WASHINGTON — Dealer groups are urging the Municipal Securities Rulemaking Board to use restraint in developing a best execution rule for the municipal market, warning that a "trade-by-trade" mandate is not feasible and pushing for their own alternative standard.
Their requests came in response to the MSRB's request for comments on a possible best execution standard, responses to which were due Oct. 7.
Dealers have long been wary of a best execution standard, emphasizing that the municipal market is far different from the corporate market, which is already governed by a Financial Industry Regulatory Authority best execution rule. Relative to other markets, munis are sparsely traded and the market is huge and varied with some 55,000 issuers and more than 1 million Cusip numbers, identifiers of bonds. Additionally, there is not yet any comprehensive central platform that market participants can go to compare prices.
The Securities and Exchange Commission's 2012 report on the municipal market recommended that the MSRB develop a best execution rule, noting the relative "opacity" of the market and that prices have tended to run higher for smaller "retail" trades than those obtained on larger institutional trades.
The intent of a best execution rule would be to improve outcomes for retail investors, who may not have any idea whether they are getting good prices. The MSRB's existing Rule G-18 on execution of transactions, is one sentence long and requires broker-dealers, when executing trades for or on behalf of a customer as an agent, to make a "reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions."
Mike Nicholas, president and chief executive officer of the Bond Dealers of America, told the MSRB that it should create a rule requiring dealers to adopt policies and procedures ensuring that they examine the best "venues and manners" of execution. Going further and requiring muni dealers to justify their transactions on a trade-by-trade basis is not feasible, Nicholas wrote.
"Any potential execution rule should be clear that, in developing its policies and procedures, dealers should take all options into consideration, including alternate trading systems, the use of broker's brokers and other dealers," the BDA letter states. "In addition, dealers should also take into consideration how different securities may warrant different manners of execution. For example, municipal securities issued by larger issuers tend to be easier to trade on alternate trading systems whereas municipal securities issued by smaller or more obscure issuers may need to be traded with dealers specializing in those kinds of credits."
Nicholas said dealers are most concerned with how FINRA examiners will interpret any new rule, and worried about the burden involved in forcing dealer firms to be prepared to justify any trade at any time. He added that sophisticated muni market professionals should be excluded from protection by the rule, as they are simply not in need of it.
The Securities Industry and Financial Markets Association reiterated its support for its own "execution with diligence" standard, which it proposed to the MSRB earlier this year. SIFMA previously provided the MSRB with a list of factors dealers should consider when making a determination about prices being reasonable, including the market for the muni, the demand for it, the availability of it, the price, the volatility of the market, and more. David Cohen, a SIFMA managing director and associate general counsel said the MSRB should stay away from relying too heavily on the prices reported from other trades.
"SIFMA encourages the MSRB to include statements in subsequent regulatory notices that a dealer's obligation is inherently one to observe a reasonable / quality process — a process that may or may not ultimately lead to an execution price that is incrementally away from some other reported trade on the day," Cohen wrote.
The Financial Services Institute, which represents independent broker-dealers and financial advisors, offered support for SIFMA's standard while echoing the concerns about the difficulty of a best execution rule in the muni market.
The Investment Company Institute supported the idea of a best execution rule, but asked that the MSRB make certain to explicitly exempt 529 college savings plans from the rule. While such muni fund securities are municipal securities, the ICI comments state, such plans are priced similarly to mutual funds and should not come under the same regulatory umbrella.