Bonds

MSRB seeking SEC approval of new remote supervision requirements

The Municipal Securities Rulemaking Board has asked for Securities and Exchange Commission approval to amend its supervision rule to reflect a remote work environment, a reality dealers have been handling for years now.

The MSRB filed for the amendment to its Rule G-27 on supervision, touting it as a step to harmonize MSRB and Financial Industry Regulatory Authority rules. The amendment would allow FINRA member-dealers to designate an employee’s private residence where supervisory activities are conducted as a residential supervisory location. The RSL would be subject to inspections on a regular schedule instead of the annual inspection currently required for offices of municipal supervisory jurisdiction (OMSJ) and supervisory branch offices.

“This amendment is an important milestone in the modernization of the regulatory framework for dealer supervision of municipal securities activities,” MSRB Chief Regulatory and Policy Officer Ernesto A. Lanza said. “We recognize that the adopted amendments by FINRA are a sea change for the industry and are mindful of the need to promote regulatory consistency for dealers.”

MSRB Chief Regulatory and Policy Officer Ernesto Lanza said the MSRB recognizes the significant change to work realities in recent years.

MSRB Executive Director Mark Kim announced in January the MSRB’s intent to modernize the supervision rule due at least in part to “the pandemic’s disruption of business models of broker-dealer firms.”

The amendment rule would set out a variety of conditions for an RSL, including that it not be held out to the public as an office, that no meetings with customers take place there, and that the person residing at the RSL still be assigned to a branch office. Other guardrails include the condition that cash and securities may not be handled at an RSL. Certain types of sales activity, such as phone calls with customers, are allowed, but formal transactions will still have to be executed at a branch office.

Dealers must also provide a list of designated RSLs to FINRA, with the first list due by Oct. 15, covering all locations designated between June 1 and Sept. 30, 2024.

Both the MSRB and FINRA had been extending temporary relief related to remote location inspections throughout the pandemic and after it, recognizing the serious disruption to the traditional way of doing business that COVID-19 caused. The rule has been filed for immediate effectiveness and the MSRB has requested an operative date of June 1.

The proposal did not go through the usual MSRB comment period, though it is not unusual for the MSRB to file directly with the SEC if a proposal mirrors an adopted FINRA rule, and FINRA announced in January it had approved this same change to its supervision rule.

Dealers groups said they are evaluating the MSRB proposal.

“In general, we will continue to ask regulators to provide maximum flexibility and clarity regarding remote work supervision,” said Michael Decker, Bond Dealers of America vice president of federal policy and research. “Firms have been managing remote employees, including bankers and traders, for four years now with very few hiccups. Rulemaking should reflect this reality.”

The Securities Industry and Financial Markets Association suggested the MSRB take a more sweeping approach to modernize its rule, based not just on the time since COVID, but the past couple of decades.

“SIFMA appreciates the MSRB’s work to harmonize Rule G-27 on supervision with FINRA, including the adoption of the residential supervisory location classification,” said Leslie Norwood, SIFMA’s head of municipal securities. “These amendments are a step in the right direction, however, in the past 20 years since this rule was originally adopted and particularly since the COVID pandemic, society has changed the ways and places people conduct business and are supervised. We continue to believe the regulators need to think holistically about modernizing this ruleset to be more workable, particularly for those that work alone out of their own home.”

Lanza said the MSRB is going to continue the conversation.

“MSRB acknowledges that the way dealers conduct business has changed over recent years with an increasing move to hybrid workplace models,” he said in a statement. “We will continue to engage with stakeholders to better understand ongoing burdens and balance those burdens against the need for robust protection of investors.”

The SEC has ultimate authority to decide on the proposal, and could choose to adopt it immediately, seek comment, or require changes.

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