MSRB readies rule change for bank dealers


The Municipal Securities Rulemaking Board’s proposal to expand Regulation Best Interest to cover bank dealers would affect just a handful of dealers in an effort to reach regulatory parity.

In a notice filed Thursday afternoon, the MSRB asked for comment on proposed changes to its Rule G-19 on suitability, to extend the requirements of the Securities and Exchange Commission’s Reg BI to bank dealers. Bank dealers are not covered by the SEC’s standard. The change would affect 21 bank dealers registered with the MSRB.

“Even among the 21 bank dealers, nearly all of this activity was concentrated in a small number of firms, with the top seven most-active bank dealers conducting the vast majority of all retail-sized customer trades last year (about 99.5%),” the MSRB said.

SIFMA supports uniformity in investor protection, said Leslie Norwood, SIFMA’s managing director, associate general counsel and head of munis.

Bank dealers are not regulated by the SEC. Before the SEC approved RegBI in 2019 the standard for brokers was a suitability standard, meaning the broker had to have a reasonable basis for belief that an investment was suitable for a customer.

Under Reg BI, they have to ensure a recommendation is in a retail customer’s best interest and the broker has a duty of care and loyalty to the customer that it didn’t have before. Reg BI went into effect in June 2020.

However, the differences in standards between broker-dealers and bank dealers is a concern, the MSRB said.

“The MSRB is concerned that this difference could cause unintentional harms and confusion to retail investors in the municipal securities market and is issuing this request for comment for further input from market participants,” the MSRB said.

Bank dealers make up just a small portion of the municipal space. Among over 1,200 dealers registered with the MSRB, only 21 firms are registered as bank dealers. Those 21 bank dealers conducted only 1.5% of all retail sized dealer-to-customer trades in 2019, the MSRB said.

The top seven most active bank dealers conducted the majority of all retail-sized customer trades last year. Some bank dealers include FHN Financial, Wells Fargo, Bank of America, Zions Bancorporation, BOK Financial Corporation and UMB Financial Corp.

Non-bank dealers conducted almost four million trades in 2019, compared to just 61,909 from the top seven bank dealers, according to MSRB data.

“The MSRB preliminarily believes that the inapplicability of Regulation Best Interest to bank dealers has created the potential for certain recommendations made by a bank dealer to a retail customer to be subject to a lesser standard of conduct relative to Regulation Best Interest than if the same recommendation were made by a broker-dealer,” the MSRB said.

Certain retail customers may then have different regulatory protections depending on whether they are a customer of a broker-dealer or bank dealer.

If Rule G-19 were to change to encompass bank dealers, some bank dealers that rarely execute retail-sized customer trades may choose to forgo retail business entirely to avoid the costs of compliance with RegBI, the MSRB said.

“Since bank dealers have a relatively minor presence in executing retail-sized trades for municipal securities, the MSRB preliminarily does not expect a significant alteration to the competitive landscape if the draft amendment were adopted,” the MSRB said. “In other words, a regulated entity in competition with other regulated entities is not expected to be disadvantaged by the draft amendment.”

Comments are due June 2, 2021.

Dealer groups said changes to a higher standard for bank dealers made sense.

“We have always supported uniformly enhancing investor protection to the level investors should and do expect, and we will review the MSRB’s proposal and look forward to commenting in line with the June deadline,” said Leslie Norwood, managing director, associate general counsel and head of munis at the Security Industry and Financial Markets Association.

“This is a common-sense proposal designed to make sure all regulations related to interactions with customers are harmonized, we support efforts like this,” said Chris Iacovella, American Securities Association CEO.

“We appreciate the MSRB’s efforts in this area,” said the Bond Dealers of America. “We are reviewing the MSRB release with our bank dealer members and we will make a decision about commenting soon.”

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