MSRB proposal would reduce volume of disclosure required by dealers

The Municipal Securities Rulemaking Board appears poised to do away with a requirement that dealers provide disclosures to customers who may not be invested in municipals, a request industry groups have been making for years.

The MSRB requested comment May 14 on potential changes to Rules G-10 on investor and municipal advisory client education and protection and G-48 on transactions with sophisticated municipal market professionals. The proposed changes would require dealers to make certain disclosures only to customers who hold a muni position or who have made a municipal bond transaction in the prior year, and would exempt SMMPs from receipt of those disclosures.

“The MSRB has been hearing from stakeholders that it is an unnecessary burden on dealers to provide the annual notifications to customers that do not hold or actively trade municipal securities,” MSRB Chief Regulatory Officer Gail Marshall said in a release Friday. “Today’s request for comment is part of the MSRB’s commitment to ensure our rules achieve the intended benefits in furtherance of the MSRB’s mission to protect investors, state and local governments, and the public interest.”

Rule G-10 currently requires dealers and muni advisors to provide either electronically or in writing by the end of each calendar year certain notifications to their customers and clients. The notifications include a statement that the firm is registered with the MSRB and the Securities and Exchange Commission, the MSRB’s web address, and a notification of a brochure available on the MSRB website that describes the protections of MSRB rules and how to file complaints with regulators.

Prior to a 2017 amendment, the rule applied only to dealers and required dealers to provide a customer with a paper copy of the MSRB’s investor brochure after a customer had made a complaint to the dealer.

Under the changes being proposed now, dealers could satisfy the rule’s requirements by making the disclosures only to customers who executed a muni translation in the past year or held municipal securities, and could notify SMMPs and all other customers with a statement on the firm’s website.

Both the Securities Industry and Financial Markets Association and the Bond Dealers of America mentioned G-10 as a rule that should be updated in comment letters on the MSRB’s strategic priorities several months ago. Leslie Norwood, SIFMA’s head of municipals, praised the move Monday.

“SIFMA members had requested that the MSRB review Rule G-10, and make clear that annual customer notifications are only due to customers that hold or trade munis and not due to sophisticated municipal market participants, who do not need such basic disclosures,” Norwood said. “Requiring that annual customer notifications go to all customers of the broker-dealer, even if that customer doesn’t hold or trade munis, has added additional costs and burdens on the dealers without increasing customer protection. Reducing unnecessary and superfluous disclosures may make it more likely that customers pay attention to relevant disclosures. We appreciate the MSRB proposing this rule change early in the year, and hope that the amendments are finalized before annual customer notifications are due at the end 2021.”

In a January comment letter, BDA CEO Mike Nicholas told the MSRB that “the rule results in superfluous disclosures to customers who do not own or trade municipal securities. We ask the MSRB to amend Rule G-10 to specify that it applies to customers who own municipal securities or who have traded municipal securities since the dealer’s last annual disclosure.”

Comments on the proposed changes are due June 28. After the close of the comment period, the MSRB could choose to file for SEC approval, or might decide to modify the proposal.