WASHINGTON — Proposed rules aimed at increasing protection for retail investors who buy municipal bonds online would impose undue costs and administrative burdens on muni dealers, and could force some firms to ditch online muni trading, industry participants say.
In comment letters filed late last week with the Municipal Securities Rulemaking Board, muni dealers and trade groups urged changes to a proposal the board issued in August related to "electronic brokerage systems."
The proposal would require firms to provide educational materials about municipal bonds to new individual investors within 10 days of when an online account is opened.
Firms would need to collect "investment profile information" — unless the firm determines none of the investors' trades would be "recommended."
Profile information could include tax status, age, income, risk tolerance and investment objectives.
Licensed muni principals would need to approve new online accounts before the investor could trade bonds, and dealers would need to sign up investors to MSRB-generated email alerts.
Letters from industry participants argued that adequate resources for online investors already exist, and said the proposal would require firms to take a host of additional steps each time a customer opens a new online account, even if that customer never intends to trade munis.
Electronic brokerage systems allow retail investors to trade bonds online and are operated by companies like Fidelity Brokerage Services LLC, TD Ameritrade, Charles Schwab & Co., Scottrade and E*Trade Financial Corp.
Investors can also trade stocks and other financial products on those firms' websites.
"Implementation, as currently proposed, would impose undue costs on electronic brokerages and may result in some online firms discontinuing altogether the availability of municipal securities to their retail customers," the Securities Industry and Financial Markets Association said in a letter signed by managing director and associate general counsel David Cohen.
The Bond Dealers of America, Fidelity and Schwab also submitted similar comments. They urged the MSRB not to require educational material be sent to all new clients within 10 days, noting that not all customers will trade munis.
Delivering the muni materials to investors who never express interest in municipal bonds would "function more like a solicitation," and could confuse customers and have the undesired effect of promoting muni bonds, said Fidelity's letter, signed by vice president and general counsel David Forman.
"No purpose is served by educating customers about a security that would not be recommended to them," Fidelity wrote.
Dealers said educational materials could be costly to provide and inconsistent, varying by the firm that sends them.
They suggested that the MSRB allow dealers to direct customers, through Internet links, to investor resources on the board's website.
They also argued that not all accounts should need to be approved by a muni principal prior to trading, saying dealers can't predict when an investor will make a trade. Principals will need to approve all new accounts, they said.
Dealers also warned that the proposal would require them to collect profile information for all customers, not just customers whose trades are recommended.
That's because firms can't be sure future online communications won't meet the criteria to be considered a recommendation, they said.
Schwab asked the MSRB for "flexibility to decide" when it would need to collect profile information prior to making a recommendation.
Letters encouraged the board to align its Rule G-19 on suitability with the Financial Industry Regulatory Authority's suitability Rule 2111, which took effect July 9. They said MSRB and FINRA rules should have the same provisions, and noted that dealers recently took great efforts to comply with Rule 2111.
"The MSRB's proposal would require a hugely burdensome and expensive overhaul of [dealers'] account opening, customer profile, and suitability processes and systems," Fidelity wrote.
Industry participants also argued that requiring dealers to enroll investors in Electronic Municipal Market Access email alerts could be costly and administratively challenging. They said firms should be allowed to refer investors directly to the EMMA website.
Cohen said in an email that the email alert requirement places too much responsibility on dealers and could create logistical problems.
