By Angela W. Adolph

The Municipal Securities Rulemaking Board (“MSRB”) requires a dealer to disclose to its customers all material information about a proposed transaction that is known to the dealer as well as material information about the security that is available to the market from established industry sources. Since 2002, dealers have distinguished their disclosures based on different capabilities of certain institutional investors as well as different types of customer-dealer relationships. Sophisticated Municipal Market Professionals (“SMMPs”) are institutional customers capable of independently evaluating investment risks and values of municipal securities and recommendations from municipal securities dealers. In the last 10 years, the amount of information publicly available about municipal bonds has significantly increased, making material facts about municipal bonds easier to discern. Thus, the MSRB proposed simplifying the analysis used to determine whether certain institutional customers qualify as SMMPs.

As revised, an SMMP is an institutional customer (1) that the dealer has a reasonable basis to believe is capable of evaluating investment risks and market value independently, and (2) that affirmatively indicates it is exercising independent judgment in evaluating the recommendations of the dealer. In order to satisfy the “reasonable basis” requirement, the dealer must consider the amount and type of municipal securities owned or under management by the institutional customer. The institutional customer may affirmatively indicate its independent judgment orally or in writing, and may provide the affirmation on a trade by trade basis, a type of obligation basis, or on all potential transactions.

When the dealer has reasonable grounds to conclude that the institutional customer is an SMMP, the dealer’s obligation to ensure disclosure of material information available from established industry sources is deemed fulfilled. Of course, the dealer is still prohibited from engaging in deceptive, dishonest, or unfair practices.

Dealers must also have a reasonable basis for recommending a particular security or strategy and have reasonable grounds for believing the recommendation is suitable for the customer. Dealers fulfill this obligation in different ways, depending on the nature of the customer and the specific transaction. When the dealer has reasonable grounds to conclude that an institutional customer is an SMMP, its suitability requirement is deemed fulfilled.

Natural persons can also be considered institutional investors. Under the new definition, the threshold amount for natural persons to be considered institutional customers dropped from $100 million to $50 million.

The new definition became effective July 9, 2012.