a Bank Dealer.
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    \8\ Notice, 87 FR at 28084.
    \9\ 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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B. 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.\10\ 
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.\11\ 
Regulation Best Interest enhanced the Broker-Dealer standard of conduct 
beyond previously existing suitability obligations, such as those then 
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.\12\
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    \10\ See, generally, Regulation Best Interest Adopting Release.
    \11\ 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.
    \12\ Regulation Best Interest Adopting Release, 84 FR at 33319.
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    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.\13\
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    \13\ 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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    In response to the Commission's adoption of Regulation Best 
Interest, 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.\14\ The Commission approved these proposed amendments on June 
25, 2020.\15\
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    \14\ 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?.
    \15\ 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?.
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C. 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.\16\ 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.\17\
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    \16\ Notice, 87 FR at 28085.
    \17\ 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. Notice, 87 FR at 28085, 
n. 13.
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D. Application of Regulation Best Interest to Bank Dealers

    The MSRB stated that 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.\18\ 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.\19\ 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,\20\ Care 
Obligation,\21\ Conflict-of-Interest Obligation,\22\ and Compliance 
Obligation.\23\
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    \18\ Notice, 87 FR at 28085.
    \19\ Id.
    \20\ 17 CFR 240.15l-1(a)(2)(i).
    \21\ 17 CFR 240.15l-1(a)(2)(ii).
    \22\ 17 CFR 240.15l-1(a)(2)(iii).
    \23\ 17 CFR 240.15l-1(a)(2)(iv).
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    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 
stated that it believes that any SEC guidance with respect to the 
understanding and application of Regulation Best Interest would be 
equally applicable to Bank Dealers.\24\
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    \24\ Notice, 87 FR at 28085.

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[[Page 38797]]

E. 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; \25\ and (b) all material facts relating to 
conflicts of interest that are associated with the retail municipal 
recommendation.\26\
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    \25\ The MSRB offered the example that, 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. Notice, 87 FR at 28085, n. 18.
    \26\ Notice, 87 FR at 28085.
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F. 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.\27\
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    \27\ Notice, 87 FR at 28086.
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G. 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.\28\
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    \28\ Id.
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H. 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.\29\
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    \29\ Id.
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I. Purpose and Intent of the Best Interest Amendments

    The MSRB stated that it proposed 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.\30\ Specific 
to enhancing the standard of investor protection, the MSRB noted that 
it 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. \31\ 
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.\32\ The MSRB also stated 
that, as the proposed Best Interest Amendments would require a Bank 
Dealer to comply with the enhanced standard of conduct required by 
Regulation Best Interest, the MSRB believes that the Best Interest 
Amendments would improve overall investor protection in the municipal 
securities market.\33\
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    \30\ Id.
    \31\ Id.
    \32\ Id.
    \33\ Id.
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    Specific to promoting regulatory parity, the MSRB stated that it 
believed 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.\34\ The MSRB 
noted that 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.\35\ The MSRB stated that 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.\36\
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    \34\ Id.
    \35\ Id.
    \36\ Id.

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[[Page 38798]]

J. Background and Purpose of the Institutional SMMP Amendment

    The MSRB stated that 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 \37\ under Regulation 
Best Interest (collectively, ``Institutional SMMPs'' and, individually, 
each an ``Institutional SMMP'').\38\
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    \37\ See supra note 11 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.
    \38\ Notice, 87 FR at 28086.
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    As is the case with the reduced customer-specific suitability 
obligations currently afforded to Institutional SMMPs under MSRB Rule 
G-48(c), the MSRB stated that it 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.\39\ The MSRB noted that this modification would effectively 
revert the quantitative suitability standard for Institutional SMMPs 
back to the previously existing standard that was in place under MSRB 
rules prior to June 30, 2020.\40\ The MSRB stated that the proposed 
Institutional 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.\41\
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    \39\ Id.
    \40\ Id.; see also 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 also 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.
    \41\ Notice, 87 FR at 28086-87. See also MSRB Rule G-48(c).
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K. 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.\42\ 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).\43\ 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.\44\ 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.\45\ 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.\46\
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    \42\ MSRB Rule G-19.
    \43\ 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. Notice, 87 FR at 28087, n. 23.
    \44\ Notice, 87 FR at 28087.
    \45\ MSRB Rule G-19, Supplementary Material .05(c).
    \46\ 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.\47\ 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.\48\ 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.\49\
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    \47\ Stated differently, 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. 
Notice, 87 FR at 28087, n. 26. 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). Notice, 87 FR at 28087, n. 26.
    \48\ Notice, 87 FR at 28087.
    \49\ Id. See MSRB Rule D-15(c) (requiring an Institutional SMMP 
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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L. 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 (i.e., an 
SMMP).\50\ 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,\51\ (ii) 
transaction pricing,\52\ (iii) bona fide

