WASHINGTON — Non-dealer financial advisors are warning the Municipal Securities Rulemaking Board's proposed new best execution rule may conflict with the MSRB's existing fair-dealing rule. Both they and dealers are seeking clarifications on what the rule would require dealers to do.
The advisor and dealer groups are making these points in comments on the MSRB's proposed new Rule G-18 on best execution, which would require broker-dealers to "use reasonable diligence" to obtain "the most favorable terms available under prevailing market conditions" for their customers.
The MSRB published the proposal for public comment last month. The draft rule, based on the Financial Industry Regulatory Authority's Rule 5310 for equities and corporate debt, would go a step beyond the current Rule G-18, which requires dealers to "make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions."
National Association of Independent Public Finance Advisors president Jeanine Rodgers Caruso said in that group's comment letter that though NAIPFA supports the best execution concept, the proposal should make clear that the execution standard applies to the secondary market only and not to primary offerings.
"NAIPFA notes that the notice does not make a distinction between transactions that occur during a primary/new offering of securities and those occurring in the secondary market," her letter states. "If, in fact, a broker-dealer will be obligated to undertake efforts to provide its customers with the most favorable prices within the context of a primary/new offering of securities, this will create an inconsistency in terms of a broker-dealer's obligations to issuers and investors under Rule G-17."
Interpretive guidance to the fair-dealing rule says that an underwriter has a duty to purchase securities from the issuer at a fair and reasonable price, but must balance that duty with its duty to sell municipal securities to investors at prices that are fair and reasonable.
"This will no longer be true if the proposed rule is enacted, since broker-dealers will be obligated to attempt to sell municipal securities to investors at prices that are the most favorable to such investors, the NAIPFA letter states. "As such, the above referenced G-17 disclosure must be amended, otherwise issuers will be misled with regard to their understanding of a broker-dealer's competing interests and the obligations owed by the underwriter to the various parties to the transaction."
Dealers should be obligated to provide a disclosure letter that would accurately reflect their obligations under the proposals if they are adopted, Rodgers Caruso wrote.
Bond Dealers of America president and chief executive officer Mike Nicholas said his group also supports the proposal's concept, but that the draft requires additional guidance on how dealers could fulfill their obligations on a trade-by-trade basis in a market lacking a central pricing platform. The draft fails to provide guidance on how many other dealers a dealer must submit bids to when selling a bond for a customer, as well as when a dealer has to access an alternative trading system to be sure it is being diligent enough in seeking the best price.
"We ask the MSRB to be mindful that dealers already must comply with fair pricing and suitability rules that protect the pricing customers receive on trades," Nicholas wrote.
The Securities Industry and Financial Markets Association submitted comments last week to the effect that the group is largely on board with the MSRB proposal, and is hoping for guidance on how the rule interacts with the board's proposed pricing rule, G-30.
