WASHINGTON — The Municipal Securities Rulemaking Board is revising its proposed rule governing the duties of municipal advisors in response to market comments, and will also propose amending its pay-to-play rule to cover MAs, the MSRB announced Tuesday.
The board reached these decisions during its meeting in Alexandria, Va. last week. Draft Rule G-42 on the duties of non-solicitor municipal advisors has caused extreme concern among bankers, who said the proposed rule's ban on MAs engaging as a principal in any other transaction with a client would prevent banks from providing traditional banking services to municipalities for whom they are acting as MAs. Non-dealer MAs have said a principal transaction ban is appropriate. MSRB chairman Dan Heimowitz said comments about G-42 being overbroad in that regard were a "major" topic of discussion.
"Those comments were heard," Heimowitz said, adding that he could not comment specifically about the revised draft at this point. "It's still somewhat of a work in progress," he said.
The board also decided to propose amendments to its Rule G-37 on political contributions, which currently covers broker-dealers, to also include MAs. The current rule prevents dealers from engaging in muni business with an issuer within two years of a contribution by a firm or a member of that firm to an issuer official. Dealers are also required to disclose contributions they make to bond ballot campaigns, because there has been a demonstrated link between campaign contributions and resulting securities business.
Heimowitz said the board decided it was appropriate that these same parameters govern the newly-regulated MAs, and that the revision should help prevent even the appearance of impropriety.
"For two decades, MSRB Rule G-37 has played a central role in curbing the use of, and the appearance of the use of, political contributions to secure municipal securities business," Heimowitz said. "Extending these provisions to municipal advisors will help prevent quid pro quo political corruption, or the appearance of such corruption, in public contracting for both dealers and municipal advisors."
Heimowitz said the proposed revisions to G-37 will probably be offered for public comment within the next 30 days, but MSRB executive director Lynnette Kelly said the board would not commit to a specific month. Market participants will be given 60 days to comment, Heimowitz said.
The board also decided to seek approval from the Securities and Exchange Commission to implement a best-execution rule, which the MSRB proposed earlier this year. The rule would require dealers to use "reasonable diligence" when handling and executing municipal security trades for retail investors to achieve a price that is as favorable as possible under prevailing market conditions.
Market participants have generally expressed support for the rule, but have told the board it would be helpful to have more guidance on how a best execution rule would interact with fair pricing obligations and how and if the rule would apply to the primary market.
Heimowitz said the best execution rule, if approved by the SEC, would be "a historic development in the muni market."
"Building on the MSRB's existing fair-pricing rules, the best-ex rule would add an additional layer of protection for retail investors while remaining flexible for dealers operating in a unique marketplace," Heimowitz said.
Finally, the board announced three initiatives aimed at advancing its agenda to improve price transparency in the market. The first is the introduction of a "price discovery tool" on the MSRB's EMMA website that will allow investors to find and compare prices of munis with similar characteristics. The tool will provide a graphical view that will enable investors to see prices at which any muni and other securities with similar characteristics were bought and sold over a specified period of time, according to an MSRB release.
The board authorized MSRB staff to develop a concept release on presenting market data to help investors make sense of markups or markdowns on their transactions. The concept release will not contain a specific rule proposal, but will seek industry and public input on ways to address markup disclosure.
Heimowitz said input on "riskless principal" transactions, when a dealer almost simultaneously buys and sells securities, thereby taking on little or no risk that the market will move against the firm during that short time, may guide future rulemaking. SEC commissioner Michael Piwowar dropped in for a discussion with the MSRB as well, Heimowitz said. Piwowar has been outspoken on improving transparency, and has singled out riskless principal transactions as an area to address.
The MSRB will also develop a proposal for enhancing its Real-time Transaction Reporting System to collect additional post-trade information for display on EMMA as well as a potential framework for a phased approach for the collection and dissemination of pre-trade data. The MSRB will seek public comment on RTRS changes this summer, and will issue a concept release on the pre-trade data transparency, Kelly said.