FAQs come late for markup disclosure compliance

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WASHINGTON - The Municipal Securities Rulemaking Board has released a long-awaited set of frequently-asked-questions-and-answers aimed at clarifying its markup disclosure requirements, a historic regulatory change that is now only weeks away.

The new FAQs, released Tuesday, came a bit later than many market participants were hoping they would, ahead of the May 14 effective date of amendments to MSRB Rules G-15 on confirmation and G-30 on prices and commissions.

Starting on that date, dealers will have to disclose their markups and markdowns in certain transactions on the confirmation forms given to customers. The markups have to be disclosed as a percentage of a “prevailing market price” (PMP), which must be calculated according to a regulatory “waterfall” hierarchy. The MSRB announced in late January that a new set of FAQs would be forthcoming.

The 31-page document includes answers already published by the board in July 2017. The new questions and answers primarily focus on more technical questions, such as whether a dealer is permitted to calculate PMP at the time of the trade but wait until later in the day to analyze which trades triggered the disclosure requirement. In that particular instance, the MSRB said yes.

Another new question requiring a more nuanced answer was how many “similar” securities a dealer must consider when trying to determine PMP.

“The obligation to determine PMP requires a dealer to use reasonable diligence,” the MSRB answered. “It does not require a dealer to seek out and consider every potentially relevant data point available in the market. At this point in the waterfall analysis, a dealer must only seek out and consider enough information to reasonably determine that it has identified the prevailing market price of the security (or that there is no probative information to determine PMP before proceeding to the next level).”

Leslie Norwood, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, said SIFMA is grateful for the new FAQs and is reviewing them, but remains hopeful that regulators will give firms more time to comply with the rules.

“The markup rule is complex, and firms are busy working to implement compliance plans before the May effective date,” Norwood said. “We continue to urge regulators to implement a conformance period to allow firms sufficient time to come into full compliance.”

Third-party vendors hope to play a significant role in markup compliance, as several companies have developed PMP calculation products that they are marketing as tested and mostly ready. The big challenge, which has led to dealer groups including the Bond Dealers of America as well as SIFMA to push for an extended compliance period, is in integrating those third-party products into their automated systems to create a seamless system for generating confirmations marked with appropriate disclosures.

Michael Ruvo, president and chief executive officer of BondWave, said his firm’s product has run about 150,000 “proof of concept” tests but that integrating into customers’ systems might need additional tinkering based on the new FAQs.

“That guidance I would have much preferred to come in January,” Ruvo said.

Ruvo said he believes regulators are sympathetic to the challenges, but that firms need to be moving ahead on the assumption that May 14 is their deadline.
“The integration challenges don’t go away,” Ruvo said. “They need to be met, and it’s going to be difficult with only seven weeks to go.”

The Securities and Exchange Commission would need to approve any extension of the compliance period beyond the effective date.

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Securities law MSRB rules SEC regulations MSRB SEC SIFMA BDA Washington DC