SEC advisory committee could be forum for raising regulatory concerns

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WASHINGTON – The Securities and Exchange Commission is seeking public input on its plans to establish a committee that will advise it on the regulatory issues facing the fixed income market as well as the markets’ structures and operations.

In a notice issued last week, the commission asked for public comments on the committee that SEC chair Jay Clayton proposed creating in his first speech, which was given at the Economic Club of New York in July.

Clayton said the committee would be like one that has already been set up for the equity markets and “would be made up of a diverse group of outside experts, who will be asked to give advice … on the regulatory issues facing the fixed income markets.”

The SEC said in its notice on Thursday that the committee will be made up of up to 21 members who represent a cross-section of the fixed-income markets. It will operate for two years or less, as determined by the commission, but its charter may also be renewed, according to the notice.

The committee will meet at least four times per year, but subgroups may meet more frequently, the SEC said.

At about the same time that Clayton called for the fixed income advisory committee to be set up, the House Financial Services Committee’s panel on capital markets, securities and investment held a hearing to review the structure of the fixed income markets.

Randy Snook, executive vice president, business policies & practices for the Securities Industry and Financial Markets Association, testified at the hearing on a wide range of issues, including regulatory issues and concerns facing municipal securities dealers.

He said that while dealers are in favor of the disclosure of “relevant transaction data” to retail investors, they are worried about being able to set up systems to comply with the Municipal Securities Rulemaking Board rules on markup disclosure, which are to take effect in May 2018.

The rules will require a dealer, which buys or sells munis for or from its own account to a retail customer and engages in one or more offsetting transactions on the same trading day in the same security in an amount that in aggregate equals or exceed the size of the customer trade, to disclose its markups and markdowns in the confirmation it sends the customer.

Markup disclosures will have to be given as a total dollar amount and a percentage of the prevailing market price. The rules establish a waterfall of factors for determining prevailing market price. Dealers initially are to look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumption of prevailing market price. They can then look at contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms. The bottom of the waterfall allows dealers to use prices or yields derived from economic models.

Snook said dealers are worried the rules would create “unmanageable compliance risks” and have “significant implementation costs” as well as possible unintended consequences that would lead them to reduce market activity in ways that could “ultimately diminish liquidity.”

Snook also expressed concerns about the development of pre-trade price transparency, which was recommended in the SEC’s 2012 Report on the Municipal Securities Market and has been explored by the MSRB.

Snook said that while SIFMA “strongly supports reasonable efforts to improve price transparency” in the municipal securities market, it is concerned that such an initiative “could be expensive to develop and implement while yielding limited useful information for investors.”

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Law and regulation Bonds SEC MSRB Washington DC