WASHINGTON — Faced with requests from dealers to withdraw its proposed principal trade price disclosure rule, the Municipal Securities Rulemaking Board now plans to modify that as well as develop an alternative proposal that would require dealers to disclose markups and markdowns on certain principal trades.
The board would obtain public comments on both the markup proposal and the modifications to the original proposed rule, which would have required dealers to disclose on their confirmations with customers a "reference price" of the same security traded the same day.
A principal trade is one that a muni dealer executes for its own account.
The MSRB announced its plans during a Monday press call to discuss the events of its board's meeting last week in New York City. MSRB executive director Lynnette Kelly said the alternative proposal would be ready for release in the early fall.
Dealers have fought for years against having to disclose markups and markdowns on riskless principal transactions, most recently arguing that "riskless" cannot be defined.
So the MSRB proposed the principal trade reference price rule last November, without using the term riskless. But dealers said the proposed rule was complex and that the reference prices would be confusing to investors. They asked the MSRB to withdraw the proposed rule.
Explaining the alternative markup proposal, Kelly said, " "We are interested in hearing the merits of this approach in comparison with our first proposal to help investors understand transaction costs and pricing of the municipal bond trade. She added that the MSRB will coordinate with the Financial Industry Regulatory Authority on the changes. FINRA had proposed a similar reference price rule for principal corporate trades.
The MSRB said in a press release after the call that it prefers the markup disclosure proposal to a revision of the original proposed reference price rule.
MSRB board members also discussed finalizing guidance for its Rule G-18 on best execution, which is set to take effect on Dec. 7. Kelly said the board has directed the MSRB staff to have the guidance completed "in the coming weeks" so that dealers will "have the time to really understand the guidance and to adjust their policies and procedures accordingly long before the December effective date."
The rule requires dealers to use "reasonable diligence" to determine the best market for a security and then buy or sell the security in that market so the resulting price to the customer is as favorable as possible.
The board additionally discussed the comments they received on a proposal that would loosen the independence requirements for individuals seeking to be the public investor representative candidate on the board. It also discussed ideas for changes that could stem from more than a year of analysis on the fees the MSRB charges.
Members did not reach a decision on the board membership question, but Kelly said the MSRB could file a proposal with the Securities and Exchange Commission to change Rules A-12, on registration, and A-13, on underwriting and transaction assessment, as soon as this week. The changes would align the MSRB's revenues with its operational and capital expenses, she said.
The board also told the MSRB staff to create a proposal addressing Rule G-12, on uniform practice, which currently contains close-out procedures for dealers purchasing municipal securities that are considered to be outdated.
The board also agreed to support changes that would match with the industry's initiative to shorten the settlement cycle to two- from three-days after the execution of a trade. It also decided to continue discussing the best ways to deal with the customer complaint process in relation to Rule G-10, on the delivery of an investor brochure.
During last week's meeting, the board also elected seven new members who will join the board on Oct. 1 as well as new leadership for fiscal year 2016. It did not identify these individuals. The board also approved a fiscal year 2016 operating budget and an operating plan.
