The Municipal Securities Rulemaking Board will issue two concept releases next month, one seeking public comment on whether to develop a best execution rule and another requesting input on enhancing post-trade data reporting and developing standards for collecting and disseminating pre-trade information.
The best execution release will be of a more general nature, and will not include the Securities Industry and Financial Markets Association’s “execution with diligence” proposal, MSRB chairman Jay Goldstone said following the board’s quarterly meeting in Boston.
SIFMA sent a letter to the board before the meeting proposing a rule that would require a dealer to use “reasonable diligence” to determine the market for a bond so the price it provides to a customer is “fair and reasonable under prevailing market conditions.”
The MSRB currently does not have a rule on best execution, a corporate concept. The board’s Rule G-18 on execution of transactions requires broker-dealers to make a “reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions.” The corporate and equities markets do have such a rule, and the lack of a muni-specific rule was highlighted as a concern in the Securities and Exchange Commission’s municipal market report last year.
Goldstone said the board had a conversation about the concept in the muni market.
SIFMA officials contend a best execution rule wouldn’t work for the muni market because it is an over-the-counter market and most bonds trade infrequently if at all in the secondary market, There is also not necessarily agreement about what “best execution” might mean, as it may or may not mean the same thing as “best price,” depending on the situation.
“There was acknowledgement that [SIFMA] prepared the letter” Goldstone said, adding, “Our action is absolutely not in response to the SIFMA letter.”
The concept release on trade data will be the second in a planned series of releases on the MSRB’s existing transaction reporting system. It will ask for market participants for suggestions on improving the quality of post-trade information as well as appropriate standards for collecting and disseminating pre-trade information on the MSRB’s EMMA website.
“The MSRB is evolving our EMMA website with the goal of creating a central transparency platform for the municipal securities market,” said Goldstone. “We continue to engage the market in an incremental process to provide public access to a consolidated display of all possible sources of pricing-related market data.”
The board also discussed Detroit’s municipal bankruptcy filing, and is monitoring the situation,, Goldstone said. The Dodd-Frank Act charges the MSRB with protecting municipal entities, including pension systems and issuers, as well as investors. In Detroit, bondholders and pension funds will both be seeking to protect their share of the same limited pool of funds, creating a potential conflict. The board wants to remind market participants that its Investor Toolkit addresses the risks of, and considerations for, buying and selling municipal securities.
No action on front running will be coming from this meeting, Goldstone said. There is currently no MSRB rule on front running, a type of insider trading that occurs when a market participant uses non-public knowledge to execute advantageous trades. This could come in many forms, MSRB executive director Lynnette Kelly said, such as when an investor gains knowledge of a trade before the trade has been reported. Goldstone said the board wants to gather more information and determine if a rule is necessary.
The board agreed to continue its efforts to consolidate voluminous interpretive guidance to existing rules, such as it has been doing with its Rule G-17 on fair dealing. The board agreed to create a new rule on municipal securities dealers’ obligations related to fair pricing outlined in a number of existing rules and interpretations. The board will seek public comment on condensing relevant requirements of its Rules G-30 on fair pricing, G-18, and G-17. The consolidations will not change the requirements in existence under the guidance.
Goldstone also responded to reports that SEC commissioner Daniel Gallagher is pushing for a delay on the approval of a municipal advisor definition until two commissioner nominees are confirmed by the Senate. The MSRB will need to develop new MA rules in response. The muni market has been clamoring for SEC action for many months.
“It’s disappointing,” Goldstone said about the further delays
The board elected officers for the year that begins Oct. 1,, and elected seven new Board of director members who will serve three-year terms. Their names will be announced next week. The board also approved a strategic plan that will guide the MSRB’s activities over the next three years, and a fiscal year 2014 operating plan and budget. Details about the strategic and operating plans will be available on Oct 1, 2013, according to the MSRB.