Exam Alert: MSRB revises definition of sophisticated municipal market professional

Effective July 9, 2012, the MSRB will modify its definition of a sophisticated municipal market professional (SMMP), bringing an MSRB interpretive notice in line with the new FINRA suitability rule for institutional customers. Continue reading

Effective July 9, 2012, the MSRB will modify its definition of a sophisticated municipal market professional (SMMP), bringing an MSRB interpretive notice in line with the new FINRA suitability rule for institutional customers.  Specifically, the new notice will define an SMMP as an institutional customer that 1) the dealer has a reasonable basis to believe can independently evaluate investment risks and market value, and 2) affirms that it is using independent judgment when considering the dealer’s recommendations.  The revised definition permits natural persons with at least $50 million in assets to be considered institutional customers.  The revised definition eliminates a provision that requires a minimum investment of $100 million in municipal securities in order to be considered an institutional customer.

The MSRB notice also changes how Rule G-17 applies to transactions with SMMPs.  The Rule G-17 requires broker-dealers to deal fairly when engaged in municipal securities activities.  The rule has been interpreted to require a dealer to, prior to selling a security to a customer, disclose all material information known to the dealer about the security along with all material information reasonably accessible to the market from established industry sources.  Existing MSRB policy states that the requirement to disclose information from established sources is considered satisfied if the customer is an SMMP and the trade is not recommended by the dealer.  The new policy states that the requirement to disclose information from established sources is fulfilled if the customer is an SMMP, regardless of whether the trade is recommended.

Sources:

MSRB Receives SEC Approval on Revised Definition of Sophisticated Municipal Market Professional

MSRB Notice 2012-27

This alert applies to the Series 7.

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