Broker-dealer groups urge modernization of MSRB dealer supervision rule

The Municipal Securities Rulemaking Board's location-focused supervisory model isa relic of an earlier era and needs to be modernized, broker-dealer groups told the MSRB in comments on the board's Rule G-27 on supervision.

The MSRB should "eliminate all location-based concepts of supervision" the Securities Industry and Financial Markets Association said in its letter responding to a request for comment the MSRB issued in January.

The Bond Dealers of America's letter described Rule G-27's "largely location-based" supervision model as "antiquated and obsolete," while the American Securities Association's letter urged the MSRB to modernize the rule "so that supervision is not anchored primarily to physical locations."

"Firms now use technology-enabled tools?trade surveillance systems, electronic communications monitoring, workflow approvals, and video collaboration?to supervise activities regardless of where personnel are physically located," Jessica Giroux, ASA's chief legal officer, said in her letter.

The letters from SIFMA, BDA and ASA were each dated March 16, the comment deadline specified in the MSRB's request for comment notice. The notice, published Jan. 14, said the MSRB was seeking comment on draft amendments to the rule as part of its ongoing retrospective rule review of supervisory obligations given "the evolution of the municipal securities marketplace and in workplace practices" since Rule G-27 last underwent substantial review and revision.

The draft amendments seek to offer greater clarity around the term "structuring of public offerings or private placements," as it is used within the definition of "office of municipal supervisory jurisdiction," and would also "increase the 30-business day exclusion from the municipal branch office registration for locations other than a primary residence," the notice said.

Beyond the amendments, the notice said the MSRB was looking for comments more broadly on additional Rule G-27 areas that should be included in the retrospective rule review and on any other information the MSRB should consider to better focus its review on rule aspects that would be most germane to how dealers do business now and in the future.

"SIFMA appreciates that the MSRB has begun to address some of the longstanding issues with Rule G-27," Leslie Norwood, managing director, associate general counsel and head of municipal securities at SIFMA, said in her comment letter.

SIFMA "feels strongly that this is a unique opportunity for the MSRB to make additional amendments to Rule G-27 so that the rule not only reflects how business and supervision is conducted today and how regulators operate in the current electronic workplace, but also positions the rule to cover inevitable future developments," Norwood said, citing paperless workflows, around-the-clock trading cycles and tokenized securities as examples of such future developments.

When Rule G-27 was originally adopted, "business was conducted in person, with paper documents, in offices that custodied cash and/or securities," her letter said. "All documents and processes are now electronic and moving to or have moved to cloud storage where they are not even stored in computer hardware at a work location."

The current supervision rule also creates challenges, "including requirements for there to be a supervisor in a 'onesie' one-person office even though that supervisor has no supervisory capabilities because they cannot supervise themselves," her letter said.

Despite Rule G-27 having requirements for location-based supervisions, it's not lost on the industry that virtually all Securities and Exchange Commission and Financial Industry Regulatory Authority examinations since 2020 have been conducted effectively via either largely or completely electronic means, the SIFMA letter said.

"If the regulators are able to effectively conduct remote examinations of broker-dealers and carry out other statutory obligations via fully remote or hybrid work arrangements, then broker-dealers should be able to effectively conduct remote supervision themselves," Norwood said.

Norwood also pointed to MSRB Rule G-44, which pertains to supervisory and compliance obligations of municipal advisors. That rule "has no location-based supervision requirements," she said in her letter, adding that municipal advisors have been able to supervise their compliance with MSRB rules effectively without location-based requirements since the adoption of Rule G-44.

SIFMA's letter called for eliminating the definition of an office of municipal supervisory jurisdiction, known as an OMSJ for short.

"The OMSJ designation was originally intended for physical offices that maintained hard copy books and records and carried out supervisory functions through line-of-sight practices, relying on direct, over-the-shoulder oversight to detect potential violations or exceptions," Norwood's letter said.

Today, however, "technology has removed the need for in-person supervision," SIFMA's letter said.

"In today's workplace, it is not physical presence that enables effective supervision, it is authorized access to the systems which enable effective supervision, and that access is independent of physical location," Norwood's letter said. "As a result, the OMSJ designation is outdated."

Employers in many areas of the economy ? including areas of financial services outside of municipal securities broker-dealers ? currently offer employment opportunities that are partially or entirely remote, and that flexibility is attractive to employees, SIFMA's letter said.

"If the municipal securities broker-dealers are to remain competitive in the marketplace relating to the hiring and retaining of highly qualified employees, then we urge the MSRB to eliminate the OMSJ definition," Norwood's letter said.

While "this is a unique opportunity for the MSRB to make additional amendments to Rule G-27, SIFMA appreciates that it may not be possible at this time," Norwood's letter said.

Absent the ability to make additional amendments at the current time, the MSRB should "approve the draft amendments that increase the length of the exclusion from the municipal branch office registration for locations other than a primary residence from 30 business days to 60 business days," her letter said.

Similarly, it should also approve ? with some SIFMA-suggested edits ? the draft amendments designed to clarify the term "structuring" in the OMSJ definition, Norwood's letter said.

"Public finance is a broad term that is not defined under MSRB rules and different dealers may include within its ambit varying aspects of the process of bringing new issues of municipal securities to market," the MSRB's RFC notice said, adding that the draft amendments aim to offer "greater clarity on what aspects of this 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 engaged in at an OMSJ."

While the draft amendments would keep the present framework in which structuring of public offerings or private placements must continue to be done at an OMSJ, they would aim to distinguish the function of final approval, commitment or other formal action on behalf of the dealer from certain "functional work" such as debt modeling or financial analysis that other public finance professionals may perform in support of final approval, according to the RFC notice.

Activities including debt modeling and financial analysis would be defined as "excluded public finance activities" under new Supplementary Material .07 of the draft amendments and would not be deemed to be structuring, the MSRB's RFC notice said.

SIFMA's letter said that broker-dealers "operate under a variety of business models, structures and processes," many of which impact what is considered "final approval" of a transaction by a broker-dealer.