Broker-dealers will not have to make the same disclosures to wealthier, more sophisticated individual investors that they do to other investors under a revised Municipal Securities Rulemaking Board interpretative notice approved recently by the Securities and Exchange Commission.

Under the notice, which takes effect July 9, the MSRB expands the definition of sophisticated municipal market professional (SMMP) to include, for the first time, individuals and other investors with assets of at least $50 million. The update of the board's 2002 interpretive notice "vastly simplifies" the analysis dealers must conduct when determining whether a customer qualifies as an SMMP, the board said in a release.

SMMPs are muni bond investors that the MSRB considers to be experienced investors. As a result, do not require the same protections as other investors. Dealers conducting trades for SMMPs have relaxed disclosure, pricing and suitability obligations. The MSRB filed the new definition with the SEC in March, saying it was justified by the greater access investors now have to municipal market information, including disclosures, transaction data, market statistics and educational material offered for free on its EMMA system.

The revised notice says an SMMP can be a customer with an institutional account, which can include individuals, corporations, partnerships and trusts with total assets of at least $50 million. The assets do not need to be in munis. The 2002 notice had required that an SMMP be an entity with at least $100 million invested in municipal securities. That threshold has been eliminated for institutional customers. Individuals were excluded from the earlier definition.

Although the threshold is higher, a dealer also must have "a reasonable basis to believe [they are] capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities." When determining a "reasonable basis," dealers should consider "the amount and type of municipal securities owned or under management by the institutional customer," the MSRB says. Also, an SMMP must "affirmatively indicate," orally or in writing, to a dealer that they are exercising independent judgement in evaluating recommendations.

The board says the revised notice will align its rules with the FINRA's new Rule 2111 on suitability, which also takes effect July 9. Rule 2111 says dealers' suitability obligations are not satisfied unless an institutional customer "affirmatively indicates" independent judgment in evaluating recommendations. A customer's affirmation under Rule 2111 will also satisfy MSRB requirements, according to the notice. Dealers who conduct any transactions with SMMPs — both recommended and self-directed — are excluded from the requirement that they disclose all material information available from established industry sources.

Under the old rules, the exclusion applied only when dealers conducted non-recommended transactions with SMMPs.

In a comment letter to the SEC, SIFMA's associate general counsel David Cohen wrote in support of the changes because they could reduce dealers' compliance costs and maintain consistency with FINRA rules.

Meanwhile, MSRB deputy executive director Ernesto Lanza noted that an affirmation alone won't satisfy board rules and that dealers must also have a reasonable basis to believe an investor can evaluate risk.

And in a comment letter to the board last year, Bond Dealers of America chief executive Mike Nicholas said his group supports the revised SMMP definition, but believes the threshold could have been cut to $25 million.



The New Definition of Sophisticated

Criteria for the expanded definition of sophisticated municipal market professional (SMMP), which takes effect July 9.

* SMMPs must be customers with an "institutional account," which can include corporations, partnerships, trusts or individuals with total assets of at least $50 million. Institutional accounts can also be those of banks, savings and loan associations, insurance companies, registered investment companies and investment advisors.

* To be considered an SMMP, dealers must have a reasonable basis to believe the customer can evaluate investment risks and market value independently, both in general and with regard to particular muni transactions. To determine "reasonable basis," dealers should consider the amount and type of the customers' municipal securities holdings.

* Customers must "affirmatively indicate" they are exercising independent judgement in evaluating dealers' recommendations. Affirmations can apply to individual trades, trades of types of securities, or all transactions in a customer's account.

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