WASHINGTON - Charles Schwab & Co. is urging the SEC to reject the Municipal Securities Rulemaking Board's proposal on sophisticated municipal market professionals, warning it that runs counter to congressional and SEC policies and will lead to the creation of "professionals only" electronic trading networks that exclude retail investors.
"We urge the Securities and Exchange Commission and the MSRB to avoid creating regulatory incentives which would lock retail investors out of the most cost-efficient and up-to-date online bond trading systems," wrote the San Francisco-based firm, one of the largest retail brokerages in the country, in a six-page letter to the SEC yesterday.
In a separate, shorter letter, the Investment Company Institute pressed the SEC to approve the SMMP proposal only if it is modified so that it is limited to electronic trading platforms and does not apply to municipal securities that are currently exempted from the SEC's secondary market disclosure rules.
If the SMMP concept is not modified in this manner, the ICI told the SEC, then the MSRB should be required to study its impact within one year of its adoption.
Under the SMMP proposal -- which the MSRB proposed in September 2000, then revised and filed with the SEC last month -- dealers would be deemed to automatically comply with the MSRB's fair practice rules when they trade with institutional investors that qualify as SMMPs in transactions where the dealer is serving as an order taker and is not recommending securities.
An SMMP would be defined as any entity with at least $100 million in municipal securities holdings that has timely access to all publicly available facts about a transaction and is capable of independently evaluating market risks and values and making investment decisions.
The Bond Market Association on Friday urged the SEC to support the proposal, claiming it is critical to the growth of online trading in the municipal market.
But Schwab, which has more than 7.8 million active retail securities accounts and more than $846 billion in customer assets, strongly opposed the concept in its comments to the commission. "As a retail-focused firm, Schwab's principal objection to the MSRB's proposal is that it fails to adequately acknowledge and protect the retail investor's right to fully participate in the growing electronic marketplace for fixed-income securities," the firm's letter said.
Schwab told the SEC it "fears that approval of the board's proposal ... will create two-tiered markets for fixed-income securities and exacerbate an existing market structure where retail investors cannot access the best prices" for municipal securities.
"Fostering the creation of 'professionals only' trading networks is contrary to any number of important public policy considerations," Schwab said. The SMMP concept runs counter to the SEC's proposed rules on alternative trading systems, which require online platforms that meet certain volume thresholds to provide fair and non-discriminatory access, the firm's letter said.
SMMPs also would be contrary to "congressional policy to foster a linked national market system for all securities to assure the economically efficient execution of transactions and promote disintermediation." While the municipal securities market is not yet part of the national market system, "a sounder policy would be to improve the existing market structure, rather than to worsen the current situation," the firm said.
The SMMP concept would force retail and small institutional investors "to pay more for municipal securities," Schwab warned. It likened the impact of the SMMP concept to the Nasdaq market, where the creation of private trading networks for dealers and large institutions led to a two-tiered market, with market professionals routinely trading at better prices than those available to retail investors.
The New York Stock Exchange does not segregate institutional order flow from retail order flow, Schwab noted.
When the retail brokerage firm previously raised its objections to the SMMP concept with the MSRB, the board responded that there was no evidence the proposal would create a "professionals-only" market.
But Schwab told the SEC yesterday, "We cannot see how the board's proposed changes would have any effect other than to foster the further growth of such systems."
The firm urged the commission to require online bond trading systems to make all of the disclosures required under the MSRB's Rule G-17 on fair dealing and to either exempt or apply to all investors the board's Rule G-18 on execution of transactions and G-13 on quotations.
Schwab also asked the SEC to allow firms to link to only one nationally recognized municipal securities information repository to comply with Rule G-17. The SEC recently issued an interpretation clarifying that the rule requires a dealer to disclose to customers at the time of trade all material facts about a security that are known to the dealer or that are reasonably accessible to the market through established industry sources, such as the NRMSIRs.
Schwab's request, however, comes as market participants have complained the NRMSIRs do not all have the same disclosure documents and that some have more than others. An informal SEC study of 30 bond issues found the NRMSIRs only had 57% to 75% of the disclosure documents the issuers were to have filed.
The ICI told the SEC that while reducing regulatory obligations may make sense for dealers taking orders online, this "is neither necessary nor appropriate" for dealers trading by telephone or in person, particularly since investors cannot rely on the NRMSIRs for secondary market disclosure information.
