PrintMSRB's request for comment on dealer supervision rule: More changes needed
BY SourceMedia | MUNICIPAL | 02:09 PM ESTSome early reactions to the Municipal Securities Rulemaking Board's request for comment on draft amendments to MSRB Rule G-27 on dealer supervision suggest that while a proposal to clarify a term relating to deal 'structuring' was welcomed, more changes to the rule are seen as necessary to reflect current workplace realities.
"I was disappointed that it didn't go further," said Peg Henry, who launched Peg Henry PLLC, a municipal securities legal consulting and expert witness services business last year after retiring from her role as head of municipal securities group legal at Stifel Financial Corp.
The muni market's principal regulator is seeking comment on the draft amendments as part of its ongoing retrospective rule review of supervisory obligations under the rule given "the evolution of the municipal securities marketplace and in workplace practices" at dealers that has occurred since Rule G-27 last underwent substantial review and revision, according to the notice, which said the rule was last amended substantively in 2007.
The deadline for submitting comments is March 16, the notice said.
The draft amendments aim to "add clarity to the term 'structuring of public offerings or private placements,'" as the term is used within the rule's definition of "office of municipal supervisory jurisdiction," ? or OMSJ for short, according to the notice.
"In addition, the draft amendments are intended to create flexibility for municipal market professionals by extending the exclusion for locations, other than a primary residence, that would otherwise be deemed a municipal branch office from 30 business days per year to 60 business days per year," the MSRB's RFC notice said.
Along with asking for input on the draft amendments, the MSRB is also seeking comments more broadly on what other areas of Rule G-27 should be included in its retrospective rule review as well as on "any relevant factors or other information that the MSRB should consider to better focus its review on the aspects of the rule that would be most relevant to how dealers engage in business today and into the future," the notice said.
"In particular, the MSRB is interested in receiving input on potential changes to or guidance with respect to Rule G-27 that would provide flexibility to dealers to implement effective supervisory structures and controls that best suit their manner of engaging in business without unduly restricting the types of physical, operational and technological parameters within which dealers must organize and conduct their business," the MSRB's notice said.
Michael Decker, senior vice president for research and public policy at the Bond Dealers of America, said uncertainty regarding the meaning of the term "structuring of public offerings or private placements" was one of two areas of concern regarding Rule G-27 that BDA has raised with the MSRB.
"Structuring was never defined in the rule, and it was unclear what it meant," Decker said.
In its notice, the MSRB said that public finance is a "broad term" that isn't defined under MSRB rules and that different dealers may include within its scope varying aspects of the process of bringing to market new issues of municipal securities. The Rule G-27 draft amendments aim to "provide greater clarity" on what parts of the process may be included within or excluded from the term "structuring of public offerings or private placements," which serves to determine whether such activities must be conducted at an OMSJ.
The draft amendments are designed to "draw a distinction between the function of final approval of bespoke recommendations, commitment of the dealer's capital or other formal action regarding the structuring of a municipal public or private offering from the functional work that supports the structuring of a deal and exempt these supporting activities from the definition of structuring of public offerings or private placements," the RFC notice said, citing debt modeling, financial analysis and numbers running as examples of such functional work.
"I think that the concept of the senior banker being the one who does the structuring is probably the right way to go, ? and that's how I would characterize what they've done," Henry said regarding the MSRB's proposal to add clarity to the term.
"Another thing I would say is it's about time that the MSRB recognized public finance," she said, adding that "none of their rules have recognized the existence of public finance in the past or investment bankers."
The draft amendments' clarification of what structuring means is "a welcome change," Decker said, adding, however, that BDA hasn't had time yet to discuss the proposal broadly among its members.
"So I'm giving you my reaction but I'll be interested to hear what my members think about this," he said.
A second area where BDA has raised concern with the MSRB around Rule G-27 relates to traders, Decker said, pointing to language in the rule pertaining to "order execution and/or market making."
Traders can't work consistently from their primary residences unless their homes are designated as an OMSJ and they obtain a supervisor's license, he said.
"That's an unnecessarily restrictive treatment of order execution and market making," Decker said. "Traders have worked remotely during the pandemic and since the pandemic successfully and without trouble."
Decker noted that the proposed amendments would expand the number of days per year that an individual can work in a non-primary residence location away from the office.
"You can work 60 days at your beach house, you just really can't work many days at all at your primary home," he said. "And that doesn't seem to make sense."
Henry also pointed to the COVID-19 pandemic and expressed disappointment that the MSRB's request for comment didn't reflect what had been learned about supervision during that era.
"I thought what they should have done is to say ?'Why can't you supervise somebody on Zoom?" Why do you have to be in an office?" she said. "I think that they should have gone further than they did in order to be realistic about how things work."
Decker agreed that tools such as Zoom allow those in supervisory roles to carry out their duties without having to be in the same office as the employees they supervise.
"The tools that firms use to supervise their employees are not location-based," he said. "It doesn't matter whether the trader is sitting next to you on the desk or a thousand miles away, you use the same tools to supervise that activity and they're electronic, technological."
The Securities Industry and Financial Markets Association "is pleased that the MSRB has a focus on MSRB Rule G-27, its dealer supervision rule, as part of its retrospective review of its rulebook, and will be filing a comment letter," Leslie Norwood, managing director, associate general counsel and head of municipal securities at SIFMA, said in a statement.
"SIFMA appreciates [that] the MSRB is seeking industry feedback regarding updating the supervision rules to reflect modern technology, risk management practices, and workplace realities," Norwood said.
The proposed amendments address some of dealers' concerns regarding the rule and SIFMA looks forward to reviewing the notice with its members, her statement said.
"The securities industry has evolved dramatically since supervision rules were implemented, and it is time for regulatory frameworks to reflect that evolution," Norwood said.
The American Securities Association "appreciates the MSRB's efforts to modernize Rule G?27 to reflect today's business practices and supervisory technologies," an ASA spokesperson said.
"We look forward to reviewing the proposal in detail and providing constructive feedback to help ensure the supervisory framework remains effective, efficient, and appropriately tailored to firms' operations," he said.
The MSRB's request for comment regarding Rule G-27 "was issued to solicit targeted input on areas where additional clarity may be helpful, including supervisory requirements and evolving work arrangements," an MSRB spokesperson said.
"MSRB will review feedback and consider whether further amendments are warranted based on the comments received," the spokesperson said.
