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SEC Approves Revised Definition of Sophisticated Municipal Market Professional

The SEC approved the Municipal Securities Rulemaking Board’s (“MSRB”) revised definition of a Sophisticated Municipal Market Professional, or SMMP, to include individuals and other investors with assets of at least $50 million.  Previously, SMMPs were limited to entities with at least $100 million invested in municipal securities.

The MSRB states that the new definition will maintain consistency with Financial Industry Regulatory Authority (“FINRA”) rules.  Pursuant to new Rule 2111, a FINRA member’s customer-specific suitability obligation to an institutional customer will be considered satisfied if the member has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies.  Members’ suitability obligations are not satisfied unless an investor “affirmatively indicates” independent judgment in evaluating recommendations.  The MSRB noted that investors have greater access to municipal market information, including disclosures, transaction data, market statistics, and educational material offered for free on its EMMA system, compared to 2002, when the initial definition was originated.  The Restated SMMP Notice and FINRA Rule 2111 will become effective on July 9, 2012.

According to the MSRB, SMMPs are experienced municipal bond investors who do not require the same protection as other investors.  The new definition exempts dealers from requirements to make certain disclosures to institutional customers that they must make to other investors.  The revised Notice states that a SMMP can be a customer with an “institutional account” which can include individuals, corporations, partnerships and trusts with total net assets of at least $50 million.  The assets do not need to be in municipal securities.  However, the dealer must have “a reasonable basis to believe [institutional investors are] capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities.”  The MSRB clarifies that when determining a “reasonable basis,” dealers should consider “the amount and type of municipal securities owned or under management by the institutional customer,” and that an SMMP must “affirmatively indicate,“ orally or in writing, to a dealer that they are exercising independent judgment in evaluating recommendations.