WASHINGTON — The Municipal Securities Rulemaking Board is seeking input from municipal market participants on whether it should require broker-dealers to seek “best execution” of customer orders for municipal securities and how this concept can best be applied to munis.
The board made the request in a notice published Tuesday and asked for comments to be submitted to it no later than Oct. 7.
The MSRB also issued a notice seeking public comments on a proposal to consolidate its existing Rules G-18 on execution of transactions and G-30 on prices and commissions, along with interpretative guidance for its Rules G-17 on fair dealing and G-30, into a single new Rule G-30 on prices and remuneration. The board asked for comments on this proposal to be submitted no later than Sept. 20.
The best execution notice is very broad and does not contain the “execution with diligence” standard that the Securities Industry and Financial Markets proposed and expected the MSRB to seek comments on. However, it focuses to some extent on the Financial Industry Regulatory Authority’s Rule 5310, a best execution standard for equities and corporate debt that SIFMA based its proposal on.
SIFMA managing director and associate general counsel David Cohen said his group’s proposal “is in line with the MSRB’s approach and will lead to a principles-based rule that would strengthen regulation in a manner consistent with the way the market operates.”
“We agree with the MSRB that an appropriately tailored execution standard that is focused on the order process would augment existing requirements to trade at prices that are fair and reasonable,” he said.
SIFMA proposed requiring a dealer to use “reasonable diligence” to determine the market for a bond so the price provided to a customer is “fair and reasonable under prevailing market conditions.” Dealers also would be required to conduct post-trade reviews that, among other things, would compare their muni prices with the prices they could have obtained from other dealers.
MSRB’s Rule G-18 already requires dealers to trade with customers at “fair and reasonable” prices and to exercise diligence in establishing the market value of munis and the reasonableness of compensation. However, the board does not impose a best execution standard such as the one that exists in the equities and corporate fixed-income markets.
The Securities and Exchange Commission, in its report on the muni market issued in July 2012, recommended the MSRB consider adopting a best execution rule for customer orders for munis.
In its notice, the MSRB said “the logical starting place for a standard of best execution” is FINRA’s Rule 5310, which requires dealers to use “reasonable diligence” to determine the best market for a security and to trade it so the resulting price to the customer is as favorable as possible under prevailing market conditions. Under that rule, many factors can be used to determine if the dealer is using “reasonable diligence,” including: the market for the security; the size and type of transaction; the number of markets checked; the accessibility of quotations; and the terms and conditions of the order.
The MSRB said that while it recognizes that any best execution rule developed “should be uniquely tailored to the attributes of the municipal securities market,” any divergence from existing best execution requirements should “not be intended to dilute them.”
The MSRB asked market participants to respond to 18 questions, including whether a best execution requirement help ensure investors receive fair and reasonable prices and whether such a requirement should only be applied to certain transactions.
“Would disclosure that a firm does not utilize a best execution standard be a reasonable alternative to a best execution requirement?” the board asked.
Should dealers be required to seek a minimum number of quotations in order to support their determinations of what the prevailing market prices are for securities? the MSRB asked. The board also wants to know procedures dealers should be required to follow to seek quotations. For example, should they get them one or more alternative trading systems, one or more broker’s brokers, or its clearing firm?
The MSRB asked how a dealer could ensure best execution when it sold a muni from its inventory to a customer.
It also asked if dealers should be required to provide to solicit bid wanteds from certain dealers, alternative trading systems or through brokers’ brokers?
The notice asked what tools dealers currently employ, or would have to apply, to document the diligence undertaken to substantiate the basis of the prevailing market price for a security.
It also seeks information on the post-trade reviews of pricing that firms conduct and whether they audit all trades or just a sampling and how often the reviews occur.
The board said market participants should talk about the benefits, as well as burdens and costs that a best execution rule would provide.
