SIFMA Wary of MSRB Guidance

WASHINGTON - The Securities Industry and Financial Markets Association is concerned that an interpretive release the Municipal Securities Rulemaking Board filed with the Securities and Exchange Commission last month may prove unreasonably burdensome for dealers and make them less willing to enter into trades with retail customers.

In a six-page letter sent to the SEC, SIFMA said it is particularly worried about a portion of the board's interpretive letter that says its Rule G-17 on fair dealing requires a dealer to disclose, prior to a bond sale, all material information about the transaction known by the dealer, as well as material information about the security that is "reasonably accessible to the market." The MSRB letter said this guidance applies to any transaction, regardless of whether the dealer is acting as a so-called order-taker in an unsolicited trade or the transaction is a primary or secondary market trade.

Picking up on the reference to secondary market trades, SIFMA told the SEC that if the MSRB is signaling that disclosure obligations for such trades should be "comparable" to disclosure for primary market trades, "which have a far longer time frame for diligence and research," then the burden of G-17 "may impinge on the efficiency of the markets and may make dealers less willing to enter into trades with retail customers."

"Because of the wide range of information available through the Internet, it is not possible to winnow the wheat from the chaff on all possible information in advance of making a retail secondary market trade, as you would in preparing the official statement for disclosure purposes for primary market trades," wrote Leslie Norwood, SIFMA's managing director and associate general counsel, who signed the letter.

SIFMA also suggested that guidance the MSRB released in 2002, which said sources of information generally used by a dealer may vary with the type of municipal security, is outmoded because of the establishment of EMMA, where retail and institutional investors can, at no cost, find primary and secondary market disclosures and trade data.

In other words, now that EMMA is the central source for such disclosures, SIFMA said it "feels strongly" that dealers should not have to check every possible established industry information source. "For most transactions, a check of EMMA and one other established industry source for historical continuing disclosure information, rating information, and any other pertinent information should suffice," SIFMA said. The industry group suggested that the other established source could be one of the four former nationally recognized municipal securities information repositories, or NRMSIRs, which still house continuing disclosures made by muni issuers prior to July 1, when SEC rule changes made the MSRB the only NRMSIR.

Though the MSRB's interpretive letter relates to the disclosure obligations of dealers to "individuals and other retail investors," SIFMA warned that the term "individual and other retail investors" has not been defined by the board.

As currently written, MSRB rules define three types of entities that dealers can trade with: other dealers; unsophisticated customers; and sophisticated municipal market professionals, or SMMPs, which are institutional investors with at least $100 million in muni holdings.

In an interdealer transaction or an unsolicited transaction with an SMMP, the dealer is not required to disclose material facts available from industry sources because the counterparty-dealer or SMMP would already has access to established industry sources, SIFMA noted.

SIFMA said a similar standard of care should apply for so-called unsolicited orders from retail and non-SMMP institutional customers, in light of the development of EMMA as well as increased access to electronic trading platforms, "as most or all of the material facts on municipal securities are now readily ascertainable for free on the EMMA Web site."

Meanwhile, SIFMA said the MSRB should clarify that it supports dealers maintaining internal information barriers designed to prevent the dissemination of material nonpublic information. The request stems from a portion of the interpretive letter which says that dealers must disclose not only information made available through established industry sources, but also material information they know about the securities even if such information is not then publicly available.

"SIFMA promotes fair and competitive markets in which inappropriate use of material nonpublic information is not tolerated," the trade group wrote. "Disclosing material nonpublic information to certain investors who are transacting in a security, but not all investors in a public manner, does not support these goals."

MSRB officials declined to comment on the SIFMA letter. Though the board's interpretive guidance was effective upon filing July 14, the SEC could act within 60 days to rescind it, a move that would be highly unusual, sources said Friday.

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