How BDA would give dealers more time to comply with markup disclosure
PHOENIX -- Bond Dealers of America is pushing the Securities and Exchange Commission for an extension of several months to comply with new markup disclosure rules, according to a letter the group sent SEC chairman Jay Clayton this week.
The Feb. 7 letter, signed by BDA CEO Mike Nicholas, does not propose a broad delay in the effectiveness of amendments to Municipal Securities Rulemaking Board rules G-15 on confirmation and G-30 on prices and commissions, but rather suggests that dealers be given an extended “conformance period” through the end of the year if they take certain outlined steps.
Set to take effect on May 14, 2018, the rule changes will require dealers to disclose their markups and markdowns on certain transactions in the confirmations they send retail customers. There has been considerable concern in the dealer community that many firms will not be able to automate their processes by May.
BDA representatives met with certain commissioners and staff in January about the markup rule effective date and the SEC folks suggested that BDA develop a “business plan” containing concrete steps that each dealer take to ensure they are taking advantage of any extra time provided by the SEC and other regulators. An approach would have to be found that does not require formal amendments to the adopted rules.
Nicholas told the SEC in the letter that he believes the BDA has satisfied those concerns with its proposal.
The BDA’s “business plan” is a multi-faceted one. First, it suggests that each dealer have until May 14 to choose a vendor who will handle calculations of “prevailing market price” for a bond on a given trade, a key element of the markup rule. The dealer should have in place an agreement with the PMP vendor that: lays out when the vendor will deliver its product; describes how the product will be integrated into the dealer’s systems; and provides for the testing of the PMP solution that is consistent with the dealer’s implementation plan.
The implementation plan would also be due May 14 and would have to establish a specific schedule that provides the dealer with “a reasonable basis” for complying with the retail disclosure rules on or before Dec. 31 of this year.
BDA outlined some of its own concerns about the May deadline in the letter. Choosing and implementing a PMP solution is a complicated process, and the end result could be bad for the very investors the SEC aims to protect, the letter explained.
“Our members are highly concerned that, if the retail disclosure rules are effective on May 14, 2018, many retail investors will receive rushed, untested, nonsensical and confusing information on their confirmations,” Nicholas wrote. “This will not serve anyone’s best interests.”
If a dealer complies with the business plan, BDA proposes, then the SEC and the Financial Industry Regulatory Authority would agree to not enforce the rule until either the completion of the dealer’s implementation plan or Dec. 31. A dealer who does not comply with the business plan would still be subject to enforcement of the rules beginning May 14, under the BDA's proposal.
“BDA believes that our proposal allows for a balancing of the concerns of all parties because it affords dealers the time they need to implement the operational changes necessary to comply with the retail disclosure rules, and it provides the regulators the confidence that the time afforded by the conformance period is used effectively by dealers to ensure that they will comply with the full retail disclosure rules by Dec. 31, 2018,” Nicholas wrote.
Copies of the letter were sent to each commissioner, as well as other SEC staff and to the MSRB and FINRA.