[[Page 38799]]

quotations,\53\ (iv) best execution,\54\ and (vi) suitability.\55\ 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.\56\
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    \50\ MSRB Rule G-48.
    \51\ 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.'')
    \52\ MSRB Rule G-48(b).
    \53\ 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.'')
    \54\ 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.'')
    \55\ MSRB Rule G-48(c).
    \56\ 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.\57\ 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.'' 
\58\ This 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.\59\
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    \57\ 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.
    \58\ MSRB Rule G-48(c).
    \59\ 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).
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M. 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.\60\ The SMMP definition in MSRB Rule 
D-15 enumerates three components, which separately address: (i) the 
minimum qualifying traits and characteristics of an SMMP customer; \61\ 
(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''); \62\ and (iii) the affirmations that 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'').\63\
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    \60\ MSRB Rule G-48.
    \61\ 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).
    \62\ 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).
    \63\ MSRB Rule D-15(c).
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    With respect to 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; \64\ 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).\65\
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    \64\ 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 
. . .'').
    \65\ 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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    The MSRB noted that 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.\66\ The MSRB stated that, 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.\67\ 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.\68\ The MSRB noted that, 
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.\69\ The MSRB noted 
that 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 that must be 
satisfied for a customer to qualify as an SMMP.\70\
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    \66\ Notice, 87 FR at 28088.
    \67\ Id.
    \68\ See MSRB Rule D-15(b) and Rule D-15 Supplementary Material 
.01.
    \69\ Notice, 87 FR at 28088
    \70\ Id.

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[[Page 38800]]

N. Purpose and Intent of the Institutional SMMP Amendment to MSRB Rule 
G-48

    The MSRB stated that 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.\71\ 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.\72\ 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.\73\
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    \71\ Id.
    \72\ 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).
    \73\ Notice, 87 FR at 28088.
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    More importantly, because each Institutional SMMP must self-
identify as an SMMP by making the SMMP Customer Affirmations, as well 
as fulfill the requirements associated with a dealer's SMMP Reasonable 
Basis Determination, the MSRB stated that the proposed Institutional 
SMMP Amendment would ease a regulatory burden on dealers that 
effectively replicates the sort of analysis an Institutional SMMP is 
willing and capable of performing itself.\74\ As a result, the MSRB 
noted that 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.\75\
---------------------------------------------------------------------------

    \74\ Id.
    \75\ Id.
---------------------------------------------------------------------------

    Although the MSRB noted that investor protection benefits 
associated with requiring dealers to perform a potentially duplicative 
suitability analysis can be appropriate in other circumstances,\76\ the 
MSRB stated that the compliance burden associated with performing a 
quantitative suitability analysis on recommendations made to 
Institutional SMMPs outweighs the potential marginal investor 
protection benefits.\77\ The MSRB noted that the proposed Institutional 
SMMP Amendment would promote efficiency in the municipal securities 
market by eliminating a regulatory burden on dealers that potentially 
provides a duplicative or unneeded analyses in supplement of an 
Institutional SMMPs' own independent and informed judgment.\78\ The 
MSRB stated that the proposed Institutional SMMP Amendment would allow 
dealers to redirect the resources associated with this regulatory 
burden to other more productive market activities.\79\
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    \76\ Notice, 87 FR at 28088-89. 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. Notice, 87 FR at 28089, n. 46.
    \77\ Notice, 87 FR at 28089.
    \78\ Id.
    \79\ Id.
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III. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change. 
The Commission finds that the proposed rule change is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the MSRB.
    In particular, the Commission believes that the proposed rule 
change is consistent with the provisions of Exchange Act Section 
15B(b)(2)(C), which provides, in part, 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, 
and 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.\80\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

