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Securities Law

Walter Says SEC Won't Take Year to Finish MA Definition

OCT 1, 2012 3:33pm ET
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The Securities and Exchange Commission does not intend to take an entire year to finalize its definition of municipal advisor, commissioner Elisse Walter said Monday.

In comments made at the Securities Industry and Financial Market’s Association’s 2012 Municipal Bond Summit in New York City, Walter told members of the muni dealer community that she expects the SEC to complete its definition in advance of September 2013, when the one-year extension of temporary MA registration rules expires.

“There is no intention on the part of the staff to take anywhere near that long,” Walter said. “I was assured that a year was picked just to ensure that there wouldn’t be any question that it would get done.”

The SEC extended its temporary municipal advisor rules in late September for another year, the second extension since the rules were created in late 2010. Market participants have been frustrated by the delays, saying many MAs are operating unregulated.

Walter declined to say when the final definition would be complete, but said a recent bill sponsored by Rep. Robert Dold, R-Ill., if enacted by Congress, could create additional work for the SEC.

The bill, which some market participants say is intended to influence the agency’s action, would alter the MA definition in the Dodd-Frank Act and create exceptions for underwriters and others.

Walter said the measure “in some senses complicates things” because it could “override the rule that the commission adopted under the old legislation.”

Dold’s bill was approved by the House in late September and has been referred to the Senate Banking Committee.

During a roughly 45-minute speech, Walter primarily addressed what she described as a shortage of price transparency, particularly pre-trade price transparency, in the muni market.

Walter said improvements in technology, including the rise of alterative trading systems, or ATS, have made it easier for dealers to share muni pricing information.

But retail investors are not seeing the benefits of those systems, she said, noting that price transparency continues to be scarce for them. She called on dealers to help pass on to individual investors the pricing benefits that are possible with ATS.

“By leveraging dramatic advances in communications and technology that have occurred in recent years, I believe we can work together to improve the transparency, efficiency and fairness of the municipal securities market to the benefit of all investors,” she said.

Walter said the SEC could require ATS to publicly disseminate best bids and offers, and responses to bid-wanted auctions, as was recommended in the SEC’s July 31 report on the market.

“Regulation can encourage the use of technology to improve market efficiency and promote competition and fairness,” she said.

Walter noted there are no standard calculations that dealers use to determine prevailing prices in order to meet fair-pricing obligations.

She said the calculations also are important because they are used by dealers to access whether their compensation charges are fair and reasonable.

Walter encouraged the Municipal Securities Rulemaking Board to develop a “framework for municipal securities dealers to use in determining prevailing market prices.”

She added that investors often don’t know how much they pay dealers for services, and said disclosure of markups and markdowns on “riskless principal transactions” — another recommendation in the SEC’s report — could shed light on dealers’ compensation.

Walter also encouraged the MSRB to “move quickly” on the SEC’s recommendation that the board require dealers to seek best execution.

“Consideration should be given to making sure that customers receive the best reasonably available prices,” she said.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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