Ready or not, here comes markup disclosure

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WASHINGTON — The Securities and Exchange Commission will not grant an extension of the May 14 effective date for new landmark markup disclosure requirements, though dealer groups are continuing to work toward some kind of understanding with other muni regulators.

The SEC gave the news to market groups earlier this week, ending months of hope for some kind of continuance, the groups confirmed.

Set to take effect next month, amendments to Municipal Securities Rulemaking Board rules G-15 on confirmation and G-30 on prices and commissions will require dealers to disclose their markups and markdowns on certain transactions in the confirmations they send to retail customers.

There has been considerable concern in the dealer community that many firms won't be able to automate their processes in time. Until now many in the market had been confident that the SEC would at least offer a “conformance period” of several months.

Under the rule changes, markup disclosures will have to be given as a total dollar amount and a percentage of the prevailing market price, commonly referred to as the “PMP.” The amendments establish a “waterfall” of factors for determining the PMP, beginning with contemporaneous trades of the same security and followed by series of other considerations.

Third-party vendors have developed products designed to calculate PMP, but firms have been complaining for months that they haven't had time to adapt their automated trade processes to comply with the rules.

“After leading the advocacy on this issue for several months, the BDA is very concerned with the SEC’s decision to not delay or allow a regulatory conformance period for markup disclosure rules in that, outside of the largest firms, the industry — while not for lack of focus — is simply not fully prepared, and could never have been prepared, to deliver accurate markup information to retail clients by mid-May,” said Bond Dealers of America Chief Executive Officer Mike Nicholas.

BDA had developed and submitted a “business plan” to the SEC that would have given dealers until 2019 to comply as long as they were taking defined steps towards compliance. Many in the market had believed the SEC would accept such a plan, because it did not require the commission to formally adjust the effective date.

“From determination of PMP to the delivery of relevant information to retail customers, this is a complicated operational process involving multiple parties and not just the broker-dealer,” said Nicholas. “The SEC’s insistence to rush this rule is unfortunate given the need and purpose of the rule — for accurate information to be distributed to retail customers. The BDA will continue to work with regulators to ensure dealers are in compliance as soon as possible and thus meeting the SEC’s objectives.”

Leslie Norwood, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, also weighed in, saying it will still be difficult for some firms to comply with the rules in time.

"Given the complexity of the markup disclosure rule, SIFMA repeatedly urged regulators to implement a conformance period to allow firms sufficient time to come into full compliance,” Norwood said. “Firms have long been working to implement compliance plans before the May effective date and will continue to work to that end. Broker-dealers are also relying on vendors currently developing compliance tools for the new rule. Connecting those new tools to existing systems and vendors, as well as related testing and training by May 14 remains a challenge.”

Markup disclosure implementation is on the MSRB’s agenda for its April 25-26 board meeting.

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SEC regulations MSRB rules Securities law Law and regulation Compliance SEC BDA SIFMA MSRB Washington DC