Dimensional Fund Advisors is urging the Securities and Exchange Commission to reject a proposed rule change supported by broker-dealer groups that would rescind the approved but not-yet-effective one-minute trade reporting standard for municipal securities.
In a July 10 comment letter to the SEC, Dimensional, an Austin, Texas-based global investment firm, referenced the SEC's Sept. 20, 2024, order granting approval of a rule change proposed by the Municipal Securities Rulemaking Board to amend Rule G-14 to require — subject to certain exceptions — dealers to report municipal securities trades to the MSRB no later than one minute after the time of trade.
"We supported the approved rule change and are extremely disappointed that the MSRB is now proposing to halt the progress it had been making toward full and complete transparency in the municipal securities market," the letter signed by Gerard O'Reilly, co-CEO and co-chief investment officer at Dimensional, and David A. Plecha, its global head of fixed income.
In the letter, the Dimensional executives added that in proposing the approved rule change, the "MSRB itself noted that the municipal securities market historically has been considered less liquid and more opaque than other securities markets, making post-trade data the most important source of information for market participants."
In a June 9 press release, the MSRB announced that the board of directors approved the filing of amendments to Rule G-14 to rescind previously approved provisions so the existing 15-minute trade reporting standard would be maintained. The decision to rescind the one-minute trading reporting deadline came after "months of dialogue and engagement with market participants," MSRB President and CEO Mark Kim said in the release.
On June 16, the SEC published a notice
"The one-minute reporting initiatives are unnecessary and would not have contributed meaningfully to market transparency," Michael Decker, senior vice president for research and public policy at the Bond Dealers of America, said in a July 11 comment letter to the SEC regarding the MSRB and FINRA proposals.
Securities Industry and Financial Markets Association President and CEO Kenneth E. Bentsen, Jr., said in a July 11 comment letter to the SEC that "the implementation of one-minute trade reporting, even in its final form that includes an exception for so-called manual trades, would have serious negative implications for the corporate bond, agency debt, securitized product, and municipal securities markets." Those impacts would be significant particularly for smaller broker-dealers, Bentsen said.
In a July 10 comment letter, Christopher A. Iacovella, president and CEO of the American Securities Association, said "ASA supports the current proposals to restore and clarify the 15-minute reporting timeframe." However, "FINRA and the MSRB could have — and should have — avoided this entire episode," he said.
"From the beginning, the MSRB and FINRA failed to demonstrate a substantive problem in trade reporting that required shortening the reporting window from 15 minutes to 1 minute," Iacovella's letter said. "To the contrary, commenters repeatedly asked for data or evidence of investor harm or a market failure that would justify the rule change and the SROs repeatedly failed to provide it."
Given the considerable resources expended, ASA requests the SEC require the MSRB and FINRA "provide a public and comprehensive accounting of all costs and staff hours associated with this rulemaking process," the letter said.
"Moving forward, the SEC needs to reform the MSRB and FINRA by holding them to a much higher standard of governance, decision-making, transparency, and accountability so this type of failure can never happen again," Iacovella said in the letter.
Because they believe that more timely reporting "would greatly benefit investors," Dimensional's O'Reilly and Plecha in their letter "strongly" encouraged the SEC not to approve the rule change proposed by the MSRB.
Given that the effective date for the approved rule change has yet to be announced, "the MSRB could alleviate compliance challenge concerns by giving market participants more time to make the necessary changes to their workflows and processes," the Dimensional executives said.
"Alternatively, instead of proposing to maintain the current 15-minute outer limit, the MSRB could propose shortening the reporting timeframe from 15 minutes to 10 minutes as an interim step, with the goal of eventually shortening the reporting timeframe to one minute," the letter from O'Reilly and Plecha said.
