MSRB Proposes to Apply Reg. BI to Bank Muni Dealers
Commentary by Steven Lofchie
The MSRB proposed amending Rule G-19 ("Suitability of Recommendations and Transactions") to align SEA Rule 15l-1 ("Regulation Best Interest") to bank municipal securities dealers.
The MSRB amendments would clarify that Rule G-19 would only apply when Regulation Best Interest was not applicable; i.e., Rule G-19 would generally apply only to transactions with legal entities (because transactions with natural persons would be already subject to Regulation Best Interest). The MSRB's proposal also provides guidance as to how bank municipal securities dealers may comply with Regulation Best Interest.
The MSRB also proposes to modify Rule G-48 ("Transactions with Sophisticated Municipal Market Professionals") to provide that the "quantitative suitability" (or anti-churning) aspect of the rule only applies where the relevant broker-dealer has actual or de facto control of the account.
The MSRB stated that these changes would eliminate the potential for regulatory arbitrage and establish a "uniform standard of investor protection" in the retail municipal space.
Commentary
Historically, the bank regulators resisted the application of investor protection regimes derived from the securities laws on banks, probably wishing to avoid subjecting banks to the potential for substantial consumer liability under the securities laws. Presumably, the MSRB would not have gone forward with this proposal unless the bank regulators were amenable.