A. Commission Findings for the Best Interest Amendments

    The Commission finds that the proposed Best Interest Amendments are 
consistent with Section 15B(b)(2)(C) of the Act \81\ because the 
amendments would: (i) prevent fraudulent and manipulative acts and 
practices; (ii) promote just and equitable principles of trade; (iii) 
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; (iv) remove impediments to and perfect the 
mechanism of a free and open market in municipal securities and 
municipal financial products; and (v) protect investors, municipal 
entities, obligated persons, and the public interest.
---------------------------------------------------------------------------

    \81\ Id.
---------------------------------------------------------------------------

i. Prevent Fraudulent and Manipulative Acts and Practices
    The Commission finds that the proposed Best Interest Amendments 
would 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.\82\ Specifically, 
the proposed Best Interest Amendments would mandate Bank Dealers 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 interest of the retail customer).\83\ As such, the 
Commission finds that the proposed Best Interest Amendments would 
enhance the quality of Bank Dealer retail municipal recommendations.
---------------------------------------------------------------------------

    \82\ Regulation Best Interest Adopting Release, 84 FR at 33318.
    \83\ Notice, 87 FR at 28085.
---------------------------------------------------------------------------

    The Commission further finds that the proposed Best Interest 
Amendments would address conflicts of interest in connection with Bank 
Dealer retail municipal recommendations, 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 it is determined that disclosure is 
insufficient to reasonably address the conflict, to mitigate, or in 
certain

[[Page 38801]]

instances, eliminate the conflict).\84\ Therefore, the Commission finds 
that reducing the potential harm to retail customers that may be caused 
by conflict of interest in connection with Bank Dealer retail municipal 
recommendations.
---------------------------------------------------------------------------

    \84\ Notice, 87 FR at 28086.
---------------------------------------------------------------------------

    By enhancing the quality of Bank Dealer recommendations to retail 
customers and mitigating harm to retail customers from potential 
conflict of interest, the Commission believes that the proposed Best 
Interest Amendments would prevent potential fraudulent and manipulative 
acts and practices and promote the protection of the retail customers 
of Bank Dealers.\85\
---------------------------------------------------------------------------

    \85\ Regulation Best Interest Adopting Release, 84 FR at 33318.
---------------------------------------------------------------------------

ii. Promote Just and Equitable Principles of Trade
    The Commission finds that the proposed Best Interest Amendments' 
mandate of a uniform standard among Broker-Dealers and Bank Dealers 
when making recommendations to retail customers in municipal securities 
would promote just and equitable principles of trade within the 
municipal securities market. Specifically, the proposed Best Interest 
Amendments would ensure Bank Dealers have regulatory obligations and 
burdens when engaging in retail municipal recommendations that are 
generally equivalent to the regulatory obligations and burdens of 
Broker-Dealers (when engaging in the same municipal securities 
activities).\86\ The Commission notes that 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. Therefore, the Commission finds that 
the proposed Best Interest Amendments will mitigate the potential for 
regulatory arbitrage and thereby promote just and equitable principles 
of trade.
---------------------------------------------------------------------------

    \86\ Notice, 87 FR at 28086.
---------------------------------------------------------------------------

iii. 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
    The Commission finds that the proposed Best Interest Amendments 
would foster cooperation and coordination between the MSRB, SEC, and 
other regulators by aligning the suitability obligations of MSRB Rule 
G-19 with the suitability obligations of Regulation Best Interest. \87\ 
The Commission notes that such alignment would establish a uniform 
standard of suitability obligations among Broker-Dealers and Bank 
Dealers when making retail municipal recommendations, creating 
regulatory clarity regarding retail municipal recommendations. As such, 
the Commission finds that the proposed Best Interest Amendments will 
foster greater cooperation and coordination among the authorities that 
examine Broker-Dealers and Bank Dealers for compliance with MSRB rules, 
as well as authorities that enforce those rules.
---------------------------------------------------------------------------

    \87\ Notice, 87 FR at 28085.
---------------------------------------------------------------------------

iv. Remove Impediments to and Perfect the Mechanism of a Free and Open 
Market in Municipal Securities and Municipal Financial Products
    The Commission finds that the proposed Best Interest Amendments 
would remove impediments to, and perfect the mechanism of, a free and 
open market in municipal securities by creating a uniform regulatory 
standard for retail municipal recommendations. By establishing one 
standard for retail municipal recommendations, the Commission finds 
that the proposed Best Interest Amendments would eliminate confusion 
about duties Bank Dealers (with retail customers and non-retail 
customers) owe to retail customers regarding municipal securities 
recommendations.\88\ The Commission further notes that having one 
standard of retail municipal recommendations would also eliminate 
confusion about the duties retail customers (who have accounts with 
both Bank Dealers and Broker-Dealers) can expect from Bank Dealers and 
Broker-Dealers regarding municipal securities recommendations. The 
Commission finds that the Best Interest Amendments would reduce Bank 
Dealers' and retail customers' confusion regarding the duties 
associated with providing retail municipal recommendation. As such, the 
Commission holds that the proposed Best Interest Amendments remove 
impediments to the municipal security market, removing uncertainty 
surrounding retail municipal recommendations.
---------------------------------------------------------------------------

    \88\ Id.
---------------------------------------------------------------------------

v. Protect Investors, Municipal Entities, Obligated Persons, and the 
Public Interest
    The Commission believes that the proposed Best Interest Amendments' 
revision to MSRB Rule G-19 will protect investors by ensuring Bank 
Dealers comply with the heightened regulatory requirements of the 
Commission's Regulation Best Interest rather than current MSRB G-
19.\89\ By uniformly applying the investor protections provided by 
Regulation Best Interest, the proposed Best Interest Amendments would 
ensure that a retail customer will receive the enhanced investor 
protections of Regulation Best Interest, regardless of whether a 
Broker-Dealer or a Bank Dealer makes retail municipal recommendation. 
In doing so, the Commission finds that the proposed Best Interest 
Amendments thereby protect investors, municipal entities, obligated 
persons, and the public interest.
---------------------------------------------------------------------------

    \89\ Id.
---------------------------------------------------------------------------

B. Commission Findings for the Institutional SMMP Amendment

    The Commission finds that the proposed Institutional SMMP Amendment 
is consistent with Section 15B(b)(2)(C) \90\ of the Act in that such 
amendment would remove impediments to and perfect the mechanism of a 
free and open market in municipal securities and municipal financial 
products, without materially diminishing the prevention of fraudulent 
and manipulative acts and practices; or the protect investors, 
municipal entities, obligated persons, and the public interest.
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    Specifically, the Commissions finds that the proposed Institutional 
SMMP Amendment would remove impediments to and perfect the mechanism of 
a free and open market in municipal securities and municipal financial 
product by eliminating 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.\91\ The Commission notes that ending 
this requirement could eliminate potentially duplicative analyses 
undertaken by dealers on behalf of Institutional SMMPs. In particular, 
the Commission notes that Institutional SMMPs have already affirmed 
their capacity and expertise to conduct such analyses for themselves, 
and presumably, the Institutional SMMPs presumably have taken upon 
themselves to perform such analyses.
---------------------------------------------------------------------------

    \91\ Notice, 87 FR at 28088.
---------------------------------------------------------------------------

    Therefore, the Commission believes that 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

[[Page 38802]]

municipal securities by reducing a compliance burden.
    The Commission further believes that proposed Institutional SMMP 
Amendment would not materially diminish the prevention of fraudulent 
and manipulative acts and practices under MSRB Rule G-19, as amended by 
the proposed Best Interest Amendments, by incorporating the concepts of 
actual control or de facto control.\92\ Specifically, the Commission 
believes that reinstating control elements would help address potential 
scenarios in which the ability of an Institutional SMMP to exercise 
independent judgment is undermined or circumvented. Such a situation 
may occur 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). The Commission further finds that the proposed 
Institutional SMMP Amendment's 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.
---------------------------------------------------------------------------

    \92\ Notice, 87 FR at 28088.
---------------------------------------------------------------------------

    Similarly, the Commission believes that the proposed Institutional 
SMMP Amendment will not materially diminish the protection of 
investors, municipal entities, and obligated person, and the public 
interest provided by MSRB Rule G-19, as amended by the proposed Best 
Interest Amendments. Specifically, under the proposed Institutional 
SMMP Amendment, new institutional customers, who otherwise would 
qualify as SMMPs but desire the additional investor protections 
afforded by quantitative suitability under MSRB Rule G-19, may decline 
to provide the required affirmations under MSRB Rule D-15.\93\ The 
Commission notes that, under the proposed rule change, existing 
Institutional SMMPs could withdraw their SMMP status and obtain the 
suitability protections afforded by MSRB Rule G-19. The Commission 
believes this ability to self-identify as an Institutional SMMP will 
help ensure that those institutional customers who desire additional 
investor protection can secure them under MSRB rules, which would then 
require a dealer to undertake a quantitative suitability analysis. 
Accordingly, the Commission finds that the proposed Institutional SMMP 
Amendment would not materially diminish essential safeguards for 
investor protection.
---------------------------------------------------------------------------

    \93\ Notice, 87 FR at 28090.
---------------------------------------------------------------------------

    In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation.\94\ Exchange Act Section 
15B(b)(2)(C) \95\ 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.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78c(f).
    \95\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The Commission does not believe that the proposed Best Interest 
Amendments would impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act because 
the proposed rule change would align MSRB rules with the requirements 
of Regulation Best Interest. As such, the proposed Best Interest 
Amendments will reduce the potential for regulatory arbitrage and any 
attendant disruption it could have caused in the competitive landscape 
between Broker-Dealers and Bank Dealers regarding retail municipal 
recommendations. Consequently, the proposed Best Interest Amendments 
will not impose any burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act, because it 
establishes a uniform regulatory environment for all retail municipal 
recommendations.
    The Commission further believes that the proposed Institutional 
SMMP Amendment would not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Exchange Act 
because the proposed rule change would be equally applicable to all 
dealers. As such, the Commission finds that any benefits or burdens to 
competition would be evenly applied to all such firms transacting with 
institutional customers. Therefore, neither the proposed Best Interest 
Amendments nor the proposed Institutional SMMP Amendment do not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act.
    The Commission has also reviewed the record for the proposed rule 
change and notes that the record does not contain any information to 
indicate that the proposed rule change would have a negative effect on 
capital formation. Further, the Commission finds that the possible 
increased investor protection offered by the proposed Best Interest 
Amendments and the possible operational efficiency proposed 
Institutional SMMP Amendments could foster greater faith in the 
integrity of the municipal security market, increasing participation in 
this market, thereby increase capital formation.
    The Commission also finds that the proposed rule change includes 
provisions that help promote efficiency. In particular, the Commission 
believes the proposed Best Interest Amendments may improve Broker 
Dealers and Bank Dealers' effectiveness in providing retail municipal 
recommendations by promoting a uniform standard of suitability 
requirements (for example, increasing compliance efficiency for firms 
who have both Broker-Dealer and Bank Dealer subsidiaries). The 
Commission also notes that the proposed Institutional SMMP Amendment 
may 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, the Commission finds 
that the proposed Institutional SMMP Amendment could eliminate 
potentially duplicative analyses undertaken by dealers on behalf of 
Institutional SMMPs.
    The Commission received no comment letters on the proposed rule 
change.
    For the reasons noted above, the Commission believes that the 
proposed rule change is consistent with the Exchange Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\96\ that the proposed rule change (SR-MSRB-2022-02) be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78s(b)(2).
    \97\ 17 CFR 200.30-3(a)(12).

    For the Commission, pursuant to delegated authority.\97\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-13814 Filed 6-28-22; 8:45 am]
BILLING CODE 8011-01-P


