SAN FRANCISCO — On the eve of its first field hearing on the municipal securities market here, the Securities and Exchange Commission issued an “
The notice was published jointly by the
While the MSRB-FINRA notice covers no new ground, the authority noted in a
“While the results of the sweeps are still being evaluated, FINRA has concerns that firms may not completely understand their obligations with respect to the disclosure of material information to customers at the time of trade,” the release said.
The joint notice stressed that dealers’ obligations are not limited to primary market transactions.
“Selling securities is not like selling other types of products,” said MSRB executive director Lynnette Hotchkiss. “Dealers must ensure that a recommended security is suitable, that all material information about it is known, and that the security is fairly priced.”
In meeting these disclosure, suitability, and pricing obligations, firms must take into account all material information that is known to the firm or that is available through “established industry sources,” including official statements, continuing disclosures, and trade data, much of which is now available through the board’s EMMA site, the notice stated.
Resources outside of EMMA may include press releases, research reports, and other data provided by independent sources. Established industry sources can also include material event notices and other data filed with former nationally recognized municipal securities information repositories, or NRMSIRs, before July 1, 2009, the notice said. After that date, EMMA became the sole NRMSIR, but it does not contain a full archive of historical continuing disclosure filings.
The MSRB-FINRA notice also said in order to meet their obligations under Rules G-17 and G-19, dealers should not solely rely on ratings as a substitute for their own assessment of a bond’s credit risk.
In addition to a bond’s credit quality, firms must obtain, analyze, and disclose other material information about a bond, “including but not limited to whether the bond may be redeemed prior to maturity in-whole, in-part or in extraordinary circumstances,” the two self regulators said.
“Whether the bond has non-standard features that may affect price or yield calculations, whether the bond was issued with original issue discount or has other features that would affect its tax status, and other key features likely to be considered significant by a reasonable investor,” their notice said.
For example, for short-term debt for which interest payments may fluctuate, firms should explain to customers the basis on which periodic interest rate resets are determined, it stated.
The SEC bulletin reads somewhat like a glossary for new investors and provides a broad overview of the commission’s agenda for its five planned field hearings. It also explains complex risk factors, including call risk, or the potential for a bond issuer to retire a bond before its maturity date, and liquidity risk that investors won’t find an active market for the munis, potentially preventing them from buying or selling when they want and making pricing more difficult.
