Amendments to MSRB Rule G-27 don't go far enough

The Municipal Securities Rulemaking Board’s new amendments filed with the Securities and Exchange Commission don’t go far enough in addressing the supervisory concerns associated with investments bankers and other traders involved in public offerings and private placements.

That view was collected as part of the MSRB’s amendments to Rule G-27 on supervision, which brings the supervision rule in line with FINRA’s Rule 3110, and aims to reflect a remote working model by establishing the employees private residence as a residential supervisory location, which has been in effect on a temporary basis for years now.

BDA’s Michael Decker said the MSRB proposal doesn’t do quite enough.

“The Residential Supervisory Location concept provides insufficient flexibility to support remote work because it applies only to supervisory functions within the firm,” wrote Michael Decker, senior vice president of research and public policy at the Bond Dealers of America in a comment letter to the SEC. “The RSL concept does not apply to investment bankers involved in structuring public offerings or private placements nor to traders involved in order execution or market making.”

“Changes to MSRB Rule G-27 leave a competitive disadvantage between dealers, who are subject to location-based supervision requirements and non-dealer municipal advisors, who are not,” Decker wrote.

The RSLs would be subject to inspections on a regular schedule instead of the annual inspection schedule currently required of offices of municipal supervisory jurisdiction (OSJ) or supervisory branch offices. But outside of direct handling of customer funds and securities, “the entire notion of location-based, on-site supervision is antiquated and quickly becoming obsolete,” BDA said.

Even then, “order execution or market making” for traders and “structuring of public offerings or private placements” for investment bankers are excluded from being designated as an RSL for no reason.

“Traders working remotely do the same job and use the same systems for trading and supervision that they do when they are working in a Branch Office,” BDA said. “There is no difference between how traders are regulated when they are in the office or working from home. Regulators have failed to explain why traders cannot be supervised remotely.”

BDA contrasts this new supervision regime with the one on the books for municipal advisors, detailed in MSRB Rule G-44, which does not include specific supervisory locations like branch offices and an MA can work and be supervised remotely as long as a firm’s Written Supervisory Procedures permit it.

This creates an unusual scenario for broker- dealers that are dually registered as MAs.

“The differences between how bankers and MAs may be supervised will create competitive advantages in favor of non-dealer MAs relative to dealers,” BDA said, noting this will play a particular role in hiring as municipal dealers and MA firms often compete for the same talent.

BDA recognized that these rule amendments were necessarily limited in scope due to the need to bring them in line with FINRA’s new rule, updated this year.

“SIFMA appreciate the MSRB harmonizing Rule G-27 with FINRA 3110 on supervision, as a positive step forward,” Leslie Norwood, associate general counsel and head of municipal securities at the Securities Industry and Financial Markets Association said in a written statement. “We look forward to continuing to work with the regulators on modernizing the supervision rules to reflect changes in the workplace post-COVID.”