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Securities Law

Dealers to MSRB: Clarify and Harmonize Rules, Analyze Costs

The Municipal Securities Rulemaking Board should harmonize its rules with those of other regulatory agencies, conduct thorough analyses of the costs imposed by its rules and clarify regulatory language to make it less ambiguous for market participants and compliance examiners, dealers told the board.

The dealer groups and individual firms made the suggestions in letters responding to a December request by the MSRB for feedback on the burdens and benefits of the rules and interpretive notices in its roughly 300-page rule book, as well as ideas for improvements.

Bond Dealers of America urged the MSRB to consider rule changes that would make the EMMA system more functional and useful, noting that finding all the disclosures filed by an issuer on EMMA can be difficult.

BDA chief executive officer Mike Nicholas said a more-robust EMMA would boost market transparency, efficiency and fairness.

"We believe the key to market transparency will be the continued expansion and improvement of EMMA," said Nicholas. "Right now, pricing information is spread among a number of different sources within municipal markets and the timeliness of that information is inconsistent."

Nicholas called for rules requiring all material information to be posted on EMMA, and said EMMA improvements should be the board's "highest priority."

He also requested clarification of language in Rule G-30 on prices and commissions that will allow market participants to better understand how fair prices are determined.

Lack of clarity results in non-uniform examinations, makes compliance difficult and makes it hard for firms to predict which data FINRA's examiners will use to determine fair prices, Nicholas said.

"We have heard instances in which FINRA examiners have used what the market would consider stale or irrelevant data ... to establish the fairness of a price," he said.

BDA also urged the board to harmonize disclosure requirements in its recent interpretive notice to Rule G-17 on fair dealing with those for dealer-affiliated advisors in Rule G-23, which prohibits a dealer from serving as both underwriter and muni advisor on the same transaction.

Nicholas added that the G-17 interpretive guidance has led some underwriters to disclose to issuers "any and all possible risks that could arise" from most basic transactions, and that such disclosures for some complex transactions are dozens of pages long and difficult for issuers to understand.

"We believe further clarification of what the MSRB is looking for in G-17 disclosures is needed and we would encourage the MSRB to do so with an eye toward focusing on the true goal," said Nicholas.

The Securities Industry and Financial Markets Association recommended in its letter that the MSRB coordinate regulatory efforts with, and help provide training to, regulators at other agencies that oversee the muni market, like the Securities and Exchange Commission, the Financial Industry Regulatory Authority and the Office of the Comptroller of the Currency. However, the MSRB should be the "final regulatory arbiter of interpreting MSRB rules," said SIFMA's letter, signed by managing director and associate general counsel David Cohen.

Cohen urged the MSRB to harmonize its rules with those of other agencies, noting that some overlapping rules have different language but the same purpose.

He suggested harmonization of rules dealing with suitability, communication and advertising, political contributions, pay-to-play, gifts, document retention, interest rate swaps and qualification requirements.

For instance, Rule G-3 on classification of principals and representatives could be harmonized with FINRA's rules to allow individuals who pass the Series 7 general securities representative exam to qualify to perform all activities of a municipal securities representative, said Cohen.

The MSRB should also consider changing Rule G-9 on preservation of records to allow firms to retain records only three years instead of four, which would be consistent with SEC rules, he said in the letter.

SIFMA also called for the investor profile information required under Rule G-19 on suitability to be harmonized with FINRA's suitability Rule 2111. Cohen noted that G-19 is currently harmonized with NASD Rule 2310, the now outdated rule of SIFMA's predecessor, the National Association of Securities Dealers.

Other groups like the Financial Services Institute, which represents independent financial firms and independent advisors, also called for harmonization of FINRA and MSRB rules. "Often, the two books are inconsistent, and this inconsistency can sow confusion and complicate compliance at the retail level," the group said in its letter.

SIFMA's letter requested a "level regulatory playing field" among market participants and urged that the MSRB's municipal advisor rules, which have not yet been issued, be "fair and equivalent" for both dealer-affiliated and independent MAs.

The MSRB has said it will propose MA rules after the SEC issues a final MA definition, which is expected early this year.

Other market participants, like Dallas-based First Southwest Co., also commented on MA issues. The firm's letter, signed by chief executive officer Hill Feinberg, called on the MSRB to clarify when an underwriter's activity qualifies as financial advice. Ambiguity leads underwriters to be reticent to discuss important topics with issuers, Feinberg said.

SIFMA's letter said the MSRB should also consider conducting cost-benefit analyses of proposed rules like the SEC and other agencies, and determine if enforcement of existing regulations can address market concerns.

SIFMA also had concerns about Rule G-17. It recommended that the MSRB reorganize its interpretive guidance into new or revised rules and requested the board give guidance to dealers about their disclosure obligations to issuers.

SIFMA touched on Rule G-32 on disclosures, recommending that the definition of "business day" be clarified so dealers are clear on filing deadlines. A cut-off time of 5 p.m. local time could be established and holidays could be excluded, SIFMA said. The group also recommended that advisors working with issuers on competitively underwritten deals be responsible for submitting preliminary official statements and official statements to EMMA.

Market participants also questioned the usefulness of some information required to be filed on EMMA.

SIFMA requested Rule G-14 on reporting trade data not require dealers to report transactions that "do not add to market transparency," such as transfers that underlie repurchase agreements, tender option bond deposits and withdrawals with trustees, as well as the creation and redeeming of exchange-traded funds.

Feinberg at First Southwest urged the board to determine if some information on EMMA is not frequently used by market participants, and to relax submission requirements for that information.

Compliance costs and regulatory fees can be difficult to bear during the current market environment, which is characterized by narrowing spreads and take downs, Feinberg said.

Other groups like the Government Finance Officers Association and the National Association of Bond Lawyers say they plan to file comments in the coming days.

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