The Municipal Securities Rulemaking Board’s proposed rule on dealers’ time-of-trade disclosure obligations is overly broad, lacks clarity and does not address important issues, such as disclosures to “sophisticated municipal market professionals” or to customers using online trading systems, warned muni dealers.
“We are concerned that this particular proposal has significant gaps and will significantly expand the existing time of trade obligation — something this proposal was not intended to do,” David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, told The Bond Buyer Wednesday.
Cohen said SIFMA supports efforts to clarify MSRB rules and interpretive notices, but in this case, “We encourage regulators to issue a re-proposal.”
SIFMA is among a handful of organizations to submit comment letters in recent days responding to the board’s February proposal to create new Rule G-47, which would codify existing guidance to Rule G-17 on fair dealing that addresses dealers’ obligations to disclose material information to customers at or before the time a muni security is purchased or sold.
The board said the rule would not alter obligations in the guidance, but is part of an effort to reorganize or eliminate some of many interpretative notices to G-17.
A letter from Michael Nicholas, chief executive officer of Bond Dealers of America, said the rule is ambiguous, noting it fails to specify which information sources dealers should consult, or whether they can comply by sending material information to customers via email.
Because dealers make thousands of trades daily, BDA said the MSRB should “present a clear, practical and mechanical method by which dealers can comply.”
“There should at least be a safe harbor or some sort of clarity that allows dealers to comply with concrete rules rather than broad-based principles,” BDA said.
The group called for the board to write a rule that can be clearly understood by dealers and effectively enforced by the Financial Industry Regulatory Authority.
SIFMA said the proposal “seems to eviscerate” recent MSRB initiatives, noting it stipulates that the fact that information is publicly available does not relieve dealers of their disclosure obligations.
The proposal contradicts other notices, SIFMA said, pointed to 2009 guidance that said preliminary official statements can be the “primary vehicle for providing the required time-of-trade disclosures” in the new issue market.
“Providing access to a POS, whether on EMMA or some other electronic platform, should continue to satisfy a dealer’s time-of-trade obligation for new issues,” SIFMA said.
Also, the 23 interpretative notices to G-17 that address time-of-trade disclosures contain “nuances that are easily lost in the short bullet-point format” of proposed G-47, SIFMA said.
Both dealer groups said the rule should except SMMPs, which are individuals and non-corporate entities that have at least $50 million invested in munis.
The letters from BDA and SIFMA, as well one from Charles Schwab & Co., said the proposal should clarify that dealers operating online trading systems can fulfill obligations by providing customers who trade online with electronic access to material information.
Such a provision is needed because the proposal would delete a G-17 interpretative notice, which says that providing online customers with electronic material information is “generally consistent with a dealer’s obligation,” SIFMA said.
The groups also said the rule should not apply in most cases to customers who sell securities, because such customers are already familiar with the bonds. “We urge the MSRB to take a practical approach that weighs costs with benefits and only applies ... to sales by customers in a very narrow set of instances, such as when an issuer has made a tender offer for the bonds in question at a price that is higher than a dealer is offering,” said BDA.
The rule should also clarify that non-public information is not considered material, the groups argued. That’s because firms’ public finance departments are sometimes aware of non-public information, like impending ratings changes, SIFMA noted. “Broker-dealers routinely impose information barriers between investment bankers and trading personnel to prevent insider trading in advance of a new offering, and we do not believe [the proposed rule] should require those barriers to be dismantled,” SIFMA said